Are EM Central Banks Running Out of Ammunition?

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Nikolay Markov, Pictet Asset Management. Nikolay Markov, Pictet Asset Management

In recent months, most major emerging market central banks have sharply cut their policy-rates to alleviate the negative economic shock of the pandemic. But is this sustainable and what can we expect going forward?

Estimating equilibrium

According to our proprietary calculations, four major EM central banks have cut their policy rates too aggressively: South Africa, India, Indonesia and, by some margin, Turkey.

Pictet AM

Using our proprietary Taylor Rule model, we calculate the fair value for Turkey’s policy rate as 14 per cent, not 8.25 per cent. This is based on the recent upsurge in inflation and domestic currency depreciation. By contrast, the Bank of Russia and Bank of Korea appear to have made appropriate policy responses.

What about the next 12 months?

Fig.2 shows our expectations for policy-rate changes in the year ahead based on our fair value estimates. For most emerging markets the estimated policy-rate fair value is much higher in 2021. This shows that most central banks have no room to cut further and should gradually revert to higher rates as the economic shock of the pandemic subsides.

Pictet AM

The most striking cases are in South Korea, South Africa and Russia. While we think these markets have appropriately cut their policy rates during the outbreak, we believe they will need to start raising rates more quickly in 2021 as their economies are expected to rebound at a stronger pace.

For other central banks however, it might be appropriate to keep their monetary policies broadly unchanged in 2021. This is particularly true in Mexico.

Turkey is once again an interesting case as our model calls for significant rate cuts in 2021, in sharp contrast with the policy recommendation for the current quarter.

This is explained by the significant disinflationary process and expected gradual recovery in economic growth which should take place in the coming year if the authorities take the appropriate policy measures to stabilise the lira, thus avoiding a full-blown balance of payments crisis. If this positive scenario materialises, it should be positive for Turkish risky assets in the coming year. Bottom line: it will get worse before it gets better.

Time to look beyond rates?

But if the scope to move EM policy-rates is increasingly limited, what about unconventional monetary tools to stimulate the economies?

The table below shows that only the central banks of South Africa, Indonesia and Poland have opted for an asset purchase program (QE) of government bonds in the secondary market (and in the case of Indonesia possibly covering corporate bonds). 

Most of the major EM central banks (China, India, Korea, Turkey, Russia, Brazil and Mexico) do not have a proper QE program yet. Still, those countries have introduced different refinancing facility schemes to provide ample liquidity to the interbank market thus supporting bank credit activity and the real economy.

Pictet AM

Close to half of the major EM central banks are expected to ease monetary policy further in the coming months. This is the case in China, Indonesia, Russia, Brazil and Mexico, suggesting that market participants and possibly even the central banks themselves do not think they have actually run out of ammunition. But as suggested by our model, we believe further monetary policy easing will be very challenging in particular for South Africa and Russia, as well as for Turkey in the near term.

 

For more information on Pictet AM’s Fixed Income capabilities, please click here.

 

Column written by Nikolay Markov, Economist in the Fixed Income department at Pictet Asset Management.

 

Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented herein.

Important notes

This material is for distribution to professional investors only. However it is not intended for distribution to any person or entity who is a citizen or resident of any locality, state, country or other jurisdiction where such distribution, publication, or use would be contrary to law or regulation. Information used in the preparation of this document is based upon sources believed to be reliable, but no representation or warranty is given as to the accuracy or completeness of those sources. Any opinion, estimate or forecast may be changed at any time without prior warning.  Investors should read the prospectus or offering memorandum before investing in any Pictet managed funds. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future.  Past performance is not a guide to future performance.  The value of investments and the income from them can fall as well as rise and is not guaranteed.  You may not get back the amount originally invested. 

This document has been issued in Switzerland by Pictet Asset Management SA and in the rest of the world by Pictet Asset Management Limited, which is authorised and regulated by the Financial Conduct Authority, and may not be reproduced or distributed, either in part or in full, without their prior authorisation.

For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.

Pictet Asset Management Inc. (Pictet AM Inc) is responsible for effecting solicitation in North America to promote the portfolio management services of Pictet Asset Management Limited (Pictet AM Ltd) and Pictet Asset Management SA (Pictet AM SA).

In the USA, Pictet AM Inc. is registered as an SEC Investment Adviser and its activities are conducted in full compliance with the SEC rules applicable to the marketing of affiliate entities as prescribed in the Adviser Act of 1940 ref. 17CFR275.206(4)-3.

 

 

Earth Overshoot Day: Towards a More Sustainable Post-Covid World

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August 22 marked Earth Overshoot Day, the point in the calendar when humans used up a year’s worth of the planet’s natural resources. For the rest of 2020, humanity will run up an environmental debt, consuming more than the Earth can naturally replenish in a 12-month period, and drawing down on what will be available for future generations. Just as worrying, we will be producing waste such as carbon dioxide emissions as we do so.

Earth Overshoot Day has been calculated every year since the 1970s by the Global Footprint Network (GFN), a non-profit research group. Over that time, the overshoot has been found to occur earlier each year. This year saw a reversal of that trend. Thanks to coronavirus-induced lockdowns, there has been a drastic shrinkage in humanity’s ecological footprint. GFN estimates that the global carbon footprint, for instance, has fallen nearly 15 per cent from last year, while that for forest products is down by more than 8 per cent. The question now is whether the world can continue along this sustainable trajectory.

The pandemic has alerted us to a number of environmental issues which, left unchecked, could either aggravate the current health crisis or even sow seeds for future virus outbreaks. Take air pollution, which is estimated to kill 7 million people prematurely every year. Researchers have found that air pollution may have exacerbated the impact of the pandemic. Several studies have linked high levels of particulate matter in the air to elevated coronavirus mortality rates.

