CC-BY-SA-2.0, FlickrPhoto: Walter
. What Sanctions Would the 5 Latin America and the Caribbean Countries Included in the EU's Tax- Haven Blacklist Face?
After two years of negotiations, the Finance Ministers of the EU Member States approved in Brussels, the first list of jurisdictions that do not cooperate in tax matters.
Of the 17 states included in this list of tax havens, there are five from Latin America and the Caribbean: Barbados, Panama, Grenada, Saint Lucia and Trinidad and Tobago. All have been singled out for not making sufficient efforts in the fight against tax evasion and they are also included in the list that the OECD produces each year.
These five are joined by 12 other countries: American Samoa, Bahrain, Guam, South Korea, Macao, the Marshall Islands, Mongolia, Namibia, Palau, Samoa, Tunisia and the United Arab Emirates.
The Bahamas and the British and United States Virgin Islands were supposed to be blacklisted, as were Anguilla, Antigua and Barbuda or Dominica, but the European Union has postponed the analysis until 2018 so that these small Caribbean islands have time to recover from the devastating hurricane season.
In addition, 47 countries have committed to address the deficiencies in their tax systems and meet the required criteria. Uruguay is on this gray list. This is due to its legislation on Free Zones indicated this year as a “harmful legal incentive” by the OECD.
The parliamentary procedure of a reform of the Free Zones Law that subjects companies to greater controls, should finish removing Uruguay from the zone of doubt.
What does it mean to be included in this list?
Recognition of the countries that encourage abusive tax practices, according to the European Commission, should have a real impact on the affected countries, thanks to the new EU legislative measures.
First, following the Commission’s proposals, the EU list is now linked to funding in the context of the European Sustainable Development Fund (EFSF), the European Fund for Strategic Investment (EFSI) and the External Loan Mandate (ELM). Their funds can not be channeled through entities in the listed countries. Only direct investment in these countries (that is, financing of projects on the ground) will be allowed in order to to preserve development and sustainability objectives.
Second, the Commission has proposed that multinationals with activities in these jurisdictions be required to have much stricter reporting requirements. In addition, any fiscal scheme that includes operations in any of the countries included in the EU list will be automatically reported to the tax authorities.
Finally, the Commission has already taken steps for Member States to impose coordinated sanctions on these countries that include measures such as increased monitoring and audits, withholding taxes, special documentation requirements and anti-abuse provisions.
The EU’s reasons
These 17 countries on the blacklist have been identified after finding out that they do not comply with international transparency standards on automatic exchange of information or encourage unfair tax competition.
“Those countries that choose not to have a business tax or to offer a zero rate should ensure that this does not encourage artificial offshore structures without real economic activity,” the Commission explains in its statement.
CC-BY-SA-2.0, FlickrPhoto: White House. How will Trump's Fiscal Reform Affect Different Asset Classes?
After passing 51-49 in the Senate Trump’s tax reform is one step further towards becoming a reality, which is expected to provide a moderate boost to US growth.
According to a survey of 51 analysts conducted by the National Association of Business Economics, around half of economists expect that changes in fiscal policy will increase the growth of the world’s leading economy by between 0.28 and 0.39 percentage points next year.
“We believe that the success of a package of fiscal measures will probably be accompanied by a slight rise in prices in the short term, of a magnitude practically similar to the setback that would result from a legislative failure,” explained Mark Burgess, Deputy Global Chief Investment Officer at Columbia Threadneedle Investments.
Small caps, consumption and finance
In general, the impact is expected to be limited, but small caps, consumer-related stocks and financial securities will be the most benefited according to Patrik Lang, Head Equity Research at Julius Baer.
“The final result will still be subject to some changes, but now it seems increasingly likely that the tax reform will take effect in the coming weeks. We maintain our opinion that the direct impact on the S&P 500 will be limited, while small caps and the consumer and finance sectors will be the most favored by the reform”.
Equities
For Peter Garnry, Head of Equity Strategy at Saxo Bank, the tax rebates will especially benefit companies with a more national orientation, as it will be positive in terms of cash flow available after taxes. With the corporate tax rate decreasing from 35% to 20%, net operating profits will increase by 20% nationwide.
“Among the sectors that are being targeted by the US tax reform is the technological sector, since a repatriation tax of 12% could be imposed. This tax would encourage companies with money abroad to return to the US. It is estimated that around $2.5 trillion in cash are abroad and that around 50% of this money would go back home and be used for the repurchase of shares,” he estimates.
High yield debt market
The tax rates high yield debt issuers pay in the United States are, on average, 28%, recalls SKY Harbor Capital Management, so with everything else equal, the proposed tax cuts will modestly improve the free cash flow for issuers.
In addition, they explain, the issuers of lower rating and with greater leverage will be negatively affected by the reform, since a reduced tax shield will offset the benefits of a reduced tax rate. And on the other hand, issuers of higher quality and investment grade will be te ones that benefit the most of repatriation.
For the firm, sectors with high average tax rates, high interest coverage rates and capital intensive operating models should be the main beneficiaries of the tax reform.
Gold waiting for political events
The tax reform should have a more lasting impact on the gold market, since it is likely to reactivate optimism regarding a higher growth rate in the United States, support the idea of rate increases and encourage a rebound of the US dollar.
