What Changes and What Doesn’t for Investors with Modi’s Narrow Victory in India

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The outcome of the election in India, where 642 million people voted, has surprised analysts and the market. Narendra Modi, the favorite, has declared victory, but it was much closer than expected. According to the experts from investment firms, the fact that Modi’s party lost the simple majority raises some questions but does not undermine the country’s strong growth drivers.

“After exit polls pointed to a landslide victory for Modi, markets saw heavy selling on Wednesday morning as it appears Modi’s Bharatiya Janata Party (BJP) lacks a simple majority, erasing the 2.5% gains made the previous day following the exit poll results. The NDA (National Democratic Alliance) coalition can still form the new government with about 300 seats; however, Modi seems to have lost the majority, so while he can remain prime minister, coalition partners may oppose some of his initiatives, leading to the market reaction,” explains Liam Patel, Small-Cap Equity Investment Manager at abrdn.

Kenneth Akintewe, Head of Asian Sovereign Debt at abrdn, views this as a classic case of “buy the rumor, sell the fact.” He attributes part of the voter dissatisfaction with Modi to high food inflation, agricultural sector difficulties, and cuts in certain subsidies.

“India has experienced high growth levels, but not everyone has benefited, and consumption has not been as strong. The election result will serve as a wake-up call for the government and could act as an important catalyst for refocusing. However, these are not easy challenges to address. This underscores the urgency of developing a prosperous manufacturing sector to create more well-paid jobs and continue pushing reforms to strengthen the economy and generate the resources needed for economic transition, such as through privatizing public enterprises and monetizing assets,” notes Akintewe.

The Templeton Emerging Markets Equity team at Franklin Templeton describes the election outcome in India as clearly disappointing for investors compared to initial expectations. “Nonetheless, it is important to focus on the long term, and we do not foresee significant political changes in Modi’s likely third term. India’s growth drivers remain centered on manufacturing, infrastructure, and consumption.”

Impact of the Election Result

If the final result is achieved with a coalition majority, abrdn’s expert believes that while India is expected to continue progressing, there is a risk of more populist policies being implemented. “Fortunately, on the fiscal side, the starting point is a much stronger fiscal performance than expected and a structurally stronger fiscal position that provides significant buffers, reinforced by higher transfers from the Reserve Bank of India (RBI) to the government,” says Akintewe.

“Indeed, regarding bond market prospects, the election result does not significantly disrupt them, as the supply-demand dynamics for bonds remain very favorable and inflation and official interest rates continue to trend downward. The instinctive response of higher yields and some currency weakness could be an attractive opportunity to add risk. However, it may complicate the continuation of some of the more challenging reforms, such as those related to agriculture, labor, and certain aspects of agricultural reform. The ball will be in the government’s court, and if there’s one thing we’ve learned about the BJP in the last decade, it’s that they are not a government that weakens in the face of adversity.” Akintewe adds.

The Templeton Emerging Markets Equity team believes that while the election results may have potential negative consequences for certain market sectors, they do not believe it changes the overall policy direction of the BJP-led National Democratic Alliance (NDA). “In the manufacturing sector, the focus will remain on developing the manufacturing base through the Production-Linked Incentive (PLI) program. Additionally, infrastructure growth will shift from the public to the private sector, with particular attention to manufacturing, including renewables,” they explain. On consumption, they note that consumption stimulation will continue, with potentially renewed focus on rural incomes, including higher fiscal transfers. “This is likely to benefit the discretionary and staple consumer sectors, where our investments in India are concentrated,” they conclude.

India in Investment Portfolios

Regarding the main challenges ahead for the Indian market to become the top emerging country in investor portfolios, Avinash Vazirani, Investment Manager, Indian Equities, at Jupiter AM and Director of the Jupiter India Select Fund, indicates that it is simply a matter of time. “Investors tend to be slow to adapt to market paradigm shifts. Over the last two decades, China has had the highest weighting in global emerging market indexes; India has been gradually gaining a higher weighting as its economy and stock market grow faster, and we believe this process will continue in the coming decades,” he argues.

He points out that the best opportunities in this market are found in “companies exposed to India’s internal growth, especially in sectors such as healthcare, where we see possibilities for spending to grow faster than the economy in general, as current spending levels are low compared to other countries.”

“Investors should know that the most common benchmark for Indian funds (MSCI India) is concentrated in large and mega-cap stocks, which can trade at higher valuations than equally attractive companies lower down the market cap spectrum but still quite large by European standards,” he concludes.

