Global investors have less appetite for higher risk exposures, particularly in the U.S., according to the BofA Merrill Lynch Fund Manager Survey for May.
While a net 47 percent of respondents remain overweight equities, this is down seven percentage points month-on-month. Appetite for U.S. stocks has declined to a net 19 percent underweight, in contrast to strong overweights across Q1. Confidence in corporate profitability has also fallen, with only 7 percent of investors viewing the U.S. as the region with the most favorable earnings outlook. Long U.S. dollar remains investment markets’ most crowded trade, in fund managers’ view. However, the survey’s 41 percent reading on this measure has fallen sharply from last month.
At the same time, overweight cash positions have risen sharply. This month’s reading of a net 23 percent is the survey’s highest since December 2014.
These shifts follow the recent aggressive sell-off in bond markets. The survey shows a strong rise in panelists’ assessment of bonds as the asset class most vulnerable to volatility in 2015 – up to 56 percent. Bond underweights have also increased.
Investors’ macroeconomic views have changed little since last month. A net 59 percent still expect the global economy to strengthen this year, though forecasts of corporate profitability have fallen a little. Seventy percent of respondents see both growth and inflation remaining below historical trends over the next 12 months.
They are increasingly divided over the timing of a U.S. rate rise, however. Almost as many now see this in 4Q as in 3Q – 36 percent versus 45 percent, respectively.
“There is no loss of faith in economic recovery, and positioning still assumes that the U.S. dollar goes up, but doubts are creeping in – hence this jump in allocation to cash,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research. “Investors are keeping faith with European stocks for now, but this remains biased towards currency plays,” said James Barty, head of European equity strategy.
Europe and Japan still preferred
In contrast to their reduced conviction towards U.S. equities, which a net 39 percent now intend to underweight over the next year, investors remain positive on both Europe and Japan – both economies where quantitative easing continues. A respective net 49 and 42 percent of fund managers are overweight the two markets.
Europe also remains the market most would like to overweight from a 12-month perspective. A net 33 percent still take this position, although this is now down as much as 30 percentage points from March’s very strong reading.
A net 18 percent make Japan their top pick for the coming year. This is a slight decline from last month.
At the same time, fund managers are less negative on emerging markets. Only a net 6 percent are now underweight, compared to April’s net 18 percent. Intention to own emerging markets stocks over the next year has risen similarly.
U.K. picks up
Britain’s recent decisive election result is reflected in investors’ more positive stance on U.K. assets. Global investors have halved their equity underweights month-on-month, while a net 3 percent of European fund managers now intend to overweight the U.K. market over the next 12 months. Last month, a net 50 percent said they would underweight it over this time period.
Similarly, views of sterling as overvalued have fallen notably. Only a net 8 percent of global fund managers now take this stance, compared to April’s net 15 percent.
Currency correlation
Investors’ stance on the major currencies correlates with their equity positioning. A net 69 percent expect the U.S. dollar to appreciate over the next 12 months. This is up slightly from April’s reading. In contrast, a net 32 and 35 percent expect the Euro and yen to decline. Yen bearishness has risen by 16 percentage points since March.
Bullishness on oil has fallen, meanwhile. Fewer than half of fund managers now expect the commodity to trade at a higher price in 12 months’ time. This is down significantly from April and March’s reading of 64 percent.
Photo: José María Mateos
. Japanese Private Capital Interested in Investing in Peru
Mr. Carlos Herrera, Executive Director of Proinversion, the Peruvian Investment Authority concluded a successful investment roadshow in Tokyo on Friday, which also included Beijing and Seoul. The government delegation was joined by over 80 attendants at the Mitsubishi Bank Office and had more than 10 bilateral meetings with private investors and conglomerates, all of who were keen to discuss investment opportunities in Peru.
The conference, organized with the support of the Peruvian Embassy in Japan and the prestigious Japanese Bank of Tokio-Mitsubishi UFJ, was inaugurated with an introduction by Peruvian ambassador Elard Escala, highlighted the more than 140 years of diplomatic relations and the fact that Japan is Peru’s fifth largest trade partner. He noted the favorable investment conditions for foreign capital such as the equal conditions for foreign and domestic investors and the solid legal framework to protect assets.
