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Corporate Defaults Piling Up

The corporate default rate is at its highest level since 2009. In its latest study on 30 November, Standard & Poor’s reported a sharp increase in the number of companies defaulting in 2015: 101 issuers reneged on their obligations. The last time the figure was so high was in 2009. The latest two companies failing to repay their debt are Uralsib, a Russian bank, and China Fishery, a global fish and seafood supplier. Among these hundred plus companies, only 21, i.e. one-fifth, are from emerging markets. Most are in Brazil and Russia. And the main sector concerned is oil and gas, says Jean-Philippe Donge, Head of Fixed Income at Banque de Luxembourg.

The latest news concerning Petrobras, Glencore, Valeant and VW has echoes of the crisis we saw in the 2000s on the corporate debt market. At that time, a number of companies were posting record debt levels which ended up causing them to default or engage in major debt restructuring: World- Com, Enron, General Motors and France Télécom to name a few. We might well wonder whether the situation is different this time round. “But if it isn’t, does this mean the corporate debt cycle is at tipping point? Are we about to see major debt restructurings?”, asks Donge. Let’s look at the history of the price of the Glencore 1.25% bond maturing in March 2021. In 2012, Glencore launched its acquisition of the Swiss mining company Xstrata. In 2013, it took over the Canadian trader Viterra and in 2015 embarked on a merger with Rio Tinto. The latter did not succeed.

Primary sector debts and bank loans

Many companies are now posting debt and liquidity levels equivalent to those of the telecoms sector in the early 2000s. You only have to look at the sharp increase in global issue volumes, says the expert. In 2014, these came to 3.5 trillion dollars compared to 2.1 trillion in 2008 (3). Weak growth and the resulting deflationary pressures have led to a fall in earnings. The first companies to be affected are linked to oil and mining.

In emerging markets, Brazil and Russia have the greatest number of struggling companies. Petroleo Brasileiro (Petrobras) and the Brazilian Development Bank (BNDES) are a microcosm of the type of problems encountered on the corporate debt market: meltdown in commodity prices at the same time as an increase in corporate debt. Petrobras is a semi-public Brazilian and integrated energy company. BNDES is the Brazilian government’s financial arm for funding various projects, ranging from agriculture to infrastructure, in Brazil and elsewhere but mainly in South America.

The quantitative easing programs being conducted in developed countries, in particular by the US Federal Reserve, led to massive financial inflows to emerging markets between 2008 and 2014. These flows encouraged an increase in bond issues and bank loans, for a total of nearly 7 trillion dollars, he adds.

The case of BNDES illustrates the position of the corporate sector in emerging markets. Last year, after a continuous increase in its loan portfolio and with assets of 330 billion dollars, it was on the point of overtaking the World Bank as the world’s second-biggest development bank after the China Development Bank. Unfortunately, it has suffered a sharp slowdown in activity this year, leading to a decline in disbursements. From January to October, the total amount of loans made by the bank came to around R$105 billion, which represents a drop of 28% compared to the amounts disbursed in the same period in 2014. From January to September, the bank’s net income came to R$6.6 billion, which is 10.3% below the level recorded in the same period in 2014, specifies Donge.

Are we heading for a corporate debt crisis?

Potential fears for the corporate debt market would seem to be justified. Debt levels are high. Earnings are down. Monetary policies have taken or will be taking a less accommodative turn (despite the recent pronouncements by the President of the ECB). In particular, the return to a cycle of rising US interest rates coupled with a relatively strong dollar are looming over the market. If this does not happen, it would mean that the economic situation is not improving. “Heavily indebted companies therefore find themselves between a rock and a hard place, especially those that operate in sectors most sensitive to economic cycles. For the next few months, it would be logical to expect them to have a decreasing capacity to pay down debt.” He concludes.

The Global Economy’s Moderate Growth is Becoming Increasingly Fragile

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The global economy’s moderate growth is becoming increasingly fragile, largely due to the weakness of investments in the energy sector and slower growth in the Chinese economy. This is the view of Guy Wagner, Chief Investment Officer at Banque de Luxembourg, and his team, published in their monthly analysis, ‘Highlights.’

