| For Elena Santiso | 0 Comentarios
Chief Investment Strategist at MFS Investment Management, James Swanson, answers five questions about the backdrop for investing after the Federal Reserve’s decision to begin tapering quantitative easing. Click on the video to find out the answers.
Read his blog by clicking in the following link.
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A recent conversation between Giordano Lombardo, Global CIO at Pioneer Investments, and his colleague Mauro Ratto, Head of Emerging Markets, helped boil down China’s recent economic reform plan.
State-Owned Enterprises
The most awaited pro-market reform concerned the role of large state-owned enterprises (SOEs). Xi Jin Ping made clear that the government should refrain from directly affecting the markets, though retaining the ownership of key economic assets. SOE’s should resemble other Asian countries, such as Singapore, where firms operate in a truly competitive environment and try to maximize profits rather than building up a lot of capacity through oft-unproductive capital expenditure. Bottom line: even though SOEs remain, as the name shows, in state hands, increasing access of private enterprises to capital, land and energy markets should prompt SOEs to be more efficient in allocating capital or end up as losers in a new competitive environment.
Financial Sector Reform
The central bank (People’s Bank of China or POBC) is unlikely to speed up this part of the reform program, in spite of the plenum’s full commitment to change. The macroeconomic case for increasing consumers’ purchasing power due to higher interest rates on deposits looks strong, but so is the need to keep bank profit margins from shrinking, if too much sector competition was allowed too soon. Some measures are aimed at helping banks manage the transition to a more competitive market.
The issuance of negotiable certificates of deposit in local currency should enable banks to get large amounts of funds at relatively stable costs, thus containing the risks of a volatile wholesale (inter-bank) market. Another, more structural, change would let them diversify their assets out of loans and make profits less reliant on the spread between deposit and lending rates. Bottom line: top Chinese banks’ balance sheets may eventually resemble their American and European counterparts with the amount of marketable securities invested.
Social Reforms
Rural land and urban residence reform was on top of the plenum’s agenda. The main changes affect rural dwellers, who will be allowed to buy land for building residential housing or infrastructure. Any limitation left to domestic migration, which curbed rural residents’ ability to move to the cities, is to be scrapped and help speed up the transition to consumption-driven growth. Cities are the engine of China’s household-led expansion, as the urban per capita income is about three times as high as the rural one. Bottom line: the rural population will eventually be entitled to the same rights as urban residents, which will benefit overall consumer spending.
| For Alicia Miguel | 0 Comentarios
It is once again time to consider some New Year’s resolutions for the market. What mistakes or misunderstandings did the market make over the last year that it should learn to avoid in the future? UBS Global Asset Management gives its suggestions.
1. I will remember that stability is not always a good thing. “At the start of the year we noted that the market had stopped reacting to political uncertainty very much, in both the US and the Eurozone. Investors had become habituated to the risks and learned to ignore them. Paradoxically, ignoring the risks can actually increase the risks. Sincepoliticians usually only change things when there is pressure from outside influence like market volatility, the problems do not get addressed. Just look at how a lack of volatility in Europe has also meant a lack of progress on structural reform and banking unión”.
2. I will not confuse monetary policy catch-up with a currency war. When the Bank of Japan (BOJ) announced ultra-loose monetary policy at the start of this year, there was much talk of currency wars, as if Japan was unfairly pushing down the yen to improve its competitiveness. UBS Global AM thinks that “a more realistic assessment would be that the BOJ had kept monetary policy far too tight in the face of both domestic deflation and foreign countries’ ultra-loose monetary policy. This meant that the BOJ was only catching up”. Wars have casualties, and in a currency war the first casualty is inflation – not something for Japan to worry about.
3. I will not confuse tapering with tightening. This has to be the big one of the year. When Ben Bernanke first announced that the Federal Reserve might start tapering its asset purchases under its quantitative easing (QE) programme, the market got over excited and translated this into earlier tightening. This was despite Chairman Bernanke insisting that tapering was simply a slower pace of easing. By September, the market pushed rates up so high that the Fed had to cancel the planned September start of tapering because financial conditions had become too tight, but finally followed through in December.
4. I will place more trust in forward guidance. The markets have tested central banks several times on their commitment to forward guidance, but central banks have stood firm. Markets do not have to believe that forward guidance will achieve the desired outcome in the long run, only that the central banks will stick to it as long as their forecasts are right. “And that is the key: feel free to disagree with the central banks’ forecasts, but trust them on how they say they will react to the data. The Bank of England is likely to be the first to be challenged simply because the unemployment data is turning out much better than its forecast”, comment Joshua McCallum, senior Fixed Income Economist in UBS Global Asset Management, and Gianluca Moretti, Fixed Income Economist.
