Emerging market debt is typically synonymous with increased risk. It is certainly true that emerging markets are more sensitive to global capital flows while the often more volatile economic and political backdrop means investors in emerging markets demand a higher risk premium.
However, this means that companies in emerging markets often take more effort to attract investors. At the basic level for a corporate bond issuer this means offering higher yields than developed market counterparts but it also means signalling to investors that there is little difference between an investment in an emerging market corporate bond and one issued by a similar company from a developed market. Over time, therefore, corporate governance standards have improved and are converging on developed market standards.
At an aggregate level, emerging market companies tend to be more financially conservative than their developed market counterparts. The chart below shows the lower leverage (debt to equity) ratio of emerging market companies compared with their US counterparts. Similarly, emerging market companies tend to hold more cash on their balance sheets than US companies.
In our view, this creates a valuable opportunity because investors can take advantage of the relatively high yields on emerging market corporate bonds while simultaneously investing in companies with stronger balance sheet and earnings fundamentals than some of their developed market peers.
Sophie del Campo, CEO at Natixis Global AM for Iberia, Latin America, and US Offshore. Natixis Global AM Strengthens its Ambitious Project in LatAm with Offices in Mexico and Future Presence in Uruguay and Colombia
When Natixis Global Asset Management decided in 2011 to open an office in Madrid, with Sophie del Campo at the helm, it wasn’t only seeking to expand its business in Iberia, but also thought of Spain as leverage to gain momentum toward Latin America. Del Campo, CEO at Natixis Global AM for Iberia, Latin America, and US Offshore, assumed the task and then began to explore the opportunities for, when the time was right, take the leap across the Atlantic. And that time has come: she has just opened an office in Mexico with Mauricio Giordano at the helm, the first part of an ambitious strategic project that within the next few months will have a physical presence in Uruguay, and Colombia, as points from which to cover the Spanish speaking region, and with which it aims to become one of the top management companies in the region.
“Latin America has all the components needed to build a lasting business: a growing market with great potential, very different customers with an appetite for diversification outside its borders, and financial needs for retirement,” says Del Campo during the first interview with the media for the advance of their plans in LatAm. The management company, which is increasingly aware of the need for international expansion, enters into the only greater geographic region, outside Africa, in which it did not have a presence, because their business is growing as much in the US as it is in Asia and Europe.
After studying the market for over two years, they finalized their plans late last year and are now already being implemented, with three key slogans: A long-term strategy, based on offering services for building lasting portfolios and target both institutional clients and distribution in the offshore world.
“Natixis Global AM’s philosophy of growth of is based on creating long term relationships, growing with the clients, and adding value, becoming their partners. We have no quantitative objectives in terms of volume but we intend to grow gradually to become one of the leading suppliers of these markets in line with the group’s philosophy”, he explains. Unlike Spain, the Latino market is not as saturated in terms of supply, and although there are challenges cropping up, such as competing with large, US management companies which are very popular in the region, Del Campo is optimistic, since she believes in the institution’s capacity to provide that added value and complementary and differentiated services based on a “multi-manager” business model, with a diverse and global supply and, rather than selling products, it aims to provide investment solutions through its portfolio construction services. “Simply selling funds would limit the value of the group. We are not only a seller of funds, we go much further”, she says.
In fact, this is the second key point of their proposal: “The motto is to help customers build lasting portfolios. The crisis has taught us the dangers of volatility and high correlations of assets and clients need to manage risks”, she explains. The management company has a center, Portfolio Research & Consulting Group, which offers research of portfolios in which they analyze, free of charge, and totally independently, the best combination of products for every client, whether funded by the Management Company or third parties. In LatAm, where each market has its own peculiarities, they will provide personalized service, “and not a ready-made fund package.”
Ambition in Hispanic Latin America
The aim is to reach Spanish-speaking Latin America, and all types of investors, both institutional and private banking distribution, during the first phase, leaving Brazil for a second time. In Mexico, the business will focus on institutions, since the Afores provide the opportunity, for which they are already designing portfolios. “The first focus is on pension funds but, according to the regulation, we will reach more market segments gradually”. Giordano, head of business and previously from Schroders, has extensive experience in institutional business.
