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Threadneedle believes that short-dated emerging market debt offers compelling investment opportunities, enabling bond investors to capitalize on the potential of developing countries with some protection from macroeconomic uncertainties.
www.fundsupermart.com invites James Waters, Fixed Income Investment Specialist at Threadneedle Investments to share his outlook on this asset class.
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Markets continue to do well on the back of an ongoing search for income generating assets by investors. This has caused nearly all assets to perform well year-to-date as both bonds and equities offer cash flows that can be harvested. With respect to equities new psychological bars were broken with the S&P touching 1600 points and the Dow Jones the 15,000 mark. At the same time, core government bond yields reached new lows and spreads on peripheral bonds tightened dramatically. Both Italian and Spanish bond yields fell through the 4% level.
In its last Marketexpress ING IM describes the reasons for the favorable performances and focus on the outlook for equity markets. In the asset manager’s opinion it is too early to say that these markets are getting ahead of themselves.
Renewed acceleration in economic growth is expected
As already said, ING IM continues to believe that the current consolidation phase will be followed by a renewed acceleration in the second half of this year. The factor that really makes the difference this time is the structural dovish shift in central bank reaction functions. Since the summer of last year it has been made very clear that the main focus of monetary policy is now on dealing with high and persistent unemployment as well as ensuring financial stability. In ING IM’s view this has also imparted a structural positive shift in corporate and market sentiment. Of course, central banks have this luxury because inflation pressure will remain absent for some time to come.
Equity investors clearly reacted on negative indicators
Looking at the record highs of some equity indices, it looks as if recent disappointing data have not influenced stock markets. ING IM points out that this is not true, however. Within equity markets they notice that investors have indeed reacted to the disappointing movement in cyclical indicators. The graph shows the underperformance of cyclical equity sectors. The CESI (blue line) is the Citigroup Economic Surprise Index. The graph illustrates that the current cyclical underperformance has already gone very far. Cyclical sector performance has declined to the lowest level since the start of the global financial crisis. This makes ING IM, from a tactical asset allocation perspective, somewhat cautious. As said, they expect the current soft patch to be temporary while global central banks are injecting liquidity – leading to an expansion of global financial conditions. What if cyclical data will recover later this year?
Cyclical sectors perform in line with cyclical indicators
Turnaround in cyclical data positive for cyclical sectors
Actually, ING IM notices a shift in investor buying behavior from ‘equity-like’ bonds (high yield) to ‘bond-like’ equities (stable dividend growers). This also explains the unusual combination of a strong equity market with defensive sectors outperforming the cyclical and ‘high beta’ sectors.
According to the report, a turnaround in cyclical data may push investors further up the risk curve. Given valuations and performances of cyclical equity sectors versus defensive equity sectors, this push could be forceful, ING IM adds. In their sector allocation they therefore closed the underweight positions in Energy and Materials (to neutral) and reduced their positions in Health Care (to neutral) and Consumer Staples (to underweight).
Despite new stock market highs, sentiment is far from euphoric
Sentiment in equity markets is far from euphoric, ING IM affirms. This is for them another reason that it is too early to say that equity markets are getting ahead of themselves. Looking at investor flows, ING IM sees no rush into equities. The US and Japan are witnessing inflows, but Europe sees outflows. All in all, the asset manager has taken somewhat more risk in equity sectors while we remain overweight equities and real estate equities versus fixed income categories.
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With monetary policy likely to remain supportive of economic expansion for an extended period of time, BNY Mellon Chief Economist Richard Hoey expects a prolonged multi-year global economic expansion, according to his most recent Economic Update.
“In the short run, the global economy has been in a subcycle of slower growth within its sustained expansion,” says Hoey. “This is due to a combination of factors, including the final months of the recession in the overall European economy, this year’s fiscal drag in the U.S. and some rebalancing in China. However, we expect acceleration in global economic growth near the end of 2013 that will significantly strengthen throughout 2014.
Other report observations include:
“Bottom of the Saucer” in Europe – Hoey expects the overall European economy to hit the “bottom of the saucer” in the last half of 2013. He expects a gradual saucer-shaped pattern in European economic activity rather than a V-shaped or U-shaped recovery and is hopeful that the European recession will end later this year.
