Russia Moves To Stabilize Its Currency

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¿Default en Rusia?
Photo: Dennis Jarvis. Russia Moves To Stabilize Its Currency

A sharp drop in the oil price has caused concerns over the potential damage to the Russian economy and has led the Russian central bank to raise official interest rates sharply to stabilize its currency. This Market Update sets out what is happening in the Russian markets, with comments from Fidelity Worldwide Investments.

Following international sanctions in protest at Russia’s expansionist policies in the Ukraine and most recently a sharp drop in the oil price, investors have become increasingly concerned about the potential damage this will have to the Russian economy as a major producer and exporter of oil. “We estimate that a 10% drop in oil prices can shave up to 1.3 percentage points off Russian GDP growth”, said the team of experts from Fidelity WI in an market analysis.

The Russian rouble has borne the brunt of these concerns (chart 2), depreciating dramatically against the US Dollar. Russian asset prices have also been falling across the board, with the stock market down over 8% in December, Russian 10 year government bond yields rising 5 percentage points to over 15% and 5 year Russian sovereign CDS rising from 318bp to over 620bp. The Central Bank of Russia (CBR) raised overnight interest rates by 1% less than a week ago but a further 10% slide in the currency yesterday prompted it to hike rates by another 6.5% to 17%.

“The CBR’s aim is to slow the depreciation of its currency rather than to achieve a reversal of direction per se.  It is very concerned by the disorderly and dysfunctional way in which the currency has been trading. Rather than spend its foreign exchange reserves, which proved a costly and ineffective strategy in 2008, the CBR has decided to use the blunt tool of interest rate rises. Over the longer term, this should be effective in slowing an uncontrolled depreciation of the rouble by making it costly to sell the currency; however, in the short run the oil price is likely to be the most important determinant of the direction of the rouble”, explains Fidelity WI.

Could the Russian state be forced into defaulting on its debt, as it did in 1998?, ask the experts from the firm. “Overall, this seems unlikely. While there are some worrying parallels with 1998 when the oil price was also falling and Russia was also involved in an international conflict (an expensive campaign in Chechnya), the Russian government balance sheet today is much stronger than in 1998. General government debt is around 10% of GDP, whereas in 1998 it was 100%. The other main difference today is the CBR’s willingness to let the exchange rate float freely. As a result, unlike in 1998 a falling Rouble today can act as a shock absorber by balancing the dollar oil price falls and keeping fiscal balances stable”, they conclude.

CLO Rule Change Clouds Outlook for Bank Loans

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La nueva regulación para CLOs cambia las perspectivas para los préstamos bancarios
. CLO Rule Change Clouds Outlook for Bank Loans

Retail investors fell out of love with US bank loans this year, but demand from issuers of collateralized loan obligations (CLOs) has remained strong. New regulations may change that. Should investors be concerned? We think so.

First, a bit of background. In recent years, investors large and small have poured money into bank loans. Most were attracted by loans’ relatively high yields and their floating-rate coupons, which would provide insulation against an eventual rise in interest rates. At one point, loan mutual funds—a good gauge of retail demand—pulled in fresh money for 95 weeks in a row.

That streak ended earlier this year. Since then, retail investors have pulled money out of loans for 23 weeks running. At the margin, the reversal may have had something to do with concern about credit quality. As we’ve noted before, high demand for loans has allowed companies with fragile credit profiles to borrow on favorable terms without offering traditional protections to lenders.

But the bigger culprit, in our view, was changing interest-rate expectations. As it became clear the Federal Reserve would likely hold rates low for longer than many thought, it became less attractive to sacrifice the higher yields available on high-yield bonds for loans’ promise of floating income.

CLO Investors Play a Large Role in the Loan Market

A shift in demand as abrupt as the one loans experienced this year would normally cause considerable volatility. But the market weathered the change well. The reason? Issuers of CLOs—loans pooled together and issued with varying levels of risk and yield—have kept buying.