The Managing Director for the Lima branch of the Bank of Tokyo-Mitsubishi, Kohei Hoshide, gave a presentation on the general state of the Peruvian economy. He emphasized, “With their economic reforms, solid growth projections and political stability, Peru is one of the leading and most attractive investment destinations for Japanese businesses and private investors.”
Carlos Herrera, Executive Director of Proinversion, presented to Japanese businesses and investors some of the many projects available for private investment in the Agency’s portfolio of infrastructure projects and explained the way in which the private investment and tender process works in Peru. He exhibited several projects such as Lines 3 & 4 of the Lima – Callao metro, the Huancayo – Huancavelica railway and several regional roads. He included also the calls for tender that are open such as for the construction of electricity generation plants, correctional facilities, real estate and solid waste treatment plants. Mr. Herrera concluded: “the visit to Tokyo has been a great success, proving that there is an ever increasing interest from Japanese companies in doing business in Peru, due to a like-minded approach of transparency and public responsibility.”
CC-BY-SA-2.0, FlickrFoto: Julio César Mesa
. Los bancos venezolanos resisten pero se enfrentan a mayores desafíos
Private Venezuelan banks continue to report resilient loan quality ratios and earnings, even when adjusted for inflation. However, growing macroeconomic imbalances, high unseasoned loan growth and government policies that favor state banks pose additional challenges, according to a Fitch Ratings report.
‘The banking system’s significant exposure to the public sector, as well as a marked shift in portfolio composition toward more vulnerable economic segments and consumer loans, could lead to a sudden deterioration in asset quality in the event of a forced economic adjustment,’ saidMark Narron, Director. ‘Further government regulations and intervention could create additional challenges.’
In December 2014, Fitch downgraded the long-term Issuer Default Ratings (IDRs) ofthe seven largest private banksto ‘CCC’ from ‘B,’in line with a downgrade of the sovereign. All these banks’ ratings are limited by the sovereign given their vulnerability to the country’s weak economic performance, high inflation and policy choices.
In addition to long-standing interest rate caps and floors and compulsory loan requirements, beginning in 2014, the government enacted policies favoring state banks. These included the migration of public sector deposits to state banks, and restrictions on private banks’ ability to provide customers with access to hard currency.These actions led to one-off liquidity events, evidenced by spikes in inter-bank rates. However, in the absence of further government intervention, Fitch does not expect these policies to lead to a sustained divergence in deposit growth relative to state banks.
Venezuelan banks continue to rely on demand deposits for the vast majority of their funding, maintaining a large, negative mismatch between short-term assets and liabilities. However, this position remains manageable under Venezuela’s current scheme of foreign exchange controls which acts as a barrier to capital flight.
The effects of inflation on operating expenses, plus an uptick in funding costs, led to weaker profitability and internal capital generation in 2014. In addition, the government’s elimination of the inflation adjustment for the calculation of income tax will further pressure profitability in 2015. Weaker profits and high nominal asset growth in turn continue to pressure capital ratios. While capital levels vary across banks, Fitch expects that capitalization will deteriorate further if the rate of deposit growth does not decline.
Loan quality ratios have been stable but belie potential risks as they are distorted by inflation. The banking system’s significant exposure to the public sector, as well as a marked shift toward more vulnerable economic segments and consumer loans, could lead to a sudden deterioration.
Many banks have continued to proactively increase reserves for impaired loans in order to better confront macroeconomic imbalances. Although reserve levels compare favorably with those of international peers, Fitch views them as potentially insufficient given the volatility in asset quality exhibited during past crises.
EFAMA has reiterated its strong support for the European Commission’s aim to build a Capital Markets Union.
In its formal response – published today – to the EC Green Paper on Capital Markets Union, EFAMA has welcomed the European Commission’s initiative, saying that an integrated capital markets union that succeeds in unlocking capital and shifting it towards long-term investments will be to the benefit of investors, the cornerstone of the asset management industry.
Peter de Proft, Director General of EFAMA, commented: “Europe is facing an important challenge, which is also a unique opportunity. We very much welcome the fact that EU policymakers are embracing the opportunities that the asset management industry offers in terms of supporting sustainable economic growth and long-term financing.”