What is equally clear from the pandemic experience, however, is how quickly air pollution can be reduced. As road and air traffic ground to a halt and factories were shuttered, air quality improved dramatically. In China, concentrations of particulate matter, known as PM2.5, fell by as much as a third in early March from a year earlier.

Although there is a strong possibility that pollution will rise rapidly to pre-crisis levels as lockdowns ease – as is already the case in China – local and national governments are not letting this crisis go to waste.

The city of Milan is introducing one of Europe’s most ambitious schemes to reallocate street space from cars to pedestrians and cyclists. More streets in London and Paris will also become vehicle-free, while New York and Seattle are widening pavements and pedestrianising neighbourhoods.

But air pollution is just one of many pressing environmental problems the pandemic has highlighted. Biodiversity is another. A number of scientific studies – most recently conducted by University College London researchers – show that biodiversity loss increases the risk of disease pandemics. We expect safeguarding biodiversity to take centre stage in the public debate on how to prevent future pandemics and achieve better health outcomes.

More radical economic transformation needed

It has taken an unprecedented lockdown to make even limited progress in delaying Overshoot Day by a few weeks. This reveals the scale of the environmental problem we’re facing. Clearly, putting the brakes on economic activity is not a viable solution.What is needed is a much more determined transformation of our economic structures.

This is a challenge that requires an all-hands-on deck approach involving everyone — governments, businesses and individuals.

Investing to make a positive environmental impact

  • Our Global Environmental Opportunities (GEO) strategy invests exclusively in businesses providing innovative solutions to environmental challenges facing our planet, while at same time using resources efficiently, minimising their waste and limiting other adverse impacts on the environment. These companies are part of the thriving environmental products and services industry, already worth some USD 2.5 trillion and growing at 6 per cent per year.
  • Stocks in GEO have a significantly lower environmental footprint than those represented in the MSCI All-Country World equity index. Analysing the nine environmental dimensions of the Planetary Boundaries framework using a proprietary life-cycle assessment methodology, the GEO portfolio achieves a significantly more positive impact than that of a typical global equity strategy, particularly in climate change and biodiversity. This is how our strategy allows investors to safeguard the planet while retaining the prospect of long-term outperformance.
  • With a risk-return profile similar to that of a growth-oriented investment strategy, Pictet AM’s Global Environmental Opportunities can be used to complement an equity allocation within a global portfolio.

 

Tribune written by Steve Freedman, Senior Product Specialist at Pictet Asset Management.

 

Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented herein.

Important notes

This material is for distribution to professional investors only. However it is not intended for distribution to any person or entity who is a citizen or resident of any locality, state, country or other jurisdiction where such distribution, publication, or use would be contrary to law or regulation. Information used in the preparation of this document is based upon sources believed to be reliable, but no representation or warranty is given as to the accuracy or completeness of those sources. Any opinion, estimate or forecast may be changed at any time without prior warning.  Investors should read the prospectus or offering memorandum before investing in any Pictet managed funds. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future.  Past performance is not a guide to future performance.  The value of investments and the income from them can fall as well as rise and is not guaranteed.  You may not get back the amount originally invested. 

This document has been issued in Switzerland by Pictet Asset Management SA and in the rest of the world by Pictet Asset Management Limited, which is authorised and regulated by the Financial Conduct Authority, and may not be reproduced or distributed, either in part or in full, without their prior authorisation.

For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.

Pictet Asset Management Inc. (Pictet AM Inc) is responsible for effecting solicitation in North America to promote the portfolio management services of Pictet Asset Management Limited (Pictet AM Ltd) and Pictet Asset Management SA (Pictet AM SA).

In the USA, Pictet AM Inc. is registered as an SEC Investment Adviser and its activities are conducted in full compliance with the SEC rules applicable to the marketing of affiliate entities as prescribed in the Adviser Act of 1940 ref. 17CFR275.206(4)-3.

Neuberger Berman and XP Inc. Join Forces to Provide US Multi Cap Strategy to Brazilian Investors

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Pixabay CC0 Public Domain. Neuberger Berman y XP unen fuerzas para ofrecer una estrategia US multicap a inversores brasileños

Neuberger Berman, a private, independent, employee-owned investment manager, has partnered with XP Inc, a leading technology-driven financial services platform, to offer its flagship US multi-cap equity strategy to Brazilian investors. Via the XP Investments platform, the Neuberger Berman Multi-Cap Opportunities Fund will be available for Brazilian retail and institutional investors through a local feeder fund managed by XP.

The Neuberger Berman Multi-Cap Opportunities Fund is driven by fundamental research to uncover investment opportunities across US equity markets regardless of capitalisation or style spectrums. The fund is a high conviction strategy which typically invests in 30-40 stocks across three distinct categories: Special Situations, Opportunistic and Classic.

The investment team, led by Senior Portfolio Manager Richard Nackenson, adopts a disciplined bottom-up process alongside in-depth quantitative and qualitative free cash flow and capital structure analysis of investee companies. Nackenson, who has run the strategy for over 15 years and has 25 years of investment experience, is supported by a dedicated team of three securities analysts, as well as Neuberger Berman’s wider equity division and ESG investment team. The management team currently runs over 2, 6 billion dollars on behalf of clients globally.

Fabiano Cintra, Funds Specialist at XP Inc, says: “XP’s core mission is to open up a new wave of solutions for Brazilian investors by partnering with the best investment management talent across the world. We are delighted to have established this partnership with Neuberger Berman, which manages over $330 billion globally, and are confident that the US Multi-Cap Opportunities fund’s unconstrained and distinct approach to US equity investing will resonate with our client base.”

