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No More Hikes in Brazil’s Rates and a Too Loose Monetary Police in Mexico

In the last Pioneer Investments’ EM Update about Central Banks & Monetary Policies, Head of Global Asset Allocation Research at Pioneer Investments, Monica Defend, shares her view on Emerging Markets monetary policies.

In Asia, and regarding to China, she considers that the implementation of fiscal reform is proceeding as ten local governments will be allowed to issue bonds with full responsibility of repayment. “Even though the economic slowdown would suggest a stronger monetary easing, in the ongoing process of liberating interest rates and increasing efficiency in credit allocation, monetary policy must remain prudent to prevent a return to the old model of allocation and growth. The latest reserve requirement ratio cut for some qualified banks supports this attitude of the People’s Bank of China”.

In India, in early June, the Reserve Bank of India (RBI) kept policy rates on hold at 8% and eased the access to liquidity (via the statutory liquidity ratio reduction and a special term repo facility). “In our opinion, the RBI’s tone has been more dovish than in April, with the aim of supporting the next actions of the new government. The well-known inflation risks to the upside are broadly balanced by the possibility of stronger government action on food”.

In Europe, some interest rate cuts could arrive in countries like Hungary. “It is clear that a certain degree of “imported” (from Eurozone) weak price dynamics, plus stable commodity prices are favoring this weak trend. The distance between the central bank’s inflation rate forecast (0.7% in Q2 2014, rising to 3% to the end of 2015) and actual data prompted a 10 basis point (bp) rate cut on May 27. The central bank also stated that “…however, achieving price stability in the medium term, points in the direction of monetary easing” and is an important piece of information for making monetary policy choices. If forecasted inflation remains similar, it is possible that a further cut will arrive soon”.

Similar in Poland: “In its statement after the last meeting (June 3), the National Bank of Poland acknowledged that April inflation is not only widely below the medium-term target (2.5%) but also below the forecasts formulated in March. The bank maintained its forward guidance of unchanged rates until at least Q3. But as in Hungary, the central bank suggested that the next inflation report round of forecasts will be key to determining the possible evolution of rates”.

Defend doesn’t see more hikes in Brazil’s rates. As the market expectated, the central bank left the benchmark Selic interest rate unchanged on May 28 at 11%, pausing a hiking cycle initiated in April 2013. The announcement reinforced the idea that the central bank’s monetary policy committee members (COPOM) are comfortable with the current rate levels, given that inflation has subsided. “Assessing the evolution of the macroeconomic scenario and the perspectives for inflation, the COPOM decided, unanimously, at this moment, to keep the Selic rate at 11.00%.” The growth slowdown is increasingly worrying economic authorities and, it is now likely that Brazil’s central bank reaction function will give greater weight to growth dynamics.

In Mexico, the police could be too loose. “The Bank of Mexico (Banxico) cut the overnight rate from 3.5% to 3% on June 6, surprising us and the market. In its statement, Banxico mentioned that this one-off rate cut was motivated by the notably weaker-than-expected economic performance in the first quarter and by the downside risks to growth that remain on the horizon. The current central bank outlook is for moderating inflation and annual growth, which implies considerable acceleration in the coming quarters. We believe that the current monetary policy stance might be too loose in a framework of a closing output gap and inflation, which is well-behaved yet above the target (especially considering the delay at which monetary policy works)”.

Don’t Skip the Homework: High Yield’s Overlooked Risks

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Many investors have taken on more risk in their quest for higher returns—especially as signs have pointed to interest rates staying stable until next year. But two key elements are often overlooked: default risk and underwriting standards.

The prolonged low interest-rate environment has continued to drive more investors toward high-yield securities. But all too often, they focus on interest rate risk, even though the high-yield sector has been fairly insulated from rising interest rates historically. Yield spreads—the extra yield above similar-maturity government bonds—often decline as rates rise, providing a cushion against rate increases. Lower-rated bonds, such as CCC-rated debt, usually have the most cushion because their spreads are higher.

An Unsettling Complacency

Today’s low overall level of high-yield spreads means this insulation is getting thinner and high-yield’s interest-rate sensitivity is increasing. Still, it’s far lower than that of investment-grade bonds, and any losses due to rising rates are generally offset rather quickly by the passage of time as investors collect coupons, and as bonds roll down the yield curve.

