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The Vital Guide to Hiring FP&A Experts

Financial Planning and Analysis (FP&A) experts are a pillar of any finance team, only building their models after feeling the pulse of every part of the business. This guide -published by a group of Toptal writers- will help you identify the very best FP&A candidates, arming you with the right sets of questions to make sure they are best suited to your specific needs.

Financial Planning and Analysis (FP&A) experts are jacks-of-all-trades and the master of most others, making them both difficult to come by and desperately valuable. According to a CEB report, “Finance and its HR partners have become adept at recruiting accountants and [other] technical professionals who have learned how to apply new regulations quickly to financial statements and manage short-term variation in their careers. However, very few professionals have been taught the skills that will help them succeed in a more judgment-based role, which also requires advanced analytical and interpersonal skills.”

Recruiting for a role that is still taking shape can be difficult and downright frustrating. This may be particularly true for FP&A, a role in which sales targets, marketing campaigns, product launches, planned investments, capital needs, political risks and far more variables besides are pored over and broken down. This guide is designed to help you spot top financial planning and analysis experts, who combine strong analytical mindsets and technical ability with top-notch people skills.

While there’s no hard and fast recruiting method, there are certain questions you can ask, allowing you to identify the skillsets needed.

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Learners at Heart

FP&A consultants need to be learners at heart. They must strive to know your business inside and out, as well as understand external factors, such as emerging trends within your industry. They will display a natural curiosity and the ability to learn quickly, turning new knowledge into valuable insights. To assess this, consider asking candidates questions like the following:

Q: The CFO of a $400M company has tasked you with an urgent project to identify the leading cost drivers in the company’s flagging pharmaceutical division, where costs have spiked 30% in the last year, while profitability has remained stagnant. This is an area of the business with which you are not familiar, and the CFO has given you a week to prepare a presentation for the executive team with a plan to increase the division’s profitability by 10+% in 12-18 months. How do you approach this project?

Top FP&A specialists know the right questions to ask in order to rapidly understand the financial dynamics of any area of the business & how to address any problems. Here are a few key questions good candidates may ask.

What are the financial results & trends for this division over the last few years?
What are the trends in the division’s industry, including competitive overview?
What are the key metrics for this division? How are performance & success measured?
What are the division’s strategic & financial goals/targets, both short-term and long-term?
What are the cost drivers for this division?
How do you allocate costs within this division? What is the methodology used? How do you measure return on investment?
Who are the decision makers within this division?

Top FP&A specialists are quick to absorb relevant data and know to disregard superfluous information, all while driving toward solutions-oriented analysis.

Talented Communicators

“I have seen people who are Excel wizards, but can’t convey key messages [for their companies]. They struggle with taking it to the next level. How do you turn a financial model into a clear message with specific recommendations and solutions? That’s the key skill,” according to Carlos Aguirre, VP of Finance @ Toptal.

It’s not enough to have outstanding analytical skills. Top FP&A consultants must be able to establish their own credibility, explain complex financial problems in simple terms to key stakeholders, and propose clear solutions, backed by accurate data and insightful analysis.

When communicating with FP&A candidates, the following traits, which are commonly valued in many new hires, are especially important to emphasize and screen for:

Intellectual curiosity (i.e. the ability to ask the right questions)
Patience with your questions
Politeness
Social skills and a great first impression
Ability to clearly teach you about something that you don’t already know

FP&A experts need to inspire confidence through skillful communication. Otherwise, their business recommendations will fall flat, and the company won’t benefit.

Q: Your client, the CEO of a $200M late-stage startup, has asked you to analyze the company’s financial results over the past year and prepare a capital allocation model for the upcoming year to present to the executive team. In the process, you uncover multiple inaccuracies in their underlying data, and you know that the company’s CFO was responsible for building their accounting/finance system from the ground up. How do you approach the project?

Elite FP&A consultants must be confident in their analyses, be capable of addressing data issues head-on, and proactively propose solutions that fix the roots of these problems. They need to be able to instill confidence that they have a detailed understanding of the situation at hand.