Dik van Lomwel, Head of EMEA and Latin America at Neuberger Berman, adds: “This partnership is testament to the Multi-Cap Opportunities Fund’s strong long-term track record and our team’s long-standing, distinct investment philosophy. It marks the latest step in our growth in Latin America and we are pleased to be able to offer this strategy to a wider range of Brazilian investors via the XP platform.”

 

Federated Hermes, Inc. expands distribution in Latin America through agreement with PICTON, S.A

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Wikimedia Commons. Federated Herme se expande en Latinoamérica a través de un acuerdo con PICTON

Federated Hermes, Inc. (NYSE: FHI), a global leader in active, responsible investing, and PICTON S.A., a leading third-party fund distributor in Latin America, have  announced an agreement that allows PICTON to market certain Federated Hermes funds to institutional clients in Latin America.

The agreement focuses PICTON’s efforts on strategically positioning Federated Hermes’ investment capabilities and services in the Latin American pension funds industry and with institutional participants across the region on a private-offering basis.

“With their experience and strong local knowledge of markets in Chile, Colombia and Peru, we are pleased to work with PICTON to market Federated Hermes’ products in the region. As a global leader in responsible investing, it was important for us to be diligent in our search process and find a firm that is client-focused and has a track record of success. We found that in the PICTON team,” said Bryan Burke, Head of global accounts and Latin America at Federated Hermes.

“PICTON is proud to enter into this arrangement with Federated Hermes, a firm with outstanding history and a leader in responsible investing,” said Matias Eguiguren, founding partner at PICTON.  “We look forward to a strong relationship driven by Federated Hermes’ investment capabilities and our broad and deep knowledge of institutional clients,” said Patricio Mebus, Head of mutual funds distribution at PICTON.

PICTON will provide due diligence, product information and analysis to institutional clients and serve as a liaison point between them and Federated Hermes’ teams.

PICTON is an independent investment firm serving high-net-worth individuals and institutional investors throughout Latin America. PICTON distributes best-in-class investment products to Latin American institutional investors, being one of the leading third-party fund distributors in the region with local offices in Chile, Colombia and Peru.

 Federated Hermes, Inc. is a leading global investment manager with 628,8 billion in assets under management as of June 30, 2020. Guided by their conviction that responsible investing is the best way to create wealth over the long term, their investment solutions span 162 equity, fixedincome, alternative/private markets, multi-asset and liquidity management strategies and a range of separately managed account strategies. Providing world-class active investment management and engagement services to more than 11,000 institutions and intermediaries, our clients include corporations, government entities, insurance companies, foundations and endowments, banks and broker/dealers. Headquartered in Pittsburgh, Federated Hermes’ more than 1,900 employee,  include those in London, New York, Boston and several other offices worldwide. For more information, visit FederatedHermes.com. #

 

Jupiter Expands Latin America and US Offshore Distribution Team

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Foto cedidaSusana García, director of sales for LatAm and Iberia; and Andrea Gerardi, senior sales executive for Jupiter AM.. Jupiter Expands Latin America and US Offshore Distribution Team

Jupiter Asset Management has announced two London-based appointments to its Latin American and US offshore distribution team, following the completion of its acquisition of Merian Global Investors on July 1st.

Andrea Gerardi will join the team as senior sales executive, assisting clients across the entire region, stated Jupiter AM in a press release. Meanwhile, Susana García, previously head of Iberian sales at Merian, joins as director of sales for LatAm and Iberia, as announced last June. García will focus on the Uruguayan and Argentinian retail markets, in addition to supporting her existing client base in Iberia.

They will both report to William Lopez, head of Latin America and US offshore. As a result of these appointments, the in-house team has doubled in size to four members.

Relationships with AMCS Group, AIVA and Compass Group

Jupiter also intends to leverage Merian’s relationship with external distribution agency, the AMCS Group, in supporting distribution in the US offshore market. This will extend Jupiter’s distribution model, already in place in the Latin America region. AIVA will continue to support Jupiter’s business development in the LatAm retail market, while Compass Group will continue to support institutional investors.

Lopez claimed to be “thrilled” to welcome two highly experienced professionals, to Jupiter. “I look forward to working with them, and our specialist distribution partners, AIVA, AMCS and Compass Group, as we grow our presence in the region. With a newly expanded product range and team, I am confident that we can offer superior service to our clients and continue to build our assets”, he added.

Described by the firm as “a front-line approach supported by local distribution partners”, Jupiter’s distribution strategy combines the expertise and oversight of an in-house team with the specialist local knowledge of on-the-ground distribution partners.

How to Design a Fixed Income Strategy for Both Resilience and Recovery?

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Photo: Nick Hayes, Head of Total Return & Fixed Income Asset Allocation, AXA Investment Managers. Photo: Nick Hayes, Head of Total Return & Fixed Income Asset Allocation, AXA Investment Managers

It is at the height of crisis periods such as the one experienced earlier this year that investors expect fixed income to prove its worth by providing the resilience needed to weather the storm. However, that is not all today’s diverse global fixed income universe has to offer.

In our view, unconstrained total return-focused fixed income strategies should be designed to use their flexibility to navigate the changing macro and market environment. That is not to say they will always be in positive territory, but the broad idea is a strategy which has the potential to deliver attractive risk-adjusted returns through an economic cycle.

Striking the right balance of different risk factors and potential opportunities is key to how we manage our Global Strategic Bond strategy. We want to ensure that we have enough ammunition, both to provide a degree of resilience when required, but also to participate as much as possible in recovery markets that inevitably follow market downturns.