A Solid Economy

Mark Matthews, Head of Research for Asia at Julius Baer, believes the changes introduced in India’s management over the last ten years have placed the economy in a solid position. Among these milestones are the demonetization of banks, the goods and services tax, the bankruptcy code, the real estate law, the corporate tax reduction, and the privatization of government-controlled companies.

“Although the BJP’s power has been diluted, it remains intact. The momentum of current economic reforms remains strong and will not fade. GDP growth in the January-March quarter, at 7.8% year-on-year, confirms an economic cycle that we believe still has several years to run. This should translate into annual earnings growth of around ten percentage points over the next few years. Finally, on June 28, India will be included in JP Morgan’s emerging markets bond index, with inclusion in two more bond indexes expected to follow. The result is that tens of billions of dollars will flow into the Indian economy from abroad over the next two years,” comments Matthews.

Ashish Chugh, Portfolio Manager at Loomis Sayles (Natixis IM), believes the BJP’s growth- and investor-friendly agenda will continue. “India has many structural growth drivers that will continue regardless of the party in power. Additionally, significant investments in physical and digital infrastructure over the last decade will continue to boost productivity and economic growth. This election result does not change India’s path to becoming the world’s third-largest economy in the coming years,” argues Chugh.

In this regard, Vivek Bhutoria, Emerging Markets Equity Portfolio Manager at Federated Hermes Limited, highlights that the country’s economy is set to grow around 7% in the foreseeable future and, in nominal terms, possibly around 11%. “The drivers of this growth are very sustainable. If we look at other major economies, while they face the challenge of an aging population, India will add between seven and eight million people to its workforce each year, which is a significant competitive advantage. Urbanization is occurring, which will generate growth in various sectors of the economy,” Bhutoria points out.

He believes policies are being implemented to attract investments, and the global supply chain realignment will benefit India over time. “We are already starting to see some benefits in terms of exports of electronics and chemicals. Additionally, other factors, such as investment in infrastructure and digital investments, are converging at the same time,” concludes Bhutoria.\

JP Morgan AM indicates that the BJP’s plans for its third term include efforts to become the third-largest country by GDP, from its current fifth position, within the next five years. “We expect the government’s overall tone and general policy outlook to remain unchanged. Given the election results, the government is likely to move forward in less controversial areas. Continued focus on infrastructure spending, boosting manufacturing capacity as part of the Make in India program, and its integration as a more significant player in supply chains will continue. Areas where India can see rapid improvements, such as continued urbanization, formalization, and digitalization, should unlock more growth potential. Where India has a competitive edge, such as labor costs, IT services, and business support, more promotion is likely,” notes Ian Hui, Global Market Strategist at JP Morgan AM.

However, he clarifies that now the more divisive issues will likely require more political maneuvering to achieve, if at all possible.

“Constitutional changes are out of reach without a two-thirds majority in the Lok Sabha. Others will require more political capital: land and labor reforms, rationalizing food and fuel subsidies now seem more challenging to pass. The next government budget will be key to understanding the approach to developments,” Hui concludes.

1,600 Vehicles and up to 40 Billion Euros at Stake Following the Adjustments Required by the EU Guidelines on the Naming of ESG Funds

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The latest guidelines approved by the EU on the naming of funds that claim to be ESG could force more than 1,600 investment vehicles to rebrand or divest up to 40 billion euros, according to an analysis by Morningstar.

The requirements include a minimum of 80% of investments that meet environmental or social characteristics or sustainable investment objectives, and exclusions as established by the EU regulations for the Paris-aligned benchmarks (PAB) and climate transition benchmarks (CTB). In this regard, the PAB exclusions are particularly important, as they would exclude investments in companies that derive a certain level of revenue from fossil fuels. Additionally, funds with the key term “sustainable” in their names will need to invest “significantly” in sustainable investments, and funds using terms related to “transition” or “impact” will be subject to specific qualitative requirements.

“While it is impossible to predict the full impact of these guidelines, we expect their implications to be significant. They have the potential to completely reshape the landscape of ESG funds in Europe, with possibly thousands of ESG funds changing names and/or adjusting their portfolios to comply with the new rules. It might be tempting to assume that the upcoming major adjustment means many ESG funds could have been greenwashing, but the reality is that there were no standards until now, and it is a complex area. The guidelines have the benefit of setting minimum standards for ESG products and, hopefully, will provide greater clarity to investors about what they are investing in,” says Hortense Bioy, Head of Sustainable Investment Research at Morningstar Sustainalytics.