In Colombia’s case, an office which could be opening sometime next year, and a market from which they will also cover Peru and Panama, there is a greater mix of clients, as in Peru, while in Uruguay (an office which they plan will be ready for opening anytime from the end of the year to early 2015) the focus is on large private banks and third party funds. Even in Chile, where more than just accessing often opportunistic pension funds, the core of their strategy is also based on growing with the fund managers and private bankers, facing their commitment to building a sustainable and lasting business. From here the expansion could reach more countries in the future, says Del Campo.
A Local and Global Team
To reach this market, Del Campo shall coordinate from Madrid all local commercial teams from Latin America (Mexico’s, and the future ones of Colombia and Uruguay) and US Offshore, where Ed Farrington is co-head for the Offshore market, also counting on marketing support, compliance and operations with the overall infrastructure of the group. Rodrigo Nunez Aguilar, director of Global Key Accounts for Latin America and the US offshore, will provide support from New York, as will the teams in Miami and Boston. All of it, in order to serve the region in a coordinated manner, and very important, for example, to plan the steps to be taken according to the regulatory characteristics of the various markets.
As for their Luxembourg funds, they are operating in international platforms and currently there are no local records, but that’s a topic that depends on each market. Nevertheless, Del Campo assures that investors feel very comfortable with the UCITS brand because they seek the security offered by regulated products. Among her market preferences, and considering a tendency to a more risky character regarding local assets, she highlights both US and European equities and emerging fixed income. In these assets she highlights the offer which can be provided by management companies within the group, such as Loomis Sayles (expert in fixed and emerging market debt) or Harris Associates (US Equities).
Growth in their DNA
Natixis Global AM’s Latin expansion arrives at a time in which their assets globally are close to a trillion dollars, as currently it has 960 billion, and when it has already secured a place amongst the top 15 management groups worldwide, according to the Cerulli ranking. In recent years, while its competitors closed down offices, the company invested heavily, opening in markets like Spain and, since the year 2000, has hired 13 new sales managers. This strategy has allowed it to double its business during the past three years. Also, instead of investing in marketing in recent years, the Management Company has invested to enhance the group’s capabilities of analysis and research for building lasting portfolios.
In the US, it accumulates ten and a half consecutive years of positive inflows in its affiliated management companies in the country, whose assets have grown from 131 billion to 453 billion in 14 years.
Steven Nicholls, Head of Fixed Income Product Specialists was recently in Madrid with Donald Amstad, Head of Business Development for Asia at Aberdeen AM.. "The Question to Ask Is What Percentage of the Portfolio Should Be in Asia and the Answer Should Have Two Digits"
There is no stopping Asian development, and the best proof of this is the increasing urbanization rate of these countries, which in turn results in an increase in life expectancy, increasingly higher per capita income (especially in the big cities) and, although it may seem an unimportant detail, the constant growth in the use of technology, especially mobile phones. For Donald Amstad, Director of Business Development for Asia at Aberdeen AM, the most representative example of this trend is South Korea, which should serve as a role model for other regions.
Taking into account that Asian currencies are generally cheap, while fixed income offers good returns -especially Asian dollar-denominated bonds which are trading at significant discounts compared to their American counterparts- and equities are not expensive either, investors should have exposure to Asia in their portfolios.
“In this scenario, the question to ask is what percentage of the portfolio should be invested in Asia, and the answer should have two digits,” said the expert, during a recent presentation in Madrid.
During his speech, Donald praised Asia’s growth potential, which is being ignored by developed countries, even though it now contributes 30% of global GDP, and estimates suggest that this figure will rise to 50% in 2050.
And for the first time in many years there is no negativity regarding China in Aberdeen. The reason is that the government has undertaken important steps, more and more people migrate from rural areas to cities, and they are also taking steps to liberalize markets, such as the recent connection between the markets of Shanghai and Hong Kong. They believe that, although growth is slower, a situation like Lehman Brothers is not about to happen. “The government has invested US$4 trillion out of the country and the same amount in domestic companies.”