5. I will start to ignore political bickering in Washington D.C. When the bipartisanship in the US ‘shut down’ the government and threatened a default on US Treasuries, the market talked a lot about the potential damage. In the event, the partial government shutdown had little impact on the economy and the default turned out to be the empty threat that it always was. The world continued, but the uncertainty may have held back the all-important recovery in business investment. The hope is that eventually businesses will become so used to the bipartisanship that they start to ignore it.
6. I will treat emerging markets as emerging. After the Fed announced the idea of tapering, some of the biggest market moves were in emerging markets (EM). Investors were treating emerging markets almost as safe havens, and capital searching for yield found a home there. Some EM used the capital inflows prudently, while others enjoyed the good times and saw their current accounts deteriorate. As soon as it looked like the QE tap might be closed, those markets saw their currencies dive. For a brief moment it looked like investors remembered that EM are risky, but promptly forgot all about it once tapering was delayed. Investors would do well to think again for this new year.
7. I will not complain when I get what I wish for. A year ago the markets were complaining that rebalancing of competitiveness in the Eurozone was not happening because inflation was too high in the periphery (pushing up the price of their goods relative to the core). Now that there are finally signs of an internal rebalancing with lower inflation in the periphery, markets are complaining that the Eurozone is heading for deflation. In fact, not much has changed between the two years – inflationary pressures were already low in the periphery while headline inflation remained high mostly because of increases in sales taxes.
8. I will not obsess about house prices. Too many people seem to think that rising house prices are a good thing in and of themselves, rather than being a symptom of a stronger economy or at least of a stronger economic outlook. Rising house prices are good for those who own houses but bad for those who do not and would like to.
9. I will prefer the simplest of similarly plausible explanations. Just as optimists invent many theories to explain why a bubble can go on forever and why ‘this time is different’, after a recession it is the pessimists’ turn to explain why they think everything will be worse forever. Some look at trend growth over the last thirty years and decide that the economy is broken, but take a look over the last 140 years and there have been bigger divergences from trend that still snapped back. As the 14th century monk William of Occam would have argued, the simpler explanation that the world is not so different is to be preferred to equally plausible but more complicated explanations about why it has changed.
| For Alicia Miguel | 0 Comentarios
Fitch Ratings projects that the U.S. high yield default rate will remain in a range of 1.5%-2.0% in 2014. The key pillars of a low default rate environment -credit availability and good corporate fundamentals- remain steady, according to the rating agency.
Building on the momentum of recent quarters, Fitch expects improved U.S. GDP growth of 2.6% in 2014, up from 1.7% this year.
Many of the recognized default candidates of the past several years have already restructured, and a stronger economy combined with favorable funding conditions is sure to give some strapped companies a new lifeline, says Fitch. “In this the fifth year of an uneven and often unpredictable recovery from the financial crisis of 2008-2009, the more important metric will be new issuance credit quality and the extent to which a soaring stock market and low borrowing costs will fuel more aggressive, debt-accretive transactions”, according to the rating agency.
The funding environment remains highly accommodative. Issuance has been exceptional and now includes a fully revived loan market. Scheduled bond and loan maturities are quite low over the near term. There is $117.6 billion maturing in 2014 and 2015, representing 5.4% of market volume and a just fraction of bonds and loans sold in 2013.
Importantly, top-line and EBITDA growth showed renewed vigor in the most recent two quarters, reversing lackluster results recorded over the prior years, says the report.
“In 2013, defaults closely followed our expectations. We projected a repeat of 2012 activity. Through late December, there have been 35 issuer defaults on $18.5 billion in bonds versus 32 issuers and $20.5 billion in 2012. The market grew 10% in size over the course of the year, which put some modest downward pressure on the default rate, but the issuer count and par value of defaults was nearly identical year over year”.
As with 2012, Fitch continue to follow developments related to Energy Future Holdings, which, due to its large size and precarious state, remains the well-recognized variable that could propel the default rate to a multi-year high. But its base forecast excludes an EFH bankruptcy. “Such an event would add 1.5% to the default rate”, says.