Morningstar has identified around 4,300 EU funds with terms related to ESG or sustainability in their names that could fall within the scope of the new guidelines. According to Morningstar, of the 2,500 funds with equity holding data, more than 1,600 are exposed to at least one stock that could be violating the PAB and CTB exclusion rules. “This represents a significant number (two-thirds) of funds that may need to consider divesting from the stocks or rebranding,” they indicate.

Morningstar explains that if all these funds retained their names, it could lead to stock divestments worth up to 40 billion dollars. “The sectors most affected by potential divestments include energy, industries (e.g., railroads, defense), and basic materials. The countries most impacted would be the USA, France, and China in terms of market value, but China, the USA, and India in terms of the number of companies,” states the latest Morningstar report.

Morningstar explains that when interpreting the PAB/CTB exclusion rules and obtaining data, managers will decide how far they want to go in the companies’ value chains and assess the related investment implications. “Due to the rigorous nature of the PAB exclusions, we expect many funds to remove terms like ESG and related terms from their names, while some will reposition as transition funds, which are subject to the less restrictive CTB exclusions, provided they can demonstrate a clear and measurable transition trajectory,” they add.

According to their estimates, in the best-case scenario, only 56% of funds with the specific term “sustainable” in their names could retain the term if the minimum threshold for a “significant” allocation to sustainable investments is set at 30%. Meanwhile, “the remaining 44% of funds would need to increase their allocation to sustainable investments, adjust their sustainable investment methodology, or rebrand.”

Investors Assess Risk and Spanish Banking Giants Feel the Impact: Some Effects of the Presidential Election in Mexico

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Following the overwhelming victory of the ruling party’s Claudia Sheinbaum in last Sunday’s elections in Mexico, the week has been filled with reactions from all sides. The country’s financial markets initially reacted adversely, plunging the day after the election on Monday, June 3, although they have partially recovered throughout the week.

The market reaction was tied not so much to Sheinbaum’s victory but to the eventual composition of Congress. The ruling party appears to have won a relative majority, opening the door for constitutional changes without needing agreements with the opposition. Other reactions involved the international financial community, including a sovereign debt rating agency, investor stances, and effects on banks heavily exposed to the Mexican economy.

Moody’s Ratings Awaits Signals

“The victory of Sheinbaum and the expected composition of Congress reinforce the outlook not just for continuity, and this has several implications,” noted the rating agency. “Moody’s Ratings expects that Sheinbaum’s policies will become clearer and signal whether she will preserve, reinforce, or reverse the trends that have begun to deteriorate Mexico’s credit profile,” it stated.

The agency highlighted several key issues for the next administration that will help determine the sovereign credit outlook:

Macroeconomic Policies: Moody’s expects Sheinbaum to maintain the current president’s austerity rhetoric, with presidential projects continuing to dictate spending objectives. However, it remains to be seen how committed she will be to fiscal austerity, especially regarding a significant reduction of the fiscal deficit, which this year will exceed 5% of GDP. Importantly, there will need to be measures to keep the deficit at levels recorded in previous years, between 2% and 3% of GDP.

Energy Sector: The agency foresees that the authorities will maintain their commitment to energy sovereignty and the dominant role of the state, with no changes to Pemex’s business model or the government’s financial support. An operation increasing Pemex’s financial obligations in 2025-26, such as debt buybacks at a discount, is now more likely with the new administration.

Social Policies: Moody’s expects the incoming government to expand the reach of social programs and preserve the universal and unconditional nature of federal transfers. Sheinbaum repeatedly stated during her campaign that the next government would make these programs constitutional mandates, which would further reduce fiscal flexibility, as rigid spending categories already account for about 80% of total public spending.

Mexico has undergone a significant change not just in the presidential mandate but in the composition of Congress. Moody’s announced it is waiting for relevant signals from the incoming president to make decisions regarding the country’s credit profile.

Risk for Investors

Thomas Haugaard, a portfolio manager for Emerging Markets Debt at Janus Henderson Investors, released a brief analysis on investor sentiment following the Mexican election results. According to Haugaard, Sheinbaum’s election could be more positive since she is considered more pragmatic than the current president.

However, the ruling party is also on track to capture more seats in Congress. Initial counts suggest that Morena and its allies could secure enough seats in the Senate and the House of Representatives, approaching a constitutional majority in the House.

