The ECB Opts for a “Meeting-by-Meeting” Approach with a Focus on Data

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Yesterday’s European Central Bank (ECB) meeting concluded without major surprises, resulting in limited movements in the financial markets. According to analyses by top international asset managers, the key takeaway from the meeting and subsequent remarks by Christine Lagarde, President of the ECB, was the emphasis on data-driven decisions.

Recent figures on service inflation and wages have not moderated as initially expected after the June rate cut. “The data flow in the coming months will determine the pace at which the ECB removes additional restrictions,” says Konstantin Veit, Portfolio Manager at PIMCO. The new projections, to be published in September, should confirm that inflation is systematically converging toward the target in the second half of 2025. Growth in the second quarter is expected to be lower than in the first, with restrictive monetary policy continuing to create challenging financing conditions, especially for companies. Before the September meeting, many data points will be released, providing sufficient confidence to resume cuts.

According to Felix Feather, Economist at abrdn, “This move reflects the ECB’s reluctance to extend its current cycle of cuts until new encouraging data is available. The central bank continued to emphasize its reliance on data, indicating that it is not committed to a specific rate path in advance.”

Salman Ahmed, Global Head of Macro and Strategic Asset Allocation at Fidelity International, notes that the ECB also downplayed the recent uptick in inflation, which it deemed temporary, and general wage pressures, which broadly align with its expectations. “Meanwhile, downside risks to growth, mainly due to the slow recovery of the industrial sector and weak credit dynamics affecting corporate investment demand, justify the ECB removing some degree of restriction. We will have two more months of data on inflation and employment, which should pave the way for cuts, barring any upward surprises,” Ahmed explains.

Inflation Analysis

Sandra Rhouma, Economist in the European Fixed Income team at AllianceBernstein, observes that the ECB’s reaction function remains unchanged, conditioned by core inflation dynamics, inflation outlook, and the strength of monetary policy transmission. “The statement highlights that most inflation indicators remained stable or decreased in June, although service inflation remains high at 4.1% in June. However, other core inflation indicators, excluding more volatile components, are at or below 2%,” she explains.

Rhouma expects core disinflation to continue and wage growth to relax in the second half of the year. “Regarding wages specifically, the ECB appears confident that profits have started to absorb the high wage growth, weakening the transmission to core prices,” she notes.

Dave Chappel, Senior Fixed Income Manager at Columbia Threadneedle Investments, points out that while growth risks remain to the downside, labor compensation is still recovering in some sectors due to post-COVID inflation increases. “The ECB remains confident that wages will ease in the coming quarters and return to levels that will allow inflation to sustainably reach the 2% target. As this happens, the central bank will take further normalization steps, likely starting in September,” he adds.

Forecast for Upcoming Cuts

Veit’s forecast is that the ECB will continue lowering official interest rates during expert projection meetings, with the next deposit facility rate cut expected in September. “Unlike earlier this year, current market prices seem reasonable and broadly align with our baseline of three cuts this year,” Veit adds.

Rhouma anticipates two additional cuts this year, in September and December, aligning with market expectations. “This pace of cuts seems most appropriate given the data dynamics and inflation outlook. Although reluctant to provide firm guidance, it is the pace some members, even among the hawks, have started to support. Structurally, nothing has changed in the Eurozone economy to justify neutral interest rates of 2.3% in 2-3 years, as currently valued by the market,” she clarifies.

Amundi expects a 25 basis points rate cut at the next meeting in September. “Although wage growth remains high and steady, President Lagarde seems to view it as a lagging indicator of inflationary pressure, and both she and the Council appear more concerned about slowing economic growth,” argues Guy Stear, Head of Developed Markets Strategy at Amundi.

Finally, Peter Goves, Head of Developed Markets Sovereign Debt Analysis at MFS IM, supports the baseline hypothesis of a cut in September.

“A cut is around 80% priced in for September. We believe the upcoming data should confirm the disinflationary narrative and allow for a cut at the next meeting. Along with the increasing likelihood of the Federal Reserve cutting rates (global factors dragging yields down), we see Bund yields falling in the second half, with a year-end target of 2.25%. This keeps us constructive on eurozone duration,” he argues.

A Microsoft Glitch Causes Problems on the London Stock Exchange and in Banks Worldwide

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The “Blue Screen of Death,” a term used to describe a major Microsoft malfunction, has caused widespread operational issues affecting the London Stock Exchange (LSE), banks, airlines, and airports during peak tourist season.

The problems began at 5:30 GMT with an alert from CrowdStrike to its clients, warning that the company’s “Falcon Sensor” software was causing Microsoft Windows to crash and display the infamous “Blue Screen of Death.” The alert included a manual fix for the issue, according to Reuters.

The LSE website has issued a warning stating that the RNS news service is experiencing a global third-party technical issue preventing news publication. “Technical teams are working to restore the service, with no impact on the trading of securities or other services on the London Stock Exchange.” Meanwhile, Bolsas y Mercados Españoles (BME), the operator of Spanish financial markets, and the regulator CNMV have confirmed that they are unaffected by the Microsoft issue, as reported by Economía Digital.

According to EFE, Downdetector, a website monitoring service outages, has noted sudden spikes in incidents affecting various banking websites using Microsoft applications since last night. Banks such as Santander España, Kutxabank, Unicaja, and Ibercaja are experiencing issues, according to capital.es.

Travel Industry Challenges

The travel sector is one of the hardest hit, with airports worldwide facing operational disruptions. Major US airlines, including Delta, United, and American Airlines, grounded all flights due to the Microsoft outage, as reported by EFE. The US Federal Aviation Administration (FAA) confirmed the incident, affecting all domestic flights regardless of their destination. Airports in Tokyo, Amsterdam, Berlin, and several in Spain have also reported system problems and delays.

The organizing committee of the Paris Olympics announced on Friday that its IT operations were impacted by a global cyber outage just a week before the event’s start. “We have activated contingency plans to continue our operations,” the committee stated, according to Reuters.

Stock Market Reactions

Companies facing technical issues saw their stock prices decline. In Spain, financial sector stocks fell between 1.19% for Santander and 0.3% for Unicaja. In Europe, Société Générale and BNP Paribas dropped by 1.3%, while Deutsche Bank in Germany fell by 2%.

Affected by the LSE disruption, Deutsche Boerse, the operator of the Frankfurt Stock Exchange, saw a 0.95% decline, and Euronext, which owns the Paris and Milan exchanges, among others, fell by 1.25%.

Tech stocks also had a rough day. CrowdStrike’s shares plummeted by 9% in early Wall Street trading, while Microsoft remained almost flat compared to the previous day’s closing price.

HSBC AM Advocates Real Diversification Amid Economic Fragmentation and Active Fiscal Policies

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In the opinion of Sefian Kasem, Global Head of ETF & Indexing Investment Specialists at HSBC AM, and paraphrasing William Shakespeare, the key to the outlook for the second half of the year lies in “cuts or no cuts (interest rates), that is the question.”

He explains, “Interest rate outlooks have changed significantly, especially concerning the U.S., and there is a greater consensus that they will be higher over the next 10 years; which creates a very different context from the last decade.” Additionally, he believes that the next six months should be approached with a clear change in mindset: “In 2023, we talked about a hard landing, but in 2024 we are already talking about a soft landing.”

This leads to his first reflection: we are facing a more fragmented environment in terms of monetary policy and geopolitics. For Kasem, although these two ideas—higher rates and greater fragmentation—will be present over the next ten years, they carry significant weight in the short term.

The HSBC AM head points out that the expectation has shifted from seven rate cuts to just two in the U.S. for this year. “Estimates of a more aggressive policy by banks continue. Their main driver will be inflation expectations, which is the primary element that monetary institutions are weighing to make monetary policy decisions,” he states.

According to his analysis, central banks in developed markets have been very focused on supporting the economic growth of their countries, but he believes it is better to use fiscal policy for that purpose. “Many of these countries will have to make decisions about their fiscal policy objectives and not rely as much on the measures we saw during the pandemic crisis to support the economies. Of course, they will have to do this in a context where inflation has moderated but is still high,” he adds.

Regarding the second fragmentation, geopolitics, Kasem warns that certain issues have gained relevance, such as infrastructure security and the resilience of supply chains. “Again, everything is connected. Greater attention will be paid to what is done with the economy and how fiscal policies are used because we are moving toward a more fragmented geopolitical environment,” he reiterates.

Implications for the Portfolio

For the HSBC AM specialist, this latter idea is relevant when positioning portfolios. “This demonstrates that investors need to have real diversification in their portfolios, as well as thematic bets, maintaining a multi-asset approach. It could be said that the time has come for a new diversification because generating alpha will be complex,” he argues.

His first proposal for investors is to be more tactical and selective in fixed income positions. He particularly finds the yields provided by global high yield, US ABS, and the 60/40 portfolio very attractive. On the latter, he notes: “The 60/40 portfolios had a tough time in 2022, but they still work. It just needs to be reviewed because, with the changing context, we cannot expect it to perform the same way it did over the last ten years.”

Additionally, he shows a preference for reducing exposure to U.S. equities, as he believes that in the risk/reward relationship, there are fixed income assets that perform similarly and offer fewer risks.

He also maintains a positive view of emerging markets. He explains that they are now much more robust than they used to be thanks to the dynamics of their monetary policy. “We prefer to introduce emerging market risk into the portfolio because their valuations are more attractive. In particular, we prefer emerging countries that are less related to the U.S.,” Kasem adds.

Finally, the HSBC AM specialist focuses on alternative assets, particularly real assets. He warns that at first glance, they may seem less attractive than before, but they can play an interesting diversifying role in terms of asset type and source of return. “It is important to have flexibility to capitalize on opportunities in the private equity segment and also in private credit, always with a medium-to-long-term view. Having exposure to commodities, real estate, and infrastructure, both listed and unlisted, will generate very good diversification for the current fragmentation scenario,” Kasem concludes.

The EU’s ESG Regulatory Framework Is Positive, but It Needs Greater Clarity and Improvements

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According to a survey conducted by CFA Institute on sustainable finance among investors, the EU’s ESG regulatory framework contributes to an increase in Sustainable Investment but needs greater clarity and improvements. One of the main conclusions of this study is the variety of challenges faced by investors in the EU regarding the disclosure of sustainable finance, the reliability of data, and the complexity of ESG ratings.

“This study represents the views of financial professionals across the ecosystem, from large asset owners to boutique asset managers. One of the reasons we conducted this study is to understand how our members perceive the current EU regulatory regime, which aims to support and promote sustainable investment. We observe mixed opinions on the topic: while there is broad consensus that the EU’s sustainable finance regime is advancing the international agenda, a similar proportion feels that the EU’s efforts are confusing, and the lack of reliable ESG data does not justify the integration of ESG considerations into investment decisions. This is a concerning finding, and regulators need to pay attention to the sentiments of investment professionals,” highlights Josina Kamerling, Head of Regulatory Affairs EMEA at CFA Institute.

In this regard, investors are urging regulators to continue driving the international sustainability agenda but with legislation better adapted to ESG disclosure requirements to ensure alignment with their needs. Regarding the lack of reliable and verifiable data, the report concludes that the rapid implementation timeline of the applicable EU legislation has forced companies and asset managers to provide required disclosures despite the lack of reliable and verifiable data.

A testament to this is that 65% stated that the lack of reliable ESG data was one of the biggest challenges for asset managers in implementing the EU’s SFDR, while 45% consider that the high costs of obtaining ESG data and the lack of skilled personnel with experience to collect and analyze it were other major challenges in implementing the SFDR.

ESG Information

The report reveals that retail investors can be confused by the volume and complexities of sustainability information, making it difficult for them to use it to make appropriate investment decisions. 45% of respondents indicated that the amount and complexity of ESG information often lead to confusion among retail investors when making an investment decision. Specifically, 36% said that the disclosure requirements under Articles 8 and 9 of the SFDR are too complex and make it difficult for retail investors to fully understand the sustainability impact of the funds they are considering investing in.

“The lack of clear definitions in the SFDR has resulted in asset managers and companies interpreting existing rules and standards in various ways, leading to diverse implementation of the EU’s ESG legislation,” the report concludes, noting that 32% expressed that it was difficult to compare ESG products because the required disclosures are not standardized and are not comparable across jurisdictions for retail investors. Furthermore, 37% believe that the regulation of the EU Taxonomy has reached an excessive level of development, resulting in information complexity and confusion among investors and stakeholders.

Recommendations for Regulators

Following the survey’s conclusions, CFA Institute has developed several recommendations for EU regulators to “address the concerns expressed by investors.” These recommendations include:

  1.  Continuing to drive the international sustainability agenda. Focus on developing more step-by-step adapted legislation regarding ESG disclosure requirements and taxonomies to ensure alignment with the needs of financial market participants.
  2. Providing clear and consistent ESG terminology throughout the sustainable finance legislative framework. Clearer definitions would promote consistency in the implementation of ESG-related legislation and minimize diverse interpretations of rules and standards.
  3.  Considering the challenge posed by unreliable ESG data and the associated costs of collecting ESG data and training personnel for further analysis. Such issues currently limit compliance with the disclosure requirements in the EU’s sustainable finance legislative framework.
  4. Better clarifying the fund categorization system described in the SFDR for the disclosure requirements under Articles 8 and 9 of the regulation. A clearer approach could reduce the complexity of ESG disclosures for investors and mitigate greenwashing risks.
  5.  Addressing the complexity of ESG ratings and the divergent methodologies used by providers. The introduction of disclosure requirements, as envisaged in the proposed regulation on ESG rating activities, is likely to increase confidence in ESG rating providers and improve the comparability of their assessments.

Investors Remain Bullish Driven by the Expected Fed Rate Cuts

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Optimism remains among investors, according to the global manager survey conducted monthly by Bank of America. According to the entity, they remain bullish driven by the expected Fed rate cuts and strong expectations that a soft landing will eventually be achieved in the U.S. economy.

However, it is noteworthy that growth expectations in July are lower and that FMS cash levels have risen to 4.1%. “Monetary policy is too restrictive according to 39% of investors, the most restrictive since November 2008, but this, in turn, reinforces the belief that global interest rates will drop in the next 12 months,” noted BofA.

56% of managers expect the Fed to cut rates for the first time at the FOMC meeting on September 18, while 87% estimate that the first Fed cut will occur in the second half of 2024. “84% expect at least two Fed rate cuts in the next 12 months: 22% predict two cuts, 40% predict three cuts, and 22% predict more than three cuts,” the survey specifies.

A soft landing is the most plausible option for 68% of respondents compared to 11% who expect a hard landing and 18% who expect neither. The bank’s conclusion is key: “We believe that hard landing risks are undervalued, given the slowdown in U.S. consumption, the labor market, and public spending. This makes us more bullish on bonds and gold in the second half of 2024.” They add that the shift in conviction from “long stocks and short bonds” expects an impact on the soft landing narrative and policy consolidating the existing conviction.

Investors’ global growth expectations decreased to a net 27% as they anticipate a weaker economy. In this regard, the entity explains that the increased pessimism about global growth this month is partly due to more negative U.S. growth prospects.

In fact, 53% of investors expect the U.S. economy to weaken, the highest percentage since December 2013. For now, two out of three investors still do not expect a global recession in the next 12 months. Specifically, 67% say a recession is unlikely, slightly down from 73% in June.

Complementing this view, “higher inflation” is no longer the main risk identified by managers, replaced by geopolitics. “87% expect lower rates, 81% a steeper yield curve, and 62% predict at least three Fed cuts in the next 12 months, starting on September 18,” noted BofA.

Asset Allocation

In this context, investors generally increased their allocation to utilities, U.S., emerging markets, and the UK, and reduced their exposure to the eurozone, commodities, and discretionary spending. Specifically, in July, investors remain overweight in equities and underweight in bonds. Notably, eurozone equity allocation fell to 10%, with a 20 percentage point month-over-month decline; the largest monthly drop since July 2012. Conversely, equity investors are more overweight in healthcare, technology, and telecommunications.

“71% of investors believe that being long in the Seven Magnificent is the most crowded trade. July marks the 16th consecutive month in which it has been the most crowded trade. 45% of respondents do not believe AI is a bubble, but a growing 43% of investors do,” added BofA.

Pictet Alternative Advisors Acquires Technology Services Group

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The team led by Edmund Buckley, Head of Direct Private Equity Investments at Pictet AA, the alternative investments division of the Swiss Pictet Group, has acquired Technology Services Group (TSG), a provider of IT services for rapidly growing small and medium-sized enterprises based in the UK. “We invest in high-quality businesses led by top entrepreneurs and are delighted to partner with Rory McKeand and the TSG management team to achieve their growth objectives,” Buckley explained.

This is the second investment by Pictet AA’s direct private equity team, following the acquisition of a majority stake in Pareto FM, a leading provider of technical services for facilities management with ESG criteria in the construction sector, in November 2023. According to the management firm, TSG covers the full range of technology within the Microsoft ecosystem, facilitating companies’ transition to cloud-based infrastructure. It holds seven Microsoft designations: Business Applications, Modern Work, Security, Digital & App Innovation, Infrastructure, Data & Artificial Intelligence, and Cloud, making it one of the few UK Microsoft Solutions Partners accredited with technical and execution capability across all Microsoft, Azure & Cloud solutions, business applications, and cybersecurity. Based in Newcastle, with over 250 full-time employees and offices in London and Glasgow, TSG serves 1,300 clients across various industries in a market driven by strong outsourcing and digitalization trends.

