A Biden Victory and Split Congress May Be Welcomed by Markets

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Pixabay CC0 Public Domain. Tikehau Capital planea lanzar un fondo de descarbonización de private equity centrado en Norteamérica

With President-elect Joe Biden facing a split Congress, investors could welcome the resulting “Biden-lite” agenda, which may include portions of his spending plans -such as fiscal stimulus and infrastructure investment- but little in the way of tax increases.

Biden’s apparent victory in the US presidential election marks an end to months of political uncertainty and turmoil. While both his victory and the outcome of the Senate races have yet to legally finalized, the base case in markets seems to be a Biden presidency and split Congress. This outcome may usher in a more diluted Biden policy agenda.

Indeed, the market narrative seemed to shift in the final days before the election: hopes of a Democratic “blue wave” turned into cheer around “Biden lite”, as Treasury yields declined and equity investors rotated from cyclical value stocks towards opportunities in growth and technology.

More broadly, the financial markets seemed relieved that this major political event was concluding, leading to a wave of risk-on sentiment in the US and globally. With a more incremental approach to policy changes under a Biden administration, we could see markets perform favorably as they benefit from more stable trade relations and better growth prospects heading into 2021. Markets may be buoyed by a return to a more multilateral approach to foreign policy, and the reduced uncertainty that may result.

Perhaps the key concern for markets under a Biden presidency was his proposed USD 4 trillion in tax hikes, including increasing corporate tax rates, capital gains taxes, and personal taxes on wealthy individuals. However, if Congress is divided, most -if not all- of these tax policies will be difficult to enact. And importantly, the Biden team may not view these as a year-one priority, as the pandemic and economic relief take center stage again.

Top priorities of a Biden-Harris administration

As President-elect Biden and Vice-President-elect Kamala Harris consider their key priorities in the weeks ahead, these focus areas could include:

1. Creation of a new pandemic taskforce: As the coronavirus pandemic remains rampant in the US and globally, one of the first priorities will be to address the virus head-on, with support from a new pandemic taskforce of scientists and medical officials. This will set guidelines to stop outbreaks, double down on testing and contact tracing, and invest heavily in vaccine distribution. This will mark a return to “relying on the science” as a fundamental pillar in managing the pandemic.

2. Fiscal stimulus: One area of agreement for both Democrats and Republicans is the need for an additional fiscal stimulus to provide pandemic relief. Thus far, Congress has issued nearly USD 3 trillion in stimulus, and Democrats and Republicans have proposed competing packages for a next round of stimulus of USD 2.2 trillion and USD 500 billion respectively. Both packages cover unemployment benefits, small business relief, and another round of stimulus cheques to households. We could certainly see stimulus passed early in the next presidential term, which is likely positive for risk assets.

3. More executive orders on climate and clean energy: Biden’s plan includes a USD 2 trillion investment in areas of clean energy, including wind, solar and renewable energy. While this policy would likely face opposition in a split Congress, we may still see a Biden presidency seek to push forward his climate and sustainability agenda via executive order, and he may appoint more “environmentally friendly” leaders to his cabinet. Overall, we could see new opportunities for sustainable investing. Some actions that he could take without the support of Congress may include rejoining the global Paris climate accord, reversing some of Trump’s executive orders on energy or signing executive orders to cut emissions.

4. Infrastructure investment: Another area where both Democrats and Republicans may ultimately agree is infrastructure investment. Both Biden and Trump have talked about investing in traditional infrastructure -such as the rebuilding of roads, bridges and airports- as well as technology like 5G and artificial intelligence. While the Biden team proposed a USD 1.3 trillion infrastructure package, we may ultimately see a smaller package approved by both sides, perhaps in the USD 750 billion range. This would nonetheless represent an important investment in US economic growth and potential jobs. It could also stimulate opportunities in the private markets space to help finance these critical projects.

5. Returning the US to the world stage: In addition to rejoining the Paris climate accord, Biden has also talked about restoring US membership in the World Health Organization (WHO), as well as repealing via executive order the travel ban on majority Muslim countries. Overall, a Biden administration would favor the US returning to the world stage as an ally and leader, aligning itself once again with its historical allies and perhaps coordinating globally on climate solutions. In terms of US-China relations, while Biden has pledged to be “tough on China”, he has indicated he prefers a less unilateral approach than his predecessor and plans to bring US allies, labour groups and environmental organisations to the negotiating table.

Reaching across the aisle

With a focus on reconciliation, a Biden administration may “reach across the aisle” for Cabinet and key position appointments. Indeed, there has been speculation that Biden may maintain Trump appointee Jerome Powell as chairman of the Federal Reserve and consider Republican senator Mitt Romney for the position of US Treasury secretary. Markets may welcome this balanced approach to governing, particularly in key roles impacting financial policy.

Markets like evolution, not revolution

Overall, the theme of a Biden victory and split Congress seems to be evolution rather than revolution -perhaps what voters and investors welcome most when it comes to government policy-. This outcome also lessens the probability of unintended consequences that we may have seen from a “blue wave”, such as rapidly rising interest rates which could be disruptive to markets. Also note that, historically, investors have seen seasonally stronger market returns from election day through year-end.

Implications for investors

Against this backdrop, we could see a broadening of participation across asset classes, with cyclical parts of the market performing alongside growth technology, and non-US markets playing catch-up, especially given more congenial global relationships and perhaps an ongoing softer US dollar. Notably, China and north Asia could benefit most from a thawing of tension, alongside better virus outcomes in that region overall.

In credit markets, with yields expected to remain stable and low, we would continue to see investors “hunt for income”. Our preferred credit risk includes parts of select high-yield assets (including “fallen angel” strategies), convertible bonds (which can participate in equity upside as well) and curve-steepened strategies that benefit from better growth and inflation potential.

Finally, we see potential areas of opportunity outside of traditional value/growth strategies, including infrastructure, clean energy, US housing, and technology infrastructure like 5G, all of which could thrive in a post-election environment.

A column by Mona Mahajan, US Investment Strategist in Allianz Global Investors

 

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Public Registers of Ultimate Beneficiaries Owners or How to Shoot Yourself in the Foot When You Have All the Arguments Not to Do It

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Islas Vírgenes Británicas (Pxfuel). ,,

My position on the creation of Registers in the British Virgin Islands (BVI) is well known and, in this commentary, I will fully explain my reasons to reject this potentially very harmful (and unnecessary) initiative.