Next Recession in U.S. Unlikely Until After Next Presidential Election – With the Federal Reserve likely to continue its easy monetary policy and the unlikelihood of substantial inflationary pressures soon, Hoey expects the next recession in the U.S. is likely to be postponed until after the next Presidential election in November 2016. Next year, Hoey expects a faster pace of growth in the U.S. economy, probably 3% or more.
No Hard Landing in China – Chinese policymakers appear to accept that the deceleration of trend economic growth is unavoidable says Hoey. Hoey does not expect a “hard landing” in China but rather a sustained economic expansion at a somewhat decelerated pace.
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The IMF Spring Meeting confirmed that the world economy slowed down moderately in the first quarter, driven primarily by the negative growth in Europe and the anticipated slowdown in the US. Against this backdrop, the idea that the world economy, and the Spanish economy, will improve over the course of the year, is gaining more ground. Consumption data for peripheral European countries is very poor, causing core countries (Germany,France) to stagnate as well. The economy is becoming politicised due to the pressure caused by high unemployment rates. The outcome of the Italian elections foretells a political change on the horizon, likely after German elections in September.
Liquidity bolsters the equity markets as well as the credit markets, leading to a positive month. Strong cumulative results for the year might seem contradictory given the pessimism regarding the world economy, and the Spanish economy in particular, but it is not the first time this has happened. Meanwhile, the stock markets anticipate a certain amount of increased flexibility in terms of restrictive policies and welcome the initiatives of the central banks.
Our funds have performed well in this context. The main reason for this positive performance is the strength of the companies in which we invest, evident after the reporting of their profits.
With respect to fixed income, the credit markets have capitalised on the negative news regarding the world economy and have once again recorded price increases (and drops in yield). Private fixed income (credit) also performed well. In this case, the price performance was slightly lower than that of 2012 (exceptional), due to a lower average accrued interest as well as smaller contribution as a result of the improved spread.
“Sell in May and go away?”
This traditional Wall Street saying suggests that, at some point, we will see a correction in the equity markets. Long-term investments should take advantage of this and increase their exposure to equities, which we currently view as more attractive than fixed income. We believe that fixed income is overstated. We must be prepared for a change in trend in bonds, since the ridiculous yields offered leave little room for an increase (and quite a bit for a decrease). As always, we know in what direction it is heading but not when. The risk of a drop in the value of investment grade fixed income, particularly German bunds andUStreasury bonds (a safe haven recently for many conservative investors), is leading us to be very prudent regarding long terms, the most vulnerable in the event of a correction.
We continue to stand by the securities which compose our fund portfolios, whose recurring growth and sustainable profits make them more resistant and triumphant in an uncertain environment such as todays.
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HSBC announced it has added four equity analysts to its Latin America research team as part of the bank’s continued leadership in providing high quality emerging market research. The analysts will enhance coverage of the Latin American metals & mining and energy sectors.
“We are pleased with the range of expertise these professionals bring to their respective roles which will allow us to provide the global insights our clients have come to expect from us,” said Ben Laidler, Head of Research for the Americas. “This investment in the Latin America research platform will allow HSBC to deepen its coverage of these important sectors.”
Luiz Carvalho has joined HSBC as a Vice President responsible for covering the Latin America oil, gas, and petrochemicals sectors. Based in Sao Paulo, Carvalho brings a wealth of experience to this important role having worked in the oil & gas industry at Shell and Transocean. Most recently, he was an energy analyst at BTG Pactual where he was a member of the top Institutional Investor ranked energy research team in 2012. He is a graduate in industrial engineering from the University of Rio de Janeiro, and speaks English, Portuguese, and French. Filipe Gouveia has also joined HSBC as an Associate, from Barclays, to support Luiz Carvalho in oil & gas research coverage.