In the United States, there are mounting signs of industrial activity slackening due to the strength of the dollar and the weakness of investments in the energy sector. The increase in household purchasing power – fuelled by falling oil prices and the recent uptick in wages – is nonetheless keeping the US economy on a path to growth. In Europe, economic statistics are pointing in the right direction, although the pace of growth in absolute terms remains subdued. Japan’s economy is continuing to stagnate while economic growth is slowing in China. “The global economy’s ‘moderate growth’ is becoming increasingly fragile,” observes Guy Wagner.

Inflation is staying low due to the ongoing slump in oil prices. In the United States, inflation edged up from 0.2% in October to 0.5% in November. The Federal Reserve’s favourite indicator, the PCE (personal consumption expenditures) deflator, excluding energy and food, remained unchanged at 1.3%. In the eurozone, the inflation rate held steady in December. Core inflation, excluding energy and food, which Mario Draghi, President of the European Central Bank (ECB), recently said was a more representative measure of the cost of living, was unchanged at 0.9%. “While oil prices remain depressed, the ECB’s target inflation rate of 2% hardly seems realistic,” says the Luxembourg economist.

As expected, after seven years of a near-zero interest rate policy, the US Federal Reserve raised its key interest rate by 25 basis points. This was the first federal funds rate hike for nearly ten years. The monetary authorities have confirmed that any subsequent increases will be implemented slowly and gradually. In Europe, the ECB expanded the quantitative easing programme by extending the asset-purchase period from September 2016 to March 2017, by including regional and local government debt in the programme, and by further cutting its deposit rate. “If the inflation target is still not met, it is likely that additional QE (quantitative easing) measures will be introduced.”

Contrary to year-end tradition, equity markets performed poorly in December. Plummeting oil prices to below 40 dollars a barrel had a knock-on effect on equity markets out of a concern that the economic slowdown might worsen and that the financing capacity of lower-rated companies could suffer. According to Guy Wagner: “After a more volatile and less successful second half in 2015 and despite the lack of alternative investments, equities could suffer a difficult year in 2016 due to the slowdown in economic conditions, the sharp increase in share prices since 2009 and global geopolitical tensions.”

In December, the euro gained 3% against the dollar, with the euro/dollar exchange rate climbing from 1.06 to 1.09. The single currency’s rebound was prompted by investors’ disappointment over the scale of the ECB’s additional QE measures. Guy Wagner concludes: “If American and European monetary policies continue to diverge, the euro’s recent rebound is likely to be short-lived.”

Downward Pressure on Fees is Set to Intensify in 2016

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Finding ways to counter the downward pressure on fees will be a focal point for asset managers across much of the world in 2016, according to the latest issue of The Cerulli Edge-Global Edition.

In assessing the outlook over the next 12 months for the asset management industry in Europe, the United States, Asia, and Latin America, Cerulli Associates, a global analytics firm, has identified a number of key threats and opportunities.

In Europe, the migration by insurance companies to unit-linked products represents an opportunity for asset managers, says Cerulli. The growing demand for multi-asset funds should also be exploited. Threats include the emerging trend by institutions to band together to make their own investments, thereby cutting costs by using fewer external managers or even completely dispensing with their services. Exchange-traded funds (ETFs) will continue to be a bugbear for active managers.

“In Europe, as with much of the world, the downward pressure on fees, fuelled by passives, the comparisons platforms enable, and regulators will not let up in 2016. Asset managers are responding–the move by veterans of active management into ETFs is an example. Other examples include, diversification and the acquisition/ creation of platforms and fintech capabilities,” said Barbara Wall, managing director of the Europe office of Cerulli Associates.

Europe accounts for just 18% of the world’s ETF market, compared with the U.S.’s 70% slice. Wall, however, believes that big change is afoot. “A few years ago, just a small number of Europeans would have known what ETF stood for–that is no longer the case, especially among the ranks of the mass affluent and those aspiring to that status. Prominent direct-to-consumer platforms such as Fidelity are offering ETFs from, for example, Vanguard, HSBC, and the iShare range, owned by BlackRock. Online wealth manager Nutmeg, though not a direct-to-consumer platform, is also helping to raise the profile of ETFs among retail investors.”

In the United States, Cerulli foresees fee pressure generating opportunities for managers that offer multi-asset and strategic beta products. Other major challenges cited by U.S. executives include the threat of passive investments, and the increased cost of revenue-sharing costs. The latter has U.S. asset managers looking at new pools of global assets to distribute abroad.

