Emerging market (EM) equities and bonds have performed remarkably well in the past months. A lot of bad news seems priced in and with lower immediate risk, investors dare to step in again. In this enviroment, ING Investment Management have closed most of the underweight positions in EM but remain cautious for the medium to longer term.
In last week’s Marketexpress we wrote about the surprisingly resilient EM currencies. Despite the seemingly hawkish comments of Fed Chairwoman Yellen and the increasing worries about Chinese growth and its financial system, EM currencies as a whole have appreciated since the second half of March.
EM bonds and currencies perform well since end of January
Policy response China after accumulation of bad news
The asset manager mentioned that one likely explanation for the EM resilience was that the reports from China had become so bad that markets interpreted them as good news: every disappointing figure was one step closer to a policy response. And indeed, last week the Chinese authorities announced a number of stimulus measures which are quite similar to the ‘mini stimulus’ package that was announced last year. The measures include accelerated spending on rail projects and public housing and extended tax relief for small businesses. Although the magnitude and effectiveness of the stimulus should not be overestimated, it should help to underpin the sentiment towards China and emerging markets.
A lot of negative news about EM is priced in
Next to that, after more than a year of strong capital outflows, markets have priced in a lot of negative news. The increasing evidence of financial system stress in China and the aggressive intervention of Russia in Ukraine have been important negative news items in the past months, but failed to push EM currencies significantly lower. This suggests that the downside risk for EM assets is lower than it has been for a while.
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BNY Mellon, a global leader in investment management and investment services, has been appointed by PGGM Vermogensbeheer B.V., the investment management arm of Dutch pension fund administrator PGGM, to provide depositary services under the Alternative Investment Fund Managers Directive (AIFMD) for assets valued at EUR14 billion.
In addition to safekeeping the funds’ assets, which are held within five fixed income investment funds, BNY Mellon will provide oversight functions and perform cash monitoring as required by AIFMD.
Based in Zeist in the Netherlands, PGGM provides pension management, integrated asset management, management support and policy advice for pension funds. PGGM manages about EUR160 billion assets (as at March 2014) on behalf of more than 2.5 million Dutch participants.
Leonique van Houwelingen, Country Executive for the Netherlands at BNY Mellon, said: “BNY Mellon’s local presence and expertise in the Netherlands, our proven depositary and trust capabilities in Europe, and the flexibility we can offer were all key factors in PGGM’s decision to appoint us as their AIFMD depositary.
“We are well-placed to provide comprehensive support for our clients as they prepare for the far-reaching changes that AIFMD will bring. In addition to new requirements around reporting, operational, technology and control infrastructures, the Directive mandates the segregation of risk management and valuation functions from portfolio management. Through our fully licensed Amsterdam branch, we are able to provide comprehensive depositary bank services in The Netherlands to ensure compliance before the final deadlines of each respective regulation.”
Van Houwelingen added: “BNY Mellon has maintained a substantial operational presence in the Netherlands over the years. We are committed to leading the way when it comes to supporting Dutch fund managers impacted by AIFMD. The depository bank function is already a key element of our regional offering, and we have a well-established and robust track record in this space in Belgium, Germany, Ireland and Luxembourg.”
The new mandate extends BNY Mellon’s long-standing custodian relationship with PGGM. BNY Mellon currently services fund assets valued at EUR1 trillion and over 1,600 funds across the region.
Article 21 of AIFMD requires that an AIFM must ensure a single depositary is appointed for each alternative investment fund it manages. The depositary will handle the safekeeping of financial instruments and other assets; ensure proper and effective monitoring of the fund’s cash flows; carry out various monitoring and oversight tasks; and implement client reporting and escalation procedures to the manager and regulators in the event of breaches.
Global alternative asset manager The Carlyle Group has announced that Jeffrey C. Holland has joined the firm as Managing Director and Head of the Private Client Group. Mr. Holland comes to this newly-created position from Cole Real Estate Investments, Inc. where he was President and Chief Operating Officer, overseeing the Private Capital and Real Estate groups. Mr. Holland joined the firm on March 17th and is based in New York.