Based in Sao Paulo, Leonardo Correa has joined as a Senior Vice President responsible for covering the Latin America metals & mining sector. Correa is a well-established analyst in this key sector, and will be responsible for further enhancing the coverage of the sector. In this role, he will also serve as an important link into HSBC’s global sector coverage. He has eight years sell-side research experience. Most recently, he was the regional sector head at Barclays, where he was an Institutional Investor survey ranked analyst, and previously he was an analyst covering metals and mining at Credit Suisse. He is an Economics graduate from IBMEC University in Sao Paulo. Luiz Fornari has also joined HSBC as an Associate, from Barclays, to support Leonardo Correa in metals & mining research coverage.
Luiz Carvalho and Leonardo Correa will report to Ben Laidler, Head of Research for the Americas, and locally to Alexandre Gartner, Head of Brazil Equity Research.
Jonathan Brandt will transition from his current Latin America metals & mining role, to lead coverage of the pulp & paper sector in Latin America and Eastern Europe, Middle East, & Africa. This is a new sector of coverage for the firm, as HSBC looks to strengthen its natural resources coverage.
These key hires continue the expansion of HSBC’s Latin America research team, following the appointments earlier this year of Alexandre Falcao (Transport, Capital Goods, and Agribusiness), Sandra Boente (Utilities), and Francisco Schumacher (Southern Cone & Andean Strategy).
HSBC’s Latin America research team now consists of 25 senior analysts, equity strategists, and economists covering over 150 stocks across the region’s six main markets -Argentina, Brazil, Chile, Colombia, Mexico, and Peru – from research offices in Sao Paulo, Mexico City, Buenos Aires and New York City.
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Warburg Pincus, a leading global private equity firm focused on growth investing, today announced the closing of Warburg Pincus Private Equity XI, L.P. (“WP XI”), an $11.2 billion global fund. This new fund is one of the largest private equity funds raised post the global financial crisis. WP XI, like Warburg Pincus’ prior funds, will invest in growth companies in the firm’s key industry sectors across the globe.
“We are pleased to announce our final close,” said Charles R. Kaye , Co-President of Warburg Pincus. “This successful fundraise, in a challenging environment, was driven by strong support from both existing and new investors. We see this success as a clear endorsement by our investors of our global growth investing model.”
WP XI’s Limited Partners include leading public and private pension funds, sovereign wealth funds, insurance companies, endowments, foundations and wealthy individuals. A significant number of the new investors in the fund are from outside of the United States. The firm held the final close of the fund within one year of the first close, as planned.
WP XI will continue to pursue a strategy the firm has followed for more than 40 years — partnering with management teams to build world-class companies. Growth is always a core aspect of Warburg Pincus’ investment thesis. The firm invests in businesses at all stages of development from start-ups and growth capital to special situations and buyouts. The firm invests globally with a focus on five key industry sectors: Energy, Financial Services, Healthcare, Technology, Media and Telecommunications (TMT), and Consumer, Industrial and Services (CIS).
The final close of WP XI follows a very active 2012 in which the firm invested over $2.3 billion in 28 new companies and made follow-on investments into several existing companies. Several of these new investments were made by WP XI including Venari Resources, a start-up company focused on deepwater exploration and production in the Gulf of Mexico; China Auto Rental, the leading car rental company in China; and InComm, a global prepaid product, services and transaction technologies company.
The firm has also been active in distributing capital back to investors in prior funds. Warburg Pincus’ funds distributed $6.2 billion to investors in 2012 and another $3 billion in the first quarter of 2013. Some of the companies contributing to this significant flow of distributions included Targa Resources, a leading midstream energy company in the United States; Ziggo, the largest cable TV company in the Netherlands; InTime, a department store chain in China; CAMP Systems, a global software provider for business aircraft; and Kotak Mahindra, a leading financial institution in India.
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Last year, the Brazilian government’s intervention in various sectors led to heightened uncertainty for corporations, resulting in the postponement of pro-growth investments that are vital if Brazil’s economic growth is to recover in 2013. In the utilities sector, the government made changes to concession terms aimed at reducing electricity prices, whilst in the banking sector, public banks were forced to lower loan rates, squeezing the profitability of the private banks. There was even pressure placed on the Brazilian central bank to extend the interest rate cutting cycle, despite worrisome inflation data. This government interference caused uncertainty for investors and a fall in private sector investment, culminating in sluggish gross domestic product growth of 0.9% last year. The forecast for 2013 is that private sector investment could be the ‘swing’ factor for the economy.