In Asia, Cerulli expects the spotlight to fall on passive products as institutions look for cost-effective solutions and regulators take steps to boost the appeal of ETFs for retail investors. Cross-border initiatives are likely to increase in 2016, offering investors diversified investment options and enabling managers to expand in other markets.

In Latin America, global managers will continue to be hampered by the knock-on effects of U.S. regulation, competition from other asset classes, and reduced flows due to unfavorable exchange rates and struggling economies. Global managers in the region are eyeing the private-equity craze sweeping the region, while separately a cottage industry of specialist distributors is promising to leverage their ties to local institutions to help global firms break into Latin pension space.

“In 2016, the clamor for reduced fees, greater transparency, and an end to ‘closet tracking’ will continue apace; competition will intensify; and institutions will be obliged to follow a road that will be a dead end for some asset managers,” said Wall. “All the while, activist investors will not let up; markets will continue to surprise; and rising costs will strain budgets. But there will be opportunities. To seize upon these, foresight, experience, and occasionally courage will be needed.”

PIMCO Names Craig Dawson as Head of EMEA

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PIMCO has named Craig Dawson as Head of Europe Middle East and Africa, succeding Bill Benz, who retires after 30 years in the company.

Craig A. Dawson is a managing director and head of strategic business management. Previously, he was head of PIMCO’s business in Germany, Austria, Switzerland and Italy, and head of product management for Europe. Prior to joining PIMCO in 1999, Mr. Dawson was with Wilshire Associates, an investment consulting firm.

William R. Benz will retire at the end of June 2016. He joined PIMCO in 1986 and is a managing director in the London office and head of PIMCO Europe, Middle East and Africa (EMEA). He is the chief executive of PIMCO Europe Ltd., the chairman of PIMCO Funds Global Investors Series plc and is a former member of PIMCO’s executive committee.

Dawson said: “Europe is a strategically important region for PIMCO, where political, sovereign and macroeconomic events have been at the heart of the market forces shaping the global economy.

“I look forward to continuing the great success that Bill and the team have built over the years in their continued focus on providing investors with the performance, market insights and client service that investors have come to expect from PIMCO around the world.”

Douglas Hodge, chief executive of PIMCO, said: “Bill has built a leading business in the UK and across Europe, the Middle East, and Africa, which Craig is perfectly placed to build on given his combination of experience in Europe and oversight of PIMCO’s strategic initiatives.”

Benz added:“Although much has changed during my 30 years at PIMCO, there are two things that have remained constant and are stronger today than when I joined: the firm’s outstanding commitment to client service, and its unwavering focus on consistent, sustained and risk-adjusted investment outperformance for all clients.”

Pershing: We Look Forward to Helping our Clients Succeed in Latin America

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Although Pershing has no physical presence in Latin America, John Ward, Managing Director Global Client Relationship with the financial services company owned by BNY Mellon, emphatically expresses the company’s commitment to a region which he considers offers opportunities, due to the demographic and regulatory changes that are taking place.

Mr. Ward is referring to Pershing’s second largest market, both by the number of clients and clients’ assets. In the region of the “Americas”, in which each country is managed independently, they currently have 100 clients from the U.S. and other countries (including Canada), whose needs are managed from the United States. In order to do this, Pershing has teams which, besides English, speak Spanish or Portuguese and understand the culture, idiosyncrasy, needs, and environment of each of the markets in which the company operates. They have clients in Chile, Panama, and Mexico as well as clients in the US – in Florida, New York, California – who serve the Latin American region.

Amongst the greatest challenges in the area, Ward mentioned the economic situation, the regulatory aspects, and the evolution of commodity prices, along with the situation in Brazil or the political changes that may occur in each of the countries, or which, in some, are already occurring.

The executive believes that the regulatory framework is maturing and that expertise in the financial market is growing. Talent is increasingly developing. We’re witnessing a growing number of Latin American firms establishing their presence in the United States to retain talent within the organization, explains Ward, referring to financial companies from Brazil, Colombia or Mexico, setting up in Miami or Houston.

On the other hand, regulatory developments favor a gradual, but very slow, increase in offer to certain investors from specific countries, attracting European fund companies, also aware of population growth, the emerging middle class, and the increasing number of HNWI. In short, Ward defines Latin America as “an opportunity for growth.”