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Bricapital has acquired interest in the first Hyatt Regency branded hotel in Colombia, in the coastal city of Cartagena. Bricapital is a subsidiary of Brilla Capital, the Miami-based real estate private equity firm with operations throughout the region. This transaction is part of a strategic partnership between the firm and Ospinas & Cia., a leading regional developer with more than 80 years of history in Colombia.
“This transaction represents a milestone for the growth of the hospitality sector in the country, and a solid anchor for our local Bricapital Private Equity Fund,” said David Brillembourg, President & CEO of Brilla Capital. “The Fund will continue to invest in hospitality assets in Colombia as part of our plans for regional growth in Latin America.”
The hotel, which will be managed by Hyatt Hotels & Resorts, will be part of a new mixed-use development project in Cartagena’s seaside Bocagrande district, one of the most high-end retail areas of the city and close to the Convention Center. The Hyatt Regency Cartagena will offer 261 rooms, including 28 suites, four floors for the Regency Club Lounge and 74 Hyatt Regency branded residential condominiums. It will feature two upscale restaurants, a cocktail lounge and bar, a 600 square meter ballroom, spa and fitness center, multi-level swimming pool, and a modern business center. In addition, the development also includes the Plaza Bocagrande shopping mall; a five-level structure with 13,000 square meters of high-end retail space, anchored by five VIP movie theaters as well as many national and international brands among its 91 stores.
“Having Bricapital join us as strategic partner for the first Hyatt Regency Hotel in Colombia confirms the will and fundamental purpose of Ospinas & Cia., which is to build long term relationships with investors, landowners and clients through iconic and profitable projects like the Plaza Bocagrande complex, which will include a hotel, residences and commercial areas, and will position us as leaders in the development of mixed-use projects in Colombia, always meeting the highest international standards,” said Andrés Arango, President of Ospinas & Cia.
The Hyatt Regency Cartagena, expected to open in the second half of 2015, will be the first Hyatt Regency-branded hotel in Colombia and will seek to attract business and leisure travelers, as well as featuring retail, cultural and entertainment venues for both tourists and locals alike to complement Cartagena’s vibrant and historical scene.
“We are delighted that Bricapital, SAS has decided to invest in the Hyatt Regency Cartagena and we are hopeful to work with them on other hotel projects in Colombia and throughout the region,” said Pat McCudden, Senior Vice President Real Estate And Development – Latin America and Caribbean for Hyatt. “Colombia is an important market for Hyatt and we continue to work aggressively to expand our presence here. We look forward to providing both leisure and business travelers a great new hotel option when Hyatt Regency Cartagena opens.”
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Investec Asset Management announced the launch of a series of new strategies as part of the expanding range of options within its specialist fund suite to further support Investec Asset Management’s global footprint in both the institutional and advisor channel.
The Luxembourg-domiciled funds will add to the growing Global Strategy Fund range, Investec Asset Management’s internationally distributed fund range, registered in Luxembourg and 22 further countries. They will be aimed at international investors, discretionary buyers, fund of funds and institutional buyers on a global basis and will be distributed via selected networks. The three strategies are:
Investec GSF Emerging Market Debt Total Return Strategy
The Investec GSF Emerging Market Debt Total Return Strategy is a total-return, benchmark-agnostic strategy which further extends Investec Asset Management’s range of EM fixed income strategies. The strategy is managed by Antoon de Klerk and Andre Roux, backed by Investec Asset Management’s experienced team of investment specialists led by co-heads Peter Eerdmans and Werner Gey van Pittius. The strategy aims to provide benchmark-unconstrained exposure to a wide opportunity set within emerging market fixed income. It will focus on opportunities in local EMD, but also make allocations to hard and corporate EMD at times. The strategy aims to offer a lower volatility than the typical universe, taking an investment approach, which combines strong fundamental bottom-up analysis with top-down positioning.
Investec GSF Asia Local Currency Bond Strategy
Managed by Wilfred Wee and Peter Eerdmans, the Investec GSF AsiaLocal Currency Bond Strategy invests in a regionally diversified portfolio of Asia local currency sovereign and corporate bonds. Asia is home to the world’s largest developing bond markets, underpinned by robust regional economic growth and strong credit quality. This Strategy aims to capture a significant yield premium over developed market bonds with a typically shorter interest rate duration risk, and uses an investment process specifically designed for local currency emerging market debt.
