Jackson Hole: More Focus on Monetary Policy Tools than on Interest Rates

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Central banks are taking a break from their respective monetary policy meetings in August, but the markets are not entirely devoid of news related to the activities of these institutions. The Jackson Hole Central Bankers Symposium (Wyoming, United States) is the summer’s key event to observe potential decisions in the meetings scheduled for the remainder of the year.

From Thursday, August 22 through Saturday, August 24, senior central bank officials from around the world will share their views on the state of the economy. A significant part of the market is also waiting for clues about the next steps in interest rates.

The main event will take place on Friday, with the appearance of U.S. Federal Reserve Chairman Jerome Powell. All eyes are on him, considering that the U.S. monetary authority has yet to lower interest rates like other institutions.

Bank of America notes that Fed chairs “tend to keep a low profile at Jackson Hole” and that the easiest course for Powell “would be to repeat his July message.” The firm has reasons to believe this will be the case this time, as last week’s economic data delivered a “clear” message: inflation is low enough for the Fed to start cutting, but not so low as to focus solely on its employment mandate. “We remain convinced that the Fed will cut twice this year, in September and December,” the firm asserts, adding that a shift in language from July “would suggest that the committee is ‘very close’ or ‘close’ to the point where monetary policy easing is likely.”

Meanwhile, George Curtis, Portfolio Manager at Vontobel, points out that the data known so far “points to a slowing economy, but one that is still growing,” and expects Powell to highlight this on Friday. “We don’t believe he will rule out a 50 basis point cut, especially considering that another labor report will be released before the September meeting,” he says, but admits that his baseline scenario remains a 25 basis point cut.

There could also be market reactions, as Federal Reserve officials have not changed their tone since the weak non-farm payroll data that triggered mass selling. “There’s a possibility that equities could continue to retreat to mid-July levels.” The S&P 500 equity index has erased its losses for the month, and credit spreads have almost done the same. However, government bond yields remain near their monthly lows, so “either Powell validates this more bearish view, or government bonds will give back some of their recent gains,” Curtis asserts.

David Kohl, Chief Economist at Julius Baer, does not expect many clues at this meeting either. He anticipates that this year’s symposium will offer fewer insights into the path of interest rates and focus more on the appropriate tools for monetary policy. “The return to the trade-off between price stability and maximum employment makes the arguments for cutting rates much clearer, as long as inflation is falling and unemployment is rising,” argues Kohl, who notes that recent positive economic data supports a gradual reduction in interest rates.

The expert points to the event’s title – “Reevaluating the Effectiveness and Transmission of Monetary Policy” – to infer that there will be a debate on the appropriate tools for guiding monetary policy. “This includes the appropriate interest rate, the level or range of inflation, and the amount of liquidity the Federal Reserve wants to provide to financial markets,” he explains.

At the same time, Kohl does not expect much in terms of what is most interesting for financial markets: the trajectory of official interest rates in the coming months. “We expect the scope and pace of monetary easing to depend more on economic data than on the fundamental issue of monetary policy debated at the symposium,” says the expert, who, on the other hand, sees “much clearer” arguments in favor of cutting rates now that falling inflation is accompanied by rising unemployment. Kohl anticipates a 25 basis point cut at each of the upcoming FOMC meetings through the end of the year.

For James McCann, Deputy Chief Economist at abrdn, Powell’s speech at Jackson Hole could signal “that rate cuts are on the horizon, but the speed and extent of the easing remain uncertain.” Given the current moderation in inflation and the cracks appearing in the labor market, the Federal Reserve may prioritize attempting a soft landing by reducing the restrictive nature of monetary policy, according to McCann. He believes it is likely that Powell will indicate the start of an ongoing easing cycle, “setting the stage for rate cuts at each of this year’s remaining meetings.” And while he acknowledges that the good news for the Federal Reserve is that last week’s data from the U.S. confirms that the economy is not heading for an imminent recession, he also notes that U.S. monetary policymakers will have a better perspective on the recent health of the labor market when the Quarterly Census of Employment and Wages benchmark revisions are released this week.