For much of 2019 and 2020, we have positioned ourselves across three main themes: own duration, be selectively long credit and maintain portfolio hedges. As markets now evolve from crisis period to recovery, the relative emphasis that we place on each of these themes may be shifting, but our convictions remain steadfast.

Rotating from resilience to recovery

The foundation of our unconstrained strategy is a simple, transparent framework which breaks the fixed income universe down into three categories: Defensive, Intermediate and Aggressive. Figure 1 shows the split between these categories as at the end of July 2020, in comparison to March 2020, highlighting how we are now shifting the strategy to focus on the recovery.

AXA IM

Figure 1 shows that our strategy came into 2020 relatively defensively positioned based on our observations indicating that we were approaching the end of the investment cycle. It also shows that by the summer we had meaningfully rotated the portfolio more towards the intermediate and aggressive assets which have been benefitting from the recovery.

The shift in relative emphasis of our three key themes is explained below:

  • Carrying quality duration: Coming into 2020, mainstream government bonds yields were low, but we believed they could go even lower with the end of the cycle approaching. Although we have brought exposure down quite a bit since March, we still think that always maintaining some portion of the portfolio at the more defensive end of the spectrum to offset some of the more ‘exciting’ assets provides the best means of delivering the potential profile investors expect from their core fixed income allocation.

 

  • Selectively long credit: With that said, an unconstrained total return strategy attracts investors seeking to use fixed income as a growth asset, so whilst capital preservation is key, it is equally vital to have exposure to a diverse pool of return-seeking assets. We had been cautious on spread risk for much of 2019 and the early part of 2020, preferring to own smaller pockets of value. Post crisis, we are now starting to turn more opportunistic on cheaper valuations in developed market credit and emerging markets. Since March we have also participated in some new issuance in investment grade credit at attractive spreads.

 

  • Portfolio hedges: We believe having elevated levels of cash is important in periods of uncertainty. While there is no yield, there is also no risk. Cash levels have come down somewhat during the recovery as we rotate the portfolio towards higher beta opportunities. We continue to use Credit Default Swaps to tactically dial risk up and down in high yield, which we believe will remain an important feature as we do not expect the recovery to occur in a straight line.

 

Although the strategy lost value when the crisis hit its peak in March, we were able to mitigate the drawdown compared to both peers and the market, recovering our losses relatively swiftly. Equally important is that strategy performance has turned materially positive, returning over 4.5% for the year-to-date*. It is worth re-emphasising that, generally speaking, investors in total return strategies do have some appetite for drawdown, in the knowledge that risk assets are typically the first to recover following a crisis and any recovery has the potential to be highly profitable.

This focus on flexibly rotating the portfolio to position as appropriate for resilience or recovery is at the heart of the strategy’s approach. It is interesting to highlight the strategy’s performance during past turbulent periods over the last three years, to demonstrate how we aim to participate as much as possible in both resilience and recovery periods.

AXA IM

 

AXA IM

Figure 2 shows the strategy’s performance during 2018 in a turbulent year for markets, stoked by fears of slowing global growth and tightening monetary policy, followed by the market recovery in the first half of 2019. During the “resilience” phase (01/05/2019 – 31/12/2019), the strategy generated a total return of +0.68%, outperforming its Morningstar Peer Group which returned -1.13% over the same period. In the ensuing “recovery” phase which occurred in the first half of 2019 (01/01/2019 – 30/06/2019), the strategy also managed to outperform its Peer Group, returning +6.95% and +6.37% respectively.

However, Figure 3 teaches us that outperforming in both “resilience” and “recovery” phases is not straightforward, since strategies which suffer greater drawdowns are more likely to rebound quicker. The ongoing COVID-19 fallout demonstrates this well: during the real crisis period of March and early April (when central bank stimulus stepped in), our strategy suffered a drawdown of -6.45%, compared to -11.02% for the Peer Group – thereby significantly outperforming during the “resilience” phase. That said, as demonstrated in Figure 3, since early April the recovery has so far been sharper in the Peer Group, given that the bottom reached in March was that much greater – most likely due to the greater average concentration of credit risk held by the Peer Group. Most importantly, however, taking both “resilience” and “recovery” phases (09/03/2020 – 23/07/2020), our strategy has returned +1.51% compared to +0.59% for the Peer Group.

While past performance is not a guide to future performance, it is helpful to view performance during the first half of 2020 in this context – in other words to consider not only the relative resilience at the height of the crisis, but the potential to participate in the recovery over the period ahead, to which we are now turning our attention.

Looking ahead

Covid-19 has been a huge shock to the world and a huge amount of uncertainty remains around the virus itself and the ongoing economic and market impact. For us, it will be as important as ever to stick to positioning the portfolio with the potential to deliver the sort of outcomes our investors expect.

In terms of what we can observe today, we see an ongoing battle between fundamentals and technicals. We expect a weak fundamental macroeconomic backdrop for some time, but this is so far being outweighed by strong technicals supported by policy around the world. Against this background, sentiment and valuations are mixed.

Parts of high yield credit and emerging markets are attractively-priced but we expect defaults to rise. So, we see opportunities to go yield-hunting but we would not be maximum bullish on credit in this environment and still see merit in balancing the risks with mainstream government bonds which even at low levels of yield offer potential defensive properties. Especially considering what profile a strategy like ours should offer investors.

Importantly, we do not believe the recovery will come in a straight line and volatility will persist. We intend to play that by employing our strategy’s flexibility to pick up assets which become priced to offer potentially good returns over the next 12 months. However, we will still use cash and portfolio hedges to do so cautiously.