“The sustainable rise in gold should materialize once growth concerns creep into the financial markets and reactivate investor demand for gold as a safe haven,” says Carsten Menke, Commodity Analyst at Julius Baer.
Agnieszka Gehringer and Kai Lehmann, courtesy photos. As Rules Regarding the Creation of Synthetic ETFs Become More Stringent, They Could Have an Impact on Growth
According to Agnieszka Gehringer and Kai Lehmann, members of the Research Institute of Flossbach von Storch, ETFs go beyond passive investment, due to their hyper trading activity and the latest innovations in the field of smart beta. In this interview with Funds Society, the experts also warn of the uncertain behavior of ETFs in turbulent periods, something not yet tested, and are confident of the industry’s potential for growth in Europe, although, they are aware the stricter rules on the creation of synthetic products could be a drag on its development.
What do you intend when you doubt that ETFs are passive?
The ETF are often put in the context of passive investment, based on the fact that they follow the performance of a certain index. This is exactly the idea staying behind the traditional index funds – an invention of Jack Bogle dating back to 1976. But Bogle aimed at providing an instrument for a long-term investment in stock market by simply following the index. To the contrary, ETF investors are very much short-term focused. They trade ETF shares very actively, indeed hyper-actively. This is what we find in our analysis based on the three biggest equity ETFs tracking respectively the German DAX, the US S&P 500 and the FTSE 100 in the UK. The volume of the ETF shares traded on average every day is four times higher than the traded stocks of the underlying indices. This hyper-activity brings the idea of passive investment ad absurdum.
Has the innovation propagated the creation of ETFs which can be called active? Isn’t it a contradiction? How does the passive and active investing complement one another in an ETF?
Besides the traditional ETF there is indeed a growing interest in the so called smart beta ETFs. Whereas the traditional ETF are supposed to reconstruct 1:1 the index performance based on the market caps of the index constituents, smart beta ETFs weight the basket of the underlying securities based on alternative criteria, called factors. In this way, they aim at performing better than the market and thus better than traditional ETFs. These factors may relate to some kind of assessment of accounting metrics of the index constituents, like book value, dividends, or cash flows, or to still other factors, such as low volatility, undervaluation or expected momentum. In this sense, smart beta ETFs add an active layer with respect to traditional ones: they are not only actively traded, but render the underlying investment choice active as well. Is it a contradiction? I wouldn’t say so – it is more an enhancement on the activity scale. But the important thing to note is that such “active” choices are not comparable with the investment decision made by an active asset manager who thoroughly analyse the entire business model of a company in order to assess its intrinsic value. Smart beta strategies are focused on fast-track, partial, rather than thorough, and more quantitative, rather than qualitative assessment of companies.
Due to this innovation, could ETFs push the active strategies aside?
Given the current popularity of ETFs, be it traditional or smart, it wouldn’t be surprising to see further rise in the relative share of ETF-managed funds. At the same time I would doubt whether it is in the interest of ETF investors to fully eliminate active investment strategy. In the end ETFs freeride on the contribution which active managers deliver to the efficient price building on capital markets. By the same token, we can’t exclude that upon the attainment of a certain critical mass on capital markets by ETFs, the price building process might get into difficulties.
It is often stated that both types of investment strategies would survive. What would be the role played by the one and the other?
It is plausible to expect that both ETFs and active management will coexist. On the side of ETFs, they have been surely attractive so far, given the positive past performance on capital markets and their warranty of obtaining the performance of the underlying index. They could be thus appropriate for investors willing to simply follow the market. At the same time, not much is known so far about ETFs’ performance under difficult weathering conditions on capital markets. Only when markets enter more turbulent waters will we be able to assess the true performance of ETFs. For now ETF investors should keep this uncertainty in mind. On the side of active managers, and especially of those following a consistent and well-founded investment strategy, they will continue to play a role in enhancing the price setting on markets, especially when we see some market turmoil.
In your opinion, which was the major innovation in the world of ETFs during the last years?
The original idea of following the market in order to enjoy the long-term positive return at a rock-bottom cost is quite revolutionary. Their invention may have helped to get in touch with capital markets. But today there is not much left out of this. To the contrary, the hyper-activity of ETF trading and allegedly “smart” investment choices of smart beta ETFs could pose more risks than benefits, should capital markets experience turmoil in the future.
In launching of novelties (smart beta, currency hedging (?), …), where could the next innovations go in the world of ETF?
Given the past creativity in the field of ETFs, the innovation could go anywhere. Just think of the different kinds of thematic or even esoteric ETFs, like for instance “biblically responsible” ETFs… If this trend continues, the question will be increasingly about the risk-reward balance of less diversification and less market liquidity versus chances to pick up an index performing better than the others. All in all, there seem to be less and less well-founded investment choices.
Is the use of ETFs changing – from tactic to strategic positioning? Does this generalization in the use regard all types of investors?
This seems to be particularly the case for institutional investors. In the past, they were using ETF for cash equalization and transition management. But now the growing use for core exposure can be observed.
Comparing the markets, the European with the US market, Europe is lagging behind, but could still catch up. How much could the European industry grow?