The spread cushion in high-yield bonds has obviously drawn in investors worried about rising rates. But what’s being missed is that the spreads are compensation for the likelihood of default—and the market has begun to feel complacent about this credit-related risk. In our view, it’s important that investors focus on bond default risk and high-yield issuers’ underwriting quality in order to prepare for the next phase of the credit cycle.

Monitoring Default Risk

As we’ve mentioned before, myopically chasing yield can be a dangerous game. We still believe that it will be at least a couple of years before we’re in the phase of the credit cycle when bond defaults are a serious concern. But investors shouldn’t disregard this risk just because default rates remain low. Companies have defaulted in the past year, and the lower the credit quality, the greater the probability of default.

There are warning signs to watch for. Price declines have always preceded the default phase of the credit cycle by a considerable amount of time, and we’re beginning to see issuer-specific events occurring. These are a telltale sign of the coming shift in the credit cycle. For example, a major retailer recently saw its bond price fall by 15%, and its outlook for recovery doesn’t look positive.

Looser Underwriting Standards

As underwriting standards diminish and poor-quality junk bond issues surface, an increasing number of investors are putting money into questionable securities. And even for creditworthy issuers, there’s reason for concern. According to Moody’s Investors Service, North American high-yield bonds reached an all-time low in covenant quality in February, which means there were fewer—and weaker—contractual safeguards to protect investors’ interests.

In her recent testimony before the US Congress, US Federal Reserve Chair Janet Yellen mentioned the loosening underwriting standards for high-yield bonds. Declining standards are a greater worry in the bank-loan market, but high-yield bonds aren’t exempt. And that means investors need to be selective.

Break Out the Books: Homework Is Key

Despite the current stable interest-rate environment and low default rates, we think it’s wise for high-yield investors to do their homework and research potential issuers carefully instead of simply jumping into high-yield bonds. Disciplined credit selection is more important than ever—arguably more important than investors’ focus on interest-rate risk—and in-depth research will determine success or failure for high-yield portfolios when the cycle turns.

Gershon Distenfeld, Director of High Yield at AllianceBernstein

Allfunds UK Recruits Chetan Modi as Research Moves Centre Stage

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Allfunds Bank UK has recruited former Morningstar OBSR researcher Chetan Modi as a senior fund analyst. The move by AFB represents not only a further investment into Allfunds UK operations but also a refocusing of the investment research capability in London, particularly in light of the changing UK market following RDR.

Modi has been at Morningstar OBSR since 2006 where he has been developing his role as Fund Analyst covering US, UK and Global Emerging Markets Equity funds. He has also been active in promoting the business to advisor groups and advising consulting on client model portfolios. Modi now joins Mark Hinton, Anais Gfeller, and Will Jackson who were recruited over the past 24 months from Kleinwort Benson, Lombard Odier and Last Word Media respectively. He also joins Manuel Yutaro Rubio who transferred from Madrid office. Their recruitment brings the AFB Investment Research Team worldwide up to 14, with 5 researchers in London and a further 9 in Madrid.

A year ago, Allfunds recruited Stephen Mohan from Cofunds to lead and expand its UK operations. Since that time Mohan has built a senior sales and development team to promote AFB’s funds administration capability in the UK and the firm recently announced its first major new client in BWCI, the Guernsey based actuarial consultancy.

Now Mohan’s attention is turning to Allfunds global research capability which has traditionally been focused on Madrid, providing research, as part of its funds administration offering, to AFB clients worldwide. With increasing emphasis in the UK on funds research in the post RDR world Mohan is now looking to refocus AFB’s efforts on providing a superior research service to clients in the UK.

In parallel, the demand for AFB UK based fund research has also grown because Mohan has significantly increased the number of British fund management groups on the Allfunds platform, adding more funds to an already world beating funds list of over 40,000 funds worldwide.

Stephen Mohan said, “Funds research is playing an increasingly important role in our offer in the UK particularly given the increasing desire by wealth managers to seek out the best funds for their clients. I’m therefore delighted that we have been able to bring in Chetan to join our investment research team in London, to provide what we believe is market leading capability to our wealth management clients.”