Overall, we believe a low yield/high volatility environment calls for unconstrained, flexible strategies. It will be important to maintain focus on transparency and risk management as global fixed income is a broad spectrum with plenty of pitfalls. In our view, the key to navigating whatever comes next is actively managed and diversified asset allocation combined with high conviction security selection, ultimately aiming to deliver attractive risk-adjusted returns.

 

*Source: AXA IM and Morningstar. Performance is shown on a net of fee basis for a representative account from the Global Strategic Bond strategy (base currency USD).

 

 

Opinion written by Nick Hayes, Head of Total Return & Fixed Income Asset Allocation, AXA Investment Managers

 

Notes:

(*) Source: AXA IM and Morningstar. Performance is shown on a net of fee basis for a representative account from the Global Strategic Bond strategy (base currency USD).

 

Important Information:

Not for Retail distribution: This document is intended exclusively for Professional, Institutional, Qualified or Wholesale Clients / Investors only, as defined by applicable local laws and regulation. Circulation must be restricted accordingly.

This promotional communication does not constitute on the part of AXA Investment Managers a solicitation or investment, legal or tax advice. This material does not contain sufficient information to support an investment decision. Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision. Before making an investment, investors should read the relevant Prospectus and the Key Investor Information Document / scheme documents, which provide full product details including investment charges and risks. The information contained herein is not a substitute for those documents or for professional external advice. The products or strategies discussed in this document may not be registered nor available in your jurisdiction.

Please check the countries of registration with the asset manager, or on the web site https://www.axa-im.com/en/registration-map, where a fund registration map is available. In particular units of the funds may not be offered, sold or delivered to U.S. Persons within the meaning of Regulation S of the U.S. Securities Act of 1933. The tax treatment relating to the holding, acquisition or disposal of shares or units in the fund depends on each investor’s tax status or treatment and may be subject to change. Any potential investor is strongly encouraged to seek advice from its own tax advisors. AXA WF Global Strategic Bonds is a sub-fund of AXA World Funds. AXA WORLD FUNDS ‘s registered office is 49, avenue J.F Kennedy L-1885 Luxembourg. The Company is registered under the number B. 63.116 at the “Registre de Commerce et des Sociétés” The Company is a Luxembourg SICAV UCITS IV approved by the CSSF and managed by AXA Funds Management, a société anonyme organized under the laws of Luxembourg with the Luxembourg Register Number B 32 223RC, and whose registered office is located at 49, Avenue J.F. Kennedy L-1885 Luxembourg. The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested. Exchange-rate fluctuations may also affect the value of their investment. Due to this and the initial charge that is usually made, an investment is not usually suitable as a short term holding. Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 7 Newgate Street, London EC1A 7NX.

 

Five Ways that Investing Could Help Create a Better Planet

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Pixabay CC0 Public DomainPhoto: Jesse Gardner. Photo: Jesse Gardner

By investing in companies finding solutions to the environmental crisis, investors can help build a better world for future generations.

  • A lightbulb moment for the planet

Pressure is mounting on governments and businesses to reverse decades of environmental degradation and to safeguard the world’s natural resources for future generations. Investors can play their part by providing capital to companies developing solutions to environmental challenges. In doing so, they can contribute to a more sustainable future whilst also potentially generating an attractive return. 

There is precedent for technology to help us solve our environmental issues. In the 1960s a scientist found that a semiconductor he was tinkering with produced a weak glow. No one then could have guessed at the revolution that would be unleashed by the introduction of the first light-emitting diodes (LEDs), which consume a fifth of the electricity of their predecessors and have dramatically reduced energy use across the globe.

The LED is just one of many environmental technologies that have transformed our impact on the environment. Here, we look at five areas where investors, and the companies they invest in, can help make a positive impact on the environment.

  • 5. Plastic alternatives

Hailed as a miracle material when it was invented, plastic has fast become the planet’s worst nightmare. Since 1950, some 8.3 billion tonnes of plastic were produced worldwide, of which only 6 per cent has been recycled (1). One refuse truck-worth of plastic is dumped into the sea every minute, and some fishermen now catch more plastic than fish (2).
Companies are now producing technologically-advanced alternatives to plastic that could change things. In the fashion industry, brands such as Stella McCartney and Prada are using Econyl (3), a material made from industrial waste (including fishing nets) which reduces greenhouse gas emissions by 58 per cent compared to nylon. Wood-based materials such as Cupro, Viscose, and Lyocell are also being used in everything from gym outfits to fire resistant clothing.

Plastics still account for more than half of the global food packaging market, but 500 million tonnes of plastic could be replaced with wood-based materials (4), with the latest carton packaging allowing food and beverages to be stored for up to 12 months without refrigeration.

  • 4. Better water use, efficiency and recycling

A quarter of a per cent. That’s how much of the world’s water is usable. The rest is too salty, too polluted or too frozen. As our population grows so does the demand for this vital resource, which is already scarce. 40 per cent of the world don’t have access to sufficient clean water (5) and the situation is deteriorating fast.

The solution is to use less water and to use it more efficiently. Technology can play a big part. Agriculture accounts for around 75 per cent of all fresh water use (6), but precision irrigation can reduce both the amount used and the pollution it causes, through reduced herbicide and pesticide use.

In cities, high-tech sensors can help to detect leaks early and even forecast in advance which pipes are about to start leaking.

As well as using and wasting less water, we need to recycle more. The waste water recycling market is growing at 20 per cent a year (7), with nanotechnology and membrane filtering among the key innovations.