Andrzej Sokolowski, Head of Private Equity in the UK at Pictet AA, noted that TSG has an attractive and defensible business model, with a high proportion of recurring revenue and clients who value service quality and expertise across the entire Microsoft suite. “It offers solutions in Azure, Dynamics, and cybersecurity, as well as accelerated deployment of artificial intelligence tools. We see significant growth potential in TSG, both organically and through mergers and acquisitions.”

Rory McKeand, CEO of TSG, stated: “The demand for cloud services among SMEs is starting from a low base and is boosted by the new and powerful generation of Microsoft productivity tools. Pictet’s investment and collaboration will accelerate the next stage of our growth.”

Pictet AA acquired TSG from founding owners Sir Graham Wylie and David Stonehouse, as well as the management team, which has reinvested part of the proceeds. “We are proud of the growth and success that TSG has achieved as a leading provider of exceptional quality IT services focused on Microsoft and the Cloud. We wish Rory, his team, the staff, and Pictet all the best for the future,” Stonehouse remarked.

The ECB’s July Meeting Arrives With No Forecast of Changes in Rates, Discourse, or Stance

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The European Central Bank (ECB) will hold its July monetary policy meeting tomorrow. According to asset managers, it is likely to proceed without major surprises and, most notably, without new interest rate cuts as market expectations suggest.

“The ECB’s July monetary policy meeting is likely to pass without incident. Similar to market expectations, we do not anticipate any interest rate cuts. Data dependency remains high, decisions are made meeting by meeting, and there is no prior commitment to a possible rate cut in September,” acknowledges Ulrike Kastens, economist for Europe at DWS.

This probable pause in July, according to Kevin Thozet, member of the investment committee at Carmignac, “will allow the institution to better assess the region’s inflation and growth trajectory and confirm that the path forward is as desired. However, the prospects of a new rate cut in September, along with the Fed, are high.”

Currently, data indicate that eurozone inflation fell to 2.5% year-on-year, while core inflation remained unchanged at 2.9%. In the opinion of Jean-Paul van Oudheusden, market analyst at eToro, as long as interest rates stay above 3%, it is likely that the ECB’s monetary policy will remain restrictive. “The current base interest rate is 4.25%, which provides room for further rate cuts despite the latest adjustment to interest rate expectations made by the central bank in June. Recently, the central bank has been cryptic about its interest rate path, but its goal is not to surprise the markets. Christine Lagarde could prepare the market for a rate cut in September or October in her press conference on Thursday,” comments van Oudheusden.

Regarding what to expect from tomorrow’s meeting, Germán García Mellado, fixed income manager at A&G, adds: “Regarding the reduction in bond purchase programs, no significant new developments are expected, since in July, reinvestments of the special program launched during the pandemic (PEPP) began to be reduced by 7.5 billion per month, with the aim of fully reducing reinvestments by 2025.”

Already stated by the ECB

In line with what the ECB has explained so far, given that there are no new growth and inflation projections, it is unlikely that the communication will change. According to Philipp E. Bärtschi, Chief Investment Officer of J. Safra Sarasin Sustainable AM, the ECB’s rate cut in June was accompanied by comments suggesting that the ECB will also cut its rates gradually rather than quickly. “However, due to the weaker growth momentum and the projected inflation path, we expect three more rate cuts in the eurozone this year,” notes E. Bärtschi.

“The messages issued in Sintra are consistent with previous communications, and barring surprises in the data, September is the preferred date for the next action by members. What is reaffirmed is the trend of rate cuts. This meeting will take place after the French elections, and although there is still some uncertainty around the composition of the next French government and the prospects for fiscal policy, we do not rule out seeing Lagarde addressing questions about what the ECB could do to protect French sovereign bonds and under what circumstances,” adds Guillermo Uriol, Investment Manager and Head of Investment Grade at Ibercaja Gestión.

Additionally, according to President Lagarde, the strength of the labor market allows the ECB to take time to gather new information. Consequently, in the opinion of Konstantin Veit, portfolio manager at PIMCO, the ECB is in no rush to cut rates further, decisions will continue to be made meeting by meeting, and the data flow in the coming months will determine the speed at which the ECB removes additional restrictions.

“Given the ECB’s reaction function, whose decisions are based on inflation outlooks, core inflation dynamics, and monetary policy transmission, we foresee that the ECB will continue cutting rates in expert projection meetings, and we expect the next rate cut to occur in September,” emphasizes Veit.

Forecast of new cuts

The market currently expects a 25 basis point rate cut in September and another in December/January. However, they identify that the ECB remains open to a slower rate cut process based on the data being published, with a meeting-by-meeting approach.

For their part, investment firms agree that the market is pricing in another 45 basis points of rate cuts for this year and consider that the current terminal rate, around 2.5%, above most estimates of a neutral interest rate for the eurozone, indicates a high concern about last-mile inflation. “Overall, the market valuation seems reasonable and broadly aligns with our baseline of three cuts for this year,” points out Veit.

On the possibility of rate cuts resuming in September, Peter Goves, Head of Developed Markets Sovereign Debt Analysis at MFS Investment Management, argues that it is not yet fully priced in, which leaves some room for an uptick in the event of a 25 basis point cut at that meeting. “This keeps us optimistic about eurozone duration in the short and medium term. European government bond spreads remain relatively tight given the risk of events in France (which turned out to be relatively brief and more idiosyncratic than systemic). We see this as a possible topic to address in the press conference, but we doubt Lagarde will comment on France’s domestic political situation. Additionally, Lagarde is likely to affirm that monetary policy transmission has worked well,” explains Goves.

The ECB’s challenge

For Thomas Hempell, Head of Macro Analysis at Generali AM, part of the Generali Investments ecosystem, the ECB sticks to its data-dependent approach and stressed that wage data plays a crucial role. “On the other hand, official interest rates remain well above the neutral rate. We believe that with the slow downward trend in inflation, the ECB will initiate quarterly interest rate cuts until the deposit rate reaches 2.5%. This broadly aligns with market expectations,” comments Hempell.

In the opinion of Gilles Moëc, Chief Economist at AXA IM, it is paradoxical that central banks are being harshly criticized just as they are about to declare victory over inflation at a manageable cost to the real economy. In fact, he considers that the ECB started cutting rates in June, before clear signs of recession began to accumulate. “We believe it will be tight, but there is a possibility that the ECB will remove monetary restraint quickly enough to avoid a recession phase. We do not expect an emergency cut at this week’s meeting; we believe there would have been clear signals to this effect at the annual conference in Sintra,” he states.

According to his forecasts, the ECB Governing Council meeting should be the occasion to make it clearer that the June cut was only the beginning of a process. “We expect the next 25 basis point cut to occur in September. The market is now pricing an 87% probability of a cut then, and we would put it even higher. It is true that disinflation has stalled, but surveys converge to paint a sufficiently moderate picture of underlying price pressure for the ECB not to wait too long. In June, Christine Lagarde energetically avoided engaging in a discussion about what would be a path to removing restrictions. We expect greater openness this week, largely validating current market prices,” he concludes.

Larry Fink Reaffirms BlackRock’s Commitment to Private Markets

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In the context of presenting the second quarter 2024 results, Larry Fink, Chairman and CEO of BlackRock, reiterated the company’s commitment to private markets. This commitment has been bolstered by the acquisition of Preqin earlier this month.

“BlackRock is leveraging the broadest set of opportunities we’ve seen in years, including private markets, Aladdin, and full portfolio solutions across both ETFs and active assets. At the same time, we are opening significant new growth markets for our clients and shareholders with our planned acquisitions of Global Infrastructure Partners and Preqin,” Fink stated.

In this regard, he highlighted that organic growth in this second quarter was driven by private markets, in addition to retail active fixed income and increasing flows into our ETFs, which had their best start to the year in history. “BlackRock generated nearly $140 billion in total net flows in the first half of 2024, including $82 billion in the second quarter, resulting in 3% organic growth in base fees. We are delivering growth at scale, reflected in a 12% increase in operating income and a 160 basis points expansion in margin,” he said regarding the results.

According to Fink, BlackRock’s extensive experience in engaging with companies and governments worldwide sets it apart as a capital partner in private markets, driving a unique deal flow for clients. “We have strong sourcing capabilities and are transforming our private markets platform to bring even more scale and technology benefits to our clients. We are on track to close our planned acquisition of Global Infrastructure Partners in the third quarter of 2024, which is expected to double the base fees of private markets and add approximately $100 billion in infrastructure assets under management. And just a few weeks ago, we announced our agreement to acquire Preqin, a leading provider of private market data,” he emphasized.

Finally, he insisted that “BlackRock is defining a unique and integrated approach to private markets, encompassing investment, technological workflows, and data. We believe this will deepen our client relationships and deliver value to our shareholders through premium and diversified organic revenue growth.”

Larger Funds, Private Markets, Active ETFs, and Long-Term Themes: What Thematics AM Has on Its Radar

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Thematics AM, an affiliate of Natixis IM, is celebrating its fifth anniversary. The asset manager, specialized in thematic investing, has focused on developing a range of global, actively managed, high-conviction thematic equity strategies. Currently, they manage €4 billion in assets and have grown from a founding team of six people to 24. We discussed the firm’s future plans and their perspectives on thematic investing in this interview with Karen Kharmandarian, the firm’s CIO and co-manager of the AI & Robotics strategy.

What is your assessment of the firm’s first five years?

Overall, very positive. Firstly, the company has grown in terms of products. We started with the Water, Safety, Artificial Intelligence & Robotics strategies, and our Meta fund, a multi-thematic product. Over time, we have added new products: Subscription Economy, Europe Selection, which is a multi-thematic strategy focused on European companies, and Climate Selection, also a multi-thematic fund, but focused on companies that comply with the Paris Agreement in terms of temperature trajectory. So, five years later, we have eight products. The first four we launched have reached between €400 million and €700 million, while the most recent ones are smaller, such as the Subscription Economy strategy, which is around €85 million. Looking ahead, our intention is for these funds to continue growing until they reach a critical size. This means we need to build trust in all of them.

What is your outlook for the next five years?

Assuming we continue generating good returns and trust, we want to keep identifying attractive investment themes while maintaining our DNA. That is, not just ‘trendy’ themes, but products that truly make sense from an investment perspective for clients, and that, in terms of investment, we have an investable universe that makes sense, allowing us to be exposed to different drivers, with diverse growth engines, offering regional and sector diversification, and where we can move with agility and flexibility to manage with a long-term vision. Our vision is to build thematic strategies where we can offer what we call ‘thematic alpha,’ where our active management adds value compared to the general market performance.

Are you considering taking this same vision and thematic strategies to the private market?

Not at the moment, although it is something we consider in the medium to long term. It would give us the opportunity to leverage our experience and identify companies that are growing rapidly in the unlisted space early on. It would require a different skill set and fully dedicated teams because you can’t cover the same number of companies as in the listed space. For now, we still see some opportunities in the listed space, especially in the middle ground between these two worlds, between the unlisted space and what we do on the listed side. Maybe in these earlier-stage companies, recently IPO or post-IPO, where we have some emerging trends appearing, but we don’t have an investable universe with too many companies. We could perhaps combine different emerging trends into a single strategy with highly promising, high-growth companies, dynamically managing these different themes within the same vehicle.

As active managers, do you find the active ETFs business attractive? Many asset managers indicate that it is a way to implement an active strategy in a more efficient vehicle. Is this something you consider for your business?

The ETF business is something we didn’t consider in the past because they were mainly passive and index strategies. But today, with these active ETF vehicles, you can do practically the same as we do in our UCITS funds, just using a different wrapper for the product. Having said that, we are quite indifferent to the vehicle itself; we can use a UCITS as we could an ETF. What matters to us is that the vehicle allows us to do exactly what we do in terms of how we manage the strategies: active management, conviction-based, fundamental stock selection, and truly having this long-term vision. As long as we can do that, if the client wants an ETF instead of a UCITS fund, we’ll do it. What matters to us is not altering our philosophy, our investment process, and the investment approach we apply to a specific theme. This offers us another potential growth opportunity and opens up a new set of clients who might not have been considering UCITS products. Perhaps this is also a sign of the times.

We have seen some investor disenchantment with thematic investing; why has it lost popularity?

We have seen tremendous growth in thematic strategies over the last, say, 10 years. The level of commercial traction and interest from all types of investors, from retail to institutional, has grown dramatically over the last 10 years. This is also a recognition of the current market reality, where sector classification or regional allocation makes less and less sense. With the success of thematic investing, new fund managers and asset managers also considered thematic strategies as a commercial hook for their products. A context was created where global equity products had become thematic strategies, but without really adopting the DNA of what a thematic strategy is and without generating very attractive returns. This disappointed the market.

In this regard, what is your approach?

For us, thematic investment strategies need to be based on long-term trends. We need to ensure that we have powerful trends that support superior growth for many years and that have enough depth and breadth of investable universe. Some of the requirements we have for our thematic strategies are: it must be enduring, it must have a significant impact, it must have a broad scope, and it must be responsible. These four criteria are really key to considering whether we see the theme as viable or not.

From the perspective of clients and investors, how do they use these strategies in their portfolios?

It depends a lot. There are common characteristics among all investors, and then there are specific objectives or requirements of some clients. Initially, we saw that thematic strategies started with retail clients, as a response to a matter of convictions and also because they are easy-to-understand products. Now we have detected that it has spread to private bankers, family offices, and institutional investors. This profile considers thematic strategies as a ‘satellite’ within their core investment portfolio and also as a bet on a specific theme to drive and diversify their performance. Progressively, we have also seen that clients are becoming more sophisticated and have moved towards thematic strategies as part of their overall allocation.

Which themes are investors most interested in now?

I would say, without a doubt, that AI and robotics are very much on the clients’ radar today because they see how their daily lives are being radically changed by AI, generative AI, OpenAI, etc., and how this can bring significant changes in the way they interact with technology. Water is also becoming a relevant theme again. Although it seems like a mature theme that has been around for many years, we see that people realize that with climate change, it is gaining new momentum. And I would also mention safety, which is regaining relevance in a context of geopolitical tensions and wars.

Cocoa: The Price Volatility Does Not Diminish the Appeal of This Agricultural Commodity

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In the course of 2024, the price of cocoa has doubled, making one of the greatest pleasures we know, chocolate, more expensive. Specifically, in April, the price of cocoa on the New York Stock Exchange reached its historical maximum at $11,500 per ton, then moderated and slightly decreased in the following months. After reaching these historical peaks, prices reversed the trend and fell by 15%, but it seems they will surge again and continue to grow over time after this correction.

Investors recognize that this agricultural commodity has great long-term appeal, despite the price volatility driven by drought and climate change affecting production. According to Bank of America, it is likely that cocoa price volatility will continue in the short term. The uncertainty around supply and its implications for spot and future cocoa contracts is the main topic of discussion with their clients. According to their latest report, cocoa harvests for 2023/2024 are expected to decrease by 25% to 30% in West Africa, a region that represents half of the global supply.

In fact, the situation has even led the government of Côte d’Ivoire to limit the delivery of cocoa supplies during the mid-crop (May-July, approximately 20% of annual production) to companies with local grinding capacity. In this regard, Bank of America analysts consider that price and futures volatility for cocoa will continue until the end of August, when projections for the main 2024/2025 crop become clearer.

Better harvest production could translate into a price increase for final products such as chocolate. Bank of America believes that major cocoa and chocolate brands will increase their prices by double digits to compensate for cocoa inflation during this period, considering a future cocoa price of approximately $6,000 per ton by 2025. “Reflecting cocoa price inflation, the impact of chocolate price increases on volume (elasticity) and mix (shift to more affordable products) will be key. However, the current price waves occur after two years of double-digit price increases, questioning historical elasticity patterns, especially in the U.S. market, which has been weak so far,” Bank of America points out in its report.

According to NielsenIQ data in the U.S., chocolate market sales have been weak so far this year, with volume down approximately 5% (and value up about 1%), clearly showing some cracks on the elasticity side. In BARN’s opinion, the main culprit remains the structure of the U.S. chocolate market, which is overrepresented in the mass market. The low representation of private labels and value brands (4% and 10% of volume, respectively) means there is a limited supply of low-priced products to prevent consumers from “abandoning” the category. In Western Europe, chocolate market sales have been resilient, with volume down about -2% (and value up about +8%). The main strength of the European market, according to BARN, is its more balanced nature compared to the U.S.

In Bank of America’s view, one of the risks for BARN is the possibility that some of its clients might reformulate their recipes to reduce cocoa content, especially in the U.S. market, to limit their own cost inflation. Although BARN has reformulation capabilities, this would be a volume obstacle as it would cannibalize sales or lead to a net revenue loss if not recovered.

As seen in the first half of 2024 results, Barry’s balance sheet is very sensitive to cocoa price movements, predominantly affecting working capital through the margin call on their short cocoa futures (reflecting the forward purchase agreement). Although the pressure on free cash flow will be intense in FY24 (BofAe: CHF -1.4bn), BARN has the necessary liquidity to face it with: 1) CHF 700 million bonds issued on June 10; 2) CHF 730 million bonds issued on May 5, 2024; 3) a CHF 500 million RCF available; and 4) approximately CHF 430 million in cash available in the first half of 2024 results.

Although it may take time to rebalance the supply and demand of cocoa, this will happen eventually, according to the report. Beyond the positive volume elasticity in the chocolate category resulting from a deflationary environment, in our opinion, the key positive for Lindt will be its ability to retain price increases, which will imply a tailwind for gross margin, likely translating into increased spending on advertising and promotion to continue nurturing brand value. Conversely, Bank of America estimates the impact will be less beneficial for BARN beyond the positive elasticity of the category, as prices will mathematically decrease for them considering the cost-plus model structure.

*Harvests begin in October.