The stock market falls in June illustrate the extent to which the financial markets are becoming increasingly dependent on political decisions while at the same time reflecting economic reality less and less. This is the view of Guy Wagner, Chief Investment Officer at Banque de Luxembourg, and his team, published in their monthly analysis, ‘Highlights’.
The lack of agreement between Greece and its creditors hung over the stock markets in June. The S&P 500 in the United States, the Stoxx 600 in Europe, the Topix in Japan and the MSCI Emerging Markets all fell. “The market falls illustrate just how dependent the financial markets have become on political decisions even though these are increasingly divorced from economic reality,” says Guy Wagner, Chief Investment Officer at Banque de Luxembourg and Managing Director of BLI – Banque de Luxembourg Investments. “Provided the political blackmail strategies like those we saw in the negotiations between Greece and its creditors do not lead to a general destabilisation of the financial system, investors are likely to continue to favour equities due to the lack of prospects of an increase in yields on the bond and money markets.”
Static global economic situation
The global economic situation is fairly static, with no major signs of picking up or slowing down. In the United States, activity is getting back to normal after a weak start to the year. In Europe, the economic situation is improving slightly due to the weak euro, albeit without any sign of a significant recovery. In Japan, the economy is continuing to mark time. In emerging markets, there is continuing fragility in several of the major economies, such as China, Brazil and Russia.
Eurozone inflation should stay in positive territory in the coming months
With the stabilisation of oil prices, inflation rates have consolidated at low levels. In the United States, inflation edged up from -0.2% in April to 0% in May. In the eurozone, the inflation rate remained in positive territory, at 0.2% in June compared to 0.3% in May. “Unless oil prices drop back, eurozone inflation should stay in positive territory in the coming months,” says Guy Wagner.
Core eurozone countries’ long rates still unattractive
The upturn in long rates that began at the end of April continued in June. The rise in bond yields affected the peripheral countries rather than the core eurozone countries due to the uncertainty over the situation in Greece. Over the whole month, the 10-year government bond yield rose in Germany, Italy, Spain and the United States. “Despite the rise, the long rates of core eurozone countries are still unattractive. In industrialised countries, US government bond yields are the only valid alternative given that they still have potential to appreciate if deflationary pressures set in,” suggests the Luxembourg economist.
Markets no longer worried by Greece’s possible exit from the eurozone
Despite the uncertainties over Greece, the euro firmed slightly in June. Greece’s possible exit from the eurozone no longer seems to concern the markets unduly, given that there is only a low risk of contagion to other peripheral countries. And given the last news and the deal with Europe. According to Guy Wagner: “Despite the recent stabilisation of the euro, the dollar’s upward trend that began in May 2014 is set to continue as long as a US interest rate hike in the second half of the year remains the most likely scenario.”
Old Mutual Global Investors announces that, subject to shareholder approval, the US $212m Old Mutual Asian Equity Fund managed by Josh Crabb, Head of Asian Equities, will evolve into an equity income generating strategy.
With a target date of 30 July 2015, the Fund will be renamed the Old Mutual Asian Equity Income Fund.
The Fund, which has been managed by Crabb since October 2014, is a sub-fund of the Dublin domiciled Old Mutual Global Investors Series plc umbrella fund. It is managed by Crabb and his team, who are based in Old Mutual Global Investors’ Hong Kong office. Since Josh took over as manager, the Fund has been in the first quartile of its peer group and has delivered 4.18% above the index (MSCI AC Asia Pacific ex Japan) ².
The Fund’s investment objective is evolving based on client demand and the change of name reflects this. The Fund aims to deliver a total return for investors, with a focus on income, as well as capital growth. It will invest in companies from across the market cap spectrum and will aim to pay an above market yield from across the economic cycle.
Old Mutual Global Investors believes this development will benefit clients as they will be able to access the region’s growing dividend stream as well as obtaining above average earnings per share growth. Studies show that the Asia Pacific region over a ten-year cumulative period has paid consistently higher dividends as a percentage of total returns than both the US and Europe, as well as delivering overall higher total shareholder returns.
Crabb has an investment career spanning over 18 years, which includes a proven track record of managing Asian income funds.
Josh Crabb comments: “As the worldwide population ages, the search for income, and in particular equity income, is at the top of the investment agenda. By evolving the Old Mutual Asian Equity Fund into an income fund we are aiming to meet the demands of those investors who look to receive an inflation-proofed income, without sacrificing their capital growth.