This level of political control is a concern for investors, as it raises the possibility of new policies that could undermine checks and balances on AMLO, Sheinbaum, and Morena. Given the tight political balance in Congress, we must wait for the final counts later this week. Meanwhile, uncertainty dominates the markets in the hours following the election, with investors awaiting more clarity.

Finance Minister Reassures Markets

On Tuesday, the Secretary of Finance and Public Credit (SHCP), Rogelio Ramírez de la O, who will remain in office under the new president, sought to calm the markets.

He assured that Mexico would not deviate from fiscal discipline and would aim to reduce the deficit next year to 3% from a previous 5.8% left by the current administration. Mexican markets have seen a “rebound effect,” but uncertainty remains as they await announcements from the new president and the official composition of Congress.

Spanish Banking Giants Feel the Impact

Spain’s two most international banking groups, BBVA and Santander, experienced a rough week in their stock prices, with one of the main causes being the election results in Mexico. More than Sheinbaum’s victory, the markets fear the ruling party’s dominance in Congress, which opens the door for constitutional changes without needing to consult or negotiate with the opposition, potentially impacting the banking business.

BBVA and Santander are highly dependent on the Latin American region, particularly Mexico. According to recent figures, BBVA is the most at risk, with 56.5% of its net profit coming from the Latin American country. “For many years, BBVA has had a clear stake in the Mexican economy, and any adverse movement could impact its earnings,” said Javier Cabrera, an analyst at XTB.

“At XTB’s analysis team, we believe that if a new tax is eventually imposed in Mexico, it would significantly affect Spain’s two most global banks, BBVA and Santander, especially BBVA, which has a large dependence on the region,” the expert added.

Although the current government had a distant relationship with the banking sector, it maintained the same conditions and allowed the banks to develop their business. Analysts fear this scenario could change with a ruling-party-dominated Congress without counterbalances.

9 out of 10 Financial Advisors Invest in Private Equity, According to Survey

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Hamilton Lane conducted a survey of 232 professional investors worldwide, in which over 90% reported allocating their clients’ capital to private markets.

The study, accessed by Funds Society, adds that nearly all financial advisors (99%) plan to allocate part of their clients’ portfolios to this asset class this year.

Additionally, 52% reported planning to allocate more than 10% of their client’s portfolios to private markets, while 70% of advisors plan to increase their clients’ allocation to this asset class compared to 2023.

Advisors cited performance and diversification as the primary reasons for the increased interest in private markets.

Regarding their own knowledge of private markets, 97% of advisors claim to have advanced knowledge. However, the report notes that their clients may not be as well-informed.

“The survey revealed that advisors recognize their clients believe alternative assets can benefit their portfolios but are not sufficiently informed about this asset class,” explains the Hamilton Lane report.

For example, 50% of advisors rate their clients’ knowledge of private market investments as beginner or having little to no knowledge of the asset class and needing basic education, despite their high interest in the asset class.

Only 4% of advisors rated their clients’ knowledge of private markets as advanced, meaning they understand the asset class well and feel confident discussing details, trends, and products in private markets.

“The conclusion of this survey is that as interest in private markets grows, there is a clear need for more education,” says Steve Brennan, Head of Private Wealth Solutions at Hamilton Lane.

When advisors were asked what tools and information about private markets they would find useful in their practice, they cited education, thought leadership, and events as the top three ways to improve their clients’ knowledge of the asset class.

The online survey was conducted from November 27 to December 22, 2023. Among the 232 respondents from around the world were private wealth firms, RIAs, family offices, and other professional advisors from the U.S., Canada, Latin America, EMEA, and APAC.

To view the full report and its conclusions, click on the following link.

Manufacturing and Construction Slow Down More than Expected in the U.S.

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The ISM manufacturing index registered a larger-than-expected contraction in May, with a drop in orders and a slowdown in production. Construction also came in weaker than expected, indicating that monetary policy is tightening and acting as a drag on economic activity, according to an ING report released Monday.

The ISM fell from 49.2 in April to 48.7 in May, indicating a contraction in the manufacturing sector. Regional surveys and the Chinese PMI had suggested a slightly different result, but the drop in orders and the slowdown in production were more pronounced than expected, ING adds.

The price component dipped slightly, but remains above the average of 54.1, indicating that inflationary pressures persist in the sector.

“The only good news was the employment component, which rose above the 50 level, the highest level since March 2022, but with production slowing and orders looking weak, there are doubts about its sustainability,” the bank’s experts add.