According to Amstrad, however, the Asian region with the highest potential is India. “It’s definitely the emerging country with most investment opportunities.” And this is due to the good measures taken by both the Prime Minister, Narendra Modi, and the Governor of the Central Bank of India, Raghuram Rajan, although there is still much to be done. For example, in spite of its huge population, the percentage of workers is increasing.
Opportunities in emerging markets’ fixed income
Investment opportunities are also to be found in fixed income. As advocated by Steven Nicholls, Head of Fixed Income Product Specialist, the potential of emerging regions is unquestionable. These are regions with a large population, where demand for goods and services is growing, and an “example of this, as Donald said, is the ever increasing use of mobile phones and internet, and not only among the young.” Also, people in rural areas have greater access to information and banking institutions, with transactions, for example, becoming more common.
This does not mean that there are no risks, however, although generally they have more solid and stronger balance sheets than ten years ago and lower levels of debt. In addition, much of the debt is denominated in local currency. “But we must be selective with the countries that are chosen.”
“We believe that besides the growth potential offered by these countries, another indicator that they will continue to give good yields is that demand should be supported in part by institutional investors in high yield corporate issues,” said the expert.
Photo: Investec. Investec: "Our Preferred Asset Class Is High Yielding Equities, Which We Think Are Reasonably Valued"
How will the potential move away from zero interest rates influence markets? John Stopford, Co-Head of Multi-Asset at Investec Asset Management, gives his view on this interview about the implications for high yield equities, income investors, emerging markets and more.
What has surprised you most in 2014?
One of the things that surprised me most is how much pessimism around the global economy has affected people’s expectations of US interest rate pricing. To our minds, the US economy is diverging, to some extent, from other economies and is creating room for the US to raise interest rates at some point in 2015. However, this has been largely priced out of markets, as markets worry about slowdowns in Europe, China and elsewhere. This has obviously had quite a big impact on bond markets and, to some extent, other asset prices as well.
Should we be concerned about US interest rates in 2015?
We think interest rate developments in the next 12 months are going to be very important. Clearly one of the key drivers of asset markets in recent years has been the very low level of interest rates and the promise by central banks to keep interest rates at low levels for a considerable period. If this driver is beginning to change then investors need to factor that into their investment thinking. We think it is highly likely that the US Federal Reserve will raise rates next year. We also think that this is a fairly significant development that will lead to a pick-up in volatility. It will cause more divergence between US assets and other markets, particularly the dollar, but also bond markets. It will create some noise in equities, although we think that equities should be able to ride through the noise and will be more focused on whether the global economy as a whole is going to expand.
How are you going to be managing your income portfolios?
The best way, we believe, to manage income asset exposure is to take a broad diversified approach. The world of income generation has widened out and it is no longer just a bond story. There are other assets – such as high yielding equities, property and infrastructure – that can provide part of an income solution. All income generating assets these days bring risks with them because all of the safe assets are pretty expensive: cash rates are very low, government bond rates are very low, so if you want to generate more income you have to take more risk. Therefore, to manage that we think you need to strike a balance between opportunity and risk management. One of the easiest ways of managing risk is to diversify and to actively manage the exposure that you take.
What are the biggest risks to these views?
We think there are both upside and downside risks. The main downside risk is the global economy is struggling to grow at a rate that will close output gaps and allow a more normal recovery. This is putting downward pressure on inflation. We may have reached a limit in terms of what monetary policy can do to offset this. There is also the risk that we might be in an uncomfortable economic environment. Asset prices may react badly to this risk, particularly some of the more growth-oriented assets.
But it is also possible that the world is already priced for a pessimistic outcome and potentially there are some upside risks in places like the US where we think growth may turn out to be stronger than people currently think, interest rates may rise somewhat faster than the market is pricing in and this will also potentially have an impact on the absolute relative pricing of assets, such as the dollar, equities, bond yi elds and so on.
How are you positioning your portfolio in terms of strategy?
At the moment our preferred asset class is high yielding equities, which we think are reasonably valued and which we think should benefit from a global expansion that could continue for some years given there are not many pressures on central banks to tighten monetary policy aggressively. We think that against that background earnings can come through, dividends can continue to rise and so equity income should do relatively well.
