In Mexico, Harbourvest Partners, Spruceview México and Lock Capital are the three alternative investment issuers that have called the most capital in amount. On the other hand, Harbourvest Partners, Lock Capital and Capital Global are the three issuers with more than $1 billion USD in committed capital out of the 17 GPs that have issued CERPIs as can be seen in the following table:
CERPIs are the vehicles that allow AFOREs to invest in Private Equity globally. So far (March 2021) there are 49 CERPIs in place totaling $9.714 million USD in committed capital, of which 25% have been called.
MIRA Manager was the first in 2016 before CERPIs were allowed in 2018 to invest 90% of its resources globally and 10% in Mexico. The opportunity to invest globally promoted that, in 2018, 12 issuers issued a CERPI for the first time, standing out in committed capital: Capital Global, Lock Capital (who replaced Lexington as manager, who issued in said year) and KKR. In 2019 three new GPs were incorporated (Harbourvest Partners, Spruceview and Actis Gestor) and four GPs continued to grow their offer of CERPIs. For 2020 only Arago Capital was the new GP that was incorporated as an issuer and three reissued.
For the potential market that global Private Equity investments have, the fact that there are only 17 issuers seems to us to represent a small number and that they are only taking a breather. In Chile, the AFPs make similar investments through 45 GPs (2.6 times more than Mexico) of which five of them have issued a CERPI in Mexico.
For the AFOREs with $230.110 million USD in assets under management (as of February 28, 2021), investments in local Private Equity represent 5% and 1% in global Private Equity, which shows their growth potential.
As there are 49 emissions and 17 GPs, the average per GP is close to 3 CERPIs for each one, however 9 have more than one CERPI and 8 GPs only have one CERPI. The number of issuances has grown due to the specialization in the age of the affiliated worker and due to its orientation towards private banking clients. It should be remembered that today SIEFOREs are based on the worker’s age (Target Date Funds). Spruceview and BlackRock for example have 9 CERPIs each, while Lock Capital has 8.
The 17 issuers can be classified as:
Global GPs,
Local GPs,
GPs who are advisers and
Those that are a combination of the above.
As CERPI issuance dominates in the Fund of Funds sector it is highly likely that there are more global GPs than we currently see. However, that information is not public.
Global investments in Private Equity by AFOREs should continue to grow in both resources and managers.
Pixabay CC0 Public Domain. XP y M&G firman un acuerdo para ofrecer su estrategia insignia de bonos flexibles a clientes brasileños
XP Inc., a leading, technology-driven financial services platform, announced its partnership with M&G plc., a leading international savings and investment company headquartered in London, to offer Brazilian-based investors access to a flagship flexible bond strategy via a new XP local fund.
XP has launched the M&G Optimal Income Advisory FIC FIM IE CP, a Brazilian domiciled fund dedicated to investing into a globally diversified fixed income strategy offered by M&G Investments, which combines top-down macroeconomic approach with a rigorous bottom-up credit analysis. Brazilian investors will have access to the BRL-hedged fund.
This partnership comes in an ideal moment as the all-time-low interest rate in Brazil (2% as of September 2020) has made global funds potentially attractive as an investment option for investors seeking to improve the risk/return ratio in their portfolios.
“We are excited to bring this flagship strategy from M&G on board. Focused on identifying the combination of assets that provide the most attractive income stream within the bond universe, the strategy not only presents new sources of potential returns, but is also meant to offer downside protection through the economic cycle”, says Fabiano Cintra, funds specialist at XP. “XP continues in its plan to connect Brazilians with the best investment opportunities in the world and M&G certainly stands out as a very well-known and well-recognized manager”, adds Cintra.
Pixabay CC0 Public Domain. Azimut continúa reforzando su presencia en la región con la adquisición de MZK Investimentos en Brasil
The Azimut Group, one of the largest independent asset managers in Europe, through its subsidiary AZ Brasile Holding, signed an agreement to acquire 100% of the capital of MKZ Investimentos, an independent Brazilian asset manager specialized in Macro Strategies with more than 125 million dollars under management.
This transaction will add to the existing AZ Quest asset management proposition thus reinforcing the Group’s strong expertise across Brazilian equity and fixed income capital markets. AZ Quest and MZK Investimentos will operate as separate legal entities until all regulatory approvals are completed.