Construction hit by high borrowing costs and lack of affordability

On the other hand, construction spending fell for the second consecutive month and is expected to see a gradual moderation in the sector. High borrowing costs and tight lending conditions remain a constraint, and in the particular case of the residential sector, where affordability is so limited, this is leading to weaker housing starts and building permits, which should translate into further weakness in construction spending.

The non-residential sector (outside of office construction) is also expected to slow, albeit from solid rates, as the initial surge of support from the Inflation Reduction and CHIPS production acts increasingly fades.

Overall, the data are consistent with the view that the manufacturing sector is not going to contribute significantly to economic activity this year. Construction is also affected by high borrowing costs and lack of affordability, which may lead to a gradual moderation in the sector, experts add.

To read the full report you can access the following link.

20% of Americans Over the Age of 50 Have No Savings, According to a Survey

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Photo:Tax Credits . The Biggest Pension Policy Challenge Faced by Latin America and the Caribbean Is Low Coverage of Formal Pension Systems

A new AARP survey reveals that one in five adults over 50 have no retirement savings in the U.S.

Additionally, 61% are concerned about not having enough money to sustain themselves during retirement. What is even more concerning, according to the study, is that nearly 30% of older adults who carry a credit card balance from month to month report having a balance of over $10,000.

The survey also shows a decline in the overall sense of financial security among men: 42% of whom describe their financial situation as “fair” or “poor,” compared to 34% in early 2022.

However, approximately 40% of men who regularly save for retirement believe they are saving enough, compared to only 30% of women.

Daily expenses remain the main obstacle to saving more for retirement, and some older Americans say they never expect to retire. Additionally, 37% are concerned about covering basic expenses, such as food and housing, and 26% are worried about covering family care costs.

“The United States is facing a severe retirement crisis. AARP has a long history of supporting legislation to expand access to retirement savings, but Congress must act more swiftly to provide the financial support that older Americans need and deserve,” said Nancy LeaMond, Executive Vice President and Chief Advocacy & Engagement Officer.

For more information about the survey, you can visit the following link.

Texas Home Sales Remain Stable in 2024

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The number of homes sold in the first quarter of 2024 was almost identical to the total in the first quarter of the previous year, according to the Texas Quarterly Housing Report published by Texas Realtors.

The supply of homes on the market increased, while the statewide median price of $330,950 was 1.6% higher than in 2023.

“Market conditions vary by location, and about forty percent of Texas metropolitan areas experienced an increase in sales compared to the first quarter of last year,” said Jef Conn, president of Texas Realtors.

However, the number of listed homes increased in almost the entire southern state, which “will give many buyers more options than they had in recent years,” Conn added.

Average prices showed an increase. The highest increase in median prices occurred in Odessa (11.2%), Midland (9.5%), and Texarkana (8.5%).

Months of inventory increased from 2.7 months at the end of the first quarter of last year to 3.8 months at the end of the first quarter of this year. Additionally, active listings increased by 33.7% at the end of the first quarter compared to the end of the first quarter of 2023, the report adds. Homes spent two fewer days on the market statewide compared to the same period last year.

Opportunities for Buyers and Sellers

While during the pandemic, buyers rushed, trying to compete with many other offers, currently, most buyers have a bit more time to examine properties and make an offer.

Although interest rates have remained steady, there are good opportunities for buyers, and for sellers, prices have remained consistent compared to last year, “indicating good opportunities to sell no matter which side of the home sale you are on,” concluded Conn.

Turn for the ECB: The Focus is on the Pace of Cuts and Not on Their First Announcement

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Finally, June has arrived, bringing with it the European Central Bank (ECB) meeting, which will take place tomorrow. All attention is focused on what the monetary institution will say and do, as the forecast is that it will announce a first rate cut of 0.25%. According to analyses by international managers, inflation continues to show some resistance to decline—the core inflation surprised on the upside again—but this should not justify the ECB not lowering rates on June 6th.

Moreover, investment firms warn that any different scenario would be a major surprise and provoke a strong reaction in the markets.

The latest report from Bank of America states that tomorrow’s rate cut should be the first 25 basis point reduction out of 200 for monetary easing between June 2024 and 2025. “We expect few changes in the ECB’s guidance in the press release, basically acknowledging the first move, data dependency, and the need to proceed with caution. Small upward revisions to short-term inflation (no changes in the medium-term) will likely also feed this caution, and the press conference will likely indicate that there is no preset path and that decisions will be made meeting by meeting,” says Rubén Segura-Cayuela, chief European economist at Bank of America.