In responding to this question, a good FP&A candidate will clearly outline their plan for:

Communicating with the CFO to discuss & further investigate data issues.
Helping fix the underlying issues and assembling accurate financial data for the successful completion of the project at hand.
Providing a strong position on what the organization stands to gain by following the proposed capital allocation model vs. other alternatives (including those that may have been taken in the past).
Ensuring a long-term fix for the data issues and a more robust system and/or process for the organization’s financial data gathering & analysis, so as to ensure that inaccuracies don’t happen again (while also making it clear how this fix / investment will benefit the organization in the long run).

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Critical Thinkers

The difference between average FP&A talent and top FP&A talent often comes down to their ability to handle large amounts of data & tight deadlines. You need to understand whether a candidate is prone to analysis paralysis.

Top FP&A experts have a keen sense for how to approach each project, how much time to allocate to each step, and which areas deserve most of their time & focus.

Q: Profit, which is currently hovering at 3% of revenue, has declined 20% over the last year within Top Flight’s core business unit–its fleet of private jets. What is your approach for efficiently identifying the main issues & making recommendations for improvements? What specific data would you leverage? What would be an alternative approach, and why?

FP&A experts will begin by outlining an overall framework, as well as the key questions that they think will most efficiently help uncover the underlying issues & help shape a successful solution. They will outline the data set needed for efficient analysis.

They will also think of strong alternative solutions in case the original approach does not yield efficient answers & optimal solutions.

FP&A experts will be able to evaluate a variety of different analytical approaches in parallel, quickly determine which one has the highest potential to be fruitful, and tackle it by asking some of the following questions:

What are the financial results & trends for this business unit over the last few years?
What are the key performance indicators & metrics for this business unit? How are those performing versus historical periods?
How is the industry performing? Are there macroeconomic issues at hand? Or is this company’s business unit underperforming the industry & the competition?
What do leaders within the business unit think is causing the underperformance? What do they think is an optimal strategic path forward? Does the data & analysis support this?
Have any initiatives have been put into place already? What were the results? Are there elements that have not been contemplated which may be contributing to the issue? (i.e. need to “peel the onion” and fully understand performance drivers & the root causes of the issues in each sub-segment within the business unit).

Creative Problem-Solvers

Along with being strong critical thinkers, top FP&A specialists are also creative problem-solvers. You want eager and adept solutions-oriented candidates. They should be hungry to proactively solve problems across the organization, horizontally and vertically.

Q: Your client is a small, privately-held business that has experienced 20% year-over-year revenue growth over the last three-year period. Lately, however, the company has been more budget-constrained, and growth has stagnated. You know that the company has ambitious long-term growth goals. How do you optimize the organization’s capital structure in order to reignite growth while keeping costs under control?

Top FP&A consultants will be able to assemble creative, innovative solutions to open-ended problems like this one. Here, it seems that the client needs more capital to invest and jump-start revenue growth. What’s the best way to tackle this issue?

For starters, FP&A experts need to be make an assessment to determine how efficiently current capital is being used, and what the return on invested capital is. Does the company really need to find additional capital? Or can existing capital usage be further optimized?

An FP&A expert can help identify creative options for reallocating existing capital & budgets to funnel more capital towards the areas with highest value from a strategic & return on investment perspective. If cost-cutting is a must, then a return on invested capital analysis can help make the most efficient cost cutting (optimization) decisions – fully backed by proper analytics.

If additional capital is needed, an FP&A expert needs to be able to advise the client on the different options available (i.e. both debt & equity) and the pros and cons of each. This includes impact to ownership, tax implications, interest costs involved, covenants or other thresholds/requirements imposed by the capital issuer, etc. In making a recommendation, FP&A experts will account for the different risks & benefits involved with each option, as well as take into consideration the client’s short & long term goals.

Patient, yet Ambitious

FP&A experts must walk a fine line between being patient and being ambitious. Weeding through reams of technical data requires both perseverance and the ability to see the light at the end of the tunnel. Experts must display patience while learning about every facet of the company as they hone their basis for analysis.

Their patience should be matched with an ambition to be a vital key player and strong voice at the decision-making table. Experts should be zealous in their ability to influence the trajectory of the business with their unique efforts. FP&A is not a passive function, and a candidate’s attitude should reflect this activist spirit.