According to the latest research from global analytics firm Cerulli Associates, anticipated reforms in Mexico have created opportunities for international asset managers. These findings and more are from Latin American Distribution Dynamics 2015: Economic Challenges at Home Forcing Global Investment Approach, a just-released report developed in partnership between Cerulli Associates and Latin Asset Management.
The Mexican mutual fund industry’s assets under management (AUM) grew by 10% in 2014, marking its third double-digit rise in three years.
The combined AUM of the Afore and mutual fund industries in Mexico stood at over US$277 billion as of year-end 2014, which puts Mexico in the second spot, behind Brazil, in terms of total AUM for locally regulated companies. Yet most market participants acknowledge that AUM should be much, much larger considering the country’s size.
Reforms in both pension and mutual funds are under consideration in Mexico, and the implementation of many new rules are expected to be rolled out soon.
“On the pension side, the new rules include measures to strengthen the social safety net, which will likely lead to larger flows directed at Afore pension managers, and will make the Afore investment regimen more flexible,” explains Thomas V. Ciampi, founder and director of Latin Asset Management. “A big part of this added flexibility will include greater margins for international investment via separate-account mandates.”
“On the mutual fund side, major reform is underway with some structural changes to the industry, as well as a planned rollout of new open-architecture fund platforms that regulators hope will lead to a new era of third-party distribution, new product development, enhanced advisory services, and increasedinvestor sophistication,” Ciampi continues.
It seems European investors followed this old market adage in May 2015, since equity funds faced outflows of €3.1 bn. But, even more noteworthy, the European mutual fund industry faced a slowdown in flows into long-term mutual funds. Those are two of the conclusions of Lipper’s latest monthly snapshot of European fund flow trends (data as at end May 2015).
“That said, the European mutual funds industry still enjoyed net inflows of €16.3 bn into these kinds of products for May, but the flow numbers stood far behind the numbers of the former months of the year. Opposite to April, the majority of the flows went into mixed-asset funds (+€18.9 bn), followed by bond funds (+€1.1 bn), property funds (+€0.6 bn), and commodity funds (+€0.4 bn). On the other side of the table, equity funds faced the highest outflows (-€3.1 bn) from long-term mutual funds, followed by alternative/hedge products (-€1.4 bn) and “other” products (-€0.4 bn)”, point out Detlef Glow, Head of EMEA research, who wrote this report.
Key highlights below:
The European funds industry enjoyed net inflows of €16.3 bn into long-term mutual funds for May. Mixed-asset funds (+€18.9 bn) were the best selling asset class overall, followed by bond funds (+€1.1 bn). Meanwhile, equity funds faced net outflows (-€3.1 bn).
Money market products faced overall net outflows of €12.8 bn for May, split into inflows of €1.0 bn into enhanced money market funds and outflows of €13.7 bn from money market funds.
The single market with the highest net inflows for May was once again Italy (+€4.9 bn), followed by Switzerland (+€2.1 bn) and Germany (+€1.5 bn). Meanwhile, Spain (-€1.5 bn), Austria (-€0.4 bn), and Finland (-€.0.2 bn) stood on the other side.
Intesa SanPaolo, with net sales of €2.5 bn, was the best selling group of long-term funds for May, slightly ahead of BlackRock (+€2.5 bn) and Pioneer (+€2.0 bn).
The ten best selling funds gathered inflows of €6.3 bn, 38.98% of the overall inflows for May, showing that fund flows in Europe are highly concentrated.
“For bond funds inflows were driven by funds domiciled in Switzerland (+€1.8 bn), followed by funds domiciled in the international fund hubs (+€0.8 bn), Sweden (+€0.6 bn), France (+€0.5 bn), and Denmark (+€0.4 bn). On the other side Spain (-€1.8 bn) was once again the domicile with the highest net outflows from bond funds, bettered somewhat by funds domiciled in Germany (-€1.1 bn) and Austria (-€0.5 bn)”, explained Glow.