In my opinion, there are at four relevant arguments worth exploring as they put my stance on the right side of history. There are none, as far as I can see, for the opposing view.

Privacy

When the Income Tax was first created, with the main aim of covering extraordinary expenses (like wars), the current arguments used by detractors against taxes were not why private individuals had to pay for crises they had not created, or even why the Government thought that it was appropriate to “rob” citizens in order to do so, but what many among us still see and defend as something fundamental in these times: the individual’s right to privacy.

Mid-19th century taxpayers thought the Government had no right whatsoever to know how much money they earned. They were already paying consumption taxes and they were not willing to let the Government meddle with their private lives.

Income Taxes evolved over time: one war led to another, and even in the absence of armed conflict, inefficient governments decided to impose them without any extraordinary circumstances. And so, more and more countries started to adopt them.

As a result, individuals started to seek ways to avoid these taxes lawfully, often by using structures in jurisdictions where this type of tax was considered akin to expropriation. They also created juridical structures aiming to protect their privacy. There is nothing to condemn in either behavior and BVI, alongside other jurisdictions that have created a framework for these business opportunities, has played a crucial role in this industry, providing the best context for these individuals to achieve their wealth planning goals.

Let us add that offshore jurisdictions were not created to capture investments by other countries’ fiscal residents, but it was the latter that drove away their own citizens by overlaying exorbitant taxes (on their income first and then on their assets) leading to an unsustainable amount of fiscal pressure. Then, continued intrusion into individual freedoms reached levels considered too high by those individuals who think privacy is an unalienable right.

The solution to this tension is not that complicated at law: When two different, individual rights oppose each other, the arising conflict is always resolved by determining which right prevails in hierarchy. When there is a “conflict” between a fundamental human right and a mere interest of the State, there can be no discussion.

Personal safety

This section would not be relevant if the entire world enjoyed the levels of legal certainty and personal security of the U.S. or Europe. This is not the case. And the vast majority of BVI users live in insecure countries, most of them in Latin America, Asia and Africa, where unfortunately violence is already part of their day to day lives.

For these individuals, the critical need for privacy that was discussed above is also relevant for other reasons. In fact, these individuals are people who live in countries where the need to protect wealth does not have anything to do with the desire to pay less taxes or the right to privacy as a right in itself (which would, of course, be understandable), but to protect their physical security. In Latin America, for example, crime levels are extremely high and that includes kidnap for extortion of high-income citizens, theft, torture and murder. What is the use of privacy then? To protect assets, of course, but also to protect life itself.

Forty-two of the 50 most violent cities in the world in 2020 are in Latin America, most of them in Mexico and Brazil. Out of the remaining 8, Durban and Mandela Bay in South Africa, and Kingston, Jamaica, stand out. Only two are in developed countries: St. Louis and Baltimore. As for the countries with the most extortion kidnappings, Brazil tops the list with 54.91% of incidents, followed by Mexico with 23.40%.

The BVI SOLUTION already exists

In BVI, there is an established system that allows authorities to know the identity of the shareholders and owners of the companies established in the territory in a matter of hours if necessary: the notorious BOSS, copied and implemented by many competing jurisdictions.

We do not deny, that under certain circumstances, this information must be provided to the authorities. Unlike those who criticize our position with regards to implementing this new BO Register, we put ourselves in their shoes and we tell them that they are right in their aims, but not in their arguments or, even less, their proposals.

In other words, the interests that this new Register is intended to protect are appropriately protected already. There is no need for further infrastructure: why would we reinvent a wheel that is not broken?

Economic arguments

If the world ever adopts this idea holistically, the offshore industry will be effectively cancelled. This would be a death knell for BVI, other offshore jurisdictions and the individuals using them with strictly lawful goals.

But why get ahead of ourselves and give away our lifeblood on a silver platter to other jurisdictions when the existence of public registries of UBOs is far from being a world standard nowadays? This would be one of the most detrimental political decisions the jurisdiction could make as it will lead to loss of business and the migration of trust and wealth planning companies out of BVI.

My fear would be that companies doing business in the BVI would be forced to move their operations and clients to jurisdictions which will not have these registers in place, such as Belize or Nevis, in order to maintain some sense of privacy for their clients. We would also face scrutiny from HNW and UHNW advisors and clients in emerging markets with regards to them having to place themselves and their clients in harm’s way in order to comply with this Register. This is simply not good for business.

Means and ends

Again, it is clear that governments have a legitimate interest in knowing the wealth status of their taxpayers, but as I always say: sometimes, the cure can be worse than the disease. What is the cost? Is this worth it if there are other, less invasive, mechanisms that lead to the same result? Do we need to lose all aspects of privacy to conform to what a few people think is the solution?

Column by Martin Litwak, lawyer specialised in international wealth management and investment fund structuring

MFS Meridian Funds Now Available in Chile

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Foto cedidaDe izquierda a derecha: L. Jose Corena, Managing Director for the Americas y Enrique Pérez Iturraspe, director regional para Chile y Perú de MFS en Santiago. MFS Meridian Funds disponibles ahora en Chile

MFS Investment Management® (MFS®) has completed the local registration process with Chile’s Financial Market Commission (CMF) for 21 of its MFS Meridian Funds®, making them broadly available for sale through financial advisors and other financial intermediaries.

“Completing this process represents a significant step forward in broadening the availability of the MFS Meridian Funds to the growing retail investor base in Chile. Furthermore, it enhances our relationships with local distributors who can now more easily add the MFS Meridian Funds across their local investment platforms,” said L. Jose Corena, managing director for the Americas, MFS International Limited.

Previously, the MFS Meridian Funds were available via certain private placements through a select number of distribution partners in Chile.

“We are extremely pleased to be able to provide greater choice in the Chilean retail market. With the local registration of the MFS Meridian Funds, we can provide enhanced diversification options for our partners through their different channels and client segments. The MFS Meridian Funds can be held across various individual investment account types, including those in the APV (Voluntary Pension Savings) market,” said Enrique Perez Iturraspe, regional director for Chile and Perú for MFS in Santiago.

The 21 MFS Meridian Funds represent strategies investing across the capital markets worldwide, which include global, regional and emerging market equity and fixed income strategies, as well as multi-asset strategies. The funds offer daily liquidity and are domiciled in Luxemburg under the SICAV form. Some of the strategies which have received interest in Chile previously are MFS Meridian Funds® – Prudent Capital Fund, MFS Meridian Funds® – U.S. Corporate Bond Fund, MFS Meridian Funds® – Global Opportunistic Bond Fund, MFS Meridian Funds® – European Research Fund and MFS Meridian Funds® – U.S. Value Fund.