Q: Your client is the board of a $1B pharmaceutical company and has asked you to build a rolling 13-week cash flow forecast to present at the organization’s next board meeting. However, the company’s CFO has been slow to provide all the information you need. How do you keep the process moving while waiting for this critical information?

Top-flight FP&A consultants can read the room and pragmatically assess possible solutions to roadblocks.

This is where patience comes into play. FP&A consultants must be able to successfully work with the CFO and build healthy credibility. However, they will ultimately never sacrifice their focus on providing their client, the board, with the comprehensive forecast requested (and on a timely basis).

An FP&A consultant will understand that a CFO is a very busy individual, and will take a proactive approach in outlining a clear framework with specific data & information requirements so as to avoid any time wasting. The FP&A expert will also offer to connect and work with the CFO’s Team directly to gather such data & information in a timely manner.

If the CFO has been very busy, it is possible that he/she will feel uneasy about not being able to spend enough time on this project. It is therefore imperative for the FP&A expert to masterfully walk the CFO through the analysis in detail, giving him/her the necessary comfort about the accuracy of the end product and building credibility along the way.

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Essential Technical Skills

The best FP&A experts need to be competent with the tools that companies are using for their financial planning and analysis activities (i.e. BI / EPM software).

As part of the hiring process, it is important to evaluate how (and how well) candidates engage with key tools of the trade (besides Excel, which is a must!). Ask them to walk you, in detail, through their experience in working with some of the tools noted below. Specifically, inquire what their level of interaction with those tools was (i.e. did they help implement them? Were they super users? Did they use them on a regular basis for their analysis activities? etc.).

Financial planning and analysis specialists need to be familiar with tools that enable monitoring and analyzing of an organization’s performance, key metrics & KPIs (such as revenue & profitability, margins, ROI, net working capital, cash conversion cycle, etc.). It’s important for FP&A consultants to be well-versed in how such tools (e.g. Hyperion, Business Objects, Cognos, etc.) work & support strong analytics.

Q: A medium-sized firm in Silicon Valley is seeking your help to select the platform the company should use next year to support their FP&A activities. Walk us through your decision-making process.

FP&A experts will need to ask and answer several key questions when considering platforms alternatives, for example:

What are the client’s key needs for the system? What type of analytics are best suited for the business?
What is the client’s budget and timeline for this implementation? Can the vendor provide estimates on implementation & recurring costs based on scope?
How rapidly is the client expanding? This is key to ensuring the solution addresses both current & future needs.
What system alternatives are out there that may suit the client’s needs? What have other companies in the client’s space used? Are there reviews/ratings available? Does online research unearth a stellar track record of system performance & service?
Does the vendor have partnerships with complementary third-party professional services or applications?
What resources does the client currently have in place for this implementation project? Which gaps need to be filled to ensure successful implementation?

And That’s How You Find the Best Talent

“It’s all about closing the gap between raw data, insights, and action”, says Dylan Hoffman, former VP of Finance @ DNA Marketing.

Technical skills in finance are only as good as the business solutions they produce.

FP&A experts are creative problem solvers, who help you look backward and forward to answer the most pressing challenges facing your organization. The best FP&A experts will also be able to quickly bridge the gap from raw data to solutions. For the best among them, not only do they think outside the box – there is no box.

You can read the original article in this link.

Billionaire’s Overall Wealth Declined by USD 300 Billion

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UBS Group AG and PwC presented their joint annual billionaires report, “Are billionaires feeling the pressure?” The report examines wealth creation within the billionaire segment in 2015 and singles out the transfer of USD 2.1 trillion in billionaire wealth that is expected over the next two decades.

2015 saw a pause as total billionaire wealth fell by USD 300 billion to USD 5.1 trillion. Headwinds such as the transfer of assets within families, commodity price deflation and an appreciating US dollar, impacted the growth of billionaire wealth. Average billionaire wealth dropped from USD 4.0 billion to USD 3.7 billion and the US added only five net new billionaires in 20151. In contrast, Asia produced one billionaire every three days, with China alone accounting for over half of the 113 additions.