The number of asset management companies looking into Latin America as a region with which to improve their indicators has grown in 2015. Changes occurring, such as pension funds in Chile, Colombia, and Peru, are causing management companies to want to expand their product offering and bring in the sales force he explains. Very few firms have their own sales teams in situ, and those with dedicated teams in the United States are more numerous. “Maybe it’s not so much about new companies, although there are some, but about existing companies refocusing their strategy for increased growth in Latin America,” he points out.

The depth and speed of growth depends on the industry itself, (which is looking for new talent, both in Wealth Advisors and in Private Banking), regulation, and on how committed to the region are the companies operating in it. While it is true that some large companies are leaving the area due to the risks involved in sustaining the business, according to Ward, there will be a consolidation of service providers, but there will also be newcomers entering to service the niches left by others. With regard to how this future development will affect their business, Pershing’s managing director of global client relationships declares that, “The diversification of our client base allows us to adapt to different market environments.”

The executive, who has been working 23 years for the company, thinks that the profitability of relationships can be very different and that there are very diverse models. “We make no distinctions between our clients or in how the service is provided, depending on their size”.

The products sold in Latin America do not differ greatly from those distributed in the United States. Its institutional client base consists of regulated institutions like brokerage subsidiaries of banks, or broker-dealers, and so typically do not serve Family Offices or Multi Family Offices, which being an emerging activity is not regulated. As regards the profile of the final clients which their client institutions serve, it is individuals ranging from the highest segment of affluent investors to the UHNW niche, and some institutional, such as pension funds or insurance.

As regards other issues with a strong presence in industry forums, such as the AML regulations or CRS, Ward points out that his company is extremely compliant with them, and recognizes that the regulation will be a critical component for their business and for any other. “We pay attention to the client’s risk profile and base our relationship on collaboration.”

Ward defines the future of the Wealth Management industry as having a strong component of digital advice complimenting the human interaction, rather than solely through robo-advisors. “Embracing digital components is critical to the advisory service and an opportunity for joint growth,” not only aimed at millennials, which can be digital natives, but at all investors. The expert is certain that technology will have a major impact on the industry and that it will assist advisors in their marketing and sales tasks to create a digital brand and, for example, to design more collaborative processes with the client. Although competition will lower prices for services and that the industry is reviewing its models to maintain its profitability, he does not believe it will significantly affect the highest wealth or UHNW sector, and doesn’t see technology as a possible substitute for personal advice, in most scenarios.

Speaking of the role technology will play, we continue our interview by analyzing another of the concerns shared by the Wealth Management industry: the aging of its clients and its professionals. “There are now more individuals than ever saving for retirement, and there are 30 trillion dollars in the United States that will pass on to the next generation over the next 30 years,” he says, adding that “there will not be enough advisors to manage that. The help of technology as a tool will be required. Digital advice will help advisors to meet that need. “

Ultimately, after reviewing the current situation and prospects for Pershing and for the industry, especially in Latin America, Ward summarizes: “We see our clients facing a growth opportunity and we are personally invested in helping them succeed, so our vision is optimistic”. He concludes: “We have a great opportunity to grow our business in Latin America and look forward to building our client relationships in the coming years.”

Michael McLintock to Retire as M&G Investments Chief Executive, to Be Succeeded by Anne Richards

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Prudential plc announced that Michael McLintock has decided to retire as Chief Executive of M&G Investments and as an executive director of Prudential. He will be succeeded later this year, subject to regulatory approval, by Anne Richards.

Anne Richards will join Prudential from Aberdeen Asset Management PLC, where she is Chief Investment Officer and responsible for operations in Europe, the Middle East and Africa. She has held senior roles at JP Morgan Investment Management, Mercury Asset Management and Edinburgh Fund Managers, which was acquired by Aberdeen Asset Management in 2003.

Mike Wells, Group Chief Executive of Prudential, said: “I would like to thank Michael for his exceptional contribution to M&G over the last two decades. Under his leadership M&G has grown to become one of Europe’s largest fund managers by offering innovative investment solutions to meet the needs of our customers and clients. I wish him all the very best for the future. I am delighted that a person of Anne’s talent is joining the group and I look forward to working with her. Anne will be able to deploy her leadership skills and exceptional knowledge of the global asset management industry to provide the best possible outcomes for our customers, clients and shareholders.”