MFS has been serving the Americas for more than 30 years, supporting clients from its hubs in Miami, Boston and London, as well as locally in Chile, through its office in Santiago. The MFS Meridian Funds are a line of 36 funds totaling nearly US$35 billion in assets available in major markets throughout the Americas and Europe.

Rick Lacaille is Appointed Senior Investment Advisor to Lead ESG Program at State Street

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Foto cedidaRick Lacaille, Senior Investment Advisor para liderar el programa ESG de State Street.. Rick Lacaille, nombrado nuevo Senior Investment Advisor para liderar el programa ESG de State Street

State Street Corporation announced in a press release that it has appointed Richard F. Lacaille –Rick Lacaille– to the newly-created role of senior investment advisor. He will lead the company’s Environmental, Social and Governance (ESG) solutions, services and thought leadership across all its businesses.

Lacaille will report to Ronald O’Hanley, chairman and chief executive officer of State Street Corporation, and, as a consequence of his appointment, Lori Heinel has been promoted to global chief investment officer for State Street Global Advisors.

The firm pointed out that, for many years, they have been at the forefront of innovation across its businesses, developing best-in class ESG capabilities including reporting and analytics tools, premier academic research, and investment solutions and products. They believe Lacaille will ensure their strategies are well-coordinated and optimized to serve clients’ increasing demand for ESG servicing, guidance and investment solutions.

“With more than two decades of leadership at State Street Global Advisors and his role as chair of State Street’s executive corporate responsibility committee, Lacaille is absolutely the right leader to take our firm’s ESG efforts to the next level. We believe ESG considerations drive long-term value for investors, and will only become increasingly more important as drivers of return and risk”, said O’Hanley.

The company also explained that Heinel, who joined State Street Global Advisors in 2014 as chief portfolio strategist and has served as deputy global chief investment officer since 2016, will assume Lacaille’s role as global chief investment officer. In the press release, they highlighted that she has been “a driving force” for a number of key initiatives across the business including implementing consideration of financially material ESG issues throughout the investment process.

In her role, Heinel will oversee the full spectrum of industry-leading investment capabilities from index funds and ETFs to active, multi-asset class solutions and alternative investments. She will lead an investment team of more than 600 professionals globally and will report to Cyrus Taraporevala, president and chief executive officer of State Street Global Advisors.

Taraporevala commented that Lori taking the reins as global chief investment officer will bring to fruition years of succession planning. “She is a change leader who I believe is strongly positioned to lead State Street Global Advisors’ Investments team, as we continue the investment innovation which has been a hallmark of our strategy for decades.”

The company noted that Lacaille and Heinel will assume their respective new roles by March 31, 2021 after a “careful and deliberate transition”.

Pictet Asset Management: The Investment Landscape in 2021

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Luca Paolini Pictet AM_0
Luca Paolini, Pictet Asset Management. Luca Paolini, Pictet Asset Management

A recovery in the job market and record levels of household savings should lift consumer spending worldwide. Investment will also get a boost from rising profits and maintenance cycles. Trade is also recovering fast and even though spending on services will remain well below pre-COVID levels, the sector should gain strength, too. 

Investors should also expect the environment to become a greater priority in 2021 – fuelling growth in sectors like clean energy. Joe Biden’s victory in the US presidential election will provide further momentum to this shift. Across the globe, green investment will form a key part of fiscal stimulus packages, feeding into a strong and synchronised economic recovery.  

Pictet Asset Management’s business cycle indicators point to to mid-single digit growth in world gross domestic product (GDP) in 2021, but positive base effects cannot hide the long-lasting damage caused by the pandemic. Pictet Asset Management estimates that the fallout from COVID-19 will permanently reduce global GDP by 4 percentage points. It will take years before the global economy can go back to pre-COVID-19 levels.

The growth gap between emerging and developed markets will widen further to the benefit of both developing world equities and debt, thanks in a large part to China – the only major economy to avoid a contraction this year. From industrial production to car sales and exports, most of China’s primary economic activity indicators are already back at or above December 2019 levels, and set to expand further. Retail sales have lagged slightly but Pictet Asset Management expects private consumption to recover gradually in the coming months. 

Pictet AM

The near term outlook for the US economy is dependent on the fiscal relief programme currently under negotiation. A package north of USD1 trillion – Pictet Asset Management’s base case scenario – could push US growth above 5 per cent next year. 

Globally, though, Pictet Asset Management would expect fiscal stimulus to be reduced compared to 2020 – not through a return to austerity policies, but because Pictet Asset Management expects fewer new measures. Central banks will act as “shock absorbers” by keeping rates low and maintaining stimulus. However, liquidity conditions are still likely to deteriorate. Pictet Asset Management estimates that the total assets of major central banks will expand only USD3 trillion next year. This is double the yearly average seen the 2008 financial crisis but significantly below this year’s record USD8 trillion. 

History tells us that this matters for risk premia. Pictet Asset Management´s models suggest that global equities’ earnings multiples could contract by as much as 15 per cent next year, but this is likely to be more than offset by an approximate 25 per cent surge in corporate profits. 

Government bond yields in the developed world are likely to move gently higher tempered by central bank action which could include balance sheet expansion by the European Central Bank and yield curve control by the US Federal Reserve.

Fixed income and currencies: conditions improve for emerging bonds, TIPS

Even if Pictet Asset Management expects the global economy to recover strongly from the ravages of the pandemic in 2021, the surge in GDP growth is unlikely to lead to a sharp sell off in developed market government bonds. That’s primarily because central banks won’t  take any unnecessary risks.

Both the ECB and the Fed will do whatever is required to keep policy accommodative and ensure a self-sustaining recovery. For the ECB that means more bond purchases and the continuation of cheap loans to banks; for the Fed, that could involve adding yield curve control (YCC) – anchoring policy to specific bond yield targets – to its anti-crisis measures.

All the while, inflation will remain below central banks’ targets. Nevertheless, the combination of strong growth and rising commodity prices will feed through to a moderate pickup in inflation expectations. That’s a dynamic investors should pay attention to: while it translates into only a very gentle rise in nominal government bond yields in 2021 (Pictet Asset Management sees 10-year Treasury yields edging up to 1 per cent) it points to a further fall in real yields.