Now, new rules that require CLO issuers to retain a bigger slice of the loans they package and sell to investors may change that. The changes, part of the Dodd-Frank regulatory reforms, are meant to limit excessive risk-taking by ensuring that CLO managers have some skin in the game.

Instead, they may drive some CLO issuers out of the market. That’s because the risk retention rules make it more expensive for smaller players to create new funds. It’s unclear just how much this will affect demand. But the rule changes could sow the sort of volatility that the loan market managed to avoid when retail demand dried up.

While much was made of retail investor behavior in recent years, it’s clear that the leveraged loan market depends most heavily on CLO investors. As the Display shows, CLOs represented 44% of current leveraged-loan buyers through June. A change affecting nearly half the market is worth paying attention to.

Of course, CLO issuers won’t disappear overnight. The new rules were approved in October and won’t go into effect for two years. As such, next year might bring increased activity as CLOs rush to issue before the rules change. But over the longer run, we think things could get more complicated.

For one thing, it’s not clear who will step in to pick up the slack if CLO demand does taper off. Will retail investors come back? If not, will companies that have come to rely on the loan market for financing be forced to tap the bond market when their existing loans come due? Will bond investors play ball?

The answers to these questions are far from clear. It’s possible that investors will come up with creative ways to minimize the impact of the change. But in our view, the only thing that’s reasonably certain is that the leveraged loan market—and loan investors—face plenty of uncertainty.

As we’ve noted before, we think investors are already being undercompensated for the risk associated with bank loans. In our view, most of the perceived advantages of the asset class—high returns, floating rates, capital structure seniority—aren’t all they’re cracked up to be.

High-yield bank loans can be a part of a well-diversified fixed-income portfolio. But with so much uncertainty on the horizon, investors should be sure to weigh risk and reward carefully. In our view, a low-volatility high-yield strategy makes the most sense in the current environment.

Opinion column by Gershon M. Distenfeld, CFA, Head of High-Yield Debt Securities across dedicated and multisector fixed-income portfolios for AllianceBernstein.

The Pacific Alliance and MILA: Forging a New Future for Latin America

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La Alianza del Pacífico y MILA: Un nuevo horizonte económico en Latinoamérica
. The Pacific Alliance and MILA: Forging a New Future for Latin America

The Pacific Alliance –an innovative and dynamic trade and investment initiative– is gathering strength in Latin America. The four-country alliance, established in 2011, represents a new generation in regional economic cooperation.

Observers in Latin America and other parts of the world may ask why this latest effort at integration and free trade will be any different from the past.

Their skepticism is justified. Earlier regional trade pacts –typically lacking a realistic economic foundation or a true commitment to change– have failed to prosper.

The Pacific Alliance –which currently includes Chile, Colombia, Mexico and Peru– is different. It represents a new breed of Latin American free trade agreements that seeks to achieve real economic integration and gradually move toward the free circulation of goods, services, capital and people among its members.

In contrast to other, inward-looking regional integration efforts, the Pacific Alliance looks outward and plans to use the economic and financial energy of its partners to develop new ties with the rest of the world, in particular the Asia-Pacific region.

The Pacific Alliance is built on a solid foundation. It is made up of like-minded governments that believe open markets and free trade are the way to promote economic growth and development. The members recognize that trading among themselves is simply not a formula for sustainable long-term growth. They want to attract foreign capital, not block it out.

This open philosophy is particularly important in view of weaker prices for raw materials, the economic slowdown in China and the urgent need for Latin America to boost exports of higher value-added manufactured goods.

The Pacific Alliance is already a significant economic force. It has a combined market of 212 million people and a GDP of over $2 trillion, accounting for 36% of Latin America’s total economic output and about half of the region’s exports.

Together, the four economies rank as the world’s eighth largest economic block. Moreover, their combined GDP growth outperforms the regional average, their growth outlook is positive and they attract more than 40% of the direct foreign investment that flows into the region.

Since creating the alliance three years ago, member states have made steady progress in meeting the group’s goals. The partners have lifted visa requirements for nationals traveling between the four nations, voted to eliminate tariffs on 92% of the products they trade and are moving to consolidate their diplomatic offices in some parts of the world.