Mr. Holland will oversee the group responsible for the development of Carlyle’s relationships with individual investors and intermediaries serving these investors. The group led by Mr. Holland will focus on arrangements with bank feeder funds and other financial advisors through which high net worth and other qualified individuals may gain access to an array of Carlyle alternative asset products. Mr. Holland will also be responsible for the development and marketing of additional registered and non-registered products that may become more broadly available, including hedge funds, credit-oriented funds and other trading strategies offered through Carlyle’s Global Market Strategies and Solutions business segments.
David M. Rubenstein, Co-Founder and Co-Chief Executive Officer, said, “Individual investors – private clients who have a broad range of investment capacity – seek the same access to our fund strategies that institutional clients have had for decades. Providing qualified individuals greater access to alternative assets and developing new products and platforms that are accessible to retail investors and mutual funds is a priority for Carlyle, and Jeff brings to this effort extensive experience in designing, developing and launching innovative products.”
Mr. Holland said, “This is a great opportunity to bring Carlyle’s institutional brand and record of excellence into the private client arena, through a variety of products, from retail mutual funds to private placements. I look forward to working with the Carlyle team to further build on their early successes.”
Prior to his work at Cole Real Estate Investments, Inc., Mr. Holland was a Managing Director and Chief Operating Officer for US Retail at BlackRock, Inc. Earlier he was a Vice President of Consulting Services at Raymond James & Associates and held positions with Capital Resource Advisors and McKinsey & Company Inc. Mr. Holland holds a Chartered Financial Analyst designation and is a member of the CFA Institute.
Mr. Holland, 42, earned his B.A. from the University of Puget Sound and his J.D. from Harvard Law School.
Wikimedia CommonsPhoto: World Economic Forum. Euro-Zone Deflation: Making Sure ‘It’ Happens Here?
In one of his most famous speeches, recently retired Chairman of the US Federal Reserve, Ben Bernanke, set out how he would ensure deflation did not take hold in the US economy. The remarks to the National Economists Club in Washington DC were titled ‘Deflation: Making sure ‘it’ doesn’t happen here’.
The speech, which compared the remedy of sweeping tax cuts and open market purchases of assets to Milton Friedman’s helicopter drop of money, led him to be dubbed ‘Helicopter Ben’. The speech, which at the time was addressing the low rates of inflation in the US at the time, actually proved to be prescient and many of the policies set out were implemented in the aftermath of the global financial crisis.
Nearly twelve years after this landmark speech and five and half years after ‘Lehman Day’ is the European Central Bank (ECB) both ignoring Bernanke’s sage words and risking a debilitating debt deflation in the euro area?
Inflation in the euro zone is close to the bottom of the range of historic outcomes available from Eurostat. What then were the factors behind such a sharp and sudden change in euro-zone inflation relative to forecast just a few months previously? According to the report by Investec Asset Management, it is energy that has been driving inflation lower in recent months and, in particular, the base effect from 2012’s large increases, when energy prices were increasing at between 8% and 9%.
However, this is not the entire story. When disaggregating the data into the underlying countries that make up the euro zone, it becomes immediately clear that the peripheral euro-zone countries are flirting with outright deflation, whereas the more solid core countries are comfortably within historical norms.
This, of course, is a direct result of the structural adjustments the stressed euro-zone countries are undertaking without the traditional remedy of currency devaluation. This so-called internal devaluation has seen wages, consumption and government spending slashed. Ben Bernanke would not have been surprised by the flirtation with deflation in the periphery as he made clear in his 2002 speech: “deflation is in almost all cases a side effect of a collapse in aggregate demand – a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers.”
What would Dr Bernanke prescribe?
ECB President Draghi believes Europe will not slip into sustained deflation and has only adopted one of Bernanke’s five measures to avoid deflation.
In his 2002 speech, Bernanke noted that, in the first instance, it was necessary for central banks to preserve a buffer zone, which reduces the risk that “a large, unanticipated drop in aggregate demand will drive the economy far enough into deflationary territory.” There can be little doubt the euro-zone crisis qualifies as large and unanticipated and so it’s too late for buffer maintenance. The table sets out the ex-Chairman’s other recommendations and Investec’s view of whether or not they have been adopted by the ECB.
Investec is concerned that the euro zone is in a fundamentally dis-inflationary environment. At present deflation is concentrated in a limited number of periphery euro-zone countries rather than the core. If it spreads, deflationary alarm bells will start to ring more loudly.
In this environment, Investec prefers German bunds and is underweight in Italy and Spain, and it has a preference for European equities over US equities on valuation grounds.
The Latin American pension system has grown to more than US$900 billion in assets under management, according to new research from global analytics firm Cerulli Associates.
“The pension industry in Latin America has been a key source of allocations for global managers and exchange-traded fund sponsors over the years, and promises to grow in importance as the size of these privatized social security systems quickly expand,” comments Nina Czarnowski, senior analyst at Cerulli. “Local capital markets will eventually be unable to absorb these additional flows.”
“Cross-border distribution to the regional pension industry remains the biggest opportunity. The good news is that, while highly competitive, it remains a fairly low-cost endeavor,” Czarnowski explains. “In fact, some of the top global managers in the region have succeeded in gaining more than US$5 billion each without a local office, or a local product.”
To the credit of the pension managers themselves, performance, global expertise, and on-going support have been the most-sought-after characteristics when choosing among cross-border managers.
“There has been a flurry of merger and acquisition activity in the pension space in Latin America, beginning in the last quarter of 2012,” Czarnowski continues.
Cerulli’s research finds that the compulsory fund systems from Mexico to Chile are doubling in size every five to six years. As they amass large sums of assets, it will be imperative for them to channel greater percentages of their assets outside of their borders.
Foto cedidaRussell Sharon, Ninoska Huerta and Ronnie Olabarrieta. Photo: Leo Di Tomaso. Artists Russell Sharon & Ronnie Olabarrieta Open Joint Show at Biscayne Art House
Modern art patrons gathered at Biscayne Art House on Brickell, Miami, on Thursday April 3 to celebrate the abstract works of Ronnie Olabarrieta and Russell Sharon. The crowd shared their love for art as they mingled with the artists.
“We are so pleased that both artists were able to fly in for the opening,” said Ana Maria de Piña, manager of Biscayne Art House. “Our shows are really special when the artists are here to share their experiences and their works of art.”
Ronnie Olabarrieta is a Puerto Rican painter and architect. His paintings consist of abstract expressionism and impressionism using vibrant colors and energetic movement in his brushstrokes. His latest works are a playful story of his inner expressions.
Russell Sharon is an American painter, who was born on a farm in Minnesota and studied in Mexico City, Boston and New York. His abstract paintings reduce landscapes into simplistic forms. The latest exhibit was inspired by wetlands and horizon lines.
Biscayne Art House is sponsored BiscayneCapital™, a boutique wealth assessment firm and one of the preeminent providers of banking services to high-net-worth individuals and families in Latin America.
The exhibition will be shown through May 9, by appointment only. For more information email info@biscaynearthouse.com.
Nuevo desarrollo hotelero en Estocolmo, Suecia /Foto: Arild Vågen. Europa, bien posicionada en un escenario global de fuerte demanda inmobiliaria
Real estate as an asset class remains well placed in the current environment, with investors continuing to rotate from bonds into other yielding assets with growth potential.
A recent report by DTZ supports this, showing that there is currently $354bn of capital targeting the real estate sector globally. Europe is accounting for an ever increasing share of this: here, investors have moved up the risk curve with secondary assets and markets such as Spain and Ireland back in vogue. Within the listed property space we have seen a number of newly listed opportunity funds raising money on the equity market to exploit the potential in these markets, focusing on the distressed assets still emerging from overexposed banks.
However, our core focus remains Northern Europe. The UK property market has been a standout performer and has started this year as it finished the last. An impending City and West End office supply shortage, combined with an uptick in occupier demand looks set to force rents materially higher. With financial strength and development exposure, the UK real estate investment trusts (REITs) remain well positioned to take advantage.
In mainland Europe, we remain cautious on the outlook for retail landlords. Inflation is low, online sales are growing, and a nascent economic recovery offers little prospect for rental growth. However, we feel the French office market may soon offer some value with rents now bottoming out. Listed companies, such as Icade, may provide an opportunity to exploit this theme, with shares now trading at discounts to asset values. In Sweden, property fundamentals remain robust with relatively healthy gross domestic product (GDP) growth likely to feed through to capital values in the stronger cities. In Germany, we continue to see value in the residential stocks where demand for rented accommodation is driving modest, but reliable rental growth.
Following a strong run in recent years, we must ask how much of the good news is already reflected in share prices. Our view is that property shares while no longer cheap continue to offer value given the potential for rental growth as economies recover. However, increasingly successful stock picking will be required in order to exploit pockets of stronger growth and greater value.
Guy Barnard, Fund manager of the Henderson Horizon Global Property Equities Fund and Pan European Property Equities Fund
Giordano Lombardo is Global CIO at Pioneer Investments. The Self-Sustained Recovery in the US Shows no Signs of Being Derailed
The transition towards a self-sustained recovery in the US is supported by strengthening internal demand, driven by recovering capital expenditure and household consumption. Giordano Lombardo, Global CIO at Pioneer Investments, in an update posted in the asset managers blog follow Pioneer, expects to see mixed signals coming from economic activity indicators and labor market as the economy normalizes, but does not expect the trend in the main drivers of growth to be derailed.
Pioneer Investment’s growth estimates for 2014 in the US are:
U.S. GDP growth of 2.8%.
Personal consumption estimated to grow at a moderate pace and then accelerate in the second half of the year.
Inflation expected to remain below 2% but step up gradually during the year.
Non-Residential Investments to accelerate in the second half of the year, giving momentum to acceleration in capital expenditures.
If the economy develops as the Fed currently forecasts GDP growth around 3% in 2014 and 3-3.5% in 2015, unemployment around 6% by the end of 2015 – Pioneer Investments expects QE to be wound down by the end of 2014. Interest rates could then start to slowly increase during 2015 (Fed Fund futures currently project rates to slowly start to rise above the current 0.25% level in the autumn of 2015).
Stronger-than-expected global demand, supported by a stronger economic performance of the Euro Area could support both confidence and exports, and somewhat offset the impact from weaker growth in emerging economies.
A productivity pick-up, accelerating the pace of recent weak growth.
Stable improvements in the consumer sector balance sheet, coupled with stable income growth and progressive improvements in the labor market could support higher patterns of consumption.
Potential Risks to U.S. Economic Growth
A significantly stronger dollar might adversely impact the export sector by making U.S.-produced goods and services more expensive in foreign markets.
After years of shedding debt, the U.S. consumer might be more reluctant to spend, detracting from growth momentum.
Geopolitical tensions, involving directly or indirectly the U.S. could be highly disruptive for the flow of oil and for financial markets in general.
Gabriel Padilla, managing director de GGM Capital en Londres. Foto cedida. GGM Capital nombra a Gabriel Padilla managing director de su nueva oficina en Londres
GGM Capital, Luxembourg-based boutique investment bank, announced it has appointed Gabriel Padilla as Managing Director of GGM Capital Markets to head up its newly opened London office.
Gabriel has over 20 years of international experience (USA, Latin America & Europe) in business development, relationship management, sales, trading and project management in the areas of securities financing, collateral management, securities clearing, settlements and custody in international markets and across different asset classes.
During his banking career he has worked in leading international organizations including JP Morgan Chase, Banco Santander and UBS, among others.
Prior to joining GGM Capital, Gabriel showed his entrepreneurial spirit by creating and leading SecFin Consulting Limited, a London based consulting company. He is a senior advisor with Eleven Canterbury mentoring, and coaching technology and services companies, enabling them to better understand financial institutions.
Guillermo G. Morales, the Executive Chairman of GGM Capital, commented: “We are delighted to have boosted our capital markets credentials with the appointment of Gabriel and expanded into the London market. It’s an exciting time in our development and we welcome such an A class operator to the company.”
Wikimedia CommonsPatrick Lemmens, portfolio manager of Robeco's strategy New World Financial Equities . Regulation Creates Opportunities for Financials Too
The effects of the last major financial crisis have been far-reaching for banks and insurance companies worldwide. Investors tend to look at the negative aspects, like higher capital requirements that put pressure on returns. “But regulation creates opportunities too”, says portfolio manager Patrick Lemmens of Robeco New World Financials Equities, who received the Lipper Fund Award on 31 March for his fund’s strong track record.
Higher capital requirements lead to more expensive banking and insurance services
The banks are responding to the higher capital requirements by charging more for their banking services, says Lemmens. The new global regulatory system for banks, Basel III, is responsible for raising these capital requirements. This system is pushing up the requirements for capital and liquidity, while financial leverage needs to be reduced. Basel III is being introduced to tackle the inadequate regulation that contributed to the major financial crisis of 2008. Lemmers explains the consequences.
“This helps banks boost returns on their capital in order to retain access to the international capital market. There are not many other options for improving profitability. Reducing costs is harder, as cuts have already been made here.” In his opinion, this also applies to insurance companies. The introduction of Solvency II is impacting the European insurance sector. The objective of this European directive is to make sure insurers have sufficient capital reserves. “Covering longevity risk costs more in the Netherlands than in other countries as a result of the regulators’ high capital requirements.”
There is also another reason why higher capital requirements can lead to raised costs. The regulators are scaring off newcomers with more stringent capital requirements and reporting obligations, says Lemmens. “They are putting up daunting barriers that make it increasingly hard for newcomers to enter. This prevents new companies that are willing to slash prices from gaining access and thus benefits the established order.”
But European payment transactions offer opportunities for newcomers
There is one section of the banking world where competition is increasing, however, and where this monopoly is being broken: European payment transactions. The reason for this is that banks in the European Union are required to provide client data to competitors to make it easier to switch from one company to another. “This should make payment transactions cheaper and easier. In the case of client data, for instance, this includes account holders’ direct-debit and standing-order authorizations,” says Lemmens.
“The banks’ monopoly on payment transactions is disappearing. Competition will increase as new players start processing payment transactions for stores and webshops, for instance. A power shift is taking place amongst those parties handling payment transactions, making way for new innovative players. This is why I invest in companies such as Optimal Payments and Wirecard. These companies are expected to show rapid growth in the coming years.”
Lemmens sees opportunities in payment transactions mainly for innovative companies that challenge the established order, and therefore does not invest in large technology companies. “I often wonder what Google is up to in the banking sector. I don’t think they intend to become a bank. Clearly, they have a lot of search data that can make them money. And they can simply buy up a bank to obtain a banking license. But the downside of such a takeover is that it puts you in full view of the regulator, who could then easily decide that Google is a systemically important bank and must maintain additional capital buffers.”
IT companies benefit from increased outsourcing
The pressure of regulation on banks and insurance companies has increased in the aftermath of the financial crisis and has led to the outsourcing of IT activities, says Lemmens. Banks and insurance companies can no longer handle these activities on their own and are finally prepared to outsource them. In his opinion, dealing with IT has become too great a challenge to handle alone.
“Just providing the regulators with all the different loan data is a massive task for the banks. This does not happen simply by pushing a button – it is a complex process. Much of this data is sourced from diverse IT systems and is subject to different methods of administration. Nevertheless, you are expected to provide it in a uniform way, and so banks have to process, match and check their loan data.” “This requires extra investments in IT. Banks now no longer want to do the work themselves and are engaging third parties to handle it for them. An added advantage of outsourcing IT is that it enables you to make the related costs more variable, causing you to become less sensitive to the economic cycle.”
“Companies such as Cognizant, Simcorp and Temenos that supply IT services for banks will benefit from this outsourcing trend. They also happen to be the companies I have in my Robeco New World Financials portfolio.”
Lemmens sums up the consequences of regulation as follows: “Regulation is generating opportunities for investors. While strengthening the established order by setting up entry barriers, it can also generate opportunities for new players such as IT companies that provide services for the financial sector and for specialized companies active in handling payment transactions.”