  • 3. Renewable and more efficient energy

Every year, 40 gigatonnes of carbon dioxide (CO2) – the prime culprit in global warming, is released into the atmosphere. In order to put the brakes on destabilising, man-made climate change, the net release of this greenhouse gas needs to drop to zero.
Cleaner sources of energy production will help. For example, by abandoning coal, UK CO2 emissions have dropped 29 per cent over the past decade and are now the lowest they’ve been since 1888 (8). Renewables such as wind, solar and tidal already provide a third of UK electricity, and are fast becoming cheaper than fossil fuels.

Carbon capture and storage (CCS) can be as simple as planting trees and generating biomass, or as complex as using new technology to suck CO2 right out of the air and lock it up in stone or concrete, or back into old oil or coal seams. The CCS market is growing 14 per cent a year and is projected to reach USD5.6 billion by 2026 (9).

Energy efficiency is key. For instance, LEDs have helped drop UK electricity demand back to 1984 levels8 and globally, energy efficiency represents about 40 per cent of potential reductions in greenhouse gases (10).

Companies developing smart buildings, better design, insulation and materials will benefit from the drive to use energy more efficiently.  

  • 2. Pollution reduction and removal

Air pollution alone kills almost 9 million people a year and cuts three years from our life expectancy (11) whilst more people die from unsafe water than from all forms of violence including war (12).

The growth of ever more densely populated cities threatens to make matters worse.

But disaster can be avoided. With smarter urban planning and the development of pollution-reducing technology, dirty air and water could be consigned to history. 

The global air pollution control market is expected to grow dramatically in the next few years, reaching over USD 100 billion by 2027 (7). Similarly, companies developing advanced water filtration and recycling technologies are helping to build a sustainable water system fit for the future.

  • 1. Environmental investment funds

An effective way to protect the planet for future generations is to invest in companies developing solutions to its most pressing environmental problems. The environmental solutions sector is thriving – at USD 2.5 trillion in size, it is growing at 6-7 per cent per year (7).

Environmental funds invest in some of the world’s most environmentally-responsible companies, and those building products or services to help solve environmental challenges such as climate change, air pollution and a lack of clean water, such as those highlighted above.

And investing to safeguard the planet doesn’t necessarily mean having to sacrifice performance. An increasing body of research research indicates that companies with stronger environmental, social and governance (ESG) values are likely to outperform the broader market over the long-term, and prove more resilient in market downturns (13).

Even a small investment can make a big environmental impact across a whole range of factors – from CO2 saved to renewable energy generated, or a reduction in the amount of fertiliser washed into our lakes and oceans.

 

Notes:

(1) Source: Our World in Data, September 2018.
(2) Source: The Guardian, March 2019.
(3) Source: Aquafil 2015 Sustainability Report.
(4) Source: Lenzing, company website, January 2019.
(5) Source: UN Water Action Decade, March 2018.
(6) Source: Encyclopedia of Water Science, Second Edition.
(7) Source: Pictet Asset Management, June 2020.
(8) Source: Carbon Brief, March 2020.
(9) Source: Bloomberg, March 2020.
(10) Source: EU 2030 Climate & Energy Framework.
(11) Source: Air Quality Life Index, November 2018.
(12) Source: UN World Water Day, March 2010.
(13) Source: Morningstar, Axioma & Boston Consulting, 2020.

 

Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented herein.

Important notes

This material is for distribution to professional investors only. However it is not intended for distribution to any person or entity who is a citizen or resident of any locality, state, country or other jurisdiction where such distribution, publication, or use would be contrary to law or regulation. Information used in the preparation of this document is based upon sources believed to be reliable, but no representation or warranty is given as to the accuracy or completeness of those sources. Any opinion, estimate or forecast may be changed at any time without prior warning.  Investors should read the prospectus or offering memorandum before investing in any Pictet managed funds. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future.  Past performance is not a guide to future performance.  The value of investments and the income from them can fall as well as rise and is not guaranteed.  You may not get back the amount originally invested. 

This document has been issued in Switzerland by Pictet Asset Management SA and in the rest of the world by Pictet Asset Management Limited, which is authorised and regulated by the Financial Conduct Authority, and may not be reproduced or distributed, either in part or in full, without their prior authorisation.

For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.

Pictet Asset Management Inc. (Pictet AM Inc) is responsible for effecting solicitation in North America to promote the portfolio management services of Pictet Asset Management Limited (Pictet AM Ltd) and Pictet Asset Management SA (Pictet AM SA).

In the USA, Pictet AM Inc. is registered as an SEC Investment Adviser and its activities are conducted in full compliance with the SEC rules applicable to the marketing of affiliate entities as prescribed in the Adviser Act of 1940 ref. 17CFR275.206(4)-3.

Luca Paolini (Pictet Asset Management): “We Are Overweighting European and Swiss Equities as well as Emerging Local Currency Debt”

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Luca Paolini Pictet AM_0
Luca Paolini, Pictet Asset Management. Luca Paolini, Pictet Asset Management

The markets have continued to show a high rate of volatility in recent weeks. The evolution of the pandemic has been a succession of bad news, with new Coronavirus cases and a loss of momentum in real time indicators. However, according to Luca Paolini, Chief Investment Strategist at Pictet Asset Management, investors continue to display optimistic tendencies based on several assumptions.

The first is that data points to a population that is better prepared to live with the pandemic in the event of a second wave of COVID-19. There is also greater optimism about the possibility of a vaccine by the end of the year, whereas only a few months ago the best forecasts predicted that it would not be available until mid-2021. The second is that the economy is in a recovery phase and if new containment measures were needed, they would be implemented in short periods of time and at the local level. The fourth is that fiscal and monetary stimuli will work in reviving the economy, and if they do not work, there will be new measures taken. Fifthly, the conflict between China and the United States is seen as rhetorical. Ignoring the voices that speak of a possible second cold war, investors believe that US elections and the vulnerability of growth in China will lead to a trade agreement between the two parties. For the bulk of investors, the crisis is temporary and so is the hit to corporate profitability.   