In addition, two years before the alliance was founded, Chile, Peru and Colombia took a bold step and began integrating their stock markets. In 2009, they established MILA –the Integrated Latin American Market or Mercado Integrado Latinoamericano– which began operating in 2011. Mexico, the largest economy in the group, recently formalized its entry into MILA, signaling its commitment to the Pacific Alliance integration process.

This move offers huge potential for investors in the region and in other parts of the world.

Other neighbors are already knocking on the alliance’s door. Costa Rica and Panama are moving to join, and 30 other countries –including Canada and the U.S. – are observers. Canada, which has free trade agreements with all four alliance partners, would be a natural fit, especially because of its significant investments in the mining and energy sectors of these countries.

MILA – A magnet for regional and international capital

Private equity firms, such as Bricapital, see a bright future for MILA. The integration of stock markets represents a giant step for local companies, pension funds and other institutional investors, both domestic and international. It will give investors and enterprises alike a greater supply of liquidity, securities, issuers, increased diversification and much larger sources of funding.

With the inclusion of Mexico, MILA’s combined market capitalization will be an estimated $1.08 trillion, close to that of Brazil’s Bovespa stock exchange.

Market integration among the alliance’s four partners will offer significant new opportunities for local pension funds to diversify their investments.

Each of the member nations places strict limits of how much their pension funds can invest internationally. But with MILA, the idea currently being considered is that investments in any of the MILA countries will be treatedas domestic.

This means that promising businesses in these markets will soon have access to a much deeper investment pool. The pension funds in Chile, Peru, Mexico and Colombia represent a total capital pool of $455 billion.

A larger, pan-regional stock market will attract new investment, providing additional capital and liquidity and improved competitiveness and innovation. In addition, MILA is expected to boost asset values, provide investors with many more investment options and exit opportunities. Those things spell more jobs and regional economic development growth, as well.

At Bricapital, we believe that the Pacific Alliance and MILA are generating new and exciting investment opportunities for the region, and will offer Latin America a brighter and more prosperous future.

Opinion column by Yrene Tamayo, Managing Director and Executive VP of Bricapital

Vontobel Asset Management Sharpens Positioning to Achieve Further Global Growth

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Vontobel separa la gestora del grupo, que pasará a funcionar como entidad jurídica independiente
Photo: Roland zh. Vontobel Asset Management Sharpens Positioning to Achieve Further Global Growth

Vontobel Asset Management – which is currently part of Bank Vontobel AG – will be run as an independent legal entity and a wholly-owned subsidiary of Vontobel Holding AG in future. This strategic realignment is intended to form the basis for further growth in the global asset management market.

The creation of an independent legal entity is in line with Vontobel Asset Management’s strategy of operating internationally. The independence of asset managers is assigned high importance in most asset management markets and is a key selection criterion applied by international consultants and clients. This realignment underscores the international growth strategy pursued by Vontobel Asset Management, and this efficient and modern organizational structure takes account of global competition, says Vontobel.

The new company will operate under the name ‘Vontobel Asset Management AG’. The transformation of the business unit into an independent legal entity is subject to the approval of the Swiss Financial Market Supervisory Authority FINMA and the General Meeting of Shareholders of Bank Vontobel AG on April 29th, 2015.

Could the Fed Trigger a Market Collapse?

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¿Crédito high grade, high yield, o renta variable estadounidense?
. Could the Fed Trigger a Market Collapse?

The US central bank, the Federal Reserve, is the subject of criticism, no matter what it does. It has been roundly criticized for making money too easy and creating bubbles everywhere — in short, that its actions aren’t working. If its actions are working, then the talk is that this artificial support will have to be removed, and the Fed will trigger a market collapse by doing less.

I suspect, however, that the easy money accusation against the Fed —and the implication that stock prices have to fall without its efforts to keep rates low— may be erroneous. Here are my reasons:

Low rates and signaling

Now that its unusual program of bond buying known as quantitative easing has ended, the Fed is hinting that it will set out to slowly raise interest rates in 2015. By any comparison with previous cycles, rates are low and real rates, or stated government bond yields minus inflation, are abnormally low, especially when contrasted with the story of better growth in the US economy.