Pictet AM

This would provide a boost to US Treasury Inflation-Protected Securities (TIPS). Pictet Asset Management expects them to outperform all developed market nominal bonds; real yields should remain close to -1 per cent  as inflation expectations gather momentum.

In a year that will see healthy global growth and increased international trade, emerging market local currency bonds should also fare well. They are among the very few fixed income assets offering a yield of above 4 per cent. Adding to their investment appeal is the prospect of a strong rally in emerging market currencies – which should unfold as the global economy recovers and as trade tensions ease under a Biden administration. Currently, emerging market currencies are close to 25 per cent undervalued versus the US dollar according to Pictet Asset Management’s model. Chinese renminbi debt should have a  particularly strong year – not only benefiting from its attractive yield compared to developed world bonds but also from the asset class’s increased presence in mainstream bond benchmarks.

Prospects for developed market corporate bonds are mixed. High yield bonds are not especially attractive at this juncture. To seasoned fixed income investors that would seem unusual as history shows sub-investment grade bonds outpace equities during the final throes of a recession and in the early phase of a recovery. Yet the problem this time round is that high yield debt is already expensive.

In the past, high yield bonds’ outperformance has taken hold whenever the gap between their real yields and stocks’ dividend yields was above 10 percentage points. The strong run would then fade as the yield gap approached 3-5 percentage points. With the yield gap currently standing at 1.5 percentage points, however, the scope for high yield bonds to register significant gains appears very limited.

Investment-grade corporate bonds are more appealing – their returns compared to those of US Treasuries are low compared to the levels normally seen at this point of the economic cycle.

When it comes to currencies, 2021 doesn’t promise to be a good year for the dollar. There are several reasons why. For one thing, the greenback’s allure should fade in the face of a synchronised global economic recovery. Then there’s the prospect of a surge in the US budget deficit and continued intervention from the Fed – a fiscal and monetary expansion which will likely place further downward pressure on the currency. The dollar continues to trade well above what fundamentals – such as interest rate and growth differentials to the rest of the developed world –  suggest is fair value. 

Gold should continue to rally – Pictet Asset Management forecasts the gold price will hit USD2,000 by end-2021. Continued quantitative easing by global central banks, a weaker trajectory for the dollar and real rates dipping further into negative territory should all underpin demand for gold.

 

For more information, please click on this link.

 

Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented herein.

Important notes

This material is for distribution to professional investors only. However it is not intended for distribution to any person or entity who is a citizen or resident of any locality, state, country or other jurisdiction where such distribution, publication, or use would be contrary to law or regulation. Information used in the preparation of this document is based upon sources believed to be reliable, but no representation or warranty is given as to the accuracy or completeness of those sources. Any opinion, estimate or forecast may be changed at any time without prior warning.  Investors should read the prospectus or offering memorandum before investing in any Pictet managed funds. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future.  Past performance is not a guide to future performance.  The value of investments and the income from them can fall as well as rise and is not guaranteed.  You may not get back the amount originally invested. 

This document has been issued in Switzerland by Pictet Asset Management SA and in the rest of the world by Pictet Asset Management Limited, which is authorised and regulated by the Financial Conduct Authority, and may not be reproduced or distributed, either in part or in full, without their prior authorisation.

For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.

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Climate Change and Emerging Markets after COVID-19: Emerging Market Giants Step up

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. Pictet Asset Management

The COVID-19 pandemic has ravaged economies worldwide. Weak infrastructure and healthcare systems, dependence on commodities and tourism for income, and high debt loads have left emerging markets suffering disproportionately.

But looking beyond the short-term, prospects for these countries are hopeful. Vast fiscal and monetary stimulus have poured into the global financial system as governments everywhere look to mitigate the pandemic’s impact on their economies. A considerable proportion has been earmarked for infrastructure. Crucially, governments will be in a position to restructure their economies in ways that not only boost their productivity but are also environmentally friendly – to build back better. Indeed, in many cases the greener course of action is also the most economically sensible for emerging markets, according to a report by Oxford University’s Smith School sponsored by Pictet Asset Management.

Even before Covid-19, the green investment potential of emerging economies was huge. It’s estimated that the Paris Agreement has paved the way for some USD 23 trillion in climate smart opportunities in emerging markets by 2030, according to the World Bank.

Pictet AM

 

So far, their performance has been mixed. Yet, there is political momentum, driven by a groundswell of popular support, for green recovery from COVID-19, in a way there wasn’t following past pushes like the 1997 Kyoto agreement. Government efforts are reinforced by and reflect a groundswell of environmental activism by both individuals, companies and communities.

Not that it necessarily needs new money. For instance, public subsidies for coal, oil and gas production and consumption amounted to roughly USD 500 billion worldwide in 2019, compared to USD100 billion for renewables.

In many cases, this support is provided by governments of less developed economies in an effort to develop oil and gas fields or to keep their populaces happy with cheap energy. But just reversing those subsidies would make huge strides towards climate change mitigation. And would save tens of billions of dollars from becoming stranded assets.

Between USD 5 trillion and USD 17 trillion of assets are already at risk if governments decide to pursue a high ambition strategy of limiting warming to 1.6˚C. That’s the value of infrastructure and other assets that would have to be mothballed to achieve the lowest rate of warming in Oxford’s scenarios. Further investment into fossil assets only pushes the value of stranded assets higher.

Pictet AM

 

The green economy already makes up some 6 per cent of the global stock market, according to FTSE Russell.  For it to expand further, investments will need to flow beyond the power sector, which currently receives most low-carbon funding, to agriculture, transport and forestry among others.

The significant structural changes economies need to undergo to mitigate climate change will absorb large amounts of funding over a long period, but financing is also needed for the many smaller, cost-effective measures that can be taken to adapt to the rise in global temperatures. For instance, early warning systems for storms and heat waves are estimated to save in assets and lives ten times what they cost. In all, adaptation currently represents just 0.1 per cent of private climate finance flows.

There’s an inevitability about the shift towards greener investment. The economics are moving in that direction. The finance will follow. Governments and private investors are likely to heed the early signals and allocate capital accordingly.

 

 

Read more about the Oxford-Smith paper at this link.

 

Except otherwise indicated, all data on this page are sourced from the Climate Change and Emerging Markets after COVID-19 report, October 2020.

Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented herein.