We are more cautious about high yield and credit in general, as we think this asset class has been the major beneficiary of low interest rates and is now a very crowded trade. It also tends to do less well towards the latter part of an economic cycle and looks reasonably expensive to us. We are underweighting high yield and are more neutral towards some of the other income-generating assets, such as emerging market debt and property, where we think having some exposure makes sense, but perhaps not too much.
Photo: Ian Ormiston, portfolio manager of the Old Mutual Europe (excluding the UK) Smaller Companies fund. Old Mutual Global Investors Launches European Small Cap Fund
Old Mutual Global Investors has announced the launch of the Old Mutual Europe (excluding the UK) Smaller Companies Fund, a sub fund of the Old Mutual Global Investors Series Plc, a Dublin domiciled umbrella fund.
The fund, which is managed by Ian Ormiston who joined Old Mutual Global Investors in October 2014, aims to achieve long-term capital growth through investing in smaller companies in Europe (excluding the UK). The portfolio will hold between 40 and 55 stocks, each with an equal weighting in the portfolio.
The fund will focus on finding companies with less than €1bn market cap, with the team researching the most inefficient part of the market in order to find cheap growth opportunities.
By investing in businesses achieving high and consistent profitability whilst avoiding illiquid stocks and turn-around companies, the fund aims to reduce inherent risks that are sometimes associated with the small cap market.
The European small cap sector offers a breath of opportunities for investors, benefiting from economic clustering and diversity that offers attractive investments in most market conditions.
Ian Ormiston commented: “The European small cap market is a diverse universe offering great opportunities for investors. As an under-researched sector, it is naturally inefficient and so by focusing on high quality, true small cap companies, with a good level of liquidity we aim to create a portfolio that can add real value to investors.”
Photo: Ruocaled. Allianz GI Shares its Wish List for Santa
Having just celebrated Thanksgiving, says Kristina Hooper, the US investment strategist and head of US Capital Markets Research & Strategy for Allianz Global Investors, we have so much to be thankful for as Americans—and as investors:
The employment situation has improved substantially in the past year – Unemployment has dropped to 5.8% in October 2014 from 7.2% in October 2013. Even U-6, the broadest measure of unemployment, has fallen to 11.5% from 13.7%.
Lower oil prices have put money back in consumers’ pockets – On June 6, oil closed at $102.66 per barrel. Last Friday, it closed at $76.1 per barrel. A roughly 25% drop in a few short months, helps compensate, at least indirectly, for the lack of wage growth many Americans continue to experience.
Global monetary policy remains very accommodative – Last week, the Bank of China lowered interest rates and the ECB president Mario Draghi suggested the probability of sovereign QE is rising. Even the Fed is looking at a broader set of economic data in assessing when to begin tightening. Policy makers want to ensure the economy is on solid footing before it acts. Even after the Fed’s initial move, the environment will remain relatively accommodative, especially given that the Fed expects to maintain its balance sheet at its existing size through re-investment of its maturing assets.
Most importantly, our veterans, who have made great sacrifices for our freedom – Thanks to our men and women in uniform, we live in a free society and enjoy all the rights and privileges that come with it, including a capitalist system.
But there are some items on our wish list for Santa:
Higher-quality jobs and higher wages – There has been very little wage growth in the past few years, a result of the substantial slack in the labor market. In general, many Americans have lower-quality jobs— ones they’re overqualified for, ones that don’t pay as much, ones that don’t include benefits—that are far worse than the ones they had before the global financial crisis. We are hopeful that will change as labor-market slack diminishes, although we expect it will vary by region and industry in the US.
Less conflict in the world – Some of our greatest risks right now are geopolitical ones. Let’s hope many of the troubling flare-ups we’ve seen recently begin to moderate. “The euro zone and Japan are concerned primarily about deflation while China is concerned with decelerating growth.”