The Fed has already signaled its intention to let rates rise, and the equity market has continued to go up. Increases in interest rates, particularly those induced by the Fed, have historically been greeted by a rising, not falling, stock market. Why? Because such actions by the US central bank tend to occur in the face of expanding economic activity and the stock market welcomes sustainable growth. Also, price-to-earnings ratios often rise, not fall, in the face of protracted rate increases.

Debt and interest expense

The net debt held on the balance sheets of companies in the S&P 500 Index is much lower relative to their cash flow than we observed in the past three cyclical peaks. Therefore, a rise in rates won’t have the same negative impact on profits as in previous cycles. And the share of debt whose interest expense has been fixed is now at historical highs: 88% of the net debt of the S&P 500 is fixed with the issuance of public bonds, not at the mercy of flexible-rate bank loans. The high share of fixed-rate debt will also tend to cushion any shocks from rising rates.

Furthermore, US consumers — who buy most of the consumer goods and services produced by publicly traded companies — have far less debt relative to their disposable income than in other cycles. Thus, they won’t have to pull back spending that much to pay for higher debt service burdens.

Supply and demand imbalance

The world may be awash in government debt of all sorts, but it is also awash in savings and accounts that seek safety. Massive reserves have piled up in emerging markets, exporting countries and pension funds. These huge storehouses of money — accounting for about 28% of global GDP — reside mostly in US dollars and pursue primarily AAA-rated debt to purchase.

Yet the supply of triple-A debt has been dwindling as more countries receive lower ratings from credit agencies. And the United States, the world’s biggest supplier of new debt, has experienced smaller government deficits and so has less need to borrow. With the supply of good bonds shrinking while the demand for them rises, this imbalance tends to work in favor of higher bond prices and lower yields, which also puts a limit on how high US rates will go when the market, not the central bank, is determining rates.

Concluding thoughts

My first conclusion is that if the equity market was vulnerable to collapse from the Fed’s actions to taper this year and tighten next year, we would already have seen it by now. After all, the markets try to anticipate what is coming next. Fed rate increases should come as no surprise to investors who have known for years that rates haven’t been at the equilibrium levels that the markets would set.

Second, there is little support for the claim that the stock market is a bubble. Many valuation measures suggest the market is in fair value, not peak price, range. Third, inflation around the world is subdued or falling, further curbing the upward rise of interest rates.

Finally, the impressive profit performance of S&P 500 companies late in 2014 shows no signs of abating. I believe the evidence is piling up that the forward momentum of the US economy can support higher profits and higher rates.

Why are Americans so Pessimistic about the U.S. Economy?

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¿Por qué los americanos son tan pesimistas acerca de la economía de Estados Unidos?
Photo: Seattle Municipal Archives. Why are Americans so Pessimistic about the U.S. Economy?

Five years after the Great Financial Crisis (GFC), despite improvements in GDP growth and employment, the U.S. public still seems to be oppressed by a cloud of negative sentiment. A recent PewResearch Survey found that a majority of Americans still perceive the economic climate as poor or fair at best (83%), a level still far below pre-crisis sentiment. Mike Temple, portfolio manager of the Pioneer Dynamic Credit Fund, explains the reasons for this pessimism.

In the eyes of many, a freight train of seemingly unsolvable problems –cost and quality of education, income disparity and structural unemployment– is leading to an accelerating decline of the U.S. and a possible near-term repeat of the GFC that ravaged investor portfolios. “We don’t deny that many daunting challenges lie ahead. But dynamic, longer-term trends are opening up entirely new avenues of invention and industry, which could potentially usher in an era of stunning growth and prosperity. We are optimists and think it is time to step back from the fear and uncertainty that currently characterizes the public mood and explore these trends, their impact on the economy and their implications for investors”, said Temple.

The Root of The Problem: What Happened to the Jobs?