Investec GSF Global Diversified Growth Fund
According to the asset manager, whilst investors need real returns in order to grow their wealth over the long term, current markets are making this search increasingly difficult given interest rates at historic lows, elevated inflation and short-term volatility in markets. The Investec GSF Global Diversified Growth Strategy aims to provide investors with attractive real returns, seeking to achieve US CPI +5% per annum over a long-term horizon with half the volatility of equities over a rolling five-year period. The Strategy launches following demand for a US-dollar centric version of the existing UK domiciled Investec Diversified Growth strategy and will also be managed by Philip Saunders and Michael Spinks, co-Heads of Investec Asset Management’s Multi-Asset team, backed by Investec’s expert in-house investment capabilities. The Strategy makes dynamic allocations across a globally diverse range of asset classes grouped together into three baskets: Growth, Defensive and Uncorrelated.
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KKR announced last week the completion of fundraising for KKR Real Estate Partners Americas LP (REPA), a $1.2 billion real estate fund that invests in North America and western Europe. Together with commitments from KKR personnel and KKR Financial Holdings, KKR’s real estate platform has over $1.5 billion of committed capital for its strategy.
Ralph Rosenberg, Global Head of Real Estate, said: “We believe the current market opportunity has the potential to create strong value-driven investment opportunities where we at KKR can leverage our sourcing channels, insights through our industry groups and portfolio companies and operating capabilities to create differentiated investment opportunities for our limited partners.”
KKR began soliciting third party capital for REPA, its first dedicated real estate fund, in the second quarter of 2013.
Commenting on the Fund, Suzanne Donohoe, Head of KKR’s Client and Partner Group, stated: “We believe the strong support from the market for the fundraise was due to the compelling nature of the opportunity and the power of the team. We are very excited that we were able to attract new and existing KKR investors from leading public and private pension funds, sovereign wealth funds, insurance companies and family offices.”
Formed in 2011 and led by Ralph Rosenberg, KKR’s Global Real Estate team has 15 people in New York, London and Hong Kong. Starting with the first investment in April of 2012, KKR has been actively investing and had warehoused a sizable portfolio of transactions on its balance sheet prior to forming REPA. Since launching the dedicated real estate platform in 2011, KKR has committed over $850 million of equity to 14 real estate transactionsin the U.S. and Europe.
The Fund will continue to target real estate opportunities—including property-level equity, debt, special situations transactions and businesses with significant real estate holdings—that can benefit from KKR’s deep, longstanding global relationships, access to information, financial structuring and capital markets capabilities and real estate operational expertise.
| For Elena Santiso | 0 Comentarios
Equity markets have been enjoying a strong year so far. Performance was primarily driven by valuations as investors were anticipating a rebound in earnings. In 2014, earnings will have to deliver and take over as key market driver. INg IM expects this to happen and foresee returns in line with earnings growth.
The biggest risk resides in emerging markets (EM). Since the taper-talk some adverse dynamics have started to develop in EM.
Earnings growth estimates and index targets
Strong year for equities
Barring a nasty unexpected event, 2013 will be a banner year for developed market equities. Year-to-date developed market equities rose by almost 20%. Despite many event risks (Cyprus, Syria, debt ceiling, US government shutdown, political scandals, German elections…) we had only one meaningful correction this year, caused by the ‘taper-talk’ of Fed Chairman Bernanke in May. However, the reversal was swift and all other hurdles represented merely wrinkles in market performance. In fact, the hurdles represented an excellent buying opportunity.
An interesting observation is that the performance was primarily driven by higher valuations. Global earnings rose a mere 2.5%. This pattern is not strange in turning points of the business cycle as investors anticipate a rebound in earnings even when trailing earnings still decline.
As the equity cycle progresses, earnings will have to deliver and eventually take over as the main driver of market performance. We have good hopes this will happen in 2014.
You can read the full report on the attached document.
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John Stopford, portfolio manager of the Investec Diversified Income Fund and across the Investec Managed Solutions Range, gives five themes on investing for income in 2014.
· The consensus looks wrong on the pricing of US growth and Federal Reserve policy
To us, the consensus looks most wrong on the pricing of US growth and Federal Reserve policy. The FOMC are certainly dovish, but they are also data dependent. Markets do not currently appear to believe in the scope for a significant acceleration in US growth. Economists have forecast this before, but growth has disappointed, and so they are once bitten, twice shy. We think this ignores the impact of fiscal policy which has been substantial. In some ways growth in 2013 of between 1.5-2% is quite impressive given the severe impact of sequestration on government spending.