Important notes

This material is for distribution to professional investors only. However it is not intended for distribution to any person or entity who is a citizen or resident of any locality, state, country or other jurisdiction where such distribution, publication, or use would be contrary to law or regulation. Information used in the preparation of this document is based upon sources believed to be reliable, but no representation or warranty is given as to the accuracy or completeness of those sources. Any opinion, estimate or forecast may be changed at any time without prior warning.  Investors should read the prospectus or offering memorandum before investing in any Pictet managed funds. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future.  Past performance is not a guide to future performance.  The value of investments and the income from them can fall as well as rise and is not guaranteed.  You may not get back the amount originally invested. 

This document has been issued in Switzerland by Pictet Asset Management SA and in the rest of the world by Pictet Asset Management Limited, which is authorised and regulated by the Financial Conduct Authority, and may not be reproduced or distributed, either in part or in full, without their prior authorisation.

For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.

Pictet Asset Management Inc. (Pictet AM Inc) is responsible for effecting solicitation in North America to promote the portfolio management services of Pictet Asset Management Limited (Pictet AM Ltd) and Pictet Asset Management SA (Pictet AM SA).

In Canada Pictet AM Inc is registered as Portfolio Managerr authorized to conduct marketing activities on behalf of Pictet AM Ltd and Pictet AM SA. In the USA, Pictet AM Inc. is registered as an SEC Investment Adviser and its activities are conducted in full compliance with the SEC rules applicable to the marketing of affiliate entities as prescribed in the Adviser Act of 1940 ref. 17CFR275.206(4)-3.

 

Climate Change and Emerging Markets after COVID-19

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. Pictet AM

The world stands to lose nearly half of its potential economic output by the end of the century. That’s the shortfall we face if we fail to make further progress on climate change.

But this is only an average. According to Laurent Ramsey, Co-CEO of Pictet Asset Management and Managing Partner at Pictet Group, emerging markets are at risk of faring even worse given their particular vulnerabilities to rising sea levels, drought and slumps in agricultural output. It’s a bleak picture. But there are also reasons for hope.

The scientific consensus on climate change is becoming widely accepted, and governments, individuals and businesses have started to act. With the benefit of some clear thinking and careful planning, much more can be done. Particularly across the emerging world.

Everywhere, human ingenuity, technological advances and the understanding that comes from experience and education are all positive forces that will drive efforts to mitigate climate change and to help us adapt to its effects.

This paper by Professor Cameron Hepburn and his team at the University of Oxford Smith School of Enterprise and the Environment offers a deep and broad analysis of the risks and opportunities emerging economies – and the world more generally – face from climate change. Their insights are based on the latest economic and climate modelling techniques.

It is research that Pictet Asset Management is proud to have sponsored. The dynamics this report describes will play a critical role for investors over the coming decades. The pace at which governments act will determine how capital should best be allocated, be it regionally or across asset classes.

Pictet Asset Management responsibility as managers of their clients’ assets is to understand the forces that shape the world, not just during the coming quarter or two, but sometimes over lifetimes – indeed, this frames their pioneering thematic approach. It also underpins their commitment to investing in emerging markets, which, notwithstanding short-term fluctuations, represent the greatest potential for long-term economic growth. Just think of the enormous strides these countries have made over recent decades.

Such are the foundations on which Pictet has grown during the past two centuries. But as talented as their own analysts, economists and investment managers are, Pictet Asset Management recognizes there is always more to learn. For nearly a millennium, Oxford’s academic community has created a well of knowledge that has profoundly influenced the course of humanity. Pictet Asset Management´s own history suggests that they have also had some success in taking the long-term view.

Which is why Pictet Asset Management has forged this partnership with Oxford’s Smith School. Thanks to their vast expertise in both environmental economics and emerging economies,

And, extraordinarily, they’ve done so through the lens of one of the most traumatic global developments in modern memory.

Compounding the challenge of how to negotiate the long-term peril presented by climate change is a more immediate crisis – the Covid-19 pandemic that has ravaged communities around the world. As this paper makes clear, the vast fiscal and monetary packages governments continue to put in place to support their economies over the near term can also considerably help efforts to limit global warming over decades to come if invested wisely.

Thankfully, the worst-case outcome, that of failing to do anything more to prevent global warming than we already have, is unlikely. Governments, businesses and individuals have recognized the need for action and have put steps in place.

Rather, the issue is: how much do we do? We can’t take for granted that all the effort will come from the developed world. Emerging countries are at risk of suffering disproportionately from the effects of global warming. And I think they are rising to the challenge – not least because taking measures is an investment that will often reap considerable rewards, and not just over the very long term.

In some areas, emerging economies are even well placed to take a lead. China already accounts for the lion’s share of photovoltaic cell manufacturing, is at the forefront of research and development and is one of the biggest adopters of the technology. Renewables combined with decentralised energy systems could help other emerging economies escape the need for massive investment in large networks. And as renewables become ever more cost effective, many of these countries could end up with cheaper energy than their developed rivals.

Some of the measures governments introduce, such as redirecting fossil fuel subsidies towards renewable energy sources, will be temporarily unpopular because they run counter to embedded interests. But the economic justification is clear. As the cost of power generated by renewables falls, fossil fuels will become ever less attractive. Great swathes of infrastructure devoted to fossil fuel production and use will be mothballed.

Ultimately, the work done by Professor Hepburn and his team leaves us hopeful. The challenges posed by climate change are huge. But they’re not insurmountable. And the emerging world has both its role to play and rewards to reap.

 

Read more about the Oxford-Smith paper at this link.

 

Except otherwise indicated, all data on this page are sourced from the Climate Change and Emerging Markets after COVID-19 report, October 2020.

Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented herein.

Important notes

This material is for distribution to professional investors only. However it is not intended for distribution to any person or entity who is a citizen or resident of any locality, state, country or other jurisdiction where such distribution, publication, or use would be contrary to law or regulation. Information used in the preparation of this document is based upon sources believed to be reliable, but no representation or warranty is given as to the accuracy or completeness of those sources. Any opinion, estimate or forecast may be changed at any time without prior warning.  Investors should read the prospectus or offering memorandum before investing in any Pictet managed funds. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future.  Past performance is not a guide to future performance.  The value of investments and the income from them can fall as well as rise and is not guaranteed.  You may not get back the amount originally invested. 

This document has been issued in Switzerland by Pictet Asset Management SA and in the rest of the world by Pictet Asset Management Limited, which is authorised and regulated by the Financial Conduct Authority, and may not be reproduced or distributed, either in part or in full, without their prior authorisation.