“We believe much of the pessimism is rooted in the challenges that the labor sector is facing. The chart below provides evidence that the rate of recovery in employment, in the last two recessions, has slowed dramatically, which has led to a national debate as to whether the rise in unemployment is structural (permanent) or merely cyclical”, affirm the portfolio manager.

Enlarge

The Federal Reserve believes that the U.S. unemployment story remains largely cyclical (translation: all we need is a robust recovery). Some distinguished voices suggest that we have entered an era of “stagnation” and need to lower our expectations, said Temple, believing the employment challenge is evidence of an economic malaise brought on by an era of diminishing innovation and demographic headwinds. “While we agree with the Stagnation argument that the demographic tailwind of the Baby Boom era is behind us, we are convinced that the longer-term employment problem is linked to the technological replacement of human workers“, says Pioneer Investments research.

The Weak Employment Cycle Began a Long Time Ago

The weak employment cycle began a long time ago with the deceleration of the labor force growth driven by secular trends, which is the foundation of the Stagnationist argument – demographics, including retiring baby boomers, female labor and immigration.

The “participation rate” (the share of the working-age population that is actually in the labor market) has been on the decline since 2000 as more people retire and leave the workforce. However, it is the younger population and the most productive sector of the workforce (25-54 year olds) that is the key driver. This segment should be the most resilient to cyclical and demographic trends, but it has clearly suffered a setback.

From Geographical Outsourcing to Technological Outsourcing

Growing competition from China is one reason for structural weakness in the U.S. job markets, explain Temple. Relocation of manufacturing to areas of the world, where labor was dramatically cheaper resulted in a loss of jobs in the U.S. Despite losing 7 million manufacturing jobs over three decades and manufacturing declining as a percentage of GDP (currently 13%, down from high teens in 1990’s), the absolute size of manufacturing output still grew. Other major sectors such as Construction, Mining, and Information have also experienced a broad decline since the beginning of the 21st century.

“Yet over this time frame, the economy has continued to grow. What gives? We believe that the geographical labor arbitrage that took place in the manufacturing sector over the past 25 years masked a wider phenomenon of technological labor arbitrage. And it is technological arbitrage – which we will examine in our next blog – that will dramatically shape th U.S. economy in the coming decade”, concludes Temple.

Higher Costs on the Horizon as Tax and Regulatory Changes Continue to Bite

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Asset managers, pension funds, banks and insurers expect to be spending more on tax and regulatory-related change in 2015 and for some years beyond, according to a new poll by BNY Mellon.

The poll, conducted at BNY Mellon’s recent third annual Tax and Regulatory Forum in London, found that 71% of the almost 250 delegates attending the event expected to see higher costs in the coming year compared to 2014.

While at the start of the event only 41% felt tax and regulatory-related costs would increase in 2015 – and 5% expected to see spending decline – by the conclusion of the day’s programme, which explored some 20 tax and regulatory changes, the consensus among delegates had shifted significantly.

Key findings of the poll included:

  • UCITS V will be a key focus for providers and clients alike in 2015. 43% of delegates believe the cost of compliance will be higher than for the Alternative Investment Fund Managers Directive (AIFMD), with 29% saying it would be about the same or less. 
  • As was the case with AIFMD, delegates were concerned about the proposed timing of upcoming regulatory changes and the potential for another bottleneck around compliance and approvals to materialise in Q1 2016. 
  • At this stage 65% of delegates polled were undecided as to when they will implement the necessary changes mandated by UCITS V.
  • Questioned as to when they expect to see the current wave of regulatory change to materially recede, 38% of delegates said 2017, while 54% said never.
  • When asked about outcomes for investors, responses echoed findings from previous BNY Mellon surveys. 51% of delegates expected investors will see higher costs and less choice – but also better protection. 
  • There was marked optimism – 82% of delegates – in that firms also see some opportunities arising from the current changes, with half of those respondents saying these opportunities would be material to their own business. 
  • Asked to identify those opportunities, 38% said cost savings, while 24% cited new markets and new asset classes. Only 15% identified new product developments.