The size of the ETF market in Europe is indeed significantly smaller than in the US. Precisely, the total assets held by US-ETFs now add up to about 3.3 bn. USD whereas its European counterparts are currently approaching the roof of 1 bn. USD. There is surely catching up potential for Europe. At the same time, there are some important regulatory changes applying next year, which could decelerate the process. Precisely, rules regarding the creation of the so called synthetic ETFs become more stringent. Accordingly, given the current non-negligible share of synthetic ETFs in Europe, this could have an impact on growth and the speed of convergence between the European and US ETF market.
Could the regulation have an impact on the use of ETFs and why?
As mentioned above, the regulation is already having an impact on the use of – in this specific case synthetic – ETFs. But more generally, given that ETFs can still be considered as relatively new to the financial market reality, the regulators have to gather information and experience regarding the functioning of ETFs. This task is not easy and regulators could lack the necessary information to set up well-functioning rules. And the past teaches us that unfortunately sometimes it needs an external shock to discover the loopholes in the system. Hopefully this time is different.
Wikimedia CommonsPhoto: Tim Paulson, Fixed Income Strategist at Lord Abbett and Justin Wells, Global Equity Strategist at Old Mutual Global Investors, discussion panel moderated by Gustavo Cano, Director of Product and Strategy for UHNW LatAm clients at BBVA Compass. “Markets Can Remain Irrational and Solvent for a Long Time. It ‘s Classical of the Herd Mentality”
In Miami, Martin Hofstadter, Offshore Business Director at Lord Abbett and Andrés Munho, Sales Manager for Latin America, Florida and Texas at Old Mutual Global Investors, welcomed US Offshore industry professionals to a lively panel on global macroeconomics. Moderated by Gustavo Cano, Director of Product and Strategy for UHNW LatAm clients at BBVA Compass, the event was attended by Tim Paulson, Fixed Income Strategist at Lord Abbett and Justin Wells, Global Equity Strategist at Old Mutual Global Investors.
Once the panel was over, the event was attended by Dr. Roberto Canessa, a renowned cardiologist and one of the sixteen survivors of the plane which crashed in the Andes in 1972.
The debate on the macroeconomic environment began by evaluating the performance of central banks, which continue to keep interest rates at low levels for a longer period of time. According to Justin Wells, it’s very complicated for the Fed to diverge radically with the rest of the main central banks, because this could cause strong volatility with respect to the rest of the currencies. In his view, central banks will maintain very benign levels of volatility despite an increase in geopolitical risks that is much greater in developed markets.
While Tim Paulson pointed to the great correlation between asset prices and balance sheet volumes of central banks. “We hope that as the Fed begins to unwind its balance sheet, the impact of its actions in the equity shares market will be reduced. We expect to see risk premiums begin to recover, at present, it’s clear that the European Central Bank’s and the Bank of Japan’s actions are surpassing the Fed’s normalization attempts, which are still very small reductions.”
Lord Abbett’s strategist argued that as long as the tremendous search for returns on revenue continues in the world, which results from the demographics of developed economies, we will continue to see low interest rates for some time. “If you compare returns on German sovereign debt with those of US debt, the latter are higher, but if you take into account the cost of currency hedging, both are more or less at the same level. US rates are at current levels due to the influence of the rate levels in Europe and Japan. And, all rates are moving together, affecting currencies. In this model, if the currency’s hedging goes up, the Fed’s rate goes along with this increase. There is massive global arbitration.”
According to Paulson, the market is expecting less aggressive behavior from the European Central Bank. “Just because they cut down from buying 60 billion to buying 30 billion, does not mean that at some point the market is going to decrease its purchase speed. In Europe, they are still trying to remain behind the Fed, but they continue to buy more than the market is able to digest. Everyone competes against everyone for profitability,” says Paulson. As for the possibility of overheating the market, in which more and more investors are looking for the first indications that a correction may be taking place, Justin Wells said that there is strong speculation about a potential correction and about why is it’s different this time. “The relationships of conventional metrics with the correlation of the market are breaking down. There is a huge level of disruption in the economy, which is very interesting.”
Meanwhile, Tim Paulson, joked with the idea of ensuring a recession in the future. “While a possible recession may come in 6 months or in10 years, none of the market participants can say when. Economic data show that the chances of a recession in the next 6 or 12 months are lower than average. A recession is possible, but unlikely in the near future. The risk is that there is always going to be something that cannot be predicted, something that causes a recession. While it is unlikely that a recession will occur with a risk of restructuring and real loss of assets as a result of the behavior of central banks, it cannot be ruled out, as it can happen. At no time in history has it been so easy to access the capital markets. A rise in interest rates may put some pressure on the markets and bring them down, but we are far from a horrible decision being made by the Fed.”
Another issue that was mentioned during the debate was the US tax reform. According to Paulson, it’s not an issue that they are implicitly considering in their strategies and he does not believe that anyone in the market is doing it. “You cannot bet on the possible final result of the tax reform. All that can be done is watch which assets will be affected by the fiscal reforms, and if everyone is taking into account the same type of tax reform or that it will happen with the same probability. It is not a question that can be easily solved, but it is how you usually play this type of events; looking for differences in probabilities.”