Michael McLintock said: “I am absolutely delighted to be handing the reins to Anne. I have loved running M&G, but after 19 years I feel strongly that it’s time for a change. M&G is a special business. I would like to thank all of my colleagues for their support and hard work over so many years. I have no doubt whatsoever that M&G will flourish under Anne’s leadership and I wish her and the team every possible success.”

Anne Richards said: “I am delighted that I have the opportunity to lead M&G, which is a world-class business. I look forward to working with the team to continue building the business and leading the next phase of M&G’s development.”

Paul Manduca, Chairman of Prudential, said: “On behalf of the Prudential board, I would like to thank Michael for his exceptional service to the Group over so many years. He has built a fund management franchise that is a leader in its field and the envy of our competitors. Michael’s experience, expertise and leadership have played an important part in the success of the group throughout his time with us. I look forward to working with Anne when she joins the board. I am pleased that we are able to attract the very best talent from across the industry, demonstrating the quality of our succession planning. Anne’s achievements and experience make her the right candidate to continue M&G’s development.”

European Investors in US Funds Find Compensation in a Strong Dollar, if the Product Is Unhedged

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Managers of U.S. equity funds should look beyond short-term issues to see the opportunities, as the world’s biggest economy continues to strengthen, while a soaring dollar looks set to benefit European investors, according to the latest issue of The Cerulli Edge.

While U.S. equity funds face headwinds in 2016 -including a potential ‘risk-off’ stance sparked by the run-up to the presidential election, further Federal Reserve interest rate hikes, and rich valuations- there are also positives to be found, says the document.

“Fed hikes may well further strengthen the dollar, making U.S. exports less competitive, which held back some companies in 2015. However, for a European investor in a US fund, there is compensation in a strong dollar, if the product is unhedged,” says Barbara Wall, Europe managing director at the global analytics firm.

In the 12 months to November 2015, the S&P 500 barely edged into positive territory in dollar terms, underperforming European benchmarks. But in euro terms, it soared 20%. Allianz’s Ireland-domiciled US equity fund, investing in standard names such as GE, produced a handsome return despite trailing the benchmark, notes Wall.

The trends edition points out that the US economy is well on the road to recovery and having created more than 10 million jobs in the past few years, can look forward to strong domestic demand, which will reduce reliance on exports. Economic woes elsewhere can only have so much of an effect, says Brian Gorman, an analyst at Cerulli, adding that the potential for investment in the U.S.’s aging infrastructure should prove positive for domestically focused industrial names.

“Stock-picking may be key if investors are to realize upside, while limiting downside if the market goes as badly wrong as some fear. Firms with well-established track records, that have been selling reasonably well, can hope to make further gains, especially if the turmoil sees some fall by the wayside,” maintains Gorman.

He cites MFS Investments’ U.S. Value Fund as one of the steadier performers since its launch in 2002, noting that while passive funds do pose a threat for actives, it is during trickier times that the latter earn their fees. “The recent pullback has made many companies look considerably cheaper. The better active fund will distinguish between real buying opportunities and cases where there will be further pain. Strongly outperforming funds abound, such as T. Rowe Price’s Luxembourg-domiciled U.S. Blue Chip equity fund, with rewarding stock picks, notably in healthcare.”

Acknowledging that China-inspired turmoil may see further outflows in equity funds in the early months of 2016, the firm believes that a strong U.S. economy will help to generate sustainable corporate profits, dividends, strong M&A activity, and share buyback programs.

“U.S. equity funds with decent records of picking the right stocks can hope to sell in Europe, given the lack of alternatives. The upside potential is clear, while the better funds can mitigate the losses during the tougher times. Managers should be using established channels to extol the virtues of U.S. equity funds, as well as pushing to appear on the growing raft of self-directed platforms,” says Wall.

New Record Inflows for the Global ETP Industry: 2.95 Billion Dollar by the End of 2015

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ETP assets up 8.3% reaching US$ 2.95 trillion in 2015 driven by record inflows Global ETP industry reached near the US$ 3 trillion mark and closed at US$ 2.95 trillion by the end of 2015. Amid volatile markets last year, ETP assets grew by 8.3% mainly attributable to organic sources (i.e. new money inflows) which made up 13.7%, while prices went negative and eroded 5.5% from overall assets. Year-on-year, organic growth or new money inflows continued to remain strong and provided healthy growth to the ETP industry.