Jean-Paul van Oudheusden, market analyst at eToro, is also aware that these speeches at Jackson Hole have “sometimes” hinted at significant changes in monetary policies. In this case, he expects Powell to highlight the success in controlling inflation and prepare markets for a potential rate cut in September in a speech where he will not take questions. “Although speculation about a 50 basis point cut has increased, July’s CPI data – which largely met expectations – does not currently support an adjustment of such magnitude,” the expert explains, adding that the actual magnitude of the rate cut “will likely depend on August’s labor market data, which will be released in two weeks.”

Guy Stear, Head of Developed Markets Strategy at Amundi Investment Institute, is convinced that the Fed will cut rates three times before the end of the year and could suggest as much at the Jackson Hole symposium. “We expect the Fed to cut rates by 75 basis points between now and the end of the year, with successive 25 basis point cuts at each Fed meeting, and we expect its chairman to continue signaling that the first rate cut is planned for September,” argues Stear.

However, the expert does not rule out the possibility that investors might be disappointed by comments referencing the stickiness of inflation. “If the U.S. two-year yield were to rise back to 4.2%, from its current 4.05%, it would be a good opportunity to increase long positions at the front of the U.S. curve,” he concludes.

ECB

Although Powell will be in the spotlight, ECB President Christine Lagarde will also command market attention. This is the view of Martin Wolburg, senior economist at Generali AM – part of the Generali Investments ecosystem – who expects a rate cut from the European monetary authority, in line with what the Federal Reserve might do.

“The ECB made no changes at its June meeting, as expected. However, the Governing Council considered that the inflation outlook was in line with its forecasts, and the rhetoric on wage growth seemed less concerning in June,” explains Wolburg, who also recalls that at that time, Lagarde herself stated that “what we do in September is totally open.” The expert is aware that July’s inflation data clearly provides some ammunition to the “hawks,” but he expects the “reduction” process to continue, with quarterly cuts in official interest rates of 25 basis points, “until the deposit rate reaches 2.5%.”

China Leads the “Brand Value” of Banking Entities Worldwide

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The total brand value of the world’s top 500 banks has doubled in a decade, according to the latest edition of the Brand Finance Banking 500 2024 ranking. The combined value of the 500 most valuable banking brands in the world has reached a record high of €1.35 trillion ($1.44 trillion), nearly double what it was a decade ago, according to Brand Finance’s sector report.

Notably, China dominates this ranking, with its entities occupying the top four positions: ICBC, China Construction Bank, Agricultural Bank of China, and Bank of China. The report indicates that Chinese banking brands have appreciated in value, retained the top four positions, and increased their brand value.

“The Chinese banking sector shows remarkable recovery, with the four major banks far ahead of their U.S. counterparts. ICBC (Industrial and Commercial Bank of China) remains the most valuable banking brand in the world for the eighth consecutive year, with a brand value of €67 billion. China Construction Bank, Agricultural Bank of China, and Bank of China occupy the second, third, and fourth positions, respectively,” the report states.

Another trend evident in the evolution of this ranking is that local banking brands prove to be stronger than global ones: BCA, from Indonesia, stands as the strongest banking brand in the world, and regional African operators score high in brand strength. In contrast, the brand value of Russian banks continues to plummet.

For U.S. banks, it is notable that they have experienced a slight decline of 6.6% in terms of brand value. Despite this, Bank of America retains the title of the leading U.S. banking brand for the fourth consecutive year, ranking fifth overall with a value of €34.8 billion. Meanwhile, Wells Fargo, which ranks sixth overall, has narrowed the gap with its U.S. competitor, with a 5% increase, reaching a brand value of €33.4 billion.

Commenting on these results, David Haigh, Chairman and CEO of Brand Finance, stated: “As the world’s leading banking brands reach new heights, Chinese megabanks continue to dominate at the top of the brand value ranking. Another key finding from our market study is that local banks are increasingly eclipsing their larger counterparts in brand strength. Dominant brands thrive in unique markets with limited competition, while banks that expand into multiple markets can successfully increase their brand value but risk diluting their strength.”

Regarding these trends, Brand Finance’s market study indicates that local and regional banks are performing as well as, and in many cases better than, banks with a global presence in terms of positioning their brand in the hearts and minds of customers.