Paul North, head of product, Europe, Middle East and Asia at BNY Mellon, said: “There seems to be a consensus that the next two years will be the most demanding in terms of tax and regulatory work and costs. Despite this, we also note the continued optimism among asset managers when they consider their longer term prospects around, and ongoing interest in, reducing costs and maintaining the pace of product development.”   

“The global trend towards tax transparency is at the heart of regulatory reform,” said Mariano Giralt, head of EMEA tax services at BNY Mellon. “The challenge for financial institutions is to keep pace with a host of new initiatives which include FATCA, the OECD’s Common Reporting Standard and potentially a Financial Transaction Tax which would cover 11 EU countries. These initiatives are adding significant compliance costs for financial institutions.”

China Balances New Appetites with Food Safety

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El gobierno chino considera la seguridad alimentaria como una prioridad
Photo: Raphael Labbé. China Balances New Appetites with Food Safety

Over the last decade, China’s disposable income per capita increased more than threefold at a compound annual growth rate of 12.3%. With rising consumption power, China’s population is spending more on food and beverages, not only in greater quantities but also on higher quality products.

That’s generally good news for food and beverage firms focused on China. Unfortunately, also on the rise has been the number of food safety issues in the country. This has affected items ranging from sausages to watermelon to baby formula, to name a few cases. Most recently, recycled oil from restaurant waste in Taiwan entered into the supply chain of hundreds of food manufacturers there, tainting several prominent brands that export products to China. Such cases have reinforced general consumer mistrust, even in well-established brands. Thus, people feel that they need to better self-regulate and avoid or limit most processed foods to minimize their exposure to potentially harmful chemicals and preservatives. By way of comparison, the average Chinese already consumes only a quarter of the amount of processed foods that the average American consumes.

Highlighting food safety as a priority, China has taken steps to improve nutrition and food manufacturing—efforts that were outlined for the first time in its last Five Year Plan (2011–2015). Furthermore, in 2013 China’s Ministry of Health mandated that processed food manufacturers disclose the nutritional value of their products using a standardized labeling format. As a result, consumers now have more data with which to make better-informed choices.

Some local businesses are addressing the issue of trust head on by proactively disclosing the source of their ingredients. During my recent research trip to Guangzhou, I ate at a popular Sichuan restaurant that promotes the memorable tagline “oil is used only once.” I decided to visit this restaurant after reading about its philosophy of using only the freshest ingredients. Its success was evident as there was a wait of more than two hours for a table.

Gaining, and especially rebuilding, consumer trust in China’s food and beverage industry will take time. There will inevitably be more scandals related to food safety. However, with each visit to China, I am encouraged to see progress being made toward a safer tomorrow, unleashing the strong underlying consumer demand and driving long-term sustainable growth in the food and beverage sector.

Column by Hayley Chan, Matthews Asia

The views and information discussed represent opinion and an assessment of market conditions at a specific point in time that are subject to change.  It should not be relied upon as a recommendation to buy and sell particular securities or markets in general. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews International Capital Management, LLC does not accept any liability for losses either direct or consequential caused by the use of this information. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquid­ity, exchange-rate fluctuations, a high level of volatility and limited regulation. In addition, single-country funds may be subject to a higher degree of market risk than diversified funds because of concentration in a specific geographic location. Investing in small- and mid-size companies is more risky than investing in large companies, as they may be more volatile and less liquid than large companies. This document has not been reviewed or approved by any regulatory body.

Investec: Quality Businesses Typically Create Dependable Earnings Growth in Difficult Market Circumstances

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Investec: “Las empresas de calidad típicamente son capaces de inspirar confianza en entornos como el actual"
Photo: Clyde Rossouw, head of Quality at Investec Asset Management. Investec: Quality Businesses Typically Create Dependable Earnings Growth in Difficult Market Circumstances

Clyde Rossouw, Head of Quality at Investec Asset Management, explains his outlook for 2015.

What has surprised you most in 2014?