Caution on the part of Portfolio Managers

Investor optimism contrasts with the caution displayed by fund managers in a recent global survey conducted by Bank of America. The results of this survey showed that only 14% expected a V-shaped recovery, compared with 44% expecting a U-shaped recovery and 30% expecting a W-shaped recovery, but overall, most believe the recent recovery is a rally within a bear market, a response to fiscal performance that has been “too stimulative”. Over 70% of fund managers believe the market is overvalued, similar to the first quarter of 2000. On the other hand, 74% believe that US technology and growth stocks are a popular investment options in a market where US equities, commodities, health care and large technology stocks are unprecedently overweight, and energy, materials and UK equities have been heavily underweight. In addition, over the next 10 years, managers expect global equities to perform in the 3-4% range, which is well below the more than 10% seen over the last decade.   

Evolution of Daily Activity

Daily activity indicators have flattened out again. Bloomberg’s daily activity indicator, which at 100% marks a normal level of activity before the crisis, reached 30% in the second week of April, placing the main economies in a state of hibernation. In the last weeks of July, the main developed economies are at fairly acceptable levels of recovery. Japan, Germany and France lead the way by exceeding the 80% mark, Italy and Spain by more than 70%, and finally the United States, the United Kingdom, Canada and Sweden by less than 65%.  

It is interesting to see that this time the US equity market looks much worse off than the bulk of the European market. Only China has a daily indicator of activity close to 100. These data show that the recovery is still going on, but that the loss of momentum is significant because consumers still perceive a high level of uncertainty in their future. The confusion also comes from governments still trying to understand how they should act.

Market liquidity and valuations

The injection of money into the economy by central banks is twice the level of 2008. A large part of this liquidity remains in the financial markets, which is why there has been a huge disconnect between capital market data and the economy.

Overall, the trend could be said to be positive. Real interest rates are negative and central banks continue to inject liquidity into an economy that shows better signs of recovery than three months ago. But, if you restrict this analysis to recent months, momentum is accelerating at a time when, if you look at valuations, they are becoming somewhat challenging.

On a scale of 0 to 100, where 0 represents an expensive asset and 100 a cheap one, at the end of July, equity levels are at 38, bond levels at 32 and commodities at 66. Pictet AM’s valuation models show that, for the first time since September 2018, equities are expensive. The market however indicates that even with negative cash flows, investors are feeling pressure to put their money to work.

Benefits Reporting Season

While bond yields depend on inflation expectations, stock returns move in line with profits. Pictet AM’s models forecast a 30% – 40% drop in US corporate earnings, while the market consensus expects a smaller drop of 20% – 30%. There is a high concentration in the S&P 500 index, where growth stocks accounted for around 50% of total earnings last year. This high concentration means that earnings per share can diverge significantly from the real economy.

This recession is hitting the service sector harder than manufacturing. This recession is three times worse than the Global Financial Crisis, but the consensus expects earnings per share to fall to about the same level as they did in the 2008 crisis. Even so, there is a positive fact to highlight, 85% of companies are reporting data which is better than expected.

What is the best market to invest in right now?

The trend seen in the last three years, where the US has outperformed almost every market, is going to change dramatically, as the US market is now expensive. At present, it shows a high concentration in large technology firms that are beginning to be exposed to regulatory problems. In addition, we have to consider the political risk lurking the US with the approach its presidential elections and the effect that the pandemic is having on the country. For these reasons, the Pictet AM strategist believes that the investment universe should be expanded to other regions.

In this regard, European shares are trading at very low levels compared to the US, and their currency, the Euro, is cheap. The recently approved emergency fund in the European Union represents a change in the region, not only for the economy, but also in investors’ perception of the European Economic Union’s crisis management. This is why Pictet AM will overweight European equities.

They are also overweighting Swiss equities. The Swiss market is a well-performing market, relatively defensive in nature and overweighting two sectors, the healthcare sector and basic consumption.

In terms of asset allocation, Pictet AM will overweight consumer staples, from a neutral position, and reduce its exposure to the financial sector, believing that the time has come to be more cautious.

In fixed income, the environment is much more complex. Bond yields are at lows in virtually all developed markets. The 10-year US Treasury bond offers a return of close to 0.50 basis points. It’s difficult to rely solely on the Fed’s purchase programme, as it does not guarantee the investor a positive return. The alternative is emerging market debt. Markets that should be more vulnerable to the coronavirus crisis have been the best performing fixed income assets, thanks to the fact that most local currencies are at very low exchange rates. In particular, Pictet AM is very optimistic about bonds in China, which are trading at a record spread over US Treasury bonds.

Finally, gold is at expensive levels, but is expected to continue to rise in price due to purchases in gold reserves being made by central banks.

 

 

Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented herein.

Important notes

This material is for distribution to professional investors only. However it is not intended for distribution to any person or entity who is a citizen or resident of any locality, state, country or other jurisdiction where such distribution, publication, or use would be contrary to law or regulation. Information used in the preparation of this document is based upon sources believed to be reliable, but no representation or warranty is given as to the accuracy or completeness of those sources. Any opinion, estimate or forecast may be changed at any time without prior warning.  Investors should read the prospectus or offering memorandum before investing in any Pictet managed funds. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future.  Past performance is not a guide to future performance.  The value of investments and the income from them can fall as well as rise and is not guaranteed.  You may not get back the amount originally invested. 

This document has been issued in Switzerland by Pictet Asset Management SA and in the rest of the world by Pictet Asset Management Limited, which is authorised and regulated by the Financial Conduct Authority, and may not be reproduced or distributed, either in part or in full, without their prior authorisation.