These opportunities are outlined in EFAMA’s recent Asset Management Report, which illustrates how the asset management industry plays a vital role in the general financing of the economy and contributes to an efficient and well-functioning Capital Markets Union.
In its response, EFAMA also aims to underline what it considers to be the necessary conditions to make a Capital Markets Union successful – particularly highlighting the crucial role of promoting long-term savings and creating a single market for personal pensions. EFAMA thinks necessary to encourage European citizens to save more for retirement, and it is convinced that developing private pensions in Europe is crucial. The creation of a European personal pension product would offer the potential to increase the volume of retirement savings while channelling those savings to long-term investments across the EU. EFAMA’s recent report on this topic provides further details and recommendations.
European asset managers have long supported the ELTIF regulation as a concrete step towards unlocking capital and encouraging a shift towards investments in long-term projects. EFAMA believes that to make this a success story, important refinements, a right framework and appropriate incentives are necessary.
In the context of building a capital markets union, ensuring appropriate calibrations in Level 2 must be a priority: appropriate and well calibrated level 2 measures in both MIFID II and Solvency II can encourage and promote, as they should, long-term investment.
EFAMA reiterates that it is crucial to ensure a regulatory level playing field and consistent regulation across sectors in the distribution of similar retail investment products. Retail investors must receive the same level of protection, whether these products are governed by MIFID II or IMD II.
Finally, EFAMA seeks to remind EU policymakers that the Financial Transactions Tax (FTT) represents a potential significant obstacle to the successful implementation of a Capital Markets Union. This proposal carries a significant risk which would cause distortions to the creation of an EU single market as it would relocate financial activities outside of the 11 participating Member States, or if applied in the 28 Member States, outside of the EU altogether. FTT would increase the costs for investors as it will render EU investment funds more expensive. It would also jeopardise long-term savings, growth and investment as it would channel investments to products not subject to FTT.
Peter de Proft, Director General of EFAMA, concluded: “Asset managers have an important role to play in the changing landscape of a more capital market based economy, and we stand ready to constructively engage with EU policymakers in the road towards financing growth in Europe.”
Foto: Julien Chalendard. La actividad de M&A entre RIAs se mantiene, pero la alineación de objetivos estratégicos cobra importancia
Registered investment advisor firms (RIAs) continue to initiate the bulk of mergers and acquisitions (M&A) of RIAs, but the success of these transactions increasingly rests on the alignment of the strategic objectives of the firms involved, according to a report recently released by Pershing LLC, a BNY Mellon company. The report, Real Deals: Achieving Purposeful Growth with Purposeful Transactions, analyzes RIA deals and offers guidance to firms for determining if or when a transaction is the optimal course of action.
According to the report, one in four advisory firms was involved in a transaction within the past five years. During this period, nearly half (48 percent) of all deals involved RIAs transacting with each other. RIA-RIA deals now account for twice the proportion of industry transactions compared with 10 years ago, when banks and other institutional buyers tended to dominate transactions. Although the total of 42 real deal transactions in 2014 is slightly less than the 48 recorded in 2013, the numbers represent a largely consistent level of M&A activity over recent years. Real deal transactions are defined as those mergers involving an RIA or acquisition of an RIA that is retail-focused, and manages $50mor more in assets or earns $500,000 or more in annual revenues.
“RIA deal-making will invariably continue and grow in frequency,” said Gabriel Garcia, director of relationship management at Pershing Advisor Solutions. “Firm owners are increasingly aware of the potential benefits of a transaction and are more confident in initiating one.”
A transaction can result in a host of strategic advantages, the principal of which include: greater economies of scale, accessing new markets, accessing new expertise and facilitating an ownership or management succession solution. But in order to gain any one of these advantages, Garcia urges firms to consider both organic and inorganic growth approaches. Organic growth is achieved from maximizing existing business capabilities such as growing the firm’s existing client base, improving efficiency to increase profitability and reinvesting profits to increase service capacity. Inorganic growth is achieved as a result of a merger with, or acquisition of, another firm.
“While M&A activity is highly regarded as a means of expansion, it is important to recognize that a transaction is not necessarily the only way to achieve growth,” said Garcia. “RIAs must first understand the strategic context of a potential transaction.”
To evaluate whether a transaction is appropriate, the report provides a four-step course of action:
Define objectives: The personal objectives of shareholders, the strategic objectives of the firm, and other clearly defined objectives serve as valuable guideposts. Without them, it is impossible to adequately determine whether a transaction is in the best interest of the firm and its shareholders.
Identify the problem: Firms are often tempted to pursue any deal opportunity that presents itself. However, a purposeful transaction should help firms address a specific problem such as the need to scale, access new markets, or acquire new capabilities, etc.
List all options: While a transaction may take the firm in the direction it wants to go, another initiative might do the same but more effectively. Identify all practical options, inorganic as well as organic, for achieving the objectives of the firm.
Analyze and discuss: Conduct a thorough analysis of each option to determine which solution will be most effective for driving the firm’s growth strategy. Review and evaluate the best options for achieving the firm’s objectives from the perspectives of cost, risk, timing, business continuity and associated distractions.
. BM&FBOVESPA and S&P Dow Jones Indices Sign Index Agreement
BM&FBOVESPA, the largest equity and futures exchange in Latin America, and S&P Dow Jones Indices, one of the world’s leading providers of financial market indices, announced today the signing of a strategic agreement to create and launch new, co-branded equity Brazilian indices. The signing, as well as a bell ringing commemorating the event, took place at BVMF.
Yesterday also marks the launch of the S&P/BOVESPA family of smart beta indices, the inaugural series of indices developed and launched as a result of this agreement. The five indices – S&P/BOVESPA Low Volatility Index, S&P/BOVESPA Inverse Risk Weighted Index, S&P/BOVESPA Quality Index, S&P/BOVESPA Momentum Index, and S&P/BOVESPA Enhanced Value Index –measure the performance of stocks within the Brazilian equity markets based on exposure they provide to respective risk factors and are the first suite of smart beta indices in Brazil. Market participants can use these indices, and combinations thereof, in various ways depending on their investment objectives.
“As the Brazilian financial market develops, BM&FBOVESPA continues to play an integral role for both local and international investors,” says Alex Matturri, CEO of S&P Dow Jones Indices. “Through this agreement, S&P Dow Jones Indices expands its mission of bringing greater index-based solutions, research, ideas, and analysis to the markets of Latin America. By launching this family of smart beta indices in Brazil, we are meeting the evolving needs of investors throughout the world for benchmarks that tilt towards certain styles, sectors, and factors.”
According to Edemir Pinto, CEO of BM&FBOVESPA: “The agreement between BM&FBOVESPA and S&P DJI is a very important step toward increasing index based opportunities for investors and further educating them on the merits of the Brazilian capital markets. The association of our brand to S&P DJI’s on new co-branded indices will reinforce BM&FBOVESPA’s position overseas through S&P DJI’s global index distribution.”
S&P/BOVESPA Smart Beta Index Offering:
S&P/BOVESPA Low Volatility Index tracks the performance of the top quintile of stocks in the Brazilian equity market, defined by the S&P Brazil Broad Market Index (BMI), that have the lowest volatility, as measured by standard deviation.
S&P/BOVESPA Inverse-Risk Weighted Index calculates the performance of the Brazilian equity market with stocks weighted based on the inverse of their volatility. It provides the exposure to the low volatility factor using a tilted approach.
S&P/BOVESPA Quality Index measures the performance of the top quintile of high-quality stocks in the Brazilian equity market as determined by their quality score. This score is calculated based on return on equity, accruals ratio, and financial leverage ratio.
S&P/BOVESPA Momentum Index computes the performance of the top quintile of securities in the Brazilian equity market that exhibit persistence in their relative performance, measured by their risk adjusted price momentum.
S&P/BOVESPA Enhanced Value Index tracks the performance of the top quintile of stocks in the Brazilian equity market with attractive valuations based on “value scores” calculated using three fundamental measures: book value-to-price, earnings-to-price, and sales-to-price.
CC-BY-SA-2.0, FlickrFoto: Simon Cunningham
. Los activos en ETFs ligados a índices MSCI alcanzan la cifra record de 418.000 millones
MSCI, a provider of research-based indexes and analytics, reports that assets in ETFs linked to MSCI indexes grew more than 12 percent in the first quarter of 2015, reaching an all-time high of $418 billion. ETF providers launched 56 products based on MSCI indexes during the period, three times more than the next index provider.
The surge in demand from ETF providers for MSCI Factor Indexes continued, with 11 new ETFs launched in the first quarter, two times higher than the next index provider. These new ETFs attracted $4.4 billion in assets, or 31 percent of the total asset flows into that category.
“Following strong growth in the number of ETFs tracking our indexes in 2014, this year is off to a record-setting start,” said Baer Pettit, Managing Director and Global Head of Products. “As the industry grows in size and complexity, we intend to maintain our position as the first choice of ETF providers who are looking for both leading-edge innovation and exceptional quality.”
In first quarter of 2015, ETFs linked to MSCI Minimum Volatility Indexes, the industry’s first low volatility benchmarks, reached a record $13 billion in assets under management; Assets in ETFs tracking the MSCI USA Quality Index surpassed the $1 billion mark; And Global currency hedged ETF assets attracted $28 billion in new assets,with half of those fund flows going to ETFs linked to MSCI Currency Hedged Indexes. There are now 68 currency-hedged ETFs globally linked to MSCI indexes, more than all other index providers combined.
With over 730 ETFs tracking MSCI indexes globally, more ETFs track MSCI’s indexes than those of any other index provider.
When Paris headquartered La Française, a 48€ billion multi-class asset manager, and London-based Inflection Point Capital Management (IPCM), a specialist firm focused on Strategically Aware Investing (SAI) joined forces in early 2014, their objective was twofold:
to create La Française Inflection Point (LFIP), an asset manager specialized in SAI equity funds and
to integrate the SAI philosophy into the investment process applied by LFIP.
Today, they have reached a significant milestone.
Just one year after the signature of their strategic partnership and the creation of La Française Inflection Point, La Française has launched its first line of SAI equity funds, an extensive line covering four geographic regions: Euro, Europe, Emerging Markets and Global, representing close to 1€ billion in assets under management and offering various investment themes (a low carbon theme is work in progress). LFIP and its eight-person international investment team, headed by Laurent Jacquier Laforge (CIO), have successfully transformed the SAI concept into a hands-on and operational investment process. IPCM supplies extra-financial data on over 900 global companies that together with LFIP, they interpret and integrate with traditional financial criteria. LFIP then selects the best in class candidates for each of its funds.
Strategically Aware Investing goes beyond the analysis of traditional Environmental, Social and Governance criteria to include three additional factors that truly reflect a company’s long- term perspectives: innovation capacity, the ability to anticipate and adapt to changing trends, and a company’s positioning relative to existing global trends. With this more comprehensive analysis and the global coverage afforded by both the IPCM and LFIP teams, La Française offers truly sustainable investment solutions to strategically aware investors.
The SAI methodology, developed by IPCM, whose team includes three of the most influential environmental investors, can be applied across all asset classes. La Française and IPCM continue to collaborate on alternative SAI investment solutions and are in the process of fine-tuning an SAI methodology which will soon be applied to fixed income investment funds.
Almost two-thirds of managers polled by Cerulli said they intend to increase their sales efforts in Italy – compared with 37% of last year’s respondents. And 43.2% of managers we surveyed plan to target France – compared with just more than one-fifth of managers polled for last year’s report. More managers than last year also plan to increase sales efforts in Spain and Germany.
Competition in Europe is stiff and managers must be more strategic to sell outside their home market. So asset managers are establishing roots in selected countries.
Franklin Templeton reaped the rewards of setting up branches in Rome, Florence, Milan, and Padua. Net inflows every quarter since have been between €800 million (US$972 million) and €1.5 billion, according to Assogestioni.
“This was a shrewd strategy that paid off,” said Barbara Wall, Cerulli’s Europe research director. “Many foreign managers launched funds in Italy, trying to sell them, either from a distance or by opening a branch in Milan. But sales is a local game and success is more likely if a firm has people on the ground-and not just in Milan,” she added.
By opening branches on target territory managers can develop closer ties and enhance understanding with distributors. This is more effective than making regular presentations as part of a road trip.
Angelos Gousios, associate director with Cerulli in London, and one of the main authors of European Distribution Dynamics 2015: Preparing for a New Era, said: “In our talks with Italian wealth managers they frequently say lack of time hinders theirwork. They do not have time to go to events. Having a branch down the road where they can pop in informally and discussmarket developments over coffee is more attractive.”
Another significant advantage to having a local presence is that a manager can tailor its message according to regional variations in disposable wealth, attitude to risk, and product choices, for example.
This and several other new findings make up the fifth iteration of Cerulli’s European Distribution Dynamics 2015 report.
European Distribution Dynamics 2015: Preparing for a New Era also:
Examines the impact of low rates of return in the French market: Low returns for money market funds and euro-contract investments are gradually pushing French investors out of their liquid positions toward long-term active products.
Assesses the prospects for distribution in Germany: Fund selection centers on risk minimization and potential newcomers must adjust their message to make headway. Striking a deal with key allies in Germany is the best insurance for a newcomer to the market.
In a new white paper, BNY Mellon explores what might happen if four of the world’s largest economies all stopped floundering and started flourishing at the same time. Although the world seems resigned to an era of subdued growth, four giant economies – Japan, America, China and India – are in the midst of recovery, reform, or both.
Under Shinzo Abe, Japan now has its most stable government in almost a decade and a central bank that has twice surprised the markets with its determination to defeat deflation. In Americaunemployment has dropped surprisingly quickly as firms have added jobs at the fastest pace since the dot-com boom. China’sPresident, Xi Jinping, has consolidated power faster than his predecessor with his anti-corruption campaign and staked his personal authority on economic reform. And in India’s 2014 election, Narendra Modi won the first single-party majority in thirty years, promising to restore the country’s economic momentum.
“This is an unusual confluence of events,” says BNY Mellon investment strategist Simon Cox. “The United States is enjoying a durable recovery just as all three of Asia’s big powers boast secure, confident governments committed, at least in word, to economic reform. The region’s stars rarely fall into alignment in this way.”
This combination raises the tantalizing possibility that all four of these giant economies might fulfill their economic potential at roughly the same time. The scenario assumes that Japan’s growth revives to 2 percent a year on average for the remainder of this decade, America’s averages about 3 percent, China’s 7 percent and India’s 8 percent. “This scenario is optimistic, without being utopian,” Cox says. “It’s contrarian, without being crazy.”
If this scenario were to materialize, the consequences would be profound. China, America, India and Japan account for almost 45 percent of global GDP. They consume a similar proportion of global energy and contributed well over half of last year’s global economic growth. BNY Mellon calls them the G4.
The optimistic G4 scenario would add over $10 trillion to the four economies’ combined GDP by 2020. According to an independent modelling exercise by the Economist Intelligence Unit, it would help add $8 trillion to the rest of the world’s GDP outside these four. This would be enough to restore a $100 oil price within three years and lift global food prices by over 40 percent from their level in March 2015. It would help the Nikkei 225 surpass 24,400, the Sensex exceed 45,000 and the S&P 500 reach 3,000 by the end of the decade.
According to Cox, recent economic weakness has left the G4 economies with substantial “slack”. Their GDP has fallen short of their potential, leaving them substantial room to grow without generating unwelcome inflationary pressure. The gap between America’s actual GDP and its potential GDP adds up to a cumulative $5.3 trillion over the past seven years, a waste of resources that is equivalent to shutting down the entire economy for three-and-a-half months.
For BNY Mellon’s G4 scenario to come true, the four economies would all have to perform better than the IMF and many other forecasters now expect. But in most cases, the G4 scenario is in keeping with what the IMF and others foresaw a few years ago. Forecasters have lowered their sights in the past few years in the belief that recent economic setbacks reflect a new trend. Cox believes this is “a little defeatist”. He prefers to view these four economies with undiminished expectations.
“Before the financial crisis, many people thought the rosy status quo would persist indefinitely. Now they’re assuming that the future must be as grey as the present. By taking on the glum consensus and exploring what could happen if the G4 all do well, we want to create a robust discussion that helps investors think through all of the potential scenarios for future growth,” says BNY Mellon Investment Management APAC CEO Alan Harden.
Steve Lackey, BNY Mellon APAC Chairman, notes, “The white papers are intended to be living documents that will reflect the ideas exchanged over the course of the year as we discuss the current challenges and future outlook for the four leading economies in the world.”