The absence of volatility and complacency in the markets
On the absence of volatility in the markets, Paulson commented that after the global financial crisis many investors did not leave behind a psychology of pessimistic tendency and continued to bet on quality and defensive styles. “This defensive mentality is what has allowed very low or very benign levels of volatility. We continue to see frequent rotations that can be very destructive, by sector and style, we feel that perhaps they reflect in a more accurate way the real level of volatility, which measured in terms of conventional metrics is simply not reflecting what is actually happening.”
For Wells, another factor that is reducing volatility is the use of quantitative models, since the existence of a reversion to the average calibrates the behavior of real activity, both in the depth of the market and on the surface. “Spreads compression, high price-to-earnings ratios, all these indicators are changes that affect risk premiums, this is really what the actions of central banks has killed. The dynamics of the markets have changed, more than 1.2 trillion dollars have abandoned large cap equity strategies since 2007, and at the same time 1.4 trillion dollars have gone into passive investment and smart beta, a huge change in terms of the underlying dynamics of the market. You need to have a process that is dynamic and that responds to it, against the change in the rules.”
According to Paulson, in a period of low volatility with incredibly cheap access to capital, businesses and consumers start making bad decisions and do not feel the weight of these decisions until after a while. They become more complacent, and eventually the pressure in the system also becomes complacent. Historically, the longer it stays in these periods of low volatility, the more violent the rupture. “In a period in which stocks and bonds have very high valuations, investors are beginning to look for opportunities in alternative investment by increasing the risk of their portfolios. Something similar to what has happened in Europe in the last six or seven years. Bond yields have turned negative and investors continue to invest because they still need more profitability, it is not logical; it ‘s only working because all investors are taking the same position at the same time. Markets can remain irrational and solvent for a long time. It’s classical of the herd mentality that investors exhibit when they are not clear in which direction to invest.”.
Lack of inflation
According to Paulson, inflation will be affected by the structural trend in the long term. The labor market in the United States is very tight, being one of the reasons why inflation has picked up a bit, but somehow deflation is being imported from Europe and Japan, something that may be reversing many of the trends that are happening. “As long as inflation remains at low levels, I am confident that risk assets will perform well or at least central banks will maintain their accommodative policies. The issue that may introduce some disruption is that inflation starts to grow faster than central banks expect and they then have to change their reaction.”
For Justin Wells, this is one of the areas in which they are seeing a greater disconnect between the convection that has worked so far and has stopped working, the classic Phillips curve. “The massive disruption that the real economy is suffering at this moment, with its winners and losers, has caused huge deflation, we are not seeing wage growth as a result of the introduction of new disruptive technologies. Some workers will be replaced by automation or other forms of disruptive technologies, at an incredible rate of disruption; something which, from the point of view of the active manager, will create a large number of opportunities.” To conclude, the asset managers commented that for the following 12 months they still expect to be closely watching the levels of support that the Fed provides to the market, the pressures that are being created in the system and how to navigate them.
Dr. Canessa’s participation
During his presentation, once the debate ended, Dr. Canessa reminded the audience that it is not necessary to wait for a plane crash to enjoy life: “Don’t look at the mountain, it can be very steep, just look at the next step that has to be taken, and if you feel disappointed look at what you have achieved up to that moment, you cannot wait until the helicopters arrive to save you, you have to continue walking.”
Wikimedia CommonsPhoto: Rafael Guajardo/ Pexels CC0. BlackRock to Acquire Citi's Asset Management Business in Mexico
BlackRock and Citibanamex, a subsidiary of Citigroup have announced a definitive agreement for BlackRock to acquire the asset management business of Citibanamex, subject to regulatory approvals and customary closing conditions.
BlackRock and Citibanamex will also enter into a distribution agreement upon the closing of the transaction, to offer BlackRock asset management products to Citibanamex clients in Mexico. Through its network of 1,500 branches in Mexico, Citibanamex provides wealth management products and services to more than 20 million clients.
The transaction involves approximately US$31 billion in assets under management of Citibanamex, across local fixed income, equity and multi-asset products, primarily for retail clients. The transaction is part of Citi’s emphasis on expanding access to best-in-class investments products, rather than on manufacturing proprietary asset management products. BlackRock’s business in Mexico currently focuses mostly on institutional clients, offering international investment and risk management products and services across asset classes, strategies and geographies.
The agreement builds upon the long-standing relationship between BlackRock and Citi and brings together two leading firms to offer a wider range of products, enhanced technology and investment capabilities for clients. It is expected to close during the second half of 2018. The financial impact of the transaction is not expected to be material to Citigroup or BlackRock earnings. Terms were not disclosed.
Armando Senra, Head of Latin America and Iberia for BlackRock, said: “BlackRock’s ambition is to become a full solutions provider in key markets around the world. This transaction is a big step forward in that direction in Mexico. The acquisition of Citibanamex’s asset management capabilities combined with our global investment platform and technology create a stronger franchise that can deliver a more compelling set of investment solutions across client segments in Mexico.”
Jane Fraser, CEO of Latin America for Citi, said: “Our goal is to create a state-of-the-art bank in Mexico focused on delivering a richer, smarter, more intuitive experience to everyone who does business with Citibanamex. The agreement with BlackRock delivers on our commitment, offering clients leading asset management services, and provides BlackRock with access to our extensive network in Mexico. We are excited by the opportunities this transaction offers and look forward to working with BlackRock.”
Mark McCombe, Head of the Americas region for BlackRock, said: “BlackRock believes in the long-term growth potential of Mexico and is committed to continue growing our presence here. Combining BlackRock’s capabilities in product and technology with the distribution network of Citibanamex creates a stronger franchise that can do more for clients.”
Ernesto Torres Cantu, CEO of Citibanamex, said: “Our commitment is to deliver the best client experience by offering the best of Mexico, and bringing to them the best of the world. Our association with BlackRock does exactly that”.
Citi Institutional Clients Group advised Citi on this transaction.
Pixabay CC0 Public DomainCourtesy photo. Inflation Is Unusually Dormant… For The Moment
Data continues to point to the broadest synchronised expansion the world has experienced in more than a decade as advanced and emerging markets continue to gain momentum. Labour markets are recovering at a rapid pace and, although the unemployment rate in Europe is still above pre-crisis lows, in the US, it has reached a low of 4.1% and in Japan, it sits at just 2.8%. And yet, inflation is oddly muted. Indeed, the average inflation rate in the OECD countries is 1.5%, down from 2.2% in 2012 and well below central banks’ official target of 2%. How is this possible, also considering that the balance sheets of the four largest central banks have exploded to USD 14 trillion in assets?
The first explanation could be that the recovery has been slow. Growth rates are still below pre-crisis levels as investment, trade and, to a lesser extent, consumption have lagged. As for labour markets, in the US for example, one reason why the tight labour market has not led to a sharp acceleration in wage growth is that the fall in the unemployment rate is the result of a change in labour supply as a large number of baby boomers have retired, thereby reducing the participation rate. This has also impacted wage growth because the pay checks of retirees are likely to have been higher than those of entrant workers. Moreover, what really impacts inflation is unit labour costs and not nominal or real wage growth and the recent improvement in productivity has allowed unit labour costs to fall over the past year. Finally, although quantitative easing and ultra-low interest rates have succeeded to boost financial asset prices, they have failed to lift inflation. This is due to the extreme slack the financial crisis caused in the economy. Slack which today is far lower as economies have recovered.
An undeniable cap on inflation also comes from exchange rate variations. The dollar, for example, impacts headline inflation through its direct impact on commodities but it also affects core inflation which excludes energy and food. A rise in the dollar makes foreign imported goods cheaper, thus increasing competition for domestic producers which pressurises them to reduce prices. The 26% rise in the dollar from mid-2014 to end 2016 and the 60% drop in oil prices during that same period were therefore much to blame for the low level of prices.
More structural factors such as disruptive technologies and globalization have also played a role in capping prices. E-commerce companies, Airbnb and Uber have enabled more price transparency as well as an additional supply of goods and services for clients, thus leading to slower inflation. Worldwide integration has given firms the possibility to move their production facilities across borders at lower costs. However, does this benefit consumers or the firms’ profit margins? And although all these topics seem reasonable, research has shown only a reduced impact on inflation.
Surprisingly, the most important driver for inflation are inflation expectations. Surprisingly also, they are backward looking as they seem to be correlated with recent or coincident inflation. The most likely outcome therefore continues to be low levels in inflation. But let’s not forget that inflation is a lagging indicator. While the correlation between core CPI and GDP growth over the last twenty years is only around 5%, when GDP growth is lagged by six quarters, the correlation jumps to 80%. The stronger growth which started in the second half of 2016 should therefore start to impact inflation soon. Moreover, a further depreciation of the dollar or a persistent spike in oil prices are possible risks. Even though inflation has continued to fall below expectations, we could be reaching an inflection point and we may see inflation trend higher. Hopefully it will be at a controlled pace!
Pixabay CC0 Public DomainPhoto: elenlackner. WisdomTree Buys ETF Securities’ European Exchange-Traded Commodity, Currency and Short-and-Leveraged Business
ETF Securities has agreed to sell its European exchange-traded commodity, currency and short-and-leveraged business to WisdomTree Investments the Nasdaq-listed (ticker: WETF) and New York headquartered global exchange-traded product provider.
The business being sold comprises all the European operations excluding the ETF platform. The business being sold to WisdomTree has $17.6 billion of AUM spread across 307 products, including the flagship gold products PHAU and GBS. The business has a comprehensive range of commodity, currency and short-and-leveraged products and more than 50 dedicated staff.
WisdomTree and ETF Securities will work to ensure that integration is seamless and expect no change to the current high standards of service and operations experienced by our customers and partners.
The sale is subject to regulatory approval and is currently anticipated to close in late Q1 2018.
Graham Tuckwell, Founder and Chairman of ETF Securities, comments: “We are pleased to be selling our European exchange-traded commodity, currency and short-and-leverage business to WisdomTree and to become the largest shareholder in the company. I believe this combination creates a uniquely positioned firm which will flourish in the years ahead, continuing to deliver huge value for customers and stakeholders. ETF Securities has a strong cultural fit with WisdomTree as both firms have been built from scratch by teams who have worked closely together for many years and who show an entrepreneurial spirit in seeking to deliver innovative and market leading products for their customers.”
Mark Weeks, the UK CEO of ETF Securities says: “This transaction creates a leading independent global ETP provider which is well positioned to compete in the rapidly growing European ETP market. We have complementary expertise, product ranges and customer networks. We both continue to challenge the status quo to provide customers with a range of differentiated products. In this industry customers want and value firms like ours, which provide broader choice.”
Yerlan Syzdykov, courtesy photo. Venezuela On the Edge of a Cliff: Lets Be Cautious
A full Venezuelan sovereign default scenario would be one of the most complex events of its type and would require a large-scale restructuring, according to Yerlan Syzdykov, Deputy Head of EM at Amundi AM who does not see anuy rapid solution to the restructuring process.
What is your analysis of recent events in Venezuela?
President Nicolas Maduro recently announced the Republic of Venezuela’s intention to restructure all foreign debt, thus recognising the country’s current debt load as unsustainable. The nation missed a coupon for about $200ml and failed to make the payment by the end of a 30-day grace period, triggering the rating agencies downgrade to default. A meeting of the International Swaps & Derivatives Association will follow shortly to discuss whether a week- long delay on bond payments from the state oil company will trigger default-insurance contracts on those securities. We think Maduro’s move is part of a political game to increase his chances of re-election in 2018, and it follows an attempt to consolidate power by the regime, including sweeping victory in recent gobernatorial elections – despite a 21% approval rating at the time. With this political capital in hand, pushing bond payments further out, Chavismo1 now turns to the debt issue. To further delay and complicate the negotiation process, the Republic invited bond holders to Caracas on 13 November to begin restructuring negotiations. The meeting was chaired by Venezuelan Vice President Tarek El Aissami. Among the attendees was the Economy Minister Simon Zerpa. who also serves as CFO of PDVSA, the state oil company. Both Mr El Aissami and Mr Zerpa have been sanctioned by the US, which inhibits US persons participating in the discussion. No specific proposals seemed to have emerged from the meeting but government officials insisted they plan to continue to service obligations.
What is the market expecting for the near future?
The restructuring announcement changes the prevalent consensus towards both Venezuela and its related quasi-sovereign bonds. The market was expecting Venezuela to service into 2018 and then seek to restructure the Republic only. Now the market has begun to debate the Republic’s specific timetable and the range of potential outcomes. With Maduro in power, the range of outcomes is narrow. The market’s assessment of the probability of a transition, and therefore Maduro’s future, will be important drivers of bond prices. Maduro’s recent comments confirm that the Republic plans to include PDVSA and other Venezuela quasi- sovereign issuers in the restructuring programme. PDVSA and the electricity company Elecar collectively have $750m in coupon arrears on $66bn of outstanding bonds. It appears that the government is proposing to address these arrears collectively or concurrently with the Republic. The Republic may be attempting to protect PDVSA by going for a restructuring. Considering the complexity of the government’s position, the decision to restructure may reflect a desire to negotiate a more favourable outcome, which is unlikely, in our view.
What happens if Venezuela should default? A full Venezuelan sovereign default scenario would be one of the most complex events of its type and would require a large-scale restructuring. Only the Republic knows Venezuela’s total debt level, which is estimated to be around $150bn. US investors hold some 70% of Venezuelan hard currency debt. This introduces further complication to an already complex situation, given the prevailing US sanctions. Creditors include recipients of promissory notes, as well as those with material trapped capital – such as airlines. This creates a potential burden on the state through unresolved claims. It also contributes to uncertainty around bond servicing, as the total size of these claims is not widely known.
Who could come to the rescue?
We see quite limited options. Venezuela does have some assets, even though foreign currency reserves have declined in the past years. The country has an equivalent of $1.2bn in SDR2 reserves with the IMF, and around $7.7bn in gold. Further external support from Russia is also a possibility. The government could also negotiate an extension to several Chinese loans due at the end of this year. Venezuela getting further loans from Russia or China remains a low probability event, in our view. China is unlikely to bail out the government, having previously declined to revise the terms of a loan. The IMF enters the process facing a number of challenges. It is said to regret its role in the recent Greek bailout. At that time, the Fund was pressured to take a 30% participation, a transaction it says it now regrets. This may influence the Fund’s path of engagement with the Republic. The Fund enters the discussion with incomplete and outdated information. Venezuela had reduced contact with the IMF in recent years. The fund’s first challenge will be to develop a precise understanding of the situation – a goal that may take time to be achieved. Holdouts present a real challenge to any attempted restructuring or re-profiling of maturities. Another wildcard: in the US, a creditor with a court judgement is entitled to attach receivables, which means creditors could seize oil payments. As a result, the Fund might alter its traditional approach and attempt a more direct resolution. For example, the Fund might move to engage the market earlier by going for an early debt haircut; should it go down this route, we expect considerable scepticism. Lastly, IMF’s decision to support the restructuring and commit any funds to the country has a complex political dimension given antagonistic relationship between Venezuelian government and the US. Overall, we believe that the Venezuela story will persist for several years.
Where does the state oil company PDVSA stand in all of this?
PDVSA enters restructuring talks with c. $42bn in outstanding bonds, of which $29bn are USD-denominated. 2016 EBITDA has been estimated at $15bn compared with $66bn in 2011. The company currently operates 44 rigs, down from 70 a few years ago. PDVSA’s oil production is likely to have fallen below 2.0 mm bpd (barrel per day), (-11% YoY), as sanctions complicate oilfield equipment purchasing. PDVSA ships around 1mm bpd to service borrowings from China and Russia, as well as to service other political commitments made by the regime. This limits the amount of production available for debt servicing. PDVSA is a different legal entity than the Republic, hence an event that impacts the Republic doesn’t automatically impact the company (so called cross-default). The Republic’s intention may be to protect PDVSA and oil flows ensuring access to petrodollars. Sovereign bondholders, however, will immediately seek to attach those flows through legal remedies based on the legal argument of ‘alter ego’. Furthermore, it is unlikely that the IMF would allow the Republic to default while PDVSA continued to service.
Would you expect any spillover from the Venezuela crisis?
Contagion among EM is mitigated by a number of factors. Firstly, the possible default of Venezuela has been well flagged. In fact many investors believed Venezuela should have defaulted long time ago. Secondly, fundamentals in EM are currently generally strong and the spreads reflect a healthy macro background. Most countries are not overleveraged, and we see current account surpluses in many EM economies. Where there is a potential contagion is around US refineries. Venezuela supplies crude to many US refineries, particularly those around the Gulf. These refineries produce gasoline and are configured to take Venezuela’s sour crude. A slowdown in Venezuelan output could reduce US gasoline production, which might alter inflation or growth characteristics. While that is theoretically possible, at this juncture it does not look likely.
In Russia, some petroleum companies are invested in PDVSA (mainly Rosneft, but also Gazpromneft and Bashneft). There is also a reported miss on a payment to ONGC, the Indian state oil company. Were Venezuela would service its debt or restructure, the result would be immaterial given the relative size of the exposure for those companies. In an unlikely scenario of a blockage of the Venezuelan oil exports, US majors and oil servicing companies will have a negative but limited impact.
Do you see opportunities emerging from the crisis?
The timing and tone of the government’s proposals may have a material impact on discussions, successful or otherwise. PDVSA, as the country’s main source of hard currency export earnings, could give exposure to Venezuelan yields from a possibly advantaged position if an event occurred. Given the overall uncertainty, the complexity of both PDVSA and the Republic’s capital structure, and the unknown size of overall liabilities, it is too early to make a meaningful assessment of potential recovery value. An additional consideration is about alternative investment opportunities – if Venezuela’s interest rate spread continues to widen, it might pull investment from other, higher-risk debt issuers: the composition of return from EM could shift in character. Overall, we remain very cautious on Venezuela, we don’t see any rapid solution to the restructuring process, and we continue to look for tactical opportunities as they emerge with risk control as a priority for our investors.
Pixabay CC0 Public DomainRodolfo Campos Villegas en su toma de protesta, foto PENSIONISSSTE. Afore Pensionissste Grants its First Investment Mandate to BlackRock
Short after a change in leadership in Afore Pensionissste, with Rodolfo Campos Villegas, as its new CEO and Ruben Omar Rincón Espinoza, as its new CIO, the Mexican pension fund is really shaking things up. An example of this is that they have granted their first investment mandate.
Sources close to the operation told Funds Society that Afore Penionissste has chosen BlackRockto invest part of their portfolio in european equities. Up until recently the afore had very small international allocation given it is one of the three ones that is not allowed to invest in derivatives and thus, properly hedge risks, but things are about to change.
One of the highlights of this pension fund is that it has the lowest fees of the Mexican system charging only 0.86%, while the system’s average is 1.03%.
Campos Villegas also plans to grow their allocation to the energy sector while reducing Mexican government debt.
Foto cedidaSimon Fox, Senior Investment Specialist at Aberdeen Standard Investments, courtesy photo. Aberdeen: “Diversification Across Funds Should Mitigate Market Falls"
Investors have to deal with both short-term volatility and downfalls risks. For Simon Fox, Senior Investment Specialist at Aberdeen Standard Investments, the adequate way to deal with this is to better diversify your portfolio. As he explains in this interview with Funds Society, at a difficult time for traditional fixed and variable income, he finds the most compelling opportunities through a range of diversifying assets, such as emerging market debt in local currency, investment in infrastructure and asset backed securities.
What does provide an ‘alternative’ approach to markets? Is it about looking for new sources of alpha or is it about protecting against risks?
Multi asset investing has evolved considerably since the Global Financial Crisis. Today’s investors are looking for a more explicit focus on their own objectives – such as a cash or RPI+ return; or maybe a consistent level of income. In the past a simple blend of stocks and bonds may have delivered decent returns, but not without significant volatility. Looking forward, historically low bond yields and challenging equity markets mean that even the returns achieved in the past look unlikely to be delivered in the future.