Similar to 2014, global ETP industry once again received healthy inflows in 2015 recording inflows of US$ 373.8 billion but this time it is the highest ever flows total for any of the years historically. Flows for US listed ETPs were similar to last year but Europe and Asia listed ETPs saw significant jump in new creations. During the last three years’ equities have stood as leaders contributing the major portion of the inflows, but since 2014 fixed income ETFs also showed significant signs of growth and contributed US$ 105.4 billion in 2015 (US$ 89.4 billion in 2014).

The US, Europe, Asia-Pac, and RoW regional ETP assets closed the year at US$ 2.11 trillion (+6.8%), US$ 507.4 billion (+10.6%), US$ 250.2 billion (+23.8%), and US$ 74.7 billion (-7.9%), respectively.

ETP assets likely to reach US$ 3.46 trillion at the end of 2016

Deutsche Bank Markets Research projects the industry will continue to grow significantly in 2016 despite potential weak markets. In their base case scenario, assuming a neutral market condition, global ETF assets may grow by 17.8%: broken down into 11.6% or US$ 335 billion growth from new flows, and 5.5% from price appreciation. This growth should put the ETF assets well on their way to US$ 3.4 trillion by the end of 2016. Deutsche Bank Markets Research expects the US ETF market to be the major contributor with asset growth of 16.1% and inflows in the vicinity of US$ 230 billion. In a bull market case, ETF assets may grow by 29.7% reaching over US$ 3.7 trillion. Deutsche Bank Markets Research expects ETPs (including ETFs and other exchange traded products such as ETVs/ETCs) to experience a similar growth rate and reach about US$ 3.46 trillion in 2016 in their base case scenario, and pass US$ 3.8 trillion in a bull market case.

ETF flows suggest that investors continue to prefer less risky assets 2015 was another strong year for global equity flows with over US$ 250 billion.

Similarly, fixed income ETP flows also attracted healthy amounts of new cash reaching just above US$ 100 billion at the end of last year. However, other asset classes such as commodities with under US$ 5 billion of inflows didn’t enjoy the same degree of interest from investors.

Most of the major trends happened within equities. Among equity products, ETPs with exposure to developed markets excluding the US received the largest new allocations with inflows of US$ 195 billion last year. Meanwhile European focused and Japan-focused equity products also received significant attention from investors with positive flows of US$ 80 billion and US$ 50 billion, respectively.

ETPs tracking US equities didn’t fall short either, and attracted US$ 66 billion in inflows during the same period. On the other hand, ETFs with focus on Chinese equities also received significant attention, but mostly due to the exodus of investors who pulled about US$ 15 billion away from these funds. Outside equities, the most remarkable trend was registered in fixed income where the investment grade space received over US$ 70 billion inflows during 2015.

Going into 2016, Deutsche Bank Markets Research continues to favor global equities (mainly DM), a strong USD as well as investment grade credit and short durations in Fixed Income (Europe is more preferable than the US). Therefore, Deutsche Bank Markets Research expects equity products particularly in developed markets to continue attracting most of the flows. Certain type of Fixed Income products and currency hedge products should continue to remain relevant during 2016, although less than in 2015; while smart beta products should raise strong support as investors seek to control risk in a more specific way in the current year.

ETP trading activity up 16.8% in 2015 reaching US$ 21.8 trillion and will continue to rise

Trading activity picked up in 2015 again with ETP turnover levels registering a rise of 16.8% over 2014. Overall turnover levels in 2015, 2014 and 2013 were US$ 21.8 trillion, US$ 18.7 trillion and US$ 16.5 trillion, respectively. In 2015, Asian ETFs recorded the highest increase of over 100% in trading volumes (US$ 1.9 trillion), significantly surpassing European on-exchange volumes (US$ 903 billion, up 22.9%). US ETFs continue to dominate the global ETP trading activity (US$ 18.8 trillion, up 12.1%). Deutsche Bank Markets Research expects to see ETP trading activity to further increase in 2016 due to wider adoption of ETFs, elevated market volatility, and more product offerings.