In terms of market performance the biggest surprise in 2014 has probably been the strength of the US stock market compared to most other markets around the world. In fact, it has been the only game in town; we have had a strong dollar and a great performing US stock market almost at the expense of everything else. We know that at the margin people have had the expectation that the US was getting better and that looks like it is running its course now.

How will ‘quality’ companies fare in 2015?

The ‘quality’ businesses we target have typically been able to create dependable, meaningful earnings growth in difficult market circumstances such as we have now, i.e. falling bond and commodity prices. Therefore, we would expect to see a similar consistency of earnings in 2015. In the past, when market participants have started to look for more dependability, quality assets have moved back into focus. As a result, we would expect a relative re-rating of such assets and that is typically the type of business in which we would look to invest in our strategies.

Where do you see the greatest opportunity in 2015?

We are focusing on two distinct categories: Companies that have pricing power and business models that are able to embrace ‘disruption’ risk.

Typically, businesses that have pricing power are able to put through inflationary or above inflationary rates of increases in their product prices. Tobacco is an obvious example: every year excise duties go up all around the world and even though the incidence of smoking is declining, tobacco companies have this pricing power mechanism built into their business model and are able to put up prices.

The other opportunity that we believe investors should focus on is businesses that have very strong market shares or business models that are able to embrace disruption risk. Technology is changing the way in which businesses have to operate. Therefore, investing in companies that are part of the disruption, but at the same time have very strong cash-generating business models, such as Microsoft, is, we believe, one way of offsetting some of the pricing risks that are at play in the market place.

What are the biggest risks to these views?

The biggest risk to any equity-based investment strategy would be if markets were to be just dismal and disappointing. We have had various episodes in the past, such as the financial crisis in 2008/9, where there was no obvious tailwind for stock market performance, and also in 2011, when there was a fear the euro zone might implode.

The biggest risk for us, therefore, is that even though we are invested in businesses that we think are more dependable in terms of their earnings, there could potentially be a significant drawdown because they are part of the equity markets.

How are you positioning your portfolio?

The businesses we invest in are typically of high quality. We also have sector preferences and have done a considerable amount of work looking at which parts of the market are able to produce companies that have intrinsically high quality characteristics. So, in terms of the natural leanings in our portfolio, we will always have a relatively high weighting in consumer staple names, certain parts of the pharmaceutical market and also within areas of technology. This does not mean that other parts of the market do not interest us, but generally they will have smaller weightings.

A cornerstone philosophically of the way we construct our portfolios is what some people would conceive to be inherent biases. But, based on academic evidence, we would rather invest in parts of the market where we believe we can maximise our probability of investment success.

In terms of individual stocks, our top ten holdings comprise a technology company, three pharmaceutical companies, a non-bank financial stock and a range of consumer staples companies with a specific focus on beverages, food, tobacco and home & personal care products. We still see opportunities across the board, but it is very much motivated by bottom-up opportunities and looking for superior businesses that have those key characteristics.

Trends in Technology for 2015

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¿Qué tecnologías darán que hablar en 2015?
Foto: Phsymys. Trends in Technology for 2015

The rapid pace of both innovation and obsolescence in technology offers a constant flow of investment opportunities worldwide. Hyper-connectivity, cyber security, smartphones, the “digital wallet” and Big Data are among the major themes three technology analysts from across Natixis Global Asset Management are closely following. They share their insight along with 2015 outlooks for technology in the U.S., Europe and Asia.

Tony Ursillo, CFA, Equity Analyst, Portfolio Manager Loomis, Sayles & Co. explain: “On the consumer technology side, we are intensely focused on the relentless shift to mobile smartphone usage. Apple’s introduction of the iPhone in 2007 marked the beginning of the modern era. In those seven years, smartphones have achieved an installed base of over two billion users globally, with more than one billion new smartphones being sold every year”.

While the early play on mobile was oriented around device sales, including tablets, “we believe the more lucrative opportunity now revolves around expanding usage of smartphones by that already installed base. We are focused on companies that offer compelling applications or solutions that can be adopted by that base”, says Ursillo.