For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.

Pictet Asset Management Inc. (Pictet AM Inc) is responsible for effecting solicitation in North America to promote the portfolio management services of Pictet Asset Management Limited (Pictet AM Ltd) and Pictet Asset Management SA (Pictet AM SA).

Funds Society Launches its First ESG Virtual Investment Summit

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Funds Society invites you to participate in a Virtual Investment Summit in which we will discuss ESG and its importance as a positive source of alpha and returns for investment portfolios. Three experts from Pictet Asset Management, Schroders and WE Family Offices will debate how sustainable environmental, social and governance practices help contribute to enhance the performance of companies in the Equity markets. The event will take place on August 26, at 10 AM ET.

Speakers include Luciano Diana, Senior Investment Manager, Thematic Equities, Pictet Asset Management, Sarah Bratton Hughes and Head of Sustainability, North America, Schroders. Richard Zimmerman, Senior Advisor at WE Family Offices, will moderate.

Luciano Diana has been Senior Investment Manager for the Pictet Global Environmental Opportunities strategy, the firm’s flagship environmental solutions portfolio, which pioneered the application of the planetary boundaries / life cycle assessment framework. From 2009 to 2014, he was Senior Investment Manager for the Pictet Clean Energy strategy, which focuses on the Energy Transition to a low carbon economy.

Before joining Pictet, Luciano spent four years at Morgan Stanley, where he headed the London based clean energy sell-side research team. He began his career in 1998 as an IT strategy consultant at Accenture.

Luciano holds a Laurea in Telecommunications Engineering from the University of Padua, Italy, and he was a Visiting Scholar at the University of California at Berkeley. He holds an MBA from INSEAD.

You can review Pictet Asset Management´s ESG web here.  You can also download the GEO 2020 Advisor Toolkit here.

Sarah Bratton Hughes Hughes is the Head of Sustainability, North America. Her responsibilities include leading the sustainability strategy and ESG integration in North America. She joined Schroders in 2011 and is based in New York.

Previously, Sarah was an Investment Director at Schroders which involved supporting and representing the Schroders Sustainability Team as well as the Schroders US Small Cap and Schroders US Small & Mid Cap investment capabilities to clients and prospective clients. She was also responsible for ESG integration in North America.

Sarah was an Associate Product Manager at Schroders from 2014 to 2017, which involved supporting the US Equities teams and representing the Schroders US Small & Mid Cap and Schroders US Large Cap investment capabilities to clients and prospective clients. She was a product executive on the same team from 2011-2014.

Prior to joining Schroders, Sarah was a Senior Analyst Investment Performance at JP Morgan Asset Management from 2010 to 2011, which involved supporting investor and client inquiries relating to investment performance reviews. She was also a Client Service Associate at JP Morgan Chase from 2007 to 2010, which involved monitoring and implementing new account openings as well as maintenance of existing accounts. Qualifications: BA in Economics from St. Francis College; BSc in Business Management from St. Francis College.

You can review Schroders´s ESG web here.

Richard Zimmerman is a Senior Advisor at WE Family Offices, based in New York, where he leads the firm’s Values-Aligned Investing Advisory Service. WE Family Offices is a Family Office Company that provides strategic wealth advice on approximately $10B of assets for about 70 U.S. and international families. WE has been highly recognized in the industry, including being named among Barron’s Top RIA Firms of 2019.

Richard is a recognized speaker in the Impact Investing arena and works with some of the world’s wealthiest families helping them align their values to their investments. He has spoken at over 25 conferences, including the UN Sustainable Investing Conference, Barron’s ESG and Impact Summit, Opal Total Impact, and Responsible Investing. He has a pragmatic and upbeat speaking approach and uses real world examples to illustrate how sophisticated investors can invest with impact.

Richard has a Master of Science in Sustainability Management from Columbia University and a B.A. from the University of Virginia. He holds a Sustainable Investment Professional Certification (SIPC) with the John Molson School of Business as well as numerous financial industry designations. He has held senior positions at global banks and multi-family offices as well as board positions at philanthropic organizations. He is a Board Director at the Capital Institute and recently served on the Ceres President’s Council.

For registration, follow this link.

 

CFA Society Uruguay Signs an Alliance with Colchester Global Investors

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In line with its mission to promote the development of the highest standard of financial practices, the CFA Society in Uruguay has sealed an alliance with UK-based fund manager Colchester Global Investors, in order to strengthen its areas of enterprise, exchange knowledge and to work together on the various actions and activities to be developed in the country, they announced in a statement.

The institutions will hold conferences, events and training sessions so that those interested can acquire the broadest knowledge in the field and exchange information with the participation of local and worldwide experts who have excelled in this area.

“Since the formation of Society in the country in 2018, CFA Society Uruguay brings together a hundred investment professionals committed to the principles of the CFA Institute, linked to the promotion of the highest ethical standards, the promotion of financial education and professional excellence for the benefit of society as a whole,” said the CFA Society Uruguay.

With over $40 billion in assets under management, Colchester Global Investors focuses exclusively on the active management of global sovereign bonds and currencies. Headquartered in London, the company has offices in New York, Dubai, Singapore and Sydney with a client base that includes sovereign wealth funds, pension funds, funds of funds, private banks and discretionary mandates.

“Among the key aspects of focusing exclusively on sovereigns is the low correlation with managers that include credit strategies, simplicity due to the lack of complex instruments, and liquidity, especially in times of market stress. Colchester is a signatory to the United Nations Principles for Responsible Investment (UNPRI) and the Task Force on Climate-Related Financial Disclosure (TCFD),” Colchester said.