2013 has begun with some signs of positive change in Brazil. The government has recognised that investments by the private sector are needed in order to spur an economic rebound. The government has re-examined its policies with respect to privatisations and has increased the rates of return offered to private investors. This has prompted a marketing drive to attract investors ahead of infrastructure concession auctions due later in the year. Importantly, having offered paltry returns in the last round, the finance ministry has indicated that more attractive returns will be on offer this time. In addition, there has been recognition that rising inflation is a problem. To this end, April saw the central bank raise interest rates from the record low level reached last year. Given the scale of the cuts in the past, coupled with loose fiscal policy (the use of government revenue collection and expenditure to influence the economy), this should not be viewed as an impediment to a reacceleration of growth.
The long-term outlook for Brazil is compelling. The country is resource-rich and has favourable long-term demographic trends (e.g. rising disposable incomes). However, the government has often created problems that have held Brazil back from reaching its full potential. The tide may be turning as the incremental changes described above indicate that the government is becoming more open and conciliatory with the private sector in order to promote investment. The hosting of the next World Cup and Olympic Games provides imposing deadlines that ensure progress has to be made. These events and the recent appointment of a Brazilian to head the World Trade Organization show the country will be in the spotlight like never before in the coming years. It is up to the politicians to ensure that an improving economic picture is part of that display.
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Wealth managers typically coordinate estate planning, legal and tax advice, and investment portfolios for high-net-worth individuals, while concierge companies are more likely to be involved in arranging support and advice from experts in more domestic affairs such as travel and education. However, Tutors International have remarked on a noticeable blurring of the lines between concierge and wealth management organisations, with wealth management often being provided as a branch of a client’s one-stop advisory service.
Tutors International, provider of full-time private tutors and travelling tutors, reported an increased number of enquiries for private tuition from wealth managers on behalf of their clients. The wealth managers extend their services beyond financial and investment management and into lifestyle and domestic affairs.
“Wealth Managers are often in a position to appreciate the non-work stresses of their clients, such as academically-failing children or those with learning difficulties, or stressful exam preparation, for example. Being able to recommend professionals of standing who have a track record of successful management of these things means that the client can spend less time worrying about them, safe in the knowledge that they have the best possible help”, said Adam Caller, founder and director of Tutors International.
“Not only does this help the client maintain and grow his or her wealth without so much distraction, but it shows that the wealth manager takes a sensible and helpful interest in the overall well-being of their client.”
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‘Inflation is hardly a hot topic at the moment’, says Peter van der Welle, strategist at Robeco. The eurozone is faced with deflationary pressures rather than anything else, and in both the US and emerging markets inflationary and deflationary pressures are more or less in balance.
Eurozone inflation continues to decline
Eurozone inflation, which amounted to 1.7% in March, has continued its gradual decline in recent months. It is now within the ECB’s medium-term target range of below but close to 2.0%. Core inflation has trended downwards to 1.3%. ‘All major components of the Inflation Monitor point to an easing of inflationary pressures’, notes Van der Welle.
So which forces are at work here? ‘Eurozone debt deleveraging and austerity, although some relaxation on the latter is notable, keep demand-pull inflation low’, explains Van der Welle. ‘Upside price pressures will remain moderate in the medium term as consumer and producer price expectations remain anchored to their historical averages’.
On the monetary side the decline in credit growth is accelerating, mainly due to declined lending to small and medium-sized enterprises. With a hampered monetary transmission mechanism, a more resilient euro after the ECB’s Outright Monetary Transactions and moderate commodity prices because of a disappointing global recovery, deflationary pressures will play a more dominant role in the near term.
Aren’t there any risks of higher inflation in the eurozone? ‘Not many, but the most likely candidate for an upward surprise in inflation is an oil price spike as a result of geopolitical tensions’, states Van der Welle.