For example, BCA of Indonesia is the strongest banking brand in the world, with a score of 93.8/100 in the Brand Strength Index (BSI) and an elite AAA+ rating. Three African brands, Equity Bank, First National Bank, and Kenya Commercial Bank, along with Romania’s Banca Transylvania, are among the five strongest brands in the world, all with AAA+ ratings.

Finally, regarding movements within the ranking, only 11 of the top 50 countries experienced declines in aggregate value, led by Russia (69%), Nigeria (28%), and Malaysia (20%). “As expected due to the international sanctions imposed on Russia, the country’s two largest brands—Sber and VTB—are at the forefront of those that have seen the largest percentage drops in brand value, with declines of 64% and 91%, respectively,” the report notes.

US Equities: A Long-awaited Mean Reversion Seems Likely

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Pixabay CC0 Public DomainAutor: Mojca-Peter from Pixabay

U.S. equities continued to rise in July, driven by a cooler-than-expected June CPI report that sparked a rotation from big tech and growth stocks to small-cap and value stocks. While it is too early to determine if this shift will be sustained, a long-awaited mean reversion seems likely, especially after the significant gains by the “Magnificent Seven” stocks over the course of the past 18 months.

Given the numerous factors influencing the stock market outlook, such as the upcoming U.S. election and interest rate changes, perhaps investors are starting to be mindful of the current market concentration. We have previously highlighted that just seven stocks account for nearly one-third of the S&P 500’s weighting and were responsible for over 50% of the index’s calendar year’s gains. Slower economic growth, a cooling labour market, and reduced consumer spending are potential factors that could increase market volatility, potentially benefiting investors who maintain a diversified portfolio.

On July 31, the Federal Reserve kept interest rates steady for the eighth consecutive meeting and have not yet indicated if a rate cut is anticipated to happen in the next meeting in September. Fed Chair Jerome Powell reiterated that the Fed will continue to reassess conditions meeting by meeting and that they are willing to hold rates steady as long as needed. On a positive note, inflation continues to cool and has made progress toward the Fed’s 2% target. The next FOMC meeting is scheduled for September 17-18. In July, the Russell 2000 Value significantly outperformed the S&P 500, yet still lags in year-to-date performance by over 500 bps. We anticipate a favourable environment for smaller companies as post-peak rates and necessary consolidation in certain industries such as media, energy and banking should lead to a more robust year.

 

Merger Arbitrage performance in July was bolstered by deals that closed, deals that made notable progress in receiving regulatory approvals, and a general firming of deal spreads following a period of heightened volatility. Amedisys (AMED-$98.05-NASDAQ), which agreed to be acquired by United Health for $101 cash per share, agreed to divest a package of care centers owned by Amedisys and UNH to home health operator Vital Caring in an effort to assuage the U.S. Department of Justice’s concerns about geographic overlap between the companies and shares reacted positively on optimism about the deal. Following a strategic review process, trade show operator Ascential plc (ASCL LN-£5.71-London) agreed to be acquired by Informa for £5.68 cash per share, with additional proceeds from a future asset sale. We crystallized gains on Westrock Co. (WRK-NYSE), Equitrans Midstream (ETRN-NYSE), Olink Holding AB (OLK-NASDAQ), Cerevel Therapeutics (CERE-NASDAQ) and Hibbett Inc. (HIBB-NASDAQ), among others. We remain optimistic about our ability to generate absolute returns going forward, and with first half M&A activity increasing 18% to $1.5 trillion, we expect to continue finding attractive investment opportunities.

In July the convertible securities market saw breadth expand, with a long overdue rotation out of mega cap tech into small cap. This trade was beneficial to many of the companies in the convertible market. While we believe there is room for this rotation to continue over a longer time horizon, we remain focused on companies with strong underlying fundamentals where we expect the convertible to provide asymmetrical exposure over time. Additionally, after months of postponed rate cut expectations, we are starting to see some data that suggests that easing financial conditions are imminent. This led to a bid in many holdings that would benefit from a lower rate environment, particularly in the Utilities sector, where we have been increasing our holdings.

 

Opinion article by Michael Gabelli, managing director at Gabelli & Partners 

Global Polarization: The Hidden Face Behind Gold’s Record Highs

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Gold is now trading above $2,500 per ounce, showing signs of potentially breaking its historical highs again. Its value as a safe-haven asset shone brightly in the first weeks of August following the volatility shock experienced by the major equity markets, causing gold to rise after several downward sessions. Now that this “scare” has passed, what could continue to drive its valuation?