Segura-Cayuela, who maintains his conviction that eurozone interest rates will be at 2% next year, predicts 75 basis points of cuts for 2024 and 125 basis points for 2025. “We also expect Lagarde to signal once again that there will be a bit more information in July to decide on the next move and much more in September, a clear indication that the next move is more likely in September than in July. Finally, similar to recent comments by Lane this week or Lagarde in the last press conference, we would expect a clear distinction between a phase of reducing the level of monetary policy restriction and a phase of rate normalization, a clear signal that, for now, they are not in a hurry to lower rates,” he adds.

The Issue is the Pace

According to Franck Dixmier, global CIO of Fixed Income at Allianz Global Investors, after a long phase of unchanged rates, the start of a cycle of cuts raises several questions about the next steps: What is the target for the ECB’s terminal rate? How quickly will the central bank reach it? Investors will be very attentive to any hint of answers to these questions, as well as announcements of new macroeconomic forecasts. “While there is consensus on this first rate cut, the pace of future cuts is a lively debate among members of the institution. Inflation expectations are anchored at levels close to the ECB’s target (five-year inflation swaps were at 2.3%), which is a good indicator of investor confidence in the ECB’s ability to meet its mandate. The Council will focus more on the inflation trajectory towards the ECB’s price stability target and its degree of confidence that inflation will remain at that level,” he notes.

Ulrike Kastens, economist for Europe at DWS, recalls that almost all members of the ECB Council have spoken in favor of a possible interest rate cut in June. “On June 6th should officially confirm that the ECB will cut its official interest rate by 25 basis points to 3.75%. However, what matters even more is the path forward. The ECB is willing to eliminate the maximum level of restriction, as Philip Lane said,” Kastens explains.

This view is also shared by Cristina Gavín, head of Fixed Income and fund manager at Ibercaja Gestión: “The key is not in this week’s rate cut, but in what the ECB’s course of action will be in the upcoming meetings, so we should pay attention to Lagarde’s press conference after the Council. The fact that the Fed is also delaying its rate cuts due to price pressures, although not a determining factor, can also influence the mood of ECB members regarding additional cuts.”

In the opinion of Germán García Mellado, fixed income manager at A&G, since the focus will be on trying to glimpse the pace of cuts from June and on the evolution of the data, it is likely that the ECB will be very cautious about giving hints about its next steps. “In any case, it seems unlikely that, with the latest published data, they will anticipate a rise for the next meeting in July, so they will likely leave everything open for September when they will update the macroeconomic projections again. It will also be relevant to see the new macroeconomic projections for the coming years, where both growth and inflation expectations will probably be slightly revised upwards, which will not provide certainty about future rate cuts,” García Mellado points out.

Regarding the ECB’s speech, Daniel Loughney, head of Fixed Income at Mediolanum International Funds (MIFL), adds: “We expect the ECB’s speech to be moderate in relation to market expectations, as we believe inflationary pressures are decreasing more than expected. The ECB will likely highlight the irregular nature of upcoming CPI releases. There are a series of idiosyncratic statistical influences on inflation at the moment that are difficult to quantify precisely: like the launch of a cheap national transport ticket in Germany a year ago. Comments on service price inflation will draw the most attention, as it has remained quite elevated lately.”

One of the conclusions put forth by Kevin Thozet, member of the Investment Committee at Carmignac, is that the market expectations of less than one rate cut per quarter for the rest of the year seem prudent. “We wouldn’t be surprised to see the ECB proceed with three or four cuts, and potentially more, in the case of an unforeseen slowdown,” he indicates. In Thozet’s opinion, “markets seem to agree on the prospect of three ECB cuts in 2024, with the official interest rate at the 3% threshold, or above, within 12 months. This scenario seems optimistic, as it doesn’t account for what the ECB might do if the economy slows down. While we are constructive regarding the short end of the yield curve, we can’t rule out underperformance of long rates due to better economic prospects and a smaller ECB balance sheet.”

Looking at the Data

In this regard, the data once again becomes the argument and reason that makes the ECB’s indications on the pace of cuts more important than the first rate cut itself. “There is no doubt that some central bankers have in mind rapid further interest rate cuts and may already favor another reduction in July, while others prefer a more cautious approach. Faced with uncertainty about inflation trends, a hawkish tone is likely to prevail, emphasizing data dependency and a meeting-by-meeting approach. President Lagarde’s central message is expected to avoid explicitly committing to another rate cut in July. Overall, we maintain our forecast of three more rate cuts until the end of March 2025,” adds Kastens.

Orla Garvey, senior fixed income portfolio manager at Federated Hermes Limited, reminds that the market already expects the ECB to cut rates tomorrow, although “what comes after the next rate cut will be more difficult for the central bank to communicate and for the markets to assess.” In her opinion, significant progress has been made towards the inflation target, but “the future path is likely to be more turbulent.” Combined “with an improvement in the growth outlook in the eurozone, markets might have less confidence in the future trajectory of the ECB’s key interest rates,” she points out.

For Felix Feather, economist at abrdn, since they consider that service inflation and wage growth remain too high for consecutive cuts in June and July, it could be a “hard line cut.” Moreover, he warns that this Friday’s year-on-year inflation will be key. “A rebound in headline inflation is expected, but it would have to be very large for the ECB to deviate from its goal of cutting in June. However, what happens with core service inflation will be key to setting expectations on the ECB’s path beyond June. The recent strength in labor cost growth could mean that service inflation strengthens, leaving the ECB on hold for a while after the initial cut,” adds Feather.

According to Martin Wolburg, senior economist at Generali AM (part of the Generali Investments ecosystem), the latest data on official German wages for the first quarter (+6.2% year-on-year) and, at the eurozone level, negotiated wage growth in the first quarter strengthened to 4.7% year-on-year, pointing to an upside risk for inflation. “The ECB’s own indicators suggest that negotiated wage growth will be around 4% in 2024 compared to 4.5% in 2023,” he notes.

Wolburg believes that while the labor market remains healthy, it is exaggerated to worry about wage growth. “But given the concerns of Governing Council members, we now consider it more likely that the ECB will cut only once a quarter starting in June. Even so, we believe the market has gone too far in reducing cumulative ECB rate cuts for 2024 to only about 60 basis points,” he says

The ECB Before the Fed: Impact on the Bond Market

According to investment firms, we are about to witness an uncommon situation in monetary policy: the ECB might reduce its reference interest rate before the Federal Reserve, for the first time since the early 2000s. The reason, according to Raphael Olszyna-Marzys, international economist at J. Safra Sarasin Sustainable AM, is that the European economy is in a very different situation compared to the United States. “The output gap is probably negative in the eurozone, and the economy has not grown for most of the past two years (the opposite of the U.S.). Credit growth is extremely weak, suggesting that the ECB’s policy is restraining activity. Eurozone inflation is clearly trending downward (much of the inflation was due to the energy crisis), despite relatively stable service inflation. Consequently, we believe the ECB has room to cut rates four times this year, starting in June,” says Olszyna-Marzys.

For Catherine Reichlin, head of analysis at Mirabaud Group, one of the keys to this difference between the ECB and the Fed lies in inflation and the perception of its evolution. While the ECB says it is truly confident that inflation is under control, the situation is different for the Fed. Since the April inflation figures, published in mid-May, were slightly below expectations, the Fed has been moderating market expectations about the timing and magnitude of future rate cuts. A multitude of central bankers are talking about the issue, with a common thread: it will take more than one data point to ensure that inflation is under control and that the monetary easing cycle can begin at the end of this year or early next year,” explains Reichlin.

In other words, volatility is the order of the day, and bond yields are fluctuating regularly, like the 10-year U.S. bond, which started the year at **3.89%**, rose to **4.70%** at the end of April, and is currently at **4.43%**. “Although expectations are different, the performance of government bond markets is similar: **-1.56%** in the United States and **-1.39%** in Europe. In Europe, the disparities are considerable: **-2.57%** in Germany versus **+0.58%** in Italy, which has benefited from a narrowing of its risk premium,” she adds.

The Mirabaud expert believes that in Switzerland, the bond market is “less bad” but still in negative territory this year with **-0.91%**. “Among the central banks that have already cut rates (Switzerland), those preparing to do so (Europe), and those delaying (United States), it is interesting to observe that their bond markets are following their course without fully incorporating the expectations of rate cuts. Additionally, bond yields, which are near their highs of recent years, still offer good entry opportunities for investors who have not yet decided to buy bonds,” concludes Reichlin.

 

Peru: The New Key Player in the Lithium Triangle

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Litio (Wikipedia)
Wikimedia Commons

When talking about lithium, attention often goes to countries like Australia, Chile, Argentina, or China. However, a recent discovery brings prominence to Peru in this market, making it one of the main key players, according to an analysis by ActivTrades.

According to analyst Ion Jauregui, the discovery of an extensive lithium deposit by American Lithium Corp in 2018 at the Falchani project, in the Puno region, near the so-called Lithium Triangle (drawn between Chile, Argentina, and Bolivia) has “significant” implications for Peru.

“The findings from November 2023 revealed that lithium resources are four times greater than initially estimated, an increase of 476% since 2019. Falchani is now among the world’s leading large-scale hard rock lithium projects and also includes uranium deposits discovered by Macusani Yellowcake, a subsidiary of Canadian Plateau Energy,” explains the analyst.

The development of this project requires an investment of nearly $800 million and has garnered international attention, representing a “transformative milestone for the Peruvian economy,” comments Jauregui.

The discovery, first observed near the border with Bolivia, 150 kilometers from Lake Titicaca, promises economic benefits for the Andean country, such as job creation in mining and infrastructure development. This, according to ActivTrade, can stimulate economic growth and diversification.

“The government could obtain significant revenues from mining royalties and taxes, which would improve public services and infrastructure,” writes Jauregui, adding that companies like Tesla could secure agreements to guarantee a steady supply of lithium for battery production.

Additionally, the uranium found could be vital for local energy production.

“On the international front, Peru will enhance its economic relations and strengthen ties with other lithium-rich Latin American countries, leading to strategic collaborations and reinforcing the region’s influence in the lithium market,” notes the analyst.

Political Factors

However, amid the enthusiasm, ActivTrades calls for consideration of the political variables at play.

While they expect that global demand for electric vehicles and renewable energy storage will drive the lithium market, which is set to grow in the long term, investors must be aware of the country and region’s developments.

“Investors should be aware of risks such as political instability and regulatory changes in Peru and South America,” warns Jauregui.

Additionally, in a context of global competition for resources—especially between heavyweights China and the United States—there is an additional layer of complexity to the matter.

 

 

iCapital Appointed Investment Fund Manager for Prime Quadrant

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iCapital announced that iCapital Network Canada (“iCapital Canada”) has been appointed Investment Fund Manager in Canada for Prime Quadrant Alternative Investment Access Funds, where iCapital will provide all administrative functions associated with managing these funds, the firm said in a press release.

Prime Quadrant is a leading trusted advisor and consulting firm for ultra-high-net-worth families in both Canada and the U.S.

This partnership, in addition to iCapital Canada’s 40+ Canadian funds and a previously announced partnership with Sterling Global, firmly positions iCapital Canada as a trusted technology partner to deliver a comprehensive digital investing experience for Canada’s leading wealth advisors and asset managers.

This is the first time iCapital has established a strategic partnership with a family office advisory firm to manage the administration of an existing platform. This partnership represents the type of opportunities iCapital can provide for firms in the independent wealth space to more efficiently scale their alternative investing businesses, the release added.

“Prime Quadrant is an innovative industry leader within the high-net-worth community, and iCapital is honored to be entrusted with the investment fund management responsibilities of their Access funds,” said Lawrence Calcano, Chairman and CEO of iCapital. “We believe that the multi-family office, independent RIAs, and the dealer wealth channel represent an outstanding opportunity for us to create industry-leading solutions. Our goal is to provide a single platform that utilizes our market-leading technology and operating system, offering advisors the tools they need to achieve better scale and efficiency for their alternatives business.”

iCapital Canada assumes the administrative functions associated with the running of alternative funds for Prime Quadrant’s clients, while Prime Quadrant remains the portfolio manager handling the selection of the underlying investment managers and strategies. Prime Quadrant has built a world-class platform, which includes top-tier private equity, real estate, private debt, venture capital, and hedge fund Access funds.

iCapital’s technology will be leveraged to streamline and automate the onboarding, subscription processing, and lifecycle operations for Prime Quadrant Access funds while providing support to the firm and its ultra-high-net-worth clients. In addition to managing Prime Quadrant’s existing alternatives Access funds, iCapital Canada will provide administrative support to the firm when launching new alternatives products in the future.

“Our relationship with iCapital will ensure Prime Quadrant can scale its ability to meet and exceed our clients’ expectations by leveraging iCapital’s technology and resources to continue developing creative solutions for our families,” said Mo Lidsky, Chief Executive Officer of Prime Quadrant. “We are excited to benefit from iCapital’s complete end-to-end solution and operating system to help simplify the many post-trade management activities for our families.”

Terms of the agreement were not disclosed.