For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.

Pictet Asset Management Inc. (Pictet AM Inc) is responsible for effecting solicitation in North America to promote the portfolio management services of Pictet Asset Management Limited (Pictet AM Ltd) and Pictet Asset Management SA (Pictet AM SA).

In Canada Pictet AM Inc is registered as Portfolio Managerr authorized to conduct marketing activities on behalf of Pictet AM Ltd and Pictet AM SA. In the USA, Pictet AM Inc. is registered as an SEC Investment Adviser and its activities are conducted in full compliance with the SEC rules applicable to the marketing of affiliate entities as prescribed in the Adviser Act of 1940 ref. 17CFR275.206(4)-3.

 

“Small is Beautiful”: Sustainable Energy Trends Bring Opportunities for Infrastructure Investors

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Pixabay CC0 Public Domain. “Lo pequeño es hermoso”: Las tendencias de la energía sostenible generan oportunidades para los inversores en infraestructuras

In 1973, a year marked by the oil crisis, the global economy was mainly powered by centralised, large-scale, fossil fuel-based technology. In a recent article, DWS recalls that, in the same year, “Small Is Beautiful”, a book published by the economist E.F. Schumacher, appeared somewhat atypical to many, as it presented the idea of an economic model based on sustainable, small-scale, decentralised energy technologies.

“Today, sustainability is increasingly at the center of the political and investors’ agenda, and Schumacher’s vision appears to be coming true, as investments in small-scale renewables and energy efficiency technologies are growing, supporting the transition to a low carbon economy”, says the asset manager. A recent survey of central bankers and finance officials sees energy efficiency as a key area of investment to stimulate the economy.1

In its view, sustainability standards are rapidly becoming more ambitious. For instance, nearly 1,000 private and listed companies are committed to science-based emissions reduction targets.2 This trend is supporting demand for the installation of small-scale renewables and for more energy efficient buildings and services.

DWS points out that the last decade was marked by an initial shift from thermal generation to renewables. “We anticipate the pipeline for large-scale renewables to expand, but we expect distributed generation and small-scale renewables to be essential for infrastructure investors, with industrial, commercial and residential projects ranging from smaller solar rooftop installations to larger combined heat and power (CHP) and cogeneration plants”, they add.

The International Energy Agency (IEA) estimates that over the next decade investment in energy efficient technologies and insulation may have to triple from current levels of USD 360 billion to nearly USD 1 trillion to help meet the goals of the Paris Agreement.

The asset manager believes that regulation continues to drive demand through a range of measures, such as feed-in-tariffs, tax reliefs and grants that vary by country and technology: “This supports the installation of rooftop solar and energy efficiency technologies, including smart meters, the replacement of inefficient boilers, or the electrification of heating and cooling systems”.3

In their opinion, Europe seems to have taken the regulatory lead in recent years, and they expect CO2 reduction targets to continue to be addressed through “green certificate” style incentives, supporting decarbonisation. Data indicate that EU renewables could surpass the 2030 target of 32%, while a gap may still remain under the EU’s 2030 energy efficiency targets.4

Regulators are also establishing minimum energy efficiency standards, requiring buildings to achieve a certain efficiency level before they are sold or leased. In Europe, they expect that requirements on buildings may expand, as governments seek to improve energy efficiency, and as more investors advocate for stronger policies that support net zero portfolio targets.

In the U.S., some states have established programs to link repayment of building renovations through property taxes, to support energy efficiency, helping reduce split incentives between landlords and tenants. “Moreover, thirty-three major U.S. cities require the public benchmarking of existing buildings’ energy efficiency, and some also set performance targets, requiring building improvements”, comments DWS.

An opportunity for infrastructure investors

As demand for small-scale renewables and energy efficiency solutions appears to be driven by a solid underlying market trend, the asset manager observes growing interest from larger utilities and infrastructure investors. “The constant flow of smaller renewables projects provides infrastructure investors with an opportunity to partner with larger independent energy services providers, supporting capital deployment, as the development and installation of small-scale renewable projects can be more profitable than largescale renewables”, they point out.

The market of installers and service providers has historically been very fragmented, and the complexity of regulation can be a challenging aspect for SMEs and large customers alike, limiting adoption rates. In their view, these factors create a market opportunity for larger, efficient independent energy services providers, supported by economies of scale.

DWS notes that, although demand is growing, financing for small-scale renewables and energy efficiency projects can be a major challenge and represents a limit for the adoption of these technologies and the reduction of CO2 emissions. Moreover, the sector may gradually transition away from government subsidies. “Infrastructure investors, alongside utilities may play a key role in the provision of integrated financing and payment solutions to end customers, helping to bridge the widening funding gap and CO2 curb emissions”, they conclude.

 

1 University of Oxford, Oxford Smith School of Enterprise and the Environment, “Will COVID-19 fiscal recovery packages accelerate or retard progress on climate change?”, May 4, 2020

2 Science Based Targets September 2020

3 LSE, Climate Change Laws of the World, accessed as at September 2020

4 European Commission “National Energy and Climate Plans: Member State contributions to the EU’s 2030 climate ambition”, September 2020

Source: DWS, European Commission “National Energy and Climate Plans: Member State contributions to the EU’s 2030 climate ambition” September 2020, IEA, November 2019, Regulatory Assistance Project, June 2020, C2ES September 2019, Hepburn et al May 2020, LSE/Grantham Research Institute 2019, SENSEI 2020, Science Based Targets September 2020. Past performance is not indicative of future returns. Forecasts are based on assumptions, estimates, views and hypothetical models or analyses, which might prove inaccurate or incorrect.

 

For institutional investors only. Further distribution of this material is strictly prohibited. For institutional investor use and registered representative use only. Not for public viewing or distribution.

DWS and FundsSociety are not affiliated.

Important risk information

Alternative investments may be speculative and involve significant risks including illiquidity, heightened potential for loss and lack of transparency. Alternatives are not suitable for all clients. This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation. Past performance is not indicative of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect.Investments are subject to various risks, including market fluctuations, regulatory change, possible delays in repayment and loss of income and principal invested. The value of investments can fall as well as rise and you may not recover the amount originally invested at any point in time. Furthermore, substantial fluctuations of the value of the investment are possible even over short periods of time.