Stronger economic growth and a healthy level of inflation globally – It’s clear based on recent monetary policy that Japan, China and the euro zone are worried about their economies. The euro zone and Japan are concerned primarily about deflation while China is concerned with decelerating growth. The International Monetary Fund downgraded global growth expectations for 2015 to 3.8% from 4% earlier this year. And while the United States is enjoying improving economic growth, it’s not immune to what’s happening on other shores. In fact, the October FOMC minutes show that the Fed is concerned about a global deceleration and the impact it would have on the United States. Let’s hope that greater deceleration can be halted, and that economies can actually see stronger growth in the coming year.
Investors who put emotions aside and invest with a plan – Investors, particularly younger ones, are far too risk averse right now. That’s cause for concern especially since we expect more volatility going forward. A recent Bankrate survey showed that 39% of millennials—those ages 18 to 29 years old—felt that the best place to invest money they “didn’t need for 10 years or more” was cash. While that’s largely due to the kind of investing environment they lived through as young adults, it doesn’t bode well for their financial security. Looking ahead, the investing environment will be more challenging with a lot of twists and turns. Still, investors should stick to a long-term financial plan and broadly diversify their portfolios, including an adequate allocation to stocks. It’s risky not to be in risk assets.
Wikimedia CommonsFoto: Giordano Lombardo, new CEO Pioneer. Leadership Change at Pioneer Investments
UniCredit and Pioneer Investments today announced that Sandro Pierri will be stepping down from his post as CEO of Pioneer Investments effective January 31, 2015. Giordano Lombardo will ensure continuity of leadership for Pioneer’s business during this phase. Mr. Lombardo has been with Pioneer for over 17 years, during which time he has been responsible for developing and leading Pioneer’s global investment management platform, currently serving as Deputy CEO and Group Chief Investment Officer.
Federico Ghizzoni, CEO of UniCredit, said, “I would like to thank Sandro for his many contributions to Pioneer over the last eleven years, and especially during his two and a half years as CEO. Pioneer produced excellent investment results and robust net inflows owing to Sandro’s strategic focus and disciplined execution. The past two years have seen Pioneer’s standing as a leading global asset manager reaffirmed, supported by outstanding investment performance and approximately €24 billion of cumulative net inflows. I wish him the very best in his future endeavors, and am confident that he leaves Pioneer extremely well positioned.”
Mr. Ghizzoni continued, “I am fully confident that Giordano and the rest of Pioneer’s management team will continue to effectively manage the business and support Pioneer’s clients and associates around the world. They have my full support.”
Sandro Pierri commented: “I want to thank Federico and UniCredit, as well as the Board of Pioneer Global Asset Management, for giving me the opportunity to lead Pioneer for the past two and a half years. We have, thanks to a fantastic team effort, outperformed our initial goals and helped Pioneer to produce strong investment performance and record levels of net inflows, and Pioneer is now in an incredibly strong position. I will always think very fondly of my time at Pioneer and wish nothing but the best for Pioneer and its people going forward.”
Banco Santander said on September that it was in talks to potentially combine its asset management arm in a joint venture with Pioneer Global Asset Management. The deal, if consumated, would create an asset manager with 347 billion euros, or about $568.2 billion, in assets under management and operations in the Americas, Europe and Asia. The leadership change announced today by Pioneer Investments could well be related with these conversations.
In 2013 Santander entered into an alliance that gave the private equity firms Warburg Pincus and General Atlantic a 50 percent stake in its asset management operations.
. Juan Fierro Has Been Appointed as New Sales Manager for Henderson in Madrid
Juan Fierro has been appointed as the new Sales Manager with Henderson Global Investors for the Iberian market. He will be working in Madrid, Spain from January 2015.
Henderson Global Investors’ has a strong commitment to the Iberian market. Spain in particular, has been one of the biggest contributors to the growth of Henderson’s European business.
Juan will report to Ignacio de la Maza, Director of Sales Iberia & Latin America, and he will be responsible for the wholesale market in the Iberian Peninsula.
Juan makes a welcome new addition to the team in Iberia, whose members already include both Rafael Bonmati and Paul Southgate.