Bob Doll / www.youtube.com. Así va la quiniela de Bob Doll para 2015: cuatro aciertos, cuatro interrogantes y dos predicciones incorrectas
At the beginning of this year Bob Doll, Senior Portfolio manager and Chief Equity Strategist at Nuveen Asset Management described 2015 as the year when investors transition from disbelief to belief, or from skepticism to optimism. Sir John Templeton coined the phrase, “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” Nuveen believes we are entering the “optimism” phase. As Doll points out, 2015 is on track to be another decent year for U.S. equities as we experience:
Solid momentum in U.S. economic growth with low inflation,
A pickup in consumer spending based on job growth, confidence and a positive wealth effect,
Solid earnings growth,
Stimulus from low commodity prices and financing costs and
A still-good liquidity environment aided by stimulus from non-U.S. central banks.
Midway through the year, these statements largely hold true. These are the predictions Bob Doll made at the beginning of the year, and how they are faring:
U.S. GDP grows 3% for the first time since 2005 (X) Although Bob Doll believes the U.S. will grow 3% for the rest of the year, the weak first quarter will make it difficult for the year as a whole to average 3%.
Core inflation remains contained, but wage growth begins to increase (✔)U.S. inflation appears to be bottoming as it moves from very low to low levels
The Federal Reserve raises interest rates, as short-term rates rise more than long- term rates (?) Both short- and long-term U.S. bond yields have started to rise in anticipation of Fed rate hikes,1 which Nuveen expects will begin in September.
The European Central Bank institutes a large-scale quantitative easing program (✔) This happened in January, and the effects are being felt in Europe, where growth is improving to some degree.
The U.S. contributes more to global GDP growth than China for the first time since 2006 (✔)As a result of U.S. growth improving and China’s growth slowing, this one is heading in the right direction.
U.S. equities enjoy another good yet volatile year, as corporate earnings and the U.S. dollar rise (?) This is the seventh year of the bull market in the United States. The S&P 500 Index has never risen for seven consecutive calendar years,yet Doll highlights this is a distinct possibility in 2015, even if only by a modest amount.
The technology, health care and telecom sectors outperform utilities, energy and materials (✔) If we were scoring these predictions in degree of correctness, this would be at the top of the list. As of last week’s market close, these favored sectors in the U.S. are up an average of 6.6% for the year while the other three are down 3.7%.
Oil prices fall further before ending the year higher than where they began (?) Oil fell earlier in the year before experiencing a recovery. If the year ended today, this one would be proven correct
U.S. equity mutual funds show their first significant inflows since 2004 (x) Equity mutual fund flows have actually been negative so far this year as investors have been moving out of U.S. stocks.Nuveen expects investor confidence will pick up and that flows will increase, but they acknowledge they will likely be on the wrong side of this prediction
The Republican and Democratic presidential nominations remain wide open (?)The list of Republican candidates is longer than virtually anyone predicted. While Hillary Clinton remains the Democratic front runner, her candidacy is not without its difficulties.
Looking Ahead
While U.S. equities are no longer table-poundingly cheap, Doll beleives that they offer better value than other financial assets and should outperform cash, bonds, inflation and commodities. Even though equities are likely to advance further, the pace of gains is likely to be slower than what investors experienced during the first six years of this bull market. Nuveen believes U.S. equities are likely to produce average annual returns somewhere in the mid-to-high single digit range. Within the U.S. equity market, they prefer mid-cycle cyclicals, companies that can generate positive free cash flow and those with higher levels of domestic earnings.
All market prices are as on 6/26/15 according to Morningstar Direct, Bloomberg and FactSet
UBS has confirmed that William Kennedy will succeed to Andreas Schlatter as global head of Distribution for its global asset management business after Reuters has revealed a UBS internal memo.
Kennedy will take up his new duties in mid-September and will be based in Zürich. He will report to Ulrich Koerner, president of UBS Global Asset Management.
“With his strong client focus, his thorough knowledge of products and his wide network across units, William Kennedy is the ideal candidate to lead the further transformation of our global distribution organisation,” said the memo which was reported by Reuters and signed by Koerner and UBS Wealth Management president Juerg Zeltner.
Prior to this, Kennedy was head of Investment Products and Services at UBS AG.
UBS Global Asset Management had €616bn in assets under management as at 31 March 2015.
Dagong Europe has published a commentary entitled Luxury Industry: Grow Big or Stay Niche – Upcoming Season Trends. The commentary gives an overview of the main trends and developments in the luxury industry, examining the drivers in its future development. It also considers the comparative positioning, strategies and market approaches of the main luxury players, focusing on the strengths and weaknesses of the changing Chinese market.