This publication contains forward looking statements. Forward looking statements include, but are not limited to assumptions, estimates, projections, opinions, models and hypothetical performance analysis. The forward looking statements expressed constitute the author’s judgment as of the date of this material. Forward looking statements involve significant elements of subjective judgments and analyses and changes thereto and/or consideration of different or additional factors could have a material impact on the results indicated. Therefore, actual results may vary, perhaps materially, from the results contained herein. No representation or warranty is made by DWS as to the reasonableness or completeness of such forward looking statements or to any other financial information contained herein.

War, terrorism, economic uncertainty, trade disputes, public health crises (including the recent pandemic spread of the novel coronavirus) and related geopolitical events could lead to increased market volatility, disruption to U.S. and world economies and markets and may have significant adverse effects on the fund and its investments.

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Investments are subject to various risks, including market fluctuations, regulatory change, possible delays in repayment and loss of income and principal invested. The value of investments can fall as well as rise and may not recover the amount originally invested at any point in time. Furthermore, substantial fluctuations of the value of the investment are possible even over short periods of time.

DWS and its affiliates do not provide accounting, tax or legal advice and investors should consult their own advisors with respect to their particular circumstances.

For investors in Peru / Argentina / Chile: Without limitation, this document does not constitute an offer, an invitation to offer or a recommendation to enter into any transaction neither does it constitute the offer of securities or funds. The offer of any services and/or securities or funds will be subject to appropriate local legislation and regulation.

Additional disclaimer for Chile: This private offer commences on current date and it avails itself of the General Regulation No. 336 of the Superintendence of Securities and Insurances, currently the Financial Markets Commission. This offer relates to securities not registered with the Securities Registry or the Registry of Foreign Securities of the Commission for the Financial Markets Commission, and therefore such shares are not subject to oversight by the latter. Being unregistered securities, there is no obligation on the issuer to provide public information in Chile regarding such securities; and these securities may not be subject to a public offer until they are registered in the corresponding Securities Registry.

La presente oferta privada toma vigencia el date y está sujeta al Reglamento General No. 336 de la Superintendencia de Valores y Seguros (SVS), conocida como la Comisión de Mercados Financieros (CMF). Esta oferta cubre aquellos instrumentos que no están registrados en el Registro de Valores o Registro de Valores Extranjeros de la Comisión de Mercados Financieros (CMF), por lo tanto, dichas acciones no están sujetas bajo la supervisión de la CMF. Debido a que no están registrados, el emisor no tiene la obligación de proporcionar información sobre dichos instrumentos en Chile, los mismos no pueden ser ofrecidos bajo una oferta pública hasta que estén registrados en el Registro de Valores que corresponde.

Additional disclaimer for Peru: The Products have not been registered before the Superintendencia del Mercado de Valores (SMV) and are being placed by means of a private offer. SMV has not reviewed the information provided to the investor. This Prospectus is only for the exclusive use of institutional investors in Peru and is not for public distribution

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For investors in Brazil: The shares in the Fund may not be offered or sold to the public in Brazil. Accordingly, the shares in the Fund have not been nor will be registered with the Brazilian Securities Commission – CVM nor have they been submitted to the foregoing agency for approval. Documents relating to the [shares in the Fund], as well as the information contained therein, may not be supplied to the public in Brazil, as the offering of shares in the Fund is not a public offering of securities in Brazil, nor used in connection with any offer or subscription or sale of securities to the public in Brazil.

For investors in Uruguay: The sale of the [Products] qualifies as a private placement pursuant to section 2 of Uruguayan law 18,627. The Products must not be offered or sold to the public in Uruguay, except in circumstances which do not constitute a public offering or distribution under Uruguayan laws and regulations. The [Products] are not and will not be registered with the Financial Services Superintendency of the Central Bank of Uruguay.

For investors in Brazil: The shares in the Fund may not be offered or sold to the public in Brazil. Accordingly, the shares in the Fund have not been nor will be registered with the Brazilian Securities Commission – CVM nor have they been submitted to the foregoing agency for approval. Documents relating to the shares in the Fund, as well as the information contained therein, may not be supplied to the public in Brazil, as the offering of shares in the Fund is not a public offering of securities in Brazil, nor used in connection with any offer or subscription or sale of securities to the public in Brazil.

© 2020 DWS Group GmbH & Co. KGaA. All rights reserved. I-079692-1 (11/20)  ORIG: I-077895-1

The COVID-19 Crisis Prompts 78% of Insurers Worldwide to Place More Emphasis on ESG

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A new report by BlackRock reveals that senior executives from insurance companies worldwide believe the COVID-19 crisis will cause a fundamental reshaping of their industry. The “2020 Global Insurance Report” reflects the responses of 360 top managers in 25 markets representing total assets under management of around 24 trillion dollars, which means two thirds of the sector.

Charles Hatami, Global Head of BlackRock’s Financial Institutions, points out in the document that the feedback is globally consistent, with four prominent themes fueling industry momentum in the aftermath of the pandemic: digitalization, ESG, portfolio resilience and reinvention of business models. “Technological transformation of the industry is underway; the overall review of business models and asset allocation in a post-COVID world are determining success factors; and sustainability, already a major focus, has accelerated in importance and implementation”, he says.

The study shows that these topics are also having an impact on insurance companies’ risk appetite and asset allocation: 64% of the respondents believe that the most serious market risk for the following 12-24 months is asset price volatility, followed by liquidity (58%) and interest rate (45%) risks. At a macro level, geopolitical factors (57%) and weak global economic growth (48%) are their main concerns.

Nevertheless, almost half of the executives say that they’re looking to increase their risk exposure, mainly in alternatives and equities. They also reveal a lower acceptance of credit and illiquidity risk and a higher propensity towards cash while they wait for further opportunities.

Prioritising sustainability objectives

BlackRock shows that 78% of insurance companies believe the COVID experience is accelerating their focus on ESG, with a greater emphasis on social and governance aspects. “The industry is leading the charge in transforming the way we invest and ESG considerations are penetrating investment decisions deeply”, the document points out. In that sense, 54% have invested in specific ESG strategies in the last year and 52% have made ESG risk a key component of their risk assessment for new investments. Actually, 32% have turned down an investment opportunity in the last 12 months due to ESG concerns.

The portfolio implementation of this agenda takes many forms: for instance, through reducing carbon intensity of existing portfolios, creating Paris aligned portfolios, and thematic and impact investing. Hatami comments that, at a time of change and consolidation within the insurance industry, the COVID crisis has further globalised several trends, ranging from potential payouts on the liability side, the accelerated growth of unit-linked businesses in certain regions, and persistent low rates and uncertainty related to inflation across developed markets. “Sustainability, already a focus in insurance underwriting, is now a key investment consideration for our clients”, he adds.