Most recently, Juan was a Risk Analyst with the Investment Risk Team also at Henderson Global Investors, where he has been for more than six years. Before joining Henderson in 2009, he worked for New Star, and Banco Santander.
Commenting on the appointment, Ignacio de la Maza, said, “Juan has in depth experience of both the asset management sector and Henderson’s product offering.
His investment risk experience adds great value to the existing presence that Henderson has in Spain. This is another step forward in structuring a solid team to serve our clients in the region.”
Harald Preissler, CIO, Chief Economist and Head of Asset Management at the Swiss Management company, Bantleon
. "With The Economic Downturn in Europe, in 2015 We Could See Debt Yields Even Lower Than The Current Ones"
Interest rates and bond yields are both at historic lows, to the point that one may think that there is no scope for further reductions. But Harald Preissler, Chief Investment Officer, Chief Economist, and Head of Asset Management at the Swiss management company, Bantleon, does not think so: he believes that low asset yields will remain for a while, “they will remain low over the next five years, and will not rise too high,” he explained during this interview with Funds Society, and he argues that there may still be scope for further reductions in the coming months.
“With the economic downturn in Europe, in 2015 we could see yields even lower than the current ones,” he says; although he acknowledges that the margin is not large. Preissler explains that bonds need not again have high returns, or undergo high volatility, in order to generate returns in the portfolios, but they are able to generate alpha if yields move in around 1% -2%.
Their management is based primarily on analyzing the economic cycle: whereas, in periods of greater strength, they opt for high yield, credit, emerging market debt, or convertibles, if the situation worsens, as has happened this year, they go back to gaining exposure to public debt, which currently represents most of the portfolios of the Bantleon Opportunities funds. It’s currently overweight in German government bonds while recognizing that if the situation improves in 2015, as expected, they will opt more heavily towards credit and high yield debt. These strategies, which can invest in European bonds, currently avoid peripheral debt because they want highly liquid assets, although it does have this asset in other portfolios.
They have two sources for profitability: duration management and the incorporation, or not, of equity. As for duration, it now stands at about four years (Opportunities funds’ conservative strategy can range from 0 to 7 and the aggressive ones between 0 and 9). “If the situation becomes complicated, we are long in duration, in order to benefit from the transfer of capital from risky assets to safer assets”; and if the situation changes, they do the opposite.
The weak economic environment not only explains their opting for German government bonds, but also their current lack of exposure to equities in flexible strategies which allow it. “The economic data is weak and the technical data indicates caution, so we prefer to be out of the stock market,” he explains, although if the situation stabilizes they will invest once more. The funds include this asset in a binary way through DAX futures (i.e. they are either invested, or not invested): for the conservative strategy they have either 0% or 20%, and for the aggressive one, either nothing or 40%.
This combination can be explained by the desire to have, at least, one source of alpha in the portfolio. “When the situation improves and fixed income yields go up, should there be exposure only to bonds, there would be no source of alpha, unless they opt for negative duration, which is somewhat more complicated from the technical point of view than exposure to the stock market. In that case, the stock market provides a source of alpha.”
QE towards late 2015?
Preissler envisions a difficult economic outlook for Europe, with growth declining but without recession, although he believes that, with the help of a weaker euro, the situation will improve next year. Should the economy fail to recover, however, he believes that the ECB could act with a real QE. For now, it would suffice with a QE in the private market, and Germany would stop at that, but should the situation worsen, purchases of public debt will come at the end of next year or in early 2016. “In the end, Draghi has no other means of improving things than to buy government debt, there is not much else he can do if another period of economic weakness comes along,” he says.
European banks will not help the recovery because, in his opinion, there is no demand for credit and companies have cash to undertake investments outside Europe; therefore approved stress tests do not involve a change in the situation.
Across the Atlantic, the Fed could start raising rates in the second quarter of next year and the management company is positioned for that movement, although they rule out sharp rises which may endanger a recovery which is still weak, and taking into account the real estate industry’s sensitivity to those increases. “US cannot afford it,” he says.