The findings build on UBS/PwC’s previous Billionaires Reports, released in May and December 2015. According to the new report, we are about to witness the greatest transfer of wealth in human history. Approximately 460 billionaires will transfer USD 2.1 trillion, the equivalent of India’s GDP, to their heirs over a period of just 20 years. For most of Asia’s young economies, where over 85% of billionaires are first- generation, this will be the first-ever handover of billionaire wealth.

Josef Stadler, Head Global Ultra High Net Worth, UBS, said: “The findings of this report help us stay ahead of the issues that matter to better advise our clients, which include over half the world’s billionaires and three out of every five billionaires in Asia. Even as China’s growth moderates, it is the bright spot for great wealth growth. Led by a tech sector on the rise, China minted 80 new billionaires in 2015 and Asia overall created a new billionaire nearly every three days. Meanwhile Europe’s billionaires stood out for maintaining and passing wealth down to their heirs. This is something that regions like Asia, where many more billionaires are first generation, can learn a lot from, especially as we head into the greatest period of wealth transfer we’ve ever seen. Just as Asian billionaires can gain from the experience of wealth transfer in Europe, there’s much that Europe can learn from the rapid billionaire growth in Asia.”

Michael Spellacy, Global Wealth Leader at PwC US added: “As the shockwaves from regulatory upheaval in the EU continue to trigger global currency fluctuations, strategic planning becomes even more crucial for wealth preservation. Those who control assets face tough investment questions. Encouragingly, this year’s report shows that Europe’s billionaires were the most resilient with many of the 60 individuals from Europe inheriting their fortunes in 2015 for the first time. The US, which boasts the biggest collection of billionaires by region, sets the trend. Total US billionaire wealth fell, but ‘new money’ fared better than old, falling by just 4%, from an average of USD 4.7bn per individual to USD 4.5bn.”

Key findings from the report include:

A USD 2.1 trillion inheritance
The past 20 years of exceptional wealth creation will soon be followed by the largest-ever wealth transfer. We estimate that less than 500 people (460 of the billionaires in the markets we cover) will hand over USD 2.1 trillion, a figure equivalent to India’s GDP, to their heirs in the next 20 years. For most of Asia’s young economies, where over 85% of billionaires are first generation, this will be the first-ever handover of billionaire wealth.

The Gilded Age pauses
After more than 20 years of unprecedented wealth creation, the Second Gilded Age has stalled. The transfer of assets within families, commodity price deflation and an appreciating US dollar have emerged as significant headwinds. In 2015, in the markets we cover, 210 fortunes broke through the billion-dollar wealth ceiling and 160 billionaires dropped off, leading to a net increase in the billionaire population of 50 to 1,397. Yet their total wealth fell from USD 5.4 trillion to USD 5.1 trillion. Average wealth fell from USD 4 billion in 2014 to USD 3.7 billion in 2015. It is still too early to tell if 2015 signals a pause in the Gilded Age or something more.

Old legacies’ lessons for new billionaires
Of the billionaire fortunes that have fallen below the billion dollar mark since 1995, 90% were not preserved beyond the first and second generations. At a time of economic headwinds and imminent wealth transfer, Europe’s old legacies are a model for new billionaires to avoid this fate. Germany and Switzerland, in particular, are the countries with the greatest share of ‘old’ wealth. Asia’s family- orientated billionaires may wish to adapt the European model of wealth preservation to their own needs.

New philanthropic models
In the first half of the 20th century, entrepreneurial families such as the Carnegies and Rockefellers funded significant advances in areas such as education and health. By doing so, they displayed many traits associated with billionaires – chiefly business focused and smart risk-takers – to drive success. After over three decades of this new Gilded Age, billionaire philanthropy is growing all over the world. New philanthropic models are emerging (loans, guarantees, contracts, impact investing etc.) and the millennial generation is putting philanthropy at the heart of their family values. In spite of this the current Gilded Age may not match its predecessor’s record.

You can read the full report here.

FOX Report Reveals How Advisors are Handling the Loss of Pricing Leverage

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A recent report from Family Office Exchange (FOX) has uncovered new strategies that forward-thinking advisors are beginning to use to better link value and price with their ultra-wealthy clients in the face of increasing price competition.