Enhancing portfolio flexibility for resilience

Close to 60% of insurers look to combine a focus on quality with higher diversification, as well as increasing portfolio flexibility with strong governance. Integrated asset liability management remains key to capturing the higher returns from select private market investments, especially in the less liquid space.

In their client conversations, BlackRock saw evidence of this more resilient approach across the different asset classes; whether it is through the focus on direct lending strategies with strong potential to deliver resilient income and portfolio returns, the emphasis on sustainability or contracted sectors in infrastructure, or the favouring of defensive, high growth opportunities such as healthcare and technology in private equity.

“Bottom line: concerns about liquidity risk should not hold back insurers from taking action to maintain stable investment income, provided they also enhance their investment framework”, highlights the asset manager.

Reinventing business models

Over 60% of senior executives envisage a more flexible, targeted product offering with closer policyholder engagement in an environment of low rates and significant pressure on policyholders following the pandemic. The report shows that insurers believe they will need better coordination between investment and product teams to respond proactively to market changes with expanded investment opportunity guidelines and a focus on new products that are better suited to a low rate environment.

Among life and multi-line insurers, 62% plan to prioritise specialised pandemic risk coverage and 57% life insurance with an investment focus during the next two years in order to respond to their customers’ evolving needs. Furthermore, insurers anticipate material changes to their business –whether it is in terms of underwriting, product offering or distribution- with technology as a key driver of change: 71% will adapt their underwriting business to the post-COVID environment by strengthening digital distribution, while 63% plan more flexibility in insurance policies and 61% see technology as an internal enabler to get closer to customers.

Embracing digital transformation

In addition, close to 70% of insurers plan to prioritise technology investment in response to the changed environment, as technological change and a more flexible and tech-enabled workforce open up new possibilities to create value across the business from operations through to digital distribution. BlackRock believes that digital transformation is now becoming “a critical component for business continuity and operational resilience”, rather than a discretionary spend to gain competitive advantage.

In this regard, as with most other sectors, the pandemic has led to business activities being conducted remotely with most staff working from home. Asked about issues encountered, only 24% reported technology gaps. For large insurers, this was even less of an issue (16%). The main concerns centered instead on risk management and the ability to maintain a culture of innovation and idea generation.

BBVA Sells its US Subsidiary to PNC for 11.6 Billion Dollars

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BBVA-Houston
Foto cedidaSede de BBVA en Houston.. BBVA vende su filial en Estados Unidos a PNC por 11.600 millones de dólares

There’s still room for new developments in the Spanish banking sector. BBVA has agreed to sell to PNC its subsidiary in the U.S. for 11.6 billion dollars (9.7 billion euros) in cash. The transaction immediately increased the rumors of a potential merger with the smaller entity Sabadell and BBVA confirmed they have started in conversations.

The bank pointed out in a press release that this amount represents almost 50% of its current market capitalization, “creating significant value for shareholders”. The transaction will have a positive impact on BBVA’s fully loaded CET1 ratio of 300 basis points, or 8.5 billion euros of CET1 generation.

“This is a very positive transaction for all sides. PNC has recognized the great value of our unique client franchise and of our great team in the US, who will be part of a leading financial services group in the country. The deal enhances our already strong financial position. We will have ample flexibility to profitably deploy capital in our markets strengthening our long-term growth profile and supporting economies in the recovery phase, and to increase distributions to shareholders”, said BBVA Group executive chairman, Carlos Torres Vila.

In the U.S., BBVA is a Sunbelt-based bank with more than 100 billion dollars in assets and 637 branches, with leading market shares in Texas, Alabama and Arizona. After the closing of the transaction, PNC, based in Pittsburgh (Pennsylvania) will become the country’s fifth-largest bank by assets.

The transaction excludes the broker dealer (BBVA Securities) and the branch in New York, through which BBVA will continue to provide corporate and investment banking services to its large corporate and institutional clients. It also excludes the representative office in San Francisco and the fintech investment fund Propel Venture Partners.

William S. Demchak, PNC’s chairman, president and chief executive officer, commented that the acquisition will accelerate their growth trajectory and drive long-term shareholder value. “This transaction is an opportunity to navigate our future from a position of strength, accelerating PNC’s expansion while drawing on our experience as a disciplined acquirer. We are excited to bring our industry-leading technology and innovative products and services to new markets and clients, leveraging our mutual commitment to building diverse and high performing teams and supporting the communities we serve”, he added.

PNC: the fifth largest retail bank

The purchase makes PNC the fifth largest retail bank in the United States, behind JP Morgan Chase, Bank of America, Wells Fargo and Citigroup. It will give the firm a greater leadership in markets with significant growth potential beyond its current presence in the Midwest and Mid-Atlantic, especially in Texas. In addition, it will strengthen its commercial and consumer banking business. 

The transaction takes place six months after PNC left BlackRock’s shareholding selling its 22.4% stake. The two operations would have some relationship to help the bank build a nationwide franchis, as Demchak told the Financial Times: “We’ve managed to effectively trade the BlackRock ownership stake we had for a franchise that takes us coast to coast. BBVA is in the best markets in the country with substantial presence down in Texas, Arizona, California and in Denver, in Alabama, and down through Florida.”

The details

BBVA pointed out that the all-cash deal by PNC values the business sold at 19.7 times its 2019 earnings and 1.34 times its tangible book value as of September, 2020. The deal “unlocks hidden value” as the price is more than 2.5 times the average valuation assigned by analysts to the business (3.8 billion euros), for a business that represented less than 10% of 2019 Group’s net attributable profit. Also, the price represents almost 50% of BBVA’s current market capitalization.

“With the transaction, BBVA will have additional flexibility to invest in its markets and increase distributions to shareholders, with a sizeable buyback as an attractive option at current share prices”, the Spanish bank said. The sale will generate a capital gain net of taxes of approximately 580 million euros and BBVA Group’s tangible book value will increase by 1.4 billion euros. The deal is expected to close in mid 2021 once the required regulatory approvals have been obtained.

A potential merger with Sabadell

The announcement of the transaction immediately sparked the rumors of a potential merger with Banco Sabadell. On Monday, BBVA confirmed to the National Securities Market Commission (CNMV) that both entities had started conversations.

After that, Banco Sabadell also confirmed the negotiations.