Expanding the social network

“Within the corporate or enterprise end market, we see two powerful trends that are far outpacing the trend line of about 3% growth in information technology (IT) spending”, tells the portfolio manager. The first is the shift of IT resources to “the cloud.” The cloud can simply be thought of as a hyperscale data center environment managed by an IT vendor who acts as a servicer, providing access to resources that historically would have been implemented and managed on premise by the enterprise itself.

The second powerful enterprise trend, continues Ursillo, is the heightened concern around securing enterprise data. High profile credit card breaches at retailers such as Target, Home Depot, and Neiman Marcus, as well as online sites like eBay, have put the spotlight on how vulnerable the payment information and other personal data of tens of millions of U.S. consumers are to an increasingly sophisticated hacker community. And that has made security breaches not just a network risk, but a business risk.

Is the “digital wallet” here to stay?

It´s no surprise that many companies are positioning themselves to gain a foothold in the online and mobile payments space. Giants like Apple, Amazon, Google and PayPal already have brand-name recognition and can leverage hundreds of millions of existing customer accounts with attached credit card or bank account information. “We maintain our belief, however, that the vast majority of these transactions will continue to traverse the existing financial network infrastructure, largely controlled by Visa and MasterCard”.

Meanwhile, Hervé Samour Cachian, Head of Value & Opportunities – European Equities says that Natixis Asset Management technology focus today is on everything that is related to Hyperconnectivity – the use of multiple communication systems and devices that allow us to remain constantly connected to networks and streams of information. This includes trends like Internet of Things, Big Data analytics, digital commerce & payment and social media. There are numerous applications, including driverless car technology, Google GlassTM and contactless payment systems that could be game-changers in the future.

“Emergence of the digital economy is the main theme in technology for us. Digitalization is a tremendously disruptive force in society and it knows no boundaries. Companies that fail to amend and to adapt their business model accordingly could be at risk, while companies that are preparing for this new paradigm can be offered multiple opportunities to reap the benefits”, explains.

“We are finding a few European tech companies connected to digital payment solutions that appear attractively valued today. For example, Paris-based Ingenico, which is a global leader in seamless payment solutions for mobile, online and in-store channels, combines three key drivers in our view: structural growth, market share gain and expansion up the value chain. We believe it could benefit long-term from the adoption of chip cards in the U.S. and the emergence of mobile payments. Another area of growing interest interconnected to it all is digital security. Within this space, European firms such as Gemalto are leading providers of innovative digital security solutions globally”, affirms Cachian.

Outlook for European technology

Despite a gloomy macroeconomic picture for Europe and other parts of the world, Natixis GAM have a positive outlook for the technology sector in 2015. Search for growth could lead investors to increase their exposure to the tech-related stocks and especially the ones that either sell or create cutting-edge products. “We believe that Internet of Things is the area of technology that could offer the most promising opportunities in 2015 – driven by gadgets and the widespread adoption of wearable technology.”

Ng Kong Chiat, Equity Analyst, Portfolio Manager of Absolute Asia Asset Management conclude that 2014 extended the strong growth pattern for the technology sector seen over the past few years. Asia-ex-Japan technology stocks were driven by the launch of Apple’s iPhone 6 and iPhone 6 Plus in September. They were also boosted by the expiry of Microsoft’s support for Win XP earlier in the year – which gave rise to and supported a corporate PC replacement cycle. Further penetration of smartphones into the emerging markets and the moderate economic recovery in the developed markets, which prompted more corporate technology spend, also supported growth in the industry this year.

“But these positive factors in 2014 could turn into hurdles for the industry in 2015, as they have created a large base and are beginning to lose momentum. In addition, some of this growth was linked to a one-time event which we may not witness in 2015. Accordingly, we believe there will be less impact from the next version of the iPhone to be released in the New Year, as well as other Apple products. Also, we believe there will be a less robust PC replacement cycle in 2015, slower penetration of smartphones worldwide and more moderate technology capital expenditures by global companies. With such a backdrop, it may be trickier to navigate in the technology space”, argues.