The findings stem from the recently released 2016 FOX Value Price Study: The Critical Link in Ultra-Wealth Market, which is available to all FOX members. According to the report, advisors have lost at least some pricing power with prospects, as fees quoted to prospective clients have dropped 17% since 2008 and 15% since 2012. Among current clients, fees have flattened-out—in large part due to the difficultly advisors encounter in articulating value.

In response, some advisors have begun utilizing four strategies to better link value and price:

Mastering Underlying Economics: Achieving sustainable business economics by thoroughly understanding value while making pricing and cost management everyone’s job at the firm.
Realigning Price and Value: Making it easier for clients to see how competitor fees line up, and enabling a more effective method to match firm talent against client needs.
Adapting Resources to Meet Changing Client Needs: Making it easier for clients to access the firm’s capabilities, and determining more efficient ways of bringing resources to bear on the client’s most pressing needs.
Managing Perception of Value: Better connecting client needs to the full value the firm may provide to them, and continually assessing whether their fees are aligned with that value

“The 2016 FOX Value Price Study reveals that the state of the ultra-wealth business remains quite healthy, even in the face of market volatility and growing competitive intensity. However, we have uncovered mounting evidence that the prevailing pricing model employed by ultra-wealth advisors needs attention,” said David Toth, Director of Advisor Research at Family Office Exchange. “The value/price relationship deserves careful thought when considering what changes to make to the pricing model. This report takes a look at how some firms are taking on the challenge of finding better ways to demonstrate value to their clients while refining their pricing models.”

Emerging Manager Mandates, an Opportunity for Women

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According to KPMG‘s 2016 Global Women in Alternative Investments Report: The Time is Now: Real Change, Real Impact, Seize the Moment, mandates and programs for women-owned and managed fund increased to 10 percent in 2016 from just two percent in 2013. At a majority of investors, women-led funds represent less than 5 percent of their total portfolio.

This year’s report highlights that emerging manger mandates are on the rise among investors, presenting additional opportunities for women-owned and managed funds. Forty percent of women-owned and managed fund respondents have pursued emerging manager mandates, up from 31 percent last year. Nearly half who pursued mandates this year won them.

However, while 32 percent of investors polled said they expect an increase in their allocations to emerging managers over the next 18 months, only 16 percent expect allocations to women-owned and managed funds to increase over the same timeframe.

Alternative Investments Audit partner Kelly Rau, also a co-author of this year’s report, added: “Although we have not seen considerable improvement in some areas since last year, there are signs of progress. Firms are embarking on creative initiatives designed to better retain and advance women in alternatives, and there are greater numbers of investors considering allocations to women-owned and managed funds.”

Alternative Investments Sector Outlook Is Mixed for the Next 18 months

48 percent expect hedge fund performance will improve. However, 18 percent of investors expect to decrease allocations to hedge funds while the same percentage plans to increase allocations to the sector.
30 percent expect improved performance for private equity; 30 percent of investors plan to increase allocations to the sector
18 percent expect improved performance for real estate funds; and 22 percent of investors plan to increase their real estate allocations

Asia’s Wealthy Trapped in Bad Investment Habits

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Wealth and asset managers in Asia ex-Japan face the challenging task of managing the expectations of retail investors who are prone to poor investment habits, yet look for high returns on their investment portfolios. These findings and more are from a new report by global research and consulting firm Cerulli Associates, Asian Wealth Management 2016: Tailor-Made for the Wealthy.

According to the report, common investment habits among investors in the region include timing the markets or focusing on the short term, having a late start to investing, and lacking in portfolio diversification.

In Cerulli’s proprietary survey of a total of 1,800 investors in six countries in Asia ex-Japan–China, India, South Korea, Taiwan, Hong Kong and Singapore–more than 50% of respondents cited timing markets as their most common practice. While this practice is observed across the region, it is especially evident among Chinese and Indian investors. In terms of wealth tiers, this is more prevalent among high-net-worth investors.

One positive takeaway from Cerulli’s survey is that retail investors in the region intend to diversify their portfolios in coming months. However, the real dilemma for wealth managers is that they aspire for high returns with low-risk products amid volatile global markets.