ETF markets to continue forward on strong organic growth

In the US, the organic growth gap between ETFs and mutual funds, and passive and active management continued to widen reaching levels of about US$ 250 billion and US$ 500 billion through the end of November 2015, respectively. In the meantime, Deutsche Bank Markets Research believes that there is still room for new entrants and new products despite the record activity registered during 2015; however, Deutsche Bank Markets Research believes that smart beta ETFs and clear distribution access should be key to the success of new ETF ventures. Furthermore, it also believes there is abundant room for organic growth in the range of US$ 500 billion to US$ 1 trillion over the next 5 to 10 years just from migration away from less efficient vehicles and penetration to the retirement market.

In Europe, smart beta products expected to be in demand as market uncertainty remains and investment landscape evolves. Also, currency hedged ETFs to be utilized to invest with reduced currency risks. Despite poor start to equity markets, ETFs tracking European equities anticipated to have a reasonable year. In addition, absolute ETF trading volumes expected to increase despite concerns on overall equity volumes.

In Asia-Pac, Japan, China and South Korea were the key domestic markets which drove the industry in 2015. Most of the AUM growth and inflows of the region were contributed by Japan listed ETFs, while China listed equity ETFs saw heavy redemptions offset by money market ETFs receiving notable inflows. Trading activity also rose in the region in 2015, primarily in China, Hong Kong and Japan. South Korea saw most number of ETF launches along with many new development plans announced by its Financial Services Commission to boost ETF market in South Korea. Deutsche Bank Markets Research expects Japan (with increased equity allocation from GPIF and the ETF purchase from Bank of Japan), China (stronger asset growth as market stabilizes and increased product adoption) and South Korea (with new developments being implemented) to be major growth drivers in Asia-Pac region in 2016.

Mario Draghi, The Italian Banking Sector, and Oil; Main concerns for Fixed Income at Pioneer

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During last week, the three things that Pioneer’s European Investment-Grade Fixed Income Team talked about where:

1. ECB – “No Surrender”
Bravissimo Mario! After a lacklustre performance at the December 2015 European Central Bank (ECB) press conference, ECB President Mario Draghi was back to his best at this week’s ECB press conference. In a virtuoso performance Draghi signalled that it will be “necessary to review and possibly reconsider in March” the ECB’s current stance, given that the expected path of inflation in 2016 is “significantly lower than the path in December”. To be fair, that was always expected, given the ongoing precipitous fall in the oil price over that period. But Draghi didn’t stop there, giving us other soundbites such as the “risks of second-round effects should be monitored closely” and the emphasis that there are “no limits” to the measures that the ECB will undertake to ensure that it meets its inflation target of “close to, but below 2%”. That comment about “risks of second-round effects” is as close as we will probably get to the ECB admitting that ongoing low levels of inflation is now impacting the general economy – the famous “unanchoring of inflation expectations” that the ECB fears so much. The second comment suggests that all options will be on the table at the March meeting, despite the minutes of the December 2015 showing a distinct preference for a deposit rate cut. Finally, President Draghi noted that the line of communication adopted today was “agreed unanimously” by the Governing Council, suggesting that their bar to further action is very low. At this stage, we believe that another 10bps cut in the deposit rate to -0.30% is likely, with other options such as an increase in the monthly pace of bond purchases, an extension of bond purchases beyond March 2017, and the loosening of current restrictions on bond purchases all open for discussion.

2. Italian Banking Sector – Reality Bites
Media leaks last Monday (January 18th) suggesting that the ECB’s central oversight arm, the Single Supervisory Mechanism, was scrutinising the non-performing loans (NPL’s) and bad debts Italian banking system truly put the cat amongst the proverbial pigeons. While this news does not come as a surprise, the market became concerned that further provisioning may be required for the weaker Italian financial institutions, which would place additional pressure on solvency levels. At the same time, progress on the Italian bad bank appeared to have stalled, with a solution to comply with European Commissions State Aid rules proving elusive. The market reaction was swift and brutal, with both equity and bond prices plummeting. The subordinated bonds of the weaker Italian banks have been under significant pressure since the start of the year and are trading at around 75c per €1 face value. At Thursday’s press conference, ECB President Draghi confirmed that the ECB is not about to force higher provisions or capital raises on peripheral banks as part of its latest NPL exercise. Rather the focus is on improving processes and strategies around the resolution of NPLs across Europe (with the recent NPL information requests sent to a broad range of banks across the region, not just to Italian institutions). Further reports emerged that the creation of a bad bank may be agreed between the Italian government and European Commission over the coming weeks . Finer details remain light, but these reports were enough to drive a rebound in Italian bank spreads on Friday. While a step in the right direction, the Italian banks do not currently have sufficient capital or provisioning to transfer NPLs at market prices to a potential new asset management vehicle. This solution is unlikely to be the panacea to the sector’s problems, but will be welcomed nevertheless and hopefully help to kick-start sales in the NPL market. We have a cautious outlook on the Italian banking sector, and still prefer to sell into strength.