In the opinion of Charlotte Peuron, equity fund manager at Crédit Mutuel Asset Management, the increase in gold’s price to $2,400 per ounce has been driven by Western investors through gold ETF purchases and a more favorable financial environment for gold.

According to her outlook, given the downward trend of the dollar against other currencies and the real U.S. interest rates, the upward trend in gold is expected to continue.

“The upward trend in gold prices dates back to 2022. Three factors explain this movement: sustained demand for jewelry; investment in physical gold (coins and bars) by Asian investors; and massive purchases by central banks in emerging countries, particularly China, who wish to diversify their foreign exchange reserves and thus reduce their exposure to the U.S. dollar,” explains Peuron.

For James Luke, a commodities fund manager at Schroders, additional factors include changes in geopolitical and fiscal trends that are paving the way for sustained demand for gold, and gold miners might be poised for a significant recovery.

“Geopolitical and fiscal fragility—trends directly linked to demographic shifts and deglobalization, which, along with deglobalization, characterize the new investment paradigm that we at Schroders have dubbed the 3D Reset—combine today to forge a path toward a sustained and multifaceted global drive for gold supplies. In our view, this could trigger one of the strongest bull markets since President Nixon closed the gold window in November 1971, ending the U.S. dollar’s convertibility to gold,” he argues.

Towards a Polarized World

One of the most interesting reflections made by Luke is that the strength of gold reflects the shift towards a more polarized world. “The escalating tension between the United States and China, and the sanctions imposed on Russia following the invasion of Ukraine in 2022, have driven record gold purchases by central banks as a monetary reserve asset,” says the Schroders manager.

Currently, the $300 billion in frozen Russian reserve assets clearly demonstrate what the “weaponization” of the U.S. dollar—or in other words, the dollar’s hegemony—can truly mean. In his opinion, the massive issuance of U.S. Treasury bonds to finance endless deficits also raises questions about the sustainability of long-term debt. Furthermore, he notes that central banks—China, Singapore, and Poland, the largest in 2023—have been paying attention, although record purchases have only increased the share of gold in total reserves from 12.9% at the end of 2021 to 15.3% at the end of 2023.

“From a long-term perspective, central bank purchases clearly reflect the evolution of global geopolitical and monetary/fiscal dynamics. Between 1989 and 2007, Western central banks sold as much gold as they practically could, as after 1999 they were limited by gold agreements that central banks reached to maintain order in sales.

In that post-Berlin Wall and Soviet Union world, where U.S.-led liberal democracy was on the rise, globalization was accelerating, and U.S. debt indicators were quite quaint compared to today’s, the demonetization of gold as a reserve asset seemed entirely logical,” he explains.

However, he clarifies that the 2008 financial crisis, the introduction of quantitative easing, and emerging geopolitical tensions were enough to halt Western sales and quietly attract emerging market central banks to the gold market, averaging 400 tons annually between 2009 and 2021. According to Luke, “these are significant figures, less than 10% of annual demand, but not seismic.”

On the other hand, he warns that the more than 1,000 tons of gold—accounting for 20% of global demand—purchased by central banks in 2022 and 2023, a pace that continued in the first quarter of 2024, is potentially seismic. “It seems entirely plausible that the current tense dynamic between established and emerging powers, combined with the fiscal fragility looming not only over the reserve currency issued by the U.S. but over the entire developed economic bloc, could trigger a sustained move towards gold,” he argues.

In this context, and to put it bluntly, his main conclusion is that “the gold market is not large enough to absorb such a sustained move without prices rising significantly, especially if other global players also try to enter more or less at the same time.

Investors Remain Optimistic, but Volatility Shock Leads them to Increase Cash in Portfolios

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Despite the market correction in early August, investor optimism has not been affected. According to BofA’s monthly manager survey, 76% continue to expect a soft landing and a Fed action, now, of four or more cuts to ensure that this expectation of a soft landing is met.