“The global luxury market grew +3.3% in 2014, the lowest since 2009, underpinned by the subdued European economy, the recent US recovery and changing consumer habits in the Asia-Pacific region”, says Richard Miratsky, Head of the Corporates Analytical Team.
“While the luxury sector is dominated, in terms of revenues, by the three major European brand-aggregators, the niche approach of smaller players has proven successful in the super-premium segment. Although very different, both strategies are effective in the current market conditions, if strong brand identity is supported by extraordinary customer experience, excellent service, effective media communication and wise geographic store location – the key drivers of success in luxury”, concludes Mr Miratsky.
“Future developments in China’s rapidly slowing luxury market are a major concern for the main players. In 2014 luxury market revenues in China reached EUR 16.8Bn, up by 4.3% year-on-year” adds Marta Bevilacqua, Director of the Corporates Analytical Team. “European players will have to manage the Euro depreciation that is encouraging the Chinese habit of travel-for-luxury shopping and undermining the sector’s margins; and the anti-bribery campaign which has constrained the historically high volumes of absolute-luxury gift-giving”, concludes Ms Bevilacqua.
Dagong Europe expects the European majors to employ new strategies to refocus on personal luxury, relying not only on brands but on quality, and implementing new value propositions to encompass the affordable luxury segment.
Main findings:
Luxury sector to sustain mild growth in the medium term, despite the subdued world economy. Emerging markets, led by China, should support industry growth at lower-than-before averages, but volatile macro patterns and political interference poses significant uncertainties.
Although size carries weight in the luxury industry, smaller players can defend their niches. Large groups can build on their extensive knowledge and experience in creating and maintaining a strong multi-brand environment. Significant synergies and economies of scale in logistics, marketing, sales channel development and back-office functions can also be achieved. For smaller players, niche strategy has been effective only where product quality and brand perception have justified extra-premium prices.
Two crucial attributes emerging behind success in the luxury sector: the combining of history and innovation. Successful brands are able to blend the past, evoking the brand attributes and distinctive style, with new technologies, enhanced services, alternative retail channels and new customer experiences.
Although the mega-mergers of the past are unlikely to re-occur, we expect a substantial number of smaller deals in the coming years. The luxury sector is quite fertile ground in terms of deals and M&A transactions, with the majority of deals closed in Europe. 202 acquisitions took place globally in 2000-14.
SMEs operating in the luxury sector have been historically reluctant to tap the financial markets. The root causes are historical family ownership of luxury companies that have grown on brand recognition, linked to iconic founders and a view that long-established brand unicity is compromised by ownership dilution. Instead, bank debt, equity injections and strong cash flows have historically been the standard funding sources for investment.
Considering the qualitative and quantitative factors, our peer group of European major companies is generally well-positioned within the mid-to-low investment grade range. Although intrinsically different, LVMH and Hermès both position strongly among luxury peers due to their strong financial profiles and successful, divergent strategies. We see Prada as the weaker peer due to its need to streamline the business model and strategy.
www.syzgroup.com. SYZ adquiere la filial de banca privada de Royal Bank of Canada en Suiza
The Swiss banking group SYZ has signed an agreement to acquire Royal Bank of Canada (Suisse) SA. With approximately CHF 10 billion in assets under management, the Swiss private banking subsidiary of RBC is chiefly active in Latin America, Africa and the Middle East. These are complementary markets for SYZ Group, which will manage nearly CHF 40 billion in assets. This acquisition allows SYZ to extend its international footprint to raise its profitability and to deliver significant synergies.
With the acquisition of Royal Bank of Canada (Suisse) SA, the assets under management of the private banking business of SYZ Group will double, reaching nearly CHF 22 billion and making it one of the top 20 largest private banks in Switzerland. In total, including its Asset Management and Wealth Management divisions, the Group will manage nearly CHF 40 billion in assets under management.
“This acquisition will enable Banque SYZ to access new markets in Latin America, Africa and Middle East, where strong entrepreneurship, one of our founding values, is expanding. It also represents a major step forward in terms of the Group’s growth strategy. I am delighted to welcome these new teams to our organization and I firmly believe that we will benefit enormously from their many skills.” stated Eric Syz, CEO of the Group.