A majority of respondents in Cerulli’s survey (barring those in Korea and Singapore) said they are looking for returns that are 5% higher than their respective country’s one-year deposit rates. In Singapore and Korea, a majority of investors’ desired returns are 3% higher than the one-year savings deposit rate in their country.

Yet, these investors have turned conservative and have significant allocation to cash and deposits in their investment portfolios. As such, wealth managers will need to convince these investors to look at other investment products to enhance portfolio returns over the longer term, given the low-yield environment.

As for wealth managers, they are striving to increase the risk profiles of investors by advising them to invest in liquid alternatives. However, Cerulli’s survey shows the percentage of retail investors who are willing to invest in alternatives, including the liquid versions, is low even in markets such as Singapore, Hong Kong, and Taiwan.

Further, new product launches have been mostly plain-vanilla funds across the region, while new product ideas have been limited except in Korea, which has seen the launch of robotics, water and clean-energy thematic funds, as well as a mutual fund sub-advised by a robo-advisor.

Meanwhile, product differentiation is one of the strategies private banks in Asia are adopting to stand out among the competition.

“Compared to improving on client service through the training of relationship managers or digitalization, which is often difficult to implement and measure, providing exclusive access to investment solutions is a more direct way of capturing and retaining investor loyalty,” said Shu Mei Chua, an associate director at Cerulli, who led the report.

Another finding from the report is that affluent Asians are gradually warming up to discretionary portfolio management (DPM) services, and this potentially offers opportunities for asset managers as well as wealth managers. “DPM is gaining traction as it has become increasingly difficult for clients to make their own decisions amid the volatile market conditions, leading them to seek professional services,” said Leena Dagade, senior analyst at Cerulli.

52% of HNW Assets Are Placed in Discretionary Mandates

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When approaching wealth managers for investment management, high net worth (HNW) individuals are more likely to opt for discretionary mandates over other services, according Verdict Financial’s 2016 Global Wealth Managers Survey, the company’s latestreport that analyzes the demand for discretionary asset management of HNW investors in 17 countries.

Although 52% of millionaires’ investable assets are managed on a discretionary basis globally, the level of interest in such services varies significantly between markets.

Bartosz Golba, Acting Head of Wealth Management at Verdict Financial, states: “HNW individuals in Singapore, the UK, and the US have an average of more than 70% of their portfolios placed in discretionary mandates – the highest share across the globe. These are all developed markets, where the uptake of discretionary asset management is generally higher than in emerging economies.

“Such services are a perfect match for clients lacking the time and expertise to manage their investments, both major factors driving demand for discretionary mandates. However, trust plays an important role as well. Investors will be skeptical about giving up control over the investment decisions to advisors they do not know well and do not have a relationship with.”

According to Golba, established wealth managers will try to leverage their relationships with existing clients to increase mandates penetration: “Discretionary services offer higher profit margins than advisory propositions. In this way, growing mandates penetration is at the center of many providers’ strategies, one example being Citi Private Bank, particularly in the Asia-Pacific region. For players with large client books, moving assets to mandated services might prove an easier way to grow revenue than competing for new clients.”

Verdict Financial’s research shows that discretionary portfolio managers will also experience competition from digital providers, which have traditionally been conceived as appealing mostly to self-directed investors.

Golba continues: “Wealth managers in developed markets have started to lean towards the view that digital players no longer compete only for execution-only business. Indeed, in Europe many providers dubbed ‘robo-advisors’ offer a discretionary investment management service. They have clear fee structures which appeal to price-sensitive clients, though the lack of a recognized brand remains their primary handicap.”

Dynamiting the Log Jam

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As Bob Dylan wrote way back when, “The Times They Are A-Changin’.” With the election of Donald Trump to the White House, they surely have. But perhaps not quite as dramatically as some commentators believe. If I look back over the CIO Weekly Perspectives written by myself and my colleagues over the past nine months, many of the current market trends were in plain view. In fact, much of what just happened in the U.S. is simply the amplification of a series of global trends that were already in place.