However, the survey picks up that global growth expectations in the August survey fell sharply by 20% compared to July, in fact a net 47% of respondents expect a weaker global economy in the next 12 months. “Growth expectations and risk appetite declined in recent weeks due to the yen volatility shock and weak July employment data,” notes the BofA survey.

As a result, investors increased cash levels again for the second consecutive month, rising from 4.1% to 4.3%. “Our broader measure of FMS sentiment, based on cash levels, equity allocation and economic growth expectations, fell to 3.7 from 5.0 last month,” the firm notes.

As for monetary policy, 55% of investors believe that globally it is too restrictive, the highest figure since October 2008. In this regard, they point out that investors’ belief that policymakers should ease quickly is driving expectations of lower rates, which is why 59% expect lower bond yields, the third highest figure on record (after November and December 2023). Bond yield expectations are also lower, a sentiment that has been increasing month-over-month.

Coupled with monetary policy expectations is the conviction that a “soft landing” of the economy will be achieved, a conviction driven by the likelihood of lower short-term interest rates. Specifically, 93% of FMS investors expect lower short-term rates 12 months from now, the highest figure in the past 24 years.

Asset Allocation

When it comes to talking about allocation within investors’ portfolios, the survey shows that in August investors rotated into bonds and out of the equity market. “The allocation to bonds increased to 8% overweight from 9% underweight. This is the highest allocation since December 2023 and the largest monthly increase since November 2023. In contrast, the allocation to equities fell by 11%, which is the lowest allocation since January 2024 and the largest monthly decline since September 2022. Notably, in absolute terms, 31% of FMS investors said they were overweight in equities, down from 51% who said so in July.

“In August, investors increased allocation to bonds, cash and health care and reduced allocation to equities, Japan, the Eurozone and materials. Investors are more overweight in healthcare, technology, equities and the U.S., and more underweight in REITs, consumer discretionary, materials and Japan. Relative to history, investors are long bonds, utilities and healthcare and are underweight REITs, cash, energy and the Eurozone,” BofA notes.

Finally, two curious tidbits of information left by this month’s survey is that the largest regional equity allocation was to the U.S., while the allocation to Japanese equities experienced the largest one-month drop since April 2016. “As a result, global managers’ allocation to U.S. equities relative to Japanese equities increased to the highest level since November 2021,” the survey concludes.

 

Appetite for Sustainable Funds Returned During the Second Quarter of the Year

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In the second quarter of 2024, the global universe of sustainable funds—which includes open-end funds and ETFs—received $4.3 billion in inflows, compared to the $2.9 billion in outflows experienced in the first quarter of the year. Does this mean that investors are returning to sustainable funds?

“The outlook for global ESG fund flows is starting to improve. We began the year with outflows, but this has since changed, with money returning to the sector. European ESG funds have gathered more than $20 billion so far this year. Across the pond, investor appetite for ESG funds remains moderate, with continued outflows, but these were smaller than those seen in the previous two quarters,” explains Hortense Bioy, Head of Sustainability Research at Morningstar Sustainalytics.

The report indicates that calculated as net flows in relation to total assets at the beginning of a period, the organic growth rate of the global sustainable fund universe was 0.14% in the second quarter, a slight improvement from the 0.01% rate in the previous quarter. “However, the aggregate growth of sustainable funds lagged behind the broader fund universe, which with $200 billion in inflows, recorded an organic growth rate of 0.4%,” the report notes.

To put this in context, the Morningstar Global Markets Index achieved a 2.6% gain in the second quarter, while fixed-income markets, represented by the Morningstar Global Core Bond Index, fell 1.2%. “Europe represents 84% of global sustainable fund assets, and the United States maintained its status as the second-largest market. With total assets of $336 billion, it held 11% of global sustainable fund assets, reflecting the distribution observed three months ago,” the report states.

Specifically, European sustainable funds raised $11.8 billion, compared to the $8.4 billion recorded in the previous quarter. The report also noted a reduction in outflows in Japan, while sustainable funds in Asia continued to attract new net money.

Lastly, it highlights that product development continued on a downward trajectory, with only 77 new sustainable fund launches in the second quarter of 2024, “confirming the normalization of sustainable product development activity after three years of high growth during which asset managers rushed to build their sustainable fund ranges to meet the growing demand from investors,” the report indicates.

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.