Compass Group Appoints Ivan Ramil as its New Institutional Clients’ Director in Mexico

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Compass Group nombra a Iván Ramil nuevo director de Clientes Institucionales en México — Photo: Mattbuck. Compass Group Appoints Ivan Ramil as its New Institutional Clients’ Director in Mexico

As was confirmed by the firm itself to Funds Society, Compass Group in Mexico has appointed Ivan Ramil as the new director for the group’s Institutional Clients in Mexico. Ramil replaced Luis Palacio, who after nearly six years in that position has joined BNP Paribas Investment Partners as commercial director, also in Mexico.

Prior to assuming his new post, Ramil worked during the past three years as Compass Group’s Strategy Director for Mexico. Ramil has extensive knowledge of international strategies and the institutional investors industry in Mexico. Before joining Compass Group, he was senior financial advisor for Corporate Banking at IXE Financial Group, and prior to that worked for over four years at Motion International Corporation.

Ramil has a degree in International Relations from the Universidad Iberoamericana in Mexico City, and has diplomas in Corporate Finance and in Economics and International Trade from the Chamber of Commerce and Industry in Madrid. He is currently a candidate for the Cross Continent MBA from the Fuqua School of Business at Duke University in North Carolina (USA).

Ramón Hache Joins Permal as Head of Business Development for Latin America

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Ramón Hache se une a Permal como responsable de Desarrollo de Negocio para Latinoamérica — Ramón Hache, Head of Business Development for Latin America at Permal Group. Photo: Linkedin.. Ramón Hache Joins Permal as Head of Business Development for Latin America

According to information available to Funds Society through sources familiar with the appointment, Ramón Hache has joined Permal Group’s ranks in order to develop the firm’s business in Latin America. He will report to Shane Clifford, Head of Business Development for the Americas. Funds Society also contacted Permal directly, but the firm declined to comment on news of the appointment.

With over 16 years’ industry experience, Hache comes from Barclays Wealth, where he was managing director. He previously worked for over a decade at Deutsche Bank Private Wealth Management, serving U.S. and Latin American HNWI.

Permal is a global alternative asset manager offering investment solutions through funds and customized portfolios. Founded in 1973 and with over 23 billion dollars under management globally, the group is defined as “product engineers.” From a “top-down” perspective, the firm focuses on the selection of managers, asset allocation, risk management and alternative investments.

Sura AM Goes Shopping in Uruguay, and Acquires Two New Companies

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Sura AM sale de compras en Uruguay, en donde adquiere dos nuevas entidades — Wikimedia CommonsPhoto: Lotus Head. Sura AM Goes Shopping in Uruguay, and Acquires Two New Companies

Grupo Sura, a South American Investment Group, has recently acquired Disgely and Jobely, two Uruguyan companies, through its investment subsidiary, Sura Asset Management; this operation will allow the group to expand its market within the insurance and securities intermediation sectors, as has been unanimously pointed out by local media.

For their part, Sura representatives in Uruguay confirmed the group’s participation in two companies, without mentioning the companies’ names, to Funds Society, “as a first step in developing new lines of business in a country where the company has extensive experience in other markets such as life insurance and savings distribution, and securities brokerage, thus complementing the range of products and services available for Sura’s clients in Uruguay.”

The company added that the corresponding authorizations must be processed before the appropriate regulators in each case.

In a recent interview with the Colombian newspaper “El Tiempo”, Andrés Castro, Sura Asset Management’s president, pointed out that Sura’s goal is to become a leading asset provider in Latin America.

Erik Halvorssen Joins CGIS Advisors in Miami

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Erik Halvorssen has just joined the CGIS team in Miami; the group includes a broker- dealer (CGIS Securities LLC) and a registered investment advisor (CGIS Advisors LLC). From its offices at 990 Biscayne Boulevard in Miami, CGIS provides brokerage and financial advisory services to a select group of domestic and international clients.

As senior vice president, Halvorssen will work alongside CGIS’ CEO, Riggin Dapena, whom he met at Bank of America during the period from 2005 to 2008 when Dapena was at the helm of the International Private Banking and brokerage business during the bank’s exit from these lines of business.

CGIS, which is held primarily by the group belonging to Chilean businessman Alvaro Saieh, began operating as a broker dealer in Miami three years ago.