For evidence, look at the central banks piece written back in March: Central Banks Just Pulled Back from the Abyss. This described the growing recognition that central banks had reached the limits of policy intervention. And, as a result, the consensus was moving away from the aggressive pursuit of negative rates in the realization that central banks had done all they could, and that the burden of lifting growth and opportunity needed to shift to political leaders and legislators.

As the summer unfolded, my colleague, Joe Amato, President and Chief Investment Officer – Equities, wrote a piece on infrastructure entitled The World Turned Upside Down. Joe’s piece also referred to the end of central bank dominance and the need for political leadership to embrace the concept of structural reform and pro-growth policies. In some ways, Joe’s words back in July were prophetic: “The more unified the political control [in the U.S.] and the worse the economy is doing, the more likely we are to see a deal [on infrastructure].”

Turning Japanese

This August, I wrote about Japan in a piece entitled Lost in Translation.

This examined Prime Minister Shinzo Abe’s latest economic stimulus package and how it was focused on fundamental labor market reform. His proposals included increasing wages for educators, changing the laws to encourage two-earner households, and improving the economics and availability of childcare. I concluded that some of the policies that Abe was pursuing would be emulated by other parts of the developed world.

Markets have been reflecting these changes for a while. Forward inflation indicators and interest rates bottomed in July and have been moving up for the past four months. Since July, bank stocks have outperformed utilities by nearly 50%, with nearly half the gain taking place through October. Commodities turned the corner even earlier, bottoming out in February.

This change in sentiment partly reflects the better growth story, but it also lends support to how fearful the market had become over the prospect of even lower rates. Indeed, the corrosive economic effects of negative interest rates probably won’t be fully appreciated for some years.

End of an Era?

Back to the present. The rapid lift in interest rates following the U.S. election has of course coincided with a much more optimistic re-pricing of risk assets in the U.S., namely stocks and credit spreads. We believe it reflects a dramatic shift in the markets’ views with respect to growth and inflation. It has happened fast and is barely reflected in any economists’ forecasts at this point. As such, it may be the “dynamite” required to blow up the log jam of the lingering aftereffects of zero interest rate policy. It provides the U.S. Federal Reserve the air cover they seem to need to continue raising rates. “ZIRP” has lost its punch, just as former Fed Chairman Ben Bernanke long ago predicted it would, and it needs to be left behind. We believe this is the beginning of the end of an era.

It may seem odd to hear a career bond man crowing about rising rates but remember, over the long term, bond market returns are all about income and, more importantly, about real income. We’ve spent a number of years struggling to find either in the higher quality bond markets. We believe the persistence of negative real rates in short to intermediate high grade fixed income is simply a recipe for losing money. For a long-term investor, the end of this era is coming none too soon.

Lombard Odier Poaches UK Distribution Head from Amundi

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Lombard Odier Investment Managers has appointed Jerry Devlin as head of UK Third-Party Distribution.

Devlin was previously head of UK Distribution at Amundi for three and a half years. At Amundi, Jerry was responsible for implementing a distribution strategy in the UK with an emphasis on global distribution accounts.

Prior to this, he was head of UK Wholesale at Macquarie Group, and has also held head of Sales roles at Castlestone Management and Barings.

Following the departure of Dominick Peasley, head of UK Third-Party Distribution, to pursue other opportunities within financial services, Devlin will join Lombard Odier on 3 January 2017.

“Unprecedented negative rates and direct intervention of key central banks has created a number of unintended consequences for investors to contend with. At Lombard Odier we seek to re-evaluate and rethink the world around us, to build an innovative and specialist investment offering that helps investors face these challenges. We are pleased to welcome Jerry, who brings a wealth of experience and insight that will be valuable as we grow our distribution business in the UK,” said Carolina Minio-Paluello, global head of Sales and Solutions at Lombard Odier.

“We would also like to take this opportunity to wish Dominick well in his future endeavours and thank him for the work he has done during his time with Lombard Odier,” she added.

Global Investors are Bullish as Cash Levels Continue to Drop

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The BofA Merrill Lynch December Fund Manager Survey shows Wall Street is bullish as cash levels continue to drop.