This transaction is still subject to the approval of the Swiss regulatory authorities.
Patricia Carral, SVP, y Mary Oliva, presidente de International Wealth Protection / Foto cedida. International Wealth Protection anuncia la incorporación de Patricia Carral, reconocida líder en planificación patrimonial
International Wealth Protection announced that Patricia Carral has joined the firm as Senior Vice President to support their exponential growth and demand for unparalleled wealth protection strategies.
Ms. Carral has been servicing Latin America’s high net worth clients for over 15 years. She was an integral member of HSBC’s International Private Bank and most recently served as Head of Private Clients – Latin America for Amicorp in Miami. She is a sought after industry expert given her experience in assisting ultra-high net worth families throughout the hemisphere with their generational wealth planning needs. Patricia, an active Trust and Estate Practitioner and a Board Member of STEP Miami Branch, has been a key participant in numerous wealth planning transactions that have involved global financial institutions, local and international accountancy and consulting firms, law practitioners and family offices. She specializes in identifying and creating the most sophisticated and suitable fiduciary solutions for the optimization of wealth preservation and transfer.
“I am honored to have Patricia join our team, her vast fiduciary experience will benefit our clients as the wealth planning and protection landscape is continuously evolving in Latin America and demands comprehensive leading edge strategies. International Wealth Protection represents the next generation of insurance based solutions and truly being able to provide clients with a holistic platform accomplishes this”, said Mary Oliva, President of International Wealth Protection.
“My decision to join International Wealth Protection stems from the realization that insurance based solutions play an integral role in developing a solid estate plan for our multinational clients. The immediate liquidity provided by insurance and its favorable tax treatment in most jurisdictions allows them to enjoy, grow and protect their wealth, for many generations to come”, said Patricia Carral.
Investors’ appetite for China’s stock market is quickly unwinding. Since the peak almost one month ago the Shanghai Composite Index lost a third of its value. Just like there were no fundamental economic reasons that could explain the earlier steep increase in stock market prices, the current crash has not been triggered by worries about an imminent hard landing. While we would certainly not dismiss this risk as futile and also think growth will slow down faster than consensus estimates, the impact on economic activity looks set to remain fairly modest.
Since the start of the equity rally last summer until its recent peak almost one month ago, Chinese stock prices more than doubled. This sharp upward move always looked suspicious given that economic activity continued its downward growth trend. Looking forward, economic growth in China will continue to decrease from current levels. The fast rise in income levels seen over the past decades (limiting the country’s future catch-up potential), the rebalancing of the economy towards consumption away from investment and China’s rapidly ageing population will all play an important role in this.
Admittedly, this does by no means imply that equity prices should have moved in the same negative direction. First of all, it can be argued that China’s stock market was far from expensive one year ago. Indeed, traditional valuation measures including the price/earnings ratio or the market capitalization of listed firms relative to GDP both suggested in fact the Chinese stock market had become fairly cheap. Moreover, despite slower growth, the rebalancing of the economy is a positive evolution and one that makes future growth more sustainable.
At the same time, however, there were also several reasons to be sceptical, certainly in times when Chinese policymakers are experiencing difficulties in trying to make sure that growth doesn’t slow too abruptly. Importantly, it cannot be denied that a lot of (official state) media attention has been given to the attractiveness of China’s stock market while policymakers were putting further rebalancing measures in place. In other words, Chinese leaders have interpreted rising stock market prices as evidence that their strategy was playing out fine and have not refrained from underlining this. Moreover, the fact that the housing market was struggling at the same time has also helped to drain savings into China’s stock market. All this in combination with the prospect of more capital account openness (including bigger representation of Chinese stocks in global equity indices) has fuelled a speculative stock market bubble.
Since its peak mid-June, the Shanghai Composite Index has fallen by around 32%. Year to date, however, the index increased more than 8%. Over the last 12 months, meanwhile, equity prices are still up more than 70%. The big challenge and difficulty of course is to see what comes next. Authorities are now taking measures to support the equity market. What’s also obvious is that this is proving very difficult, especially when at least a significant part of the money invested is debt-financed. All in all, for reasons explained here, the impact on overall economic activity should remain fairly limited at this point. That said, recent turbulence once again underlines how difficult it is for Chinese leaders to deal with the huge imbalances stemming from the unsustainable credit boom witnessed after the 2008-2009 crisis.