3. Oil is in a Bull Market
Not the headline you might expect to see after the last couple of months, but technically it could be correct if the recent bounce in the oil price continues. The standard definition of a bull (bear) market is a 20% rise (fall) in the price of an asset. The oil price has appreciated by almost 18% from its intraday lows of last week to Monday morning. What is also interesting is the effect this has had on markets – it has been the main driver of a classic “risk-on, risk-off” sentiment. So as the oil price has risen in the past couple of days, we’ve seen equities recover, core bond yields rise, peripheral bond spreads tighten, the U.S. Dollar has appreciated against the Euro and the Japanese Yen and credit spreads globally have tightened. In turn, that backs up the view of the European Investment-Grade Fixed Income team that much of the price action in the first three weeks of the year is a response to the movements in the oil price, and not a reflection of changing economic fundamentals.

Aggregate Venture Capital Deal Value Hits Record High in 2015 

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2015 saw the aggregate value of venture capital deals increase for the third successive year to stand at $135.8bn, up from $93.5bn in 2014 and more than double the $57.1bn in 2013. Although the 9,202 deals recorded in the year is similar to both 2013 and 2014 (9,785 and 9,811 respectively), average deal size is up to $18.4mn in 2015 from $12.4mn in 2014. This represents a 6% drop from the 9,811 deals in 2014, but a 45% increase on the $93.5bn aggregate value recorded last year, according to Preqin.

Asia, in particular, has seen a significant uptick in venture capital deal activity, as Greater China recorded 1,605 deals, more than in Europe (1,373), while India recorded 927 deals, almost twice the number seen in 2014 (512).

Despite the overall healthy deals environment, significant gains in Asia were balanced by declining deal numbers elsewhere. Europe recorded 1,373 deals, its second annual decline from a peak of 2,002 in 2013, and the lowest number of deals recorded in the region since 2010. Similarly, although aggregate deal value in North America increased, the number of deals in the region fell 23%, from 5,587 in 2014 to 4,307 in 2015. While Preqin expects these totals to rise as new data becomes available, 2015 activity does not look likely to match the levels seen in previous years.

Stages, sizes and exits

Most venture capital deals occur earlier on in the lifecycle of a company, with 33% of deals completed at angel or seed stage and a further 26% at Series A; The average size of financing rounds has risen substantially over 2015. Series A financings rose 34% from $7.9mn in 2014 to $10.6mn this year, while the average venture debt financing increased from $9.6mn to $32.7mn. Investments made in Series D and beyond are now worth an average of $94.0mn.  

The July financing of Didi Kuaidi was the largest venture capital deal of 2015 at $2bn. Of the 10 biggest deals of the year, five were in Asia, and five were in the US, with none taking place in Europe.

Overall venture capital exit activity declined in 2015 for the first time since 2008. The number of exits decreased from 1,138 in 2014 to 1,052 in 2015, while the total exit value declined 41%, from $125.1bn to $73.3bn.  

“It was another strong year of financing in the venture capital industry. Asia once again developed strongly throughout the year, and achieved a notable milestone with Greater China recording more deals in a year than Europe for the first time ever. While North America, especially California, continues to dominate the venture capital industry, Asia is beginning to occupy an ever-larger share of the market.  

Exit activity has been stifled through the year, with both the number and total value of exits decreasing from the levels seen in 2014. A tricky IPO market has made managers and investors wary, but there is still a lot of value being generated through exits from portfolio companies.” Says Felice Egidio – Head of Venture Capital Products, Preqin.