In 2014 the swing away from fiscal tightening will be bigger than the tightening seen in 2013. This alongside improving capital expenditure and consumer spending helped by lower gasoline prices should allow the US economy to grow much more strongly than for a number of years. This should cause markets to rethink the speed of policy normalisation pursued by the Fed. It will still be very gradual, but perhaps not quite as gradual as suggested by forward market pricing. The dollar, which has been held back by QE, should receive a strong shot in the arm as a result.
We also expect JGB yields to rise sharply at some point, with yields increasingly out of line with rising inflation expectations and aggressive reflation by the BoJ. Clearly, the BoJ buying is suppressing yields, but ultimately fair value is much higher.
· Developed market government bond yields are still too low
Yields on 10 year government bonds in the US and the UK rose to almost 3% and in Germany rose to nearly 2% but have since backed off. Real yields are close to zero, assuming that inflation remains low. This remains unattractive; as economic growth picks up, we expect real yields to rise at the longer end of the yield curve, even if inflation remains subdued. The time to return to a full weighting in government bonds will be when central banks are tightening monetary policy, which is unlikely anywhere before the end of 2014. Bond yields in Japan remain well below 1%, suggesting that domestic investors do not expect the government’s strategyof raising inflation to a sustained 2% to succeed.
With the yen likely to remain weak, we are avoiding this market also. For investors, we would look at this as a time to avoid strategic positions in government bonds in developed markets, but consider buying into weakness.
· Steady commodity prices and rising employment could lead to some inflation disappointment
Consensus opinion about commodity prices has been a lot more volatile than actual prices. With demand for energy and metals growing steadily but supply also, we expect them to continue to trade sideways. This means that commodity prices will cease to put downward pressure on inflation.
Employment growth continues to be strong in developed and most emerging markets; before long, this will feed through into higher earnings. This should sustain economic growth but limit the potential for higher profit margins and may result in moderately negative inflation surprises.
The suggested implication for bond investors is not to take current low inflation rates for granted.
· The dollar is cheap
Last year, our view was that the dollar bull market would continue to be postponed. Although growth in the US economy is picking up, the Federal Reserve is determined that it should not be threatened by tighter monetary policy. Very loose monetary policy means a weak dollar, which has provided support to emerging economies and their markets. However, dollar pessimism is extreme, the currency is cheap and growth is likely to surprise on the upside. This means that the surprise is likely to be in the direction of tighter monetary policy. The dollar may not be ready to rally yet but further weakness looks unlikely and it is likely to strengthen in the year overall. The suggested investment implication for investors is to position with a moderate overweight in dollars initially with the probability of raising exposure during the year.
· Opportunities in credit and emerging market debt
While yields on government bonds remain unattractive, those on investment grade corporate bonds offer a modest pick-up in yield and those on high yield a more significant one. However, the additional yield offered by credit is unlikely to be sufficient to compensate for a rise in government bond yields.
Issuance of both investment grade and high yield bonds has been significant, implying no shortage of supply. The opportunity for credit upgrades is diminishing as companies with the potential to improve balance sheets have mostly done so.
Credit may be a disappointing investment until government bonds have adjusted. The opportunity in EMD looks better, with many currencies having weakened significantly, yield spreads over developed market bonds reasonable and opportunities for adding value more extensive, though emerging market currencies may need to weaken further in the short term.
In our view, 2014 looks like being a difficult year for corporate credit and a modest one for emerging market debt, but there may be an attractive long term buying opportunity later in the year
| For Elena Santiso | 0 Comentarios
What can we learn from long-term trends when planning for the future? The next Robeco World Investment Forum focuses on the role played by long-term trends and their effects on investing.
Historically, the main drivers of long-term trends are threefold: demographics, globalization and technology. Take, for example, the growing middle classes in emerging markets. People there are increasingly buying smart phones, driving new cars and wanting IKEA furniture in their homes. Or take the example of a Polish doctor commuting to the UK as a result of cheap flight tickets now available worldwide. And finally, technology can create new industries and destroy others.
These drivers also have problems attached, however: managing demographic expansion, globalization and technological innovation requires a more sustainable approach to production, consumption and waste management. What are the main trends? Where in the economic cycle are we currently? What will be the next fluctuation or wave oscillation? And how will this affect our long-term growth path? These are key questions that demand an answer. And more importantly, how do these trends and cycles influence your asset-allocation questions? We will explore how these long-term trends relate to the shorter term business cycles and to decisions on your investment portfolio.
The Robeco World Investment Forum will bring together the world’s leading thinkers, who will speak on the most pressing economic issues of our times.