Halvorssen, who to date was the director of the U.S. multifamily office Lowenhaupt Global Advisors in Miami, told Funds Society that leaving Lowenhaupt was a very conscious decision and was a natural progression which will greatly benefit his clients in terms of access to products, and specialized consulting and costs. Halvorssen guarantees that CGIS Advisors has a better understanding of international clients, which “will surely benefit my clients.”

Halvorssen will also rely on the Chilean group’s analysis team. “In Miami, we have a trading desk with six active brokers who are very familiar with the international client’s sensitivity.”

Before joining Lowenhaupt Global Advisors, this financial professional with 17 years’ industry experience, worked as a sales manager in private banking at Bank of America and Banco Santander, and founded his own firm, Pax Advisors, also in Miami.

Hispania Acquires Two Office Buildings in Barcelona for €40.15 Million

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Hispania, through its subsidiary Hispania Real SOCIMI, has acquired two office buildings located in the area of Plaza de Les Glòries in Barcelona. The deal has amounted to €40.15 million, fully disbursed with Hispania’s own funds.

The total leasable area of both buildings amounts to 18,206 square metres, plus 4,700 square metres of underground space. The buildings are located in the intersection of Av. Diagonal with Gran Vía de Les Corts Catalanes and are part of the complex that includes the Shopping Centre Les Glòries, which is being fully refurbished. This upgrading will draw further value on the buildings which are part of the complex.

The complex is located in an area that offers one of the highest growth prospects within the Barcelona office market, currently absorbing a significant share of take-up in the city, along with the CBD. This area is perfectly connected to the city centre through subway, bus and tram and is 20 minutes away from the El Prat Airport.

Moreover, Les Glòries is going through a profound transformation as a result of the new design of its central square, which plans the undergrounding of the roads, which will be covered by a large park, giving continuity to the Av. Diagonal. Cushman & Wakefield acted as advisor of the selling part.

Azora and its team, manager of Hispania, have a broad experience in the investment, repositioning and active management of office assets.

This investment is the first step towards the creation of a high quality office portfolio by Hispania.

A month ago, Hispania Activos Inmobiliarios, through its subsidiary Hispania Real Socimi, acquired -in a deal out of the market- from Santander Banif Inmobiliario F.I.I., 213 apartments located in the residential complex Isla del Cielo, in Parque Diagonal Mar in Barcelona.

Brazilian Beats

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La montaña rusa brasileña — Wikimedia CommonsNicholas Cowley, Investment Manager, Global Emerging Markets Equities. Brazilian Beats

Latin American equities have been on a rollercoaster ride year-to-date led by currency volatility and rotations in sentiment. Nick Cowley, Global Emerging Markets Equities fund manager at Henderson Global Investors, recaps on the drivers and looks at where the opportunities lie.

Brazilian equities have been particularly volatile, starting the year on a downward trend before a sharp turn in sentiment leading to the rally from March. Nick looks at the likelihood of further rises on the “hope” that the October elections will lead to a more pro-business stance. This could come in the form of a change in president, with polls showing an increase in popularity of the opposition, or pressure leading current incumbent, Dilma Rousseff, to shift her stance. While the forthcoming results are difficult to forecast at this stage, the polls have buoyed equity markets with companies, such as Petrobras, that have previously benefitted from positive shifts in government policy leading the way. A similar move occurred in India recently with markets rallying ahead of the election. The Henderson Global Emerging Markets team has been adding to its Brazil exposure in recent months.

In Mexico, the journey has been slightly less volatile, with earnings trends continuing last year’s theme of disappointment. However, progress is being made at a political level, underpinning the longer term growth story, and Nick expects the pick-up in government spending to lend support in the near term. Elsewhere, currency devaluation in Argentina and Venezuela has rightly caused investors’ concern.

Overall, sentiment towards Latin American equities has generally been improving off a low base and Nick believes this can continue. He favours companies able to deliver secular growth as a result of the adoption of products and services to levels moving towards those seen in developed markets.

To view Nicholas Cowley’s webcast, please click on the video.

“Life after Zero” Could Pose Risks as Easing Ends, Markets Look for Rate Increases

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Valuations are becoming stretched across markets, setting up the markets for more volatility — especially as US quantitative easing ends and focus shifts to prospective US interest rate rises, according to the BlackRock Investment Institute’s Mid-Year 2014Investment Outlook.

The Mid-Year Outlook, “Life After Zero,” provides an update on the Institute’s previously released 2014 global market view, examining such key questions as “what does life after zero (rates) look like?” and offering specific asset guidance for the remainder of the year. The BII maintains its view that a “low for longer” scenario will continue to play out through the remainder of 2014, under which real rates and overall volatility stay subdued.

“Easy monetary policies by central banks have pushed down yields, encouraging risk taking and inflating asset valuations,” says Peter Fisher, Senior Managing Director of the BlackRock Investment Institute. “In today’s environment, markets are more susceptible to volatility as investors shift their focus away from the end of U.S. quantitative easing and towards concerns about the timing and magnitude of future interest rate hikes.” “The longer monetary policy hinders volatility, the more stretched valuations become, and the greater the risk of equity markets disconnecting from earnings growth,” said Russ Koesterich, BlackRock’s Chief Investment Strategist.

Stage set for emerging markets rebound

Over the past six months, the biggest change globally, the BII believes, was that a brewing crisis in emerging markets stabilized. Many economies have adjusted and started closing current account deficits, setting the stage for an economic and market rebound.”In the emerging markets, selection is key, as countries develop at very different speeds,” Koesterich says. “We favor countries with strong balance sheets that are implementing reforms to make their economies more competitive (think Mexico).” With risk assets grinder higher and volatility extremely low, the BII “would get worried if we were to see leverage rise much further. In the meantime, brace for shifts in internal market dynamics (think the equity momentum reversal this spring).”

Diverging global central bank policies

Central bank monetary policy is expected to continue to diverge between regions, with the U.S. Federal Reserve and the Bank of England moving towards a period of tightening, in contrast to the European Central Bank and Bank of Japan which look set to remain with loose policies for some time. “This divergence goes some way towards explaining BlackRock’s asset preferences,” said BlackRock Investment Institute’s Chief Investment Strategist, Ewen Cameron Watt. “We broadly favor European and Japanese equities, both supported by accommodating central bank measures, while anticipated rate hikes and the year-end cessation of quantative easing leads us to be more cautious towards U.S. and, to some extent, UK risk assets.”

The US economy has been “cruising below its speed limit for years,” the BII notes, yet it could be on the verge of a cyclical pickup, driven by pent-up demand for housing, the fading of the fiscal drag from spending cuts and tax hikes, and a near-term increase in capital spending. As conditions continue to improve, one risk is that the Fed may stay “low for too long,” which could eventually result in a rapid series of growth-braking rate hikes.

Across Europe, the bar is low for growth to surprise on the upside. The European Central Bank (ECB)’s resolve to prevent the eurozone from falling into a deflationary spiral is likely good news for European risk assets. “Watch current account balances to gauge competitiveness and the ECB’s maneuvering room to start an asset purchase program.” the BII says. As one example, the BII notes, a falling surplus in Germany could lead to renewed efforts by the ECB to push down the euro — and a “melt-up” in European equities.

Despite recent underperformance in Japanese equities, the BII is maintaining a bullish stance, supported by “Godzilla-like” QE by the Bank of Japan, cheap valuations, structural reforms to boost economic growth, and a rise in domestic investor interest.

For China, GDP growth expectations have come down, but could probably edge even lower, with the country’s investment fueled growth not sustainable, in the BII’s view. “A lot depends on China’s export machine, which makes up a quarter of GDP,” the BII says. “If exports hold up, the government has more maneuvering room. Any downside surprises to export growth could set in motion a vicious cycle.”

The BII offered region-by-region investment recommendations for 2014’s second half:

The US

· Buy volatility. It is cheap and the risk of binary outcomes is growing.

· Look for relative value in bonds and consider long-short for equities.

Europe

· Buy cyclicals, energy and large cap value. Caveat: Earnings need to come through.

· Underweight peripheral debt. Risks are now skewed to the downside.

Asia

· Buy (hedged) Australian rates as slowing China demand hits hard.

· Contrarian: Buy banks (a cheap and easy way to profit from an equity rebound).

Japan

· Buy (hedged) Japanese equities.

Emerging Markets

· Favor active management: Not all boats will float.

· Buy select local debt (Brazil and Mexico).

The BlackRock Investment Institute Mid-Year 2014 Outlook can be found in this International Version