Opportunities in emerging markets
For the Bantleon Opportunities strategy, the manager believes that there is value in other fixed income assets in addition to European public debt. In their multi-asset strategy, Bantleon Family and Friends, they have, also with a duration of four years in debt assets, positions in credit, although he has cut down somewhat in high yield. As well as in European government debt, although peripheral this time, including Spanish debt, these positions were built in early 2012 and are still overweight.
15% is in equities, some US but especially in emerging countries, in which it’s overweight, as he considers that the weakness of last year, which resulted from the end of QE in the US, has faded and the situation will improve. It also has 7% in gold as a hedge against potential crises.
Bantleon manages over 10 billion Euros. Capital Strategies Partners, specializing in mutual funds brokerage, represents Bantleon in Latin America and Spain.
CC-BY-SA-2.0, FlickrFoto: Jônatas Cunha. La renta variable de los mercados emergentes ya acusa la salida de capitales
Looking into 2015, it’s a good moment to review both the most important issues of 2014 and the challenges we face for next year. Philip Saunders, Co-Head of Multi-Asset at Investec Asset Management highlights the outlook for 2015, which will come marked by a deflationist environment and the strength of equity markets.
What has surprised you the most in 2014?
I think what has surprised me the most was the market’s resilience to macro negatives throughout most of 2014 until October. We saw a long period when we did not see any meaningful correction despite some fairly serious threats in the form of ISIS and energy, lacklustre European growth and the weakness of the Chinese economy. In the autumn we saw a more conventional correction and that, I think, is generally healthy for the markets.
What is your outlook for global growth for 2015?
Our outlook for global growth in 2015 is relatively constructive. We think some of the concerns about economic weakness in the short term are overdone. Although we are not expecting a blisteringly strong global economy in 2015 it should continue to register positive growth in the vicinity of just over 3% internationally, which is very similar to the experience we have had over a number of years. The composition of that growth has shifted. It has moved away from emerging economies, where we have seen weaker growth, towards a stronger US economy, which seems to be firing on a lot of domestic cylinders, including energy. Weakness in China will probably continue, but it is a growth recession and we think that expectations for Europe are excessively negative. We think the general growth backdrop will be supportive for equity markets. The global economy is not going to race away and we think that interest rates are likely to remain low. Inflation prints around the world are likely come in at pretty low levels allowing central banks to pursue easy monetary policies, which should support growth.
What type of growth are we currently seeing and how does this affect market cycles?
The kind of growth we are currently seeing is pretty anaemic and unbalanced. Many economies are at different points in cycles, which we call asynchronous growth, i.e. it is not synchronised and therefore it is still positive, but it is not as dynamic as we have seen in periods in the past when all economies have tended to strengthen on a coordinated basis. That is quite good for investors because overly strong growth tends to result in inflation, which tends to encourage central banks to tighten policy. We are not seeing that and we do not think that we will see that for some time. Low inflation, low interest rates and a long economic cycle are constructive for equity markets in particular and also means that real long-term interest rates do not have to rise as much as would otherwise have to be the case.
What are the biggest risks to these views?
We think that the biggest risk is on the deflationary side rather than the inflationary side. We think that inflation is unlikely to be a problem because we are in a fundamentally disinflationary environment. Global growth is unbalanced at the moment because it is overly dependent on the performance of the US economy. We think the US economy is going to perform just fine and that will help to underpin growth internationally at a time when other economies are having to adapt. However, if the US economy were to weaken significantly that would compromise our global growth outlook, which will raise risks and affect corporate earnings. Our equity view depends on constructive corporate earnings. In practice, the corporate sector is performing better than national economies and we expect that to continue.
How are you positioning your portfolios?
Our portfolios currently reflect a strategic bias towards equities. We think that equity markets are fairly valued at current levels and we think that they are supported generally by an improving earnings dynamic. We also prefer equities within the growth space to other growth assets, such as high yield bonds or emerging market debt. The skew towards equities is less than in the post summer of 2012 period, but is still positive. That is balanced by defensive assets. We continue to be happy to hold bonds, even though yields are relatively low at the moment, simply because we see the principal risk to our primary scenario as being a deflationary one. This would result in undermining the prospects of earnings and it would mean that yields would fall even lower than they are at currently.