To address these challenges, we believe that investors should further diversify their portfolios. In particular, there are, today, a broader array of asset classes available and accessible to investors via UCITS regulated investment structures. Our Diversified Asset team seeks out fundamentally attractive long-term investments across listed equities, private equity, property, infrastructure, high yield bonds, loans, emerging market debt, asset backed securities, alternative risk premia, insurance linked securities, litigation finance, peer-to-peer lending, aircraft leasing, healthcare royalties and other asset classes.
Combining these asset classes in a diversified portfolio results in the attractive returns coming through in a much more consistent fashion than any one asset class in isolation. This approach is very transparent and does not rely on complex derivatives trades or our ability to trade in and out of markets over short-term horizons. This makes the approach easy to understand and robust to differing market conditions.
What are the main risks that you currently appreciate and how could alternative strategies help to mitigate them?
Investors have to contend with both the risk of short-term volatility and also the risk of failing to generate the growth (or income) that they need over the longer-term.
We believe that the right foundation for dealing with both of these is to better diversify the portfolio. As we have seen over the last few years, equity markets can, and do, suffer large drawdowns over short time periods – notably in the summer of 2015 and the start of 2016. By being more diversified, our multi-asset funds have experienced much smaller drawdowns through these periods; as such, they have also been able to compound positively as the markets have recovered.
And talking on risk, we could mention the low rates risk… do you see a bubble in fixed income? And could this bubble burst in some markets? How do you manage this risk in the funds? – Central Banks: what do you expect from Fed? Which will be the next steps of ECB? How do you manage all this issues in your portfolios?
When building our portfolios we make use of sophisticated optimization techniques and other quantitative modelling; but we also believe that it is important to consider the possible future risk scenarios that risk models won’t capture. Most recently we have assessed the possible impact of a North Korea/US conflict, a global pandemic and secular stagnation – as well as a rout in bond markets. While we regard it as a very low probability, there is nonetheless a risk that the US Fed is forced to raise interest rates rapidly over the next 12 months to deal with inflationary pressures and the prospect of a substantial fiscal stimulus. This scenario would see Treasury yields spike higher and equity markets fall. While our multi-asset funds would likely be down in this scenario, we would expect them to provide significant protection relative to a more traditional balanced portfolio.
Often this exercise throws up a call for some portfolio protection (put options, gold, etc) as minds become overly focused on the worst-case scenarios. However we remain of the view that the diversification across the funds should mitigate market falls to a large degree and that portfolio protection strategies are typically not cost effective. The recent reduction in equities is an example of our more preferred route to risk reduction especially when stretched equity valuations make the risk-reward trade-off less attractive. We currently have no exposure to traditional fixed income – either government bonds or investment grade credit.
Brexit: Which risks do you appreciate related to this process? Do you place the portfolios at a specific way in the run-up of Brexit?
At the start of 2016 – ahead of the UK referendum – we modelled a Brexit impact in our scenario analysis. In practice, the diversified and global nature of our portfolios, as well as share class specific currency hedging, meant that Brexit had little impact on our portfolios.
About Multi-Asset spectrum: in which segment do you see more opportunities of returns: in risk assets or in those assets with lesser risk?
Our asset allocation is derived from a longer-term outlook than many multi-asset funds, with a 5 year view of risk and return the main driver of our positioning. The chart below shows our current outlook for various asset classes. It highlights that traditional bonds – investment grade credit and government bonds – offer limited return potential (and, in some scenarios, limited diversification benefit). Equities still offer a premium over risk free assets, but this has narrowed over the last 6 months, notably in the US where valuations looked stretched on a range of measures. As such, we find the most compelling opportunities across a range of diversifying assets. This includes local currency emerging market debt (benefitting from good yields and strong fundamentals); infrastructure investments (which we can access through REIT-like investment trust structures); and asset backed securities.
Taking into account the environment of markets: do you consider necessary to reduce the expectation of returns or is still possible to obtain good returns with an alternative and multi-asset approach?
As can be seen from the chart above, our 5-year view is that traditional assets will under-perform relative to history. However, by being able to diversify the portfolio across a broader array of asset classes, we continue to believe that we can meet our long-term return targets for our funds while maintaining a volatility well below that of equity. Since inception our growth strategy has outperformed its Cash+4.5%pa return target, net of institutional fees, with a volatility of c.4.5%pa. Our ability to access a range of compelling opportunities stems from our ability to identify and access a broad range of asset classes in a liquid form. This is driven by the breadth and depth of resources we have across a range of investment specialisms.
Could you give us some examples of investments you currently hold in the portfolio? I mean some bets on relative value, for instance.
Within social infrastructure we have taken a couple of new positions recent months – adding Bilfinger Berger Global Infrastructure (BBGI) and International Public Partnerships limited (INPP). Both INPP and BBGI provide exposure to a large portfolio of Public Private Partnerships/Private Finance Initiative projects across the UK, continental Europe, Canada, Australia and the USA. These provide attractive, government-backed and largely inflation-linked long-term cash flows.
Within our special opportunities sleeve we have also made a new allocation BioPharma Credit. This holding provides exposure to a diversified portfolio of debt backed by the assets or royalties of biotechnology firms. Benefitting from the premium associated with specialist lending, Pharmakon Advisors are targeting an 8-9%pa return from a portfolio offering significantly different return drivers to other exposures in our Funds.