In the US inflationary and deflationary forces are in balance
‘In the US, core inflation has been running close to the Fed’s objective of 2%, while headline inflation at 1.3% can hardly be seen as threatening from an inflation perspective’, says Van der Welle. ‘The US economy continues to recover, with rising house prices and an improving labor market. As the shale gas revolution takes momentum, commodity prices have a lower inflationary impact.’
The Fed has continued asset purchases at a rate of USD 85bn a month to sustain asset prices. However, inflation expectations remain firmly anchored. ‘The monitor has been showing a flat pattern over the last months, which does not suggest that inflationary pressures are building’, remarks Van der Welle. As unemployment is still is above its natural rate, wage pressures remain timid, except in the energy sector. A substantial improvement in the labor market outlook will cause the Fed to lower its quantitative easing, probably later this year. ‘For now, the monitor is neutral, signaling that inflationary and deflationary pressures are more or less in balance.’
In emerging markets inflation remains moderate as commodities prices decline
In emerging countries actual inflation has crept up over the past months. Consumer prices have risen slightly above the ten-year average in three of the four BRIC countries. Russia is the exception. ‘The Inflation Monitor shows that inflationary pressures remain subdued’, notes Van der Welle.
The most important contribution to inflation in China currently seems to come from monetary induced inflation, as Chinese growth still depends heavily on credit growth. China intends to restrain credit growth, but is at the same time intervening in the FX market to keep the renminbi weak. Economic data has been weak across the board due to weak global recovery. Monetary authorities have reacted to the slow recovery by cutting interest rates and continuing monetary expansion. ‘However, also in emerging market the risks of inflation are more or less balanced as the recent decline in commodity prices eases inflationary pressures’, Van der Welle concludes.
Robeco’s Inflation Monitor is designed to show whether inflation pressures are on the rise, thus indicating whether the risk of future inflation is increasing. The monitor’s forecasts come in the form of z-scores* that indicate how current inflation-linked data—on the economy, monetary developments, commodities and inflation expectations—should be regarded in the context of the latest business cycle.
Based on the assumption that the past ten years are a reliable proxy for a normal cycle, a stable z-score of zero would indicate that price pressures are currently in line with the average over the most recent business cycle.
*Z-score = (most recent observation – ten-year average) / average standard deviation of monthly data
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Multi-tiered service offerings, key hiring and social media helped fuel the return to growth at multifamily offices, according to findings of the 9th Annual MFO Study from The Family Wealth Alliance. Multifamily offices saw a 9.6% gain in assets under advisement and an 11.3% increase in revenues according to the study, which was conducted in late 2012.
“Multifamily offices have worked hard to overcome barriers to growth faced by the industry. They’ve hired business development officers, revisited pricing strategies, and added new service offerings aimed at less wealthy families than their traditional clients,” said Bob Casey, head of research for The Family Wealth Alliance. “The No. 1 business challenge cited by participants is the lack of marketplace differentiation for MFOs, their service model and the benefits they can offer to client families,” he added.
Among the 9th Annual MFO Study findings:
Use of dedicated business development officers among study participants jumped by 22.9% in 2011, and is a common practice among larger MFOs but the exception among mid-size or smaller MFOs. More than one-third of participants have adopted a two-tier pricing and service model, offering a full MFO service menu at higher fees at asset minimums of $20 million to $30 million, and a more limited-service menu focusing on investments, with lower asset minimums and fees.
All 51 firms participating in the 9th Annual MFO Study are listed in the report. For a full list, please click here.
Alliance Research is supported by its partner firms. These organizations are: Babson Capital Management LLC, Efficient Capital Management, Inc., OppenheimerFunds, Inc., Pershing Advisor Solutions, State Street Global Advisors, State Street Wealth Manager Services, Summitas and World Gold Council.
Alliance Research will conduct in 2013 its 10th Annual MFO Study, the 3rd Annual 2013 External CIO Study, the 2nd Annual Security Study, which looks at acute, unforeseen and chronic security threats to private families and an Inaugural Alliance Reporting Study, which examines the current state of consolidated reporting for private families. For more, please go to.
All 51 firms participating in the 9th Annual MFO Study are: