Janus Henderson Announces Acquisition of Victory Park Capital

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EBW Capital and AIS Financial form strategic alliance

Janus Henderson Group announced that it has entered into a definitive agreement to acquire a majority stake in Victory Park Capital Advisors, a global private credit manager.

With a nearly two decade-long track record of providing customized private credit solutions to both established and emerging businesses, “VPC complements Janus Henderson’s highly successful securitized credit franchise and expertise in public asset-backed securitized markets, and further expands the Company’s capabilities into the private markets for its clients”, the statement said.

VPC invests across industries, geographies, and asset classes on behalf of its long-standing institutional client base. VPC has specialized in asset-backed lending since 2010, including in small business and consumer finance, financial and hard assets, and real estate credit. Its suite of investment capabilities also includes legal finance and custom investment sourcing and management for insurance companies.

In addition, the firm offers comprehensive structured financing and capital markets solutions through its affiliate platform, Triumph Capital Markets. Since inception, VPC has invested approximately $10.3 billion across over 220 investments , and has assets under management of approximately $6.0 billion, according the firm information.

Janus Henderson expects that VPC will complement and build upon Janus Henderson’s $36.3 billion in securitized assets under management globally, the press release adds.

“As we continue to execute on our client-led strategic vision, we are pleased to expand Janus Henderson’s private credit capabilities further with Victory Park Capital. Asset-backed lending has emerged as a significant market opportunity within private credit, as clients increasingly look to diversify their private credit exposure beyond only direct lending. VPC’s investment capabilities in private credit and deep expertise in insurance align with the growing needs of our clients, further our strategic objective to diversify where we have the right, and amplify our existing strengths in securitized finance. We believe this acquisition will enable us to continue to deliver for our clients, employees, and shareholders,” said Ali Dibadj, Chief Executive Officer of Janus Henderson.

This acquisition marks another milestone in Janus Henderson’s client-led expansion of its private credit capabilities following the Company’s recent announcement that it will acquire the National Bank of Kuwait’s emerging markets private investments team, NBK Capital Partners, which is expected to close later this year, the firm says.

“We are excited to partner with Janus Henderson in VPC’s next phase of growth. This partnership is a testament to the strength of our established brand in private credit and differentiated expertise, and we believe it will enable us to scale faster, diversify our product offering, expand our distribution and geographic reach, and bolster our proprietary origination channels,” said Richard Levy, Chief Executive Officer, Chief Investment Officer, and Founder of VPC.

The acquisition consideration comprises a mix of cash and shares of Janus Henderson common stock and is expected to be neutral-to-accretive to earnings per share in 2025 and is expected to close in the fourth quarter of 2024 and is subject to customary closing conditions, including regulatory approvals.

The next phase of the AI journey will be driven by broader adoption of generative AI

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Pixabay CC0 Public Domain

Artificial Intelligence made headlines in 2023, but where is it headed now? ChatGPT and other generative AI tools have directly benefited a handful of stocks so far. According to Allianz GI, the next wave of AI advancements should expand opportunities to other companies within the ecosystem.

“This initial buildout of AI infrastructure lays the critical foundation for further disruptions as companies across various sectors leverage generative AI capabilities,” they argue.

According to Allianz GI’s latest report, the next phase of generative AI adoption and growth should benefit a broader ecosystem, including AI applications and AI-enabled industries in the coming years. “We are still in the early stages of AI infrastructure buildout and generative AI adoption. Unlike previous innovation cycles, where agile startups disrupted larger incumbents, this time, tech giants have been the initial beneficiaries. These tech giants have more resources, unique data sources, and significant infrastructure capabilities to train large language models (LLMs) and seize early opportunities with generative AI,” the manager notes.

So far, they believe that much of the outperformance in stocks has been concentrated in a select group of AI infrastructure and tech giant companies in this initial phase. Specifically, a handful of semiconductor companies whose accelerated computing chips are crucial for AI training, and major hyperscale internet and cloud providers who quickly leveraged generative AI and showed some early monetization.

“Continued developments in generative AI and large language models (LLMs) have driven much stronger demand for AI infrastructure so far, causing some supply constraints as hyperscale cloud platforms invest heavily to meet the rising demand from corporations and governments worldwide. Demand is expanding into other areas like next-generation networks, storage, and data center energy infrastructure to support the explosive growth of new AI workloads,” the report comments.

Allianz GI also observes a new wave of AI applications incorporating generative AI capabilities into their software to drive more value and automation opportunities. “Many companies in AI-enabled industries are also increasing investments in generative AI to train their own industry-specific models on proprietary data or insights to better compete and innovate in the future,” they state.

However, they warn that many of these new AI use cases are still in the pilot development phase and are not yet monetizing or contributing to earnings. They explain that, along with higher interest rates for a longer period in 2024, there has been greater dispersion in stock performance between infrastructure, software/applications, and other sectors so far this year. The market is taking a wait-and-see approach to valuing the benefits of generative AI in the broader ecosystem at this time. Allianz GI expects more clarity on the impact in the coming year as new applications and use cases emerge with each generation of better AI chips and as these AI models become smarter.

“In general, the AI innovation cycle is just beginning. The initial buildout of AI infrastructure sets the stage for more companies across various industries to leverage generative AI capabilities and catalyze the next phase of adoption and growth. In this next phase of disruption and change, there will be significant opportunities to generate alpha through active stock selection in AI applications and AI-enabled industries,” they conclude.

 

Alberto Silva (BTG Pactual Chile): “It is essential to understand the changing needs of clients and develop business in the region”

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Photo courtesyAlberto Silva, Director of Multifamily Office at BTG Pactual Chile

Today, given the economic context marked by high levels of uncertainty, wealth management has gained relevance among managers, as it allows them to maximize and preserve the value of their clients’ assets through personalized financial and investment strategies. This includes protecting wealth by mitigating risks through diversification and selecting assets resistant to fluctuations. Additionally, it focuses on ensuring sufficient resources for retirement and facilitating efficient wealth transfer to future generations. Wealth management also involves continuous adaptation to personal and market changes, always maintaining alignment with clients’ long-term goals and safely leveraging financial innovations.

Alberto Silva, a Chilean native, is the new Director of Multifamily Office at BTG Pactual Chile. With over 18 years of experience in the financial industry, he was a portfolio manager in fixed income, equity, and structured products. His transition to wealth management was driven by a desire to develop commercial and soft skills, in addition to his active management experience.

What are the biggest challenges you currently face as Director of Multifamily Office at BTG Pactual Chile?

The main challenge is to provide highly personalized and comprehensive service to high-net-worth families while maintaining a solid track record in an increasingly volatile and complex financial environment. Additionally, we face growing competition due to the emergence of advisors and small offices, along with technological advances that have intensified competition and reduced fees in the industry.

What strategies do you consider key for growth and sustainability in the asset and wealth management sector, especially in Chile?

It is essential to understand the changing needs of clients in a complex geopolitical and demographic environment. At BTG Pactual Chile, we focus on developing business in the region, leveraging local investment opportunities, and benefiting from a robust team in major financial centers worldwide.

What are the key trends in the wealth management industry?

There is a growing trend toward greater diversification of portfolios, especially with increased international exposure. The internationalization of portfolios, increased exposure to dollars, and the use of international platforms are key trends in an environment of rising uncertainty, demographic changes, and technological advancements affecting both the industry and markets. In this regard, BTG Pactual’s international platform has been crucial in providing Latin American clients access to markets in Europe and the United States.

Regarding the growth of the industry, do you think it will lean more towards separately managed accounts or collective investment vehicles?

There is room for both types of products. In our experience, institutional clients prefer separately managed accounts, while high-net-worth families tend to opt for collective investment vehicles. Throughout my experience, I have managed all kinds of assets, with a greater emphasis on fixed income strategies. At BTG Pactual, we use an open-architecture platform to invest with the best global managers, providing consistent value to our clients.

Do you allocate a certain percentage of a client’s portfolio to alternative assets, and how do these vary in terms of geographic location?

Yes, we have developed an alternative assets program with exposures ranging from 25% to 35% in products like private equity, private debt, and real estate. We have also been active in club deals, offering investments with higher returns and lower volatility, though with less liquidity. The underlying assets of these alternative investments vary geographically. Our open-architecture strategy allows us to invest with the best local and international managers, consistently identifying those who deliver high returns.

What is the biggest challenge in capital raising or client acquisition?

The biggest challenge is understanding the client’s needs to create a value proposition that combines their financial goals, expected returns, risk, liquidity, and the family’s values and legacy.

What factors do you think a client prioritizes when investing?

Clients prioritize expected returns relative to perceived risk, the efficiency and cost of investment strategies, and, increasingly, family values and the purpose of the wealth.

How is technology transforming the wealth management sector, specifically artificial intelligence?

Technology is democratizing investment opportunities through platforms and virtual assistants. Artificial intelligence facilitates rapid analysis of large volumes of information and the automation of administrative tasks, allowing us to focus on client relationships and identifying investment opportunities.

What are the most important skills a wealth management director should develop, and how do you personalize investment strategies to meet each client’s needs?

A wealth management director should develop essential skills such as analytical ability, effective communication, teamwork, and adaptability to change, especially in a volatile and challenging financial environment. To personalize a client’s investment strategies, at BTG Pactual, we have a highly qualified team both locally and internationally. In Chile, we are 12 professionals dedicated to the Multifamily business, supported by a team of 35 in the United States, Brazil, and Luxembourg, and backed by over 8,000 professionals worldwide.

Future of Wealth Management

In the next 5 to 10 years, Alberto forecasts a significant generational shift in investment decision-making. New generations are inclined toward alternative investments, venture capital, and strategies addressing technology and climate change impacts. This shift occurs in an environment of decreasing expected returns, driving a greater search for opportunities that offer both financial performance and positive social impact. The integration of advanced technology and the personalization of investment strategies will also play a crucial role in adapting to these new priorities and meeting emerging investor expectations.

Interview conducted by Emilio Veiga Gil, Executive Vice President at FlexFunds, in the context of the “Key Trends Watch” initiative by FlexFunds and Funds Society.

Neither Recession, Nor Bear Market, Nor Hard Landing: It’s Just Volatility

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Markets are recovering. In this context of calm, investment firms insist that stock market volatility is normal, even though we had become accustomed to its absence.

“The S&P 500 has retreated more than 8% since its peak on July 16, which is not unusual. In fact, we have seen 5% or more contractions occur on average three times per year since the 1930s. As for corrections of 10% or more, they have happened once a year, and indeed we are on schedule, as the last correction was in the fall of 2023,” Bank of America noted in its report yesterday.

According to the bank’s analysts, a full bear market (a drop of 20% or more), is unlikely: only 50% of the signals that historically preceded S&P 500 peaks have been triggered, compared to an average of 70% before previous market peaks. “Bear markets have historically occurred once every three to four years on average, and the last one was from January to October 2022. Despite growing recession concerns due to weaker economic data, our economists expect a soft landing, do not anticipate recession-sized rate cuts, and forecast the first cut in September,” they add.

Schroders echoes this message: sharp declines are not particularly unusual in equity markets. “In recent days, there has been a sharp sell-off in stocks, which has hit consensus and crowded trades hard. However, this should be seen in the context of exceptionally strong equity markets since October 2023 – by mid-July, the MSCI All-Country World Index had risen about 32% from its October lows – and a correction is perfectly healthy and normal,” reiterates Simon Webber, Head of Global Equities at Schroders.

Enguerrand Artaz, fund manager at La Financière de l’Echiquier (LFDE), shares this view, explaining that the correction occurred in the context of very bullish markets and large accumulations of speculative positions, including short positions on the yen. “The sudden liquidation of these positions, combined with traditionally more limited summer liquidity, likely amplified market movements,” he explains. And he adds: “The market capitulation of recent days seems particularly exacerbated, although some of the triggers should be taken seriously. Therefore, at this time, it seems important to adopt a cautious approach without overreacting to short-term movements.”

Moreover, for most asset managers, a soft landing in the U.S. remains the most plausible scenario. “Market anxiety is understandable, especially after the pace of economic growth slowed and price pressures experienced a widespread relaxation. We expect this trend to continue and its dynamics to moderate through the end of the year. This means that the risk of recession is increasing, but not to levels that concern us. It is unlikely that growth will plummet and economic fundamentals remain quite solid. Consumer and business finances appear quite healthy. Our working hypothesis remains a soft landing, with a 55% probability, and we manage a 30% probability of recession,” says Fidelity International’s Global Macroeconomics and Asset Allocation team.

“Looking at equity markets in general, we would say that investors have become more attentive to the condition of the U.S. economy and whether the Fed might be lagging in its interest rate strategy. In recent days, markets have adopted a risk-off mode, as investors worry about growth and employment. In such circumstances, areas of the market where investors’ funds are most concentrated tend to be the hardest hit,” conclude Shuntaro Takeuchi and Michael J. Oh, portfolio managers at Matthews Asia.

Central Banks’ Response

In this market event, we have seen old and new habits. Undoubtedly, “the old” is getting used to living with volatility again and “the new” is the strong intervention of central banks every time the market hiccups (a reality we have lived with for the past ten years). Evidence of the latter is that the tranquility of Asian markets has come from the Bank of Japan, whose deputy governor came out yesterday to announce that he will not raise interest rates further if markets are unstable.

According to Bloomberg, this reassured anxious investors. “The comments provided much-needed reassurance at a time when many are still worried that the yen carry trade reversal has further to go,” they note.

In the case of the Fed, the debate is whether it is taking too long to cut rates. “The problem is that in June the Fed only announced one rate cut this year. This was too aggressive and prevented it from acting quickly in July. The Fed could cut 50 basis points in September to make up for lost time. But the market is now pricing in five cuts in 2024, which is an overreaction,” explains George Brown, Senior U.S. Economist at Schroders.

Fidelity International experts expect the Fed to cut interest rates by 25 basis points in September and December. “In any case, we won’t know the severity of the risks emanating from financial markets until it’s too late, which could then justify a strong central bank response. That means we can’t rule out the possibility of more and bigger rate cuts (up to 50 bps) if financial conditions tighten further. The Fed could issue an official statement to quell the market’s most immediate concerns, stating that it is monitoring developments and ready to act if market turmoil begins to affect liquidity and monetary policy outlooks,” they argue.

According to the U.S. asset manager Muzinich & Co, it seems that the market is realizing two things. On the one hand, the Fed is behind in cutting interest rates, and the effects of its inaction this year are negatively impacting many sectors of the economy.

“Investors should expect a Fed reaction: at the time of writing, rate cut expectations stand at 50 basis points for September and November, and a 25 basis point cut in December,” they point out. Additionally, they note that “investor overexuberance and perhaps lack of attention to fundamental variables have led to excessive valuations in some sectors, especially in the stock market.”

Finally, Paolo Zanghieri, Senior Economist at Generali AM, part of the Generali Investments ecosystem, incorporates the eurozone scenario, as it was the first to publish its quarterly GDP. “Despite the persistent strength of inflation data, lower inflation expectations (based on the market) and fears of global growth have prompted a sharp revision of ECB rate cuts. At the time of writing, markets expect three more 25 basis point cuts this year (from the current 3.75%) and place the deposit rate at 2% by the end of 2025.

This pessimistic view implies a rapid return to the inflation target, something we only consider consistent with a recessionary evolution. We maintain our view of an official interest rate of 2.5% by the end of 2025,” he indicates.

Triple Event: Data Will Guide the Decisions of the Fed, BoE, and BoJ

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On Wednesday and Thursday, there will be a triple event for central banks: the US Federal Reserve (Fed), the Bank of England (BoE), and the Bank of Japan (BoJ) will hold their respective monetary policy meetings. Each institution faces its own challenges and has its messages for the market. However, they all have one thing in common: dependence on the evolution of macro data, particularly inflation.

In the case of the Fed, everything indicates that it will maintain interest rates in this upcoming meeting, which will be interpreted as preparing for a possible first cut in September. However, things are not as clear for the Bank of England (BoE), where the sentiment for a possible cut is only 50%, despite what the data suggests. Lastly, experts explain that this BoJ meeting is important because it will provide more details on the plan to reduce the asset purchase program (QT), the next step to normalize monetary policy. The main conclusion is that there will be no rate hike, as it will be a gradual process to give the market time to digest the bonds and avoid a spike in yields.

The Fed in the US

According to Christiaan Tuntono, senior economist for Asia Pacific at Allianz Global Investors, the prospect of a rate cut in the US and the rebound in demand for semiconductors and electronics, in general, are currently very favorable factors for part of the Asian economy and many local equity markets. “In this sense, we expect the Federal Reserve to keep interest rates unchanged next week but to acknowledge the improvement in US inflation, which could open the door to a rate cut by the end of the summer,” Tuntono points out.

Regarding the importance of data, Pramod Atluri, manager at Capital Group, highlights that “the US economy has largely adapted to this new interest rate environment, and I expect growth to remain above 2% in 2024.” In his opinion, this resilience shown by the US economy has led investors to adjust their expectations regarding interest rates. Although Atluri believes that the arguments for future rate cuts are no longer as evident, the central bank seems inclined towards cuts.

In this regard, the views and analysis from international managers coincide with Tuntono Atluri’s assessment. There is also a consensus in interpreting the latest macro data from the country. “Although the labor market shows clear signs of normalization and recent consumer inflation data has been relatively positive, the central bank has been encouraged by macroeconomic data several times over the past 18 months, only to later discover that the economy continued to operate at an excessive pace. Therefore, it is likely that the Fed will argue that it is prudent to observe the next six weeks of data to clearly validate the need for policy easing,” says Erik Weisman, chief economist at MFS Investment Management.

However, in his opinion, more important than what the Fed does in the next month and a half is how the market will gauge the subsequent pace of rate cuts and the eventual landing zone. “The magical soft landing of 1995 was achieved with only 75 basis points of rate cuts, and some argue that we will see a repeat of that episode in the next six months or so. However, the market expects the Fed to cut between 175 and 200 basis points before the first quarter of 2026,” estimates Weisman.

Regarding when the Fed’s first rate cut will be, managers’ analyses also point to the same timeline: September. “We believe that this week’s data, especially the 0.18% month-over-month core PCE and the signs of cooling shelter inflation, continue to reinforce our view that the first cut will occur in September. We expect a moderate hold at the Fed meeting, with Powell indicating during the press conference that a first cut is likely to happen quite soon if data continues to evolve as expected,” says Greg Wilensky, director of US Fixed Income and Portfolio Manager at Janus Henderson.

“The lower inflation rates of the past three months should pave the way for a rate cut in September. This is likely to be reflected in the meeting’s conclusions, as the Committee is expected to ensure that confidence in inflation evolving sustainably towards 2% has strengthened and emphasize that the risks to employment and inflation objectives are now balanced. Powell is likely to use his speech at Jackson Hole next month to outline the framework for the easing cycle and remind investors that the Fed will likely lower rates gradually once it begins,” adds Raphael Olszyna-Marzys, international economist at J. Safra Sarasin Sustainable AM.

For his part, Brendan Murphy, head of North American Fixed Income at Insight Investment (part of BNY Investments), expects the committee’s official statement to include some modest changes, reflecting how their key inflation metrics are now close to the target and the labor market shows signs of slowing down. “The central bank may be concerned about a potential sudden deterioration in the labor market at some point, so we expect most members to prefer acting soon to ensure a soft landing for the economy. Chairman Powell could also use next month’s Jackson Hole Symposium to set expectations for the rate-cutting cycle,” comments Murphy.

Looking at the United Kingdom

A completely different case from the US is the Bank of England (BoE). According to Katrin Loehken, economist for the UK and Japan at DWS, the outcome of the BoE’s upcoming meeting on Thursday is not clear at all. “The market expects a rate cut with just over 50% probability, and we also anticipate a reduction in the official rate from 5.25% to 5%. However, uncertainty is high because there are good arguments for both sides,” says Loehken.

In this sense, she explains that if most members of the Monetary Policy Committee (MPC) place more emphasis on a prudent and data-dependent assessment of the current situation, the negative surprise in service price inflation in July would be an argument against a rate cut, as would the slow decline in wage dynamics. “With a wait-and-see attitude, nothing wrong would be done in that case. Chief Economist Pill seems to be in the waiting camp after his last speech,” she clarifies.

On the other hand, the DWS economist highlights that updated growth and inflation forecasts should show that the economy is still growing moderately and that inflation is likely to fall below the 2% target in the medium term. Additionally, the current weakening of the labor market also raises the question of how restrictive the central bank should remain.

“In our view, these arguments are more favorable to a first rate cut and are also consistent with the central bank’s generally pessimistic rhetoric. The assessment of voting behavior is further complicated by the new composition of the Monetary Policy Committee. Therefore, only a narrow majority should vote in favor of the expected rate cut,” comments Loehken.

However, Johnathan Owen, manager at TwentyFour AM (Boutique of Vontobel), believes that the BoE may delay this rate cut. “The latest UK inflation figures will bring some relief to consumers, but behind the headline figure, Bank of England policymakers face a more complex picture that suggests rate cuts could still be far off. The latest data showed that the Consumer Price Index (CPI) inflation fell exactly to 2% in May, in line with market expectations and marking a return to the BoE’s 2% target for the first time since July 2021,” argues Owen.

According to him, before Wednesday’s CPI data, markets had largely ruled out any chance of the Bank of England cutting rates in June, although the probability of a cut in August was at 44%. “Despite the Bank of England achieving its headline inflation target of 2%, the rigidity of services inflation, driven by strong wage growth and resilient demand in certain sectors, makes a rate cut in August increasingly unlikely, in our opinion,” defends the expert from TwentyFour AM.

Lastly, Peder Beck-Friis, economist at PIMCO, maintains his outlook and points out that the BoE will make two rate cuts in 2024. “Core inflation is likely to decline as the effects of the pandemic fade, monetary policy remains restrictive, and the labor market rebalances. Rachel Reeves’ comments yesterday show that the new government is firmly committed to fiscal discipline, reducing the upside risks to inflation in the coming years,” explains Beck-Friis.

Japan and Its Historic Monetary Policy

Finally, according to analysts at Banca March, in Japan, investors are betting on a rate hike at the July meeting, especially after the long silence from Governor Ueda—he will arrive at the meeting with more than 40 days without public interventions—and in light of the recent appreciation of the yen (5% higher against the dollar).

Not only is a rate hike expected, but a reduction in its monthly bond purchases could help strengthen the yen even further. “The possibility of a BoJ rate hike could lead to higher yields on Japanese bonds. However, they could see some volatility in case of a surprise. These actions would represent a significant shift in Japan’s monetary policy, affecting bond yields. Yields fell today and could remain under pressure before the BoJ meeting, although they remain near their highs. Additionally, the risks of escalating geopolitical tensions in the Middle East and elsewhere could drive flows into safe-haven assets, benefiting the yen,” explains Bas Kooijman, CEO and manager at DHF Capital S.A.

According to Magdalene Teo, Asian fixed income analyst at Julius Baer, it is still possible for the BoJ to maintain a hawkish stance by setting the stage to reduce bond purchases with a clear and bold plan to raise interest rates. “In any case, the big decision this week will come from Japan. Any communication error could be costly for the BoJ. The AUD and most Asian currencies, except MYR, IDR, and KRW, depreciated against the USD yesterday,” concludes Teo.

BNY Investments Launches a New Global Aggregate Fixed Income Fund

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BNY Investments has announced the launch of the BNY Mellon Global Aggregate Bond Fund, a vehicle managed by Insight Investment (Insight), a global manager with $838.1 million in assets under management, of which $252.6 million is in fixed income.

According to the asset manager, the fund launches with an initial capital of approximately $150 million and will primarily invest in government debt securities and investment-grade credit from around the world. The strategy is co-managed by the Global Credit, Global Rates, and Macro Research teams. These three teams are part of Insight’s Fixed Income Group (FIG), composed of 166 investment professionals worldwide. Specifically, the vehicle will be led by Adam Whiteley, Head of Global Credit, and Harvey Bradley, Senior Portfolio Manager, in coordination with Portfolio Manager Nathaniel Hyde.

“Our approach focuses on selecting the best ideas from a set of global fixed income opportunities to build a truly diversified portfolio. While we prioritize investment-grade debt, we can invest in high yield and emerging market fixed income. When building the portfolio, the team combines Insight’s top-down macroeconomic analysis with bottom-up security selection to identify opportunities that offer attractive risk-adjusted returns regardless of market conditions,” explained Peter Bentley, Co-Head of Fixed Income at Insight.

Sasha Evers, Head of Europe ex-UK at BNY Investments, added: “We are in an ideal moment for fixed income because yields are at levels we haven’t seen since before the global financial crisis. This new fund is managed the same way as the global aggregate fixed income strategy launched by Insight in 2015, which has assets of €9.2 billion.”

The fund is part of BNY Mellon Global Funds, plc (BNY MGF), the range of products domiciled in Ireland, and is registered in Austria, Belgium, Denmark, Finland, France, Germany, Italy, Luxembourg, Netherlands, Norway, Singapore, Spain, Sweden, and the United Kingdom.

Political Uncertainty, Inflation, and Central Banks Will Shape the Exchange Rate Between the Euro and the Dollar

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The political uncertainty following recent European elections and ahead of the U.S. elections in November this year is a key factor in evaluating the future of the euro-dollar exchange rate. Additionally, this situation is compounded by the evolution of inflation in both economies, which is decreasing at a slower pace than expected, and the decisions that the ECB and the Fed will make regarding the pace of interest rate cuts.

To provide an approximate forecast of how the euro-dollar relationship will evolve, we have gathered analysis from various experts. For example, Claudio Wewel, currency strategist at J. Safra Sarasin Sustainable AM, considers it unlikely that the euro will rebound, as manufacturing momentum is slowing, although the currency should rise once the Fed starts cutting rates.

“Since the beginning of the year, the euro has had a mediocre performance. So far this year, it has fallen by around 3% against the U.S. dollar, while it has recorded a 1% rise in trade-weighted terms. Notably, the euro’s fluctuation band has been narrowing in recent years, and since January, the euro-dollar ratio has remained between 1.06 and 1.10,” Wewel points out.

According to his view, the duration of the current episode of “prolonged rise” will depend on the data. In this regard, he notes that the latest U.S. macroeconomic data have been weaker than expected, suggesting a moderation of the U.S.’s superior cyclical performance. However, he sees it as unlikely that the cyclical euro will benefit from the weakening economic activity in the U.S., given that the main economies of the eurozone have seen disappointing manufacturing PMIs in June.

“In this relative cyclical context, the ECB should be able to cut its policy more than the Federal Reserve this year. Along with the greater rigidity of U.S. inflation, the Fed’s less deep rate cut path than the market expected also reflects the increased odds of Donald Trump’s victory in the 2024 U.S. presidential election, which markets have started to consider as the base case. In our opinion, Trump’s policy mix would likely be more inflationary than a continuation of Biden’s policies, implying that in 2025 the Fed would implement fewer rate cuts in this case,” adds the expert from J. Safra Sarasin Sustainable AM.

From Ebury, they point out that market nervousness and uncertainty will benefit safe-haven currencies. The fintech predicts a slight appreciation of the euro-dollar pair in the coming months, which will largely result from “some convergence in economic outcomes across the Atlantic in 2024, as the U.S. economy slows after an impressive year, while the eurozone accelerates from a very low base.” Ebury analysts believe this circumstance “will push the pair back towards the 1.10 level by the end of the year, with further appreciation towards the 1.14 level in 2025.”

However, they warn that the outcome of the November presidential elections in the U.S. could pose a risk to this view. “A Donald Trump electoral victory, which markets currently assign about a 50% probability, could be bearish for EUR/USD if the former president doubles down on the protectionist policies that characterized his previous tenure in the White House,” they explain.

Parity: An Omen of Bad Luck?

Finally, according to Bank of America, parity between the two currencies is “rare” and “has not lasted long,” and they believe that for it to happen again, “everything would have to go wrong and stay that way.” According to their analysts, the probability of the euro/dollar reaching parity or less using quarterly data is zero.

“The verdict is still out on whether the euro/dollar will stay at its post-2014 lows or recover to its previous highs. Much depends on the balance between unsustainable debt and U.S. exceptionalism, and to what extent Europe unites to tackle its severe challenges stemming from geopolitics and energy dependency. A potential trade war after the U.S. elections could further weaken the euro. However, for us, parity remains only an outcome in extreme risk scenarios, and even then, we wouldn’t expect it to last long,” explains the entity in one of its latest reports.

Drawing on historical perspective, BofA indicates that the euro/dollar fell below parity only in exceptional circumstances that did not last long. Specifically, it did so only during the periods of 2000-2002 and from August to October 2022. “The first period, which was the longest, occurred during the dot-com bubble in the United States and its burst. The second period was during a perfect storm of negative shocks for Europe, with the war in Ukraine triggering a severe deterioration in its terms of trade through an energy shock, and with divergent monetary policies as the Fed was raising rates while the ECB denied inflation, delaying its policy tightening. However, the euro/dollar was above parity in November 2022, as these shocks began to diminish and the ECB started catching up with the Fed,” they point out.

Their analysis shows that the euro/dollar weakened but stayed above parity during other severe shocks. For example, it was well above parity during the global financial crisis and the eurozone crisis. It weakened substantially but also remained above parity during the ECB’s negative policy rate period after 2014. “Similarly, it stayed well above parity and without a clear trend during Trump’s first term in the United States: the euro/dollar initially strengthened and then weakened. It also remained well above parity during the pandemic,” concludes BofA in its report.

BNP Paribas Enters into Exclusive Negotiations for the Acquisition of AXA Investment Managers

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Photo courtesy

The BNP Paribas Group announced this Thursday that it has entered exclusive negotiations with AXA to acquire 100% of AXA Investment Managers (AXA IM), which represents more than $916 billion (€850 billion) in assets under management, along with an agreement for a long-term partnership to manage a large portion of AXA’s assets.

BNP Paribas Cardif, BNP Paribas’ insurance business, after proceeding directly with the proposed transaction as principal, would have the opportunity to rely on this platform to manage around $172 billion of its savings and insurance assets.

With the combined contribution of BNP Paribas’ asset management platforms, the new business formed, whose total assets under management would amount to $1,612 billion, “would become a leading player in Europe in the sector,” the firm’s statement says.

“This project would position BNP Paribas as a leading player in Europe in long-term asset management. Benefiting from critical mass in public and alternative assets, BNP Paribas would more efficiently serve its customer base of insurers, pension funds, banking networks, and distributors. The strategic partnership established with AXA, the cornerstone of this project, confirms the ability of both groups to join forces. This significant project, which would drive our long-term growth, would represent a powerful growth engine for our Group,” said Jean-Laurent Bonnafé, Director and CEO of BNP Paribas.

The acquisition would also allow the combined businesses “to benefit from AXA IM Alternatives’ market leadership position and track record in private assets, driving further growth with both institutional and retail investors,” the firm’s information adds.

The agreed price for the acquisition and the establishment of the partnership is around $5.5 billion (€5.1 billion) at the expected closing by mid-2025.

With a CET1 impact of approximately 25 basis points for BNP Paribas, the expected return on the invested capital in the transaction would be over 18% from the third year onwards, once the integration process is completed, the information states.

The signing of the transaction is subject to the information and consultation process with the employee representative bodies. The transaction is expected to close by mid-2025 once regulatory approvals have been obtained.

“AXA Investment Managers has been an internally created success story for the AXA Group. Over the past 25 years, we have built an exceptional franchise anchored in investment expertise, an unwavering focus on the client, and a proven track record in sustainability. Thanks to the quality of its teams, AXA IM is today a leading player, especially in Alternatives in Europe,” said Thomas Buberl, CEO of AXA.

Awaiting The Harris Effect, Trump Remains The Favorite

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The Predictable Exit of Joe Biden Happened Last Weekend. According to data from Polymarket, Kamala Harris has a 92% chance of being the Democratic nominee for the November presidential election. The support from most Democrats, as well as from the 50 state party leaders, guarantees — barring any last-minute major surprise — her official nomination at the party congress at the end of August.

Although initially (and before news of Biden’s withdrawal), Robert F. Kennedy Jr. seemed better positioned, according to betting houses, Harris’s replacement seems to bring some hope to the Democratic ranks. After facing serious difficulties in attracting campaign contributions in recent weeks, they have reportedly raised over $150 million in donations in less than 24 hours since the new candidacy announcement, according to CNBC.

With barely three months before the elections, and seeing how the gap has widened substantially between Kamala and other Democratic candidates in the latest polls, it seems that the blue party is rallying around the least bad option they have. Kamala Harris’s contributions to the White House battle have a marginally positive balance.

On the negative side, Harris’s electoral record is not brilliant. She won the California Attorney General position in 2010 by only 0.8% more votes than her opponent, Republican Steve Cooley. As previously explained, she was not the preferred replacement for Biden. She also doesn’t seem likely to significantly diminish Trump’s apparent advantage in the electoral vote (vs. popular vote). Additionally, as Vice President of the current administration, she will bear the brunt of issues like inflation or lack of control in immigration that are dragging down poll numbers.

Perhaps the most unfavorable aspect, which Donald Trump will surely exploit to his advantage, is the perception among conservative Americans regarding Harris’s political positioning, which is to the left of Biden and other more conservative Democratic presidents. Considering the U.S. demographics (50.4% women and approximately 14% African Americans, with only about 23% of registered Democrats identifying as “liberals”), the median voter theorem consolidates her as a disadvantaged candidate.

On the positive side, Harris’s disapproval rating before the announcement was better than Joe Biden’s (49.5% vs. 57%). In her role as Vice President, anyone who would have voted for Biden this November would reasonably consider a scenario where Kamala would have to replace him in the Oval Office before 2028 and would be the natural alternative for Democrats in the presidential elections that year.

Additionally, it forces Republicans to rethink their strategy, facilitating their opponents’. Kamala is now in a position to attack Trump using his advanced age as a primary argument (Harris is 59 years old, compared to Trump’s 78). Counteracting the negative interpretation of her chances according to the median voter theorem, a Pew “think tank” chart suggests a “center” or moderate voter group (39%) that surpasses both blue liberals and red conservatives. In other words, if Kamala can convincingly take a step to the right — assuming, with the addition of JD Vance, that Trump won’t moderate his rhetoric — she could improve her poll numbers compared to Biden’s records.

As explained in this analysis published in 2022, Americans who actively use X to interact with politicians, media, or journalists in public forums demonstrate that Harris could leverage this tool to present a more moderate profile: as distribution graphs show, blues have much more exposure to the social network than conservative Republicans.

Applying the 13 criteria of historian Allan Lichtman, which have accurately predicted the popular vote direction in all presidential elections from 1984 to 2020 and offer an interesting framework to study contenders’ merits despite being subjective at times and dependent on almost real-time information at others, my result would favor Trump (6 or more false criteria coincide with a change of White House occupant).

In the coming weeks, we’ll start receiving poll results that will show whether the Democrats’ surprise move allows Kamala Harris to close the gap with Donald Trump. The first, from Quinnipiac University, conducted a day after the announcement, seems to point in this direction: 49% of participants supported Trump, compared to 47% for Harris, improving the 48% – 45% shown in the previous poll with Biden. Another Ipsos poll on Wednesday placed her two points ahead of her opponent. The average of the three most recent polls leaves the difference at just one point.

For now, although Trump remains the favorite, his approval rating is low at 42.3%, but it surpasses Kamala Harris’s 37.8%. The balance of the few polls conducted since July 19 gives him a three-point advantage. The bets, which have been more accurate in identifying winners in other electoral processes, are 61%-36% in favor of the Republican, although he has lost three points in the last three days.

The election remains close, and it’s important to follow the polls in the “swing states” identified a couple of weeks ago, as they could be key: a shift towards normalization in Pennsylvania, Michigan, or Wisconsin (historically Democratic strongholds now leaning the other way).

Only a month has passed since the first presidential debate, and things have moved very quickly since then. Although it’s very likely that Powell will clarify his intention to start lowering rates in September at the July Fed meeting, the other support for portfolio rotation discussed last week has become much more unstable.

The rebalancing towards more cyclical, value, and small-cap companies could continue to benefit from macro announcements pointing to a consolidation in the disinflation trend, allowing the Fed on the 31st to lay the foundations for the start of a cycle of easing monetary policy.

However, more evident signs of a cooling job market or loss of momentum in the first quarter’s industrial activity rebound would deny the hypothesis of a cycle elongation. Additionally, investors, after the initial boost, may reassess the macro implications of a second Trump term, which might not be as favorable for the stock market.

Why Will Equities Be One of the Major Stars of the Second Half of the Year?

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The presentation of the semi-annual outlook by international asset managers has highlighted three common ideas: the impact of monetary policy decisions by major central banks, the increase in geopolitical risks, and the importance of being invested in both traditional and alternative assets. In this context, the main risk for investors is staying out of the market, given the numerous sources of uncertainty and volatility on the horizon for the next six months.

According to the managers’ projections, global growth expectations are set at 3.1% in 2024 and 3% in 2025. Inflation is expected to normalize in 2024, allowing central banks to continue cutting rates, although not all at the same time. In this regard, a renewed spike in inflation after the U.S. elections is a risk that investors should watch.

Benjamin Melman, Global CIO of Edmond de Rothschild AM, notes that a year ago, the economy presented many uncertainties, as disinflation remained tepid and there were fears of a recession in the United States. However, political difficulties were relatively contained at that time. Since then, the issues have reversed. “While the economic environment now seems quite promising, it is overshadowed by political problems. The only constant has been the continuous deterioration of the geopolitical environment. This means that there could be some volatility triggered by political turmoil in France or the potential return of Trump to the White House. The good news is that markets can sometimes overreact to political crises, which can create some attractive opportunities,” Melman states.

Taking this into account, the CIO of Edmond de Rothschild AM suggests that “considering the returns recorded so far this year and the strength of the global economy, it makes sense to remain well exposed to equities.”

Opportunities in Equities

“The economic context supports profits and risk assets, but most of the upside potential is already priced in by the markets, and it will be challenging to find clear catalysts for new gains. To navigate this uncertain transition to the next phase of the cycle, we favor high-quality equities, along with a positive bias in duration and commodities to protect against inflationary risks,” adds Vincent Mortier, Group CIO of Amundi.

When discussing specific opportunities, Melman notes that within equity markets, “while the main geographical decisions (U.S. versus Europe) will largely be determined by the aforementioned political issues, the investment teams prefer Big Data and Healthcare, as well as European small caps, which are trading at very attractive valuations considering the more favorable economic environment and the monetary easing that has already begun.”

Mortier expands on his idea of high-quality equities: “Avoid concentration risks and focus on quality and valuation.” He adds that opportunities abound in U.S. quality and value stocks and global equities. “Also consider European small caps that could capitalize on the economic cycle recovery, with attractive valuations. In terms of sectors, our position is balanced between defensives and cyclicals at the lower end of the range. We are more positive on financials, communication services, industrials, and healthcare,” states Mortier.

He also believes that emerging market equities offer interesting opportunities and relatively attractive valuations compared to the U.S. “We favor Latin America and Asia, highlighting India for its robust growth and transformation trajectory,” he adds.

Ronald Temple, Chief Market Strategist at Lazard, expects to see a broadening of the equity market rally driven by better earnings growth outside the technology sector. “This broadening does not mean that tech and AI stocks will stop performing. However, it is likely that the gap between tech leaders and the rest of the market will narrow, or even reverse, as investors realize that the rest of the market has largely stagnated for more than two years and now offers more attractive return potential,” he argues.

Temple also notes that non-U.S. markets are trading at much less demanding valuation multiples and are expected to benefit from accelerated growth while the U.S. market slows down. “Additionally, non-U.S. companies are often more exposed to variable-rate debt, which should benefit them as the ECB and other central banks ease monetary policy before the Fed, and they could also experience a more significant recovery in revenues and profits from current levels,” he concludes.

Ashish Shah, Chief Investment Officer, Public Investing at Goldman Sachs Asset Management, estimates that in equity markets, stronger business models have demonstrated margin resilience, with recent earnings seasons in the United States exceeding expectations. Performance has expanded beyond the so-called Magnificent Seven.

“The second half of 2024 may present opportunities for investors to broaden their horizons beyond the largest names, with U.S. small-cap companies poised to rebound, offering attractive absolute and relative valuations. Small-cap companies can provide access to greater growth potential from future mid- and large-cap leaders. Certainty around rate cuts should provide additional tailwinds,” Shah points out.

Regarding Europe, he adds that “the improved growth and inflation mix in Europe, combined with better corporate earnings dynamics and modest valuations, bodes well for continental European equities.” In the Japanese equity market, he sees great opportunities as structural changes are driving good performance after decades of deflation.