“Fund managers have pushed pause on a risk rally, with cash balances falling sharply over the past two months,” said Michael Hartnett, chief investment strategist. “With expectations of growth, inflation and corporate profits at multi-year highs, Wall Street is sending a strong signal that it is bullish.”

Manish Kabra, European equity quantitative strategist, added that, “Despite the improved outlook on European economic growth and inflation, global investors continue to shun European stocks amid concerns of further EU disintegration or bank defaults.”

Other highlights include:

Investor expectations of global growth jump to 19-month highs (net 57% from net 35% in November), while expectations of global inflation are at the second highest percentage level in over 12 years (net 84% from net 85% last month).
With a net 56% of investors thinking global profits will improve in the next 12 months, fund managers are the most optimistic about corporate profit expectations in 6.5 years.
Cash levels continue to fall to 4.8% in December from 5.0% in November and 5.8% in October.
Allocation to banks jumps to record highs (net 31% overweight from net 25% last month); the current reading is far above its long-term average.
Over one-third of investors surveyed name Long USD as the most crowded trade.
Investors identify EU disintegration and a bond crash as the two most commonly cited tail risks, corroborated by light EU and bond positioning.
On corporate investment, a record number of investors (net 74%) think companies are currently under-investing.
54% of investors, up from 44% last month, think the rotation to cyclical styles and inflationary sectors will continue well into 2017, supported by a strong USD and higher rates.
Allocation to US equities improves to 2-year highs of net 15% overweight from net 4% overweight in November.
Allocation to Japanese equities jumps to 10-month highs, from net 5% underweight in November to net 21% overweight in December; this is the biggest month-over-month jump in FMS history.
Investors are underweight Eurozone equities for the first time in 5 months, at net 1% underweight in December from net 4% overweight last month.

Santa Has Brought More Inflation…But it Won’t Last

| For Gabriela Huerta | 0 Comentarios

Eurozone inflation in November was confirmed at 0.6% y-o-y in the final reading, one notch higher than in October (0.5%). Energy deflation intensified slightly (from -0.9% to -1.1%) as pump prices declined over the month. According to Fabio Balboni, European Economist at HSBC, this was offset by slightly higher food prices, particularly unprocessed food (from 0.2% to 0.7%), albeit still at very low levels. Core (0.8%) and services (1.1%) inflation remained flat for the fourth consecutive month. And core industrial goods inflation was also stable at 0.3% for the fourth consecutive month, down from a local peak of 0.7% in January 2015, suggesting that the impact of previous EUR depreciations might already be waning.

Across countries, the harmonised inflation rate remained stable in Germany (0.7%) and Spain (0.5%), but it increased in France (from 0.5% to 0.7%). HICP finally moved into positive territory in Italy, from -0.1% in October, to 0.1%, although it is still lagging behind the other Big 4 members. In November, there were only four countries still in deflation in the eurozone: Slovakia, Greece and Ireland (-0.2%) and Cyprus (-0.8%).

“In the coming months, with the base effects from energy fading, the oil price up 15% the past month, and the EUR having fallen below 1.05 against the USD, we expect inflation to rise fast. Pump prices were already 2% higher in the first half of December and are likely to rise further in the second half, benefiting from the festive season. We could also see a reversal of the recent slowdown in core industrial goods prices, with the latest PMIs pointing to output prices finally starting to rise. These elements could push eurozone inflation to 1% y-o-y in December. We then expect it to continue to rise, peaking at 1.8% in February, and possibly above 2% in Spain also thanks to some tax increases on alcohol and tobacco agreed by the government.” He says.

All of this, Balboni believes, could cause a bit of a headache for ECB Governing Council in the coming months, with inflation peaking in some countries at close to (or even above) 2%. However, the need to continue to provide fiscal support in countries where the output gap is still wide, and where wage growth is still slowing (the latest print was 1.2% in Q3 for the eurozone) are likely to keep underlying inflationary pressures muted. “We won’t have to worry about a possible early tapering of QE already next year. In December, ECB’s head Mario Draghi was quick to accept the offer on the table of a nine-month extension – albeit at a slower pace – still slowing until the end of 2017. This should allow the ECB to look through the inflation peak in the first half of next year before having to make a decision on a possible further extension of QE.” He concludes.