MZK, founded in 2017, has a senior and integrated management team, deriving from a joint activity developed over the last 15 years, which includes experiences in treasuries of major local and international banks, such as HSBC, Bradesco and BNP Paribas. This entire team, composed of qualified professionals and complementary profiles, will be integrated in the AZ Quest’s macro team and will be led by MZK CEO, Marco Antonio Mecchi.
This operation adds value also to MZK’s clients through the exchange of expertise from the current team with the other AZ Quest areas, such as equity, private credit and arbitrage. Moreover, MZK current team will access the competencies of over 150 portfolio managers in 18 investment hubs that make up the Azimut Global Asset Management Team. Professionals will benefit from this tremendous synergy without any changes in the current products structure.
The mutual fund industry in Brazil totals more than 1 trillion dollars with an excess of 70% of assets under management being concentrated on low-risk fixed income strategies. Local interest rates still significantly below the historical norm are conducive for a continuation in the rotation from low to medium-high risk investment strategies such those managed by MZK. In this context, the transaction strengthens the Group’s macro product proposition to local clients and underpin the potential for further organic growth capitalizing on the underlying industry trends.
Giorgio Medda, CEO and Global Head of Asset Management of Azimut Group, comments: “The investment in MZK fits well with our plans of adding breadth to our Global Asset Management Team local capabilities, particularly in a key market for global investment portfolios like Brazil. Our overall strategy to expand the Group’s integrated asset management platform in Brazil will benefit from new product development, which has been instrumental in our organic growth locally since 2015.”
Marco Antonio Mecchi, one of the MZK founder, comments: “The synergy and complementarity created by the merger of MZK and Azimut adds value and local expertise to its clients and also adds strength to the franchise. The new company will manage funds effectively using the leverage of the global structure Azimut provides and the local knowledge and experience MZK provides. We are very excited to be part of this Group and lookforward to the development of new businesses”.
Pixabay CC0 Public Domain. Un ETF para capturar la revolución energética
The crowds of tourists vanished from Venice’s historic canals. Fish were seen swimming in the city’s normally murky waterways. Then, NASA published satellite images of Earth, showing a dramatic reduction in greenhouse gas emissions across all the major cities under lockdown.
For a moment, we saw what a future low-carbon world might look like.
Demand for new energy grew in 2020
During a turbulent 2020, demand for energy generated by coal and oil fell by 8.5% and 6.7% respectively. But demand for renewable energy rose by +1%.
Renewable energy demonstrated its reliability, even in a recession. The massive stimulus response from central banks created favourable financing conditions for both wind and photovoltaic (PV) solar projects. And some institutional investors even saw new energy as a safer-haven investment, as its returns can have lower correlation to more mainstream asset classes.
This progress was happening as fossil fuel demand plummeted to its lowest level in more than 70 years. At one point, oil futures were trading at negative prices due to a massive glut in supply.
The chart below from the IEA shows the global energy demand by source in 2020:
Misconceptions persist about renewable energy
Although demand for renewable energy remained positive during the pandemic and more people are carbon-aware than ever, there are still many misconceptions about it.
These misconceptions are gradually being debunked – and new energy sources could see a major increase in investment as a result. Let’s address three common concerns about renewables and new energy now:
Misconception #1: “Renewable energy is just hype”
Renewable energy is being adopted because it makes financial sense. Over half the coal plants operating today cost more to run than building new renewable energy infrastructure instead. Even cancelling new coal power station projects today could save more than half a trillion dollars globally.
The ‘levelised cost of energy’ (LCOE), which is directly linked to the costs to build and operate an energy generator, has fallen significantly for both wind and photovoltaic solar power. Across the globe, LCOE for wind, solar and battery storage has plummeted over the past decade, led by technological advances and increasing cumulative installed capacity, which have progressively reduced costs.
The cost of renewable energy and battery storage has plummeted
The chart below from BloombergNEF shows the Global LCOE benchmarks for PV, wind and batteries:
Misconception #2: “All fossil fuel-related financing is unsustainable”
The world needs energy to power the economic growth that makes the low-carbon transition possible. While directly financing fossil fuel plants is not sustainable, the financing of energy efficiency for fossil fuels does help us transition towards a more sustainable world. Rather than stopping all investment in fossil fuel-related companies, it would be more effective to improve the efficiency of the existing energy model, even as we manage the transition to the low-carbon model.
We want to – and must – move towards the new energy model. But in the meantime, we have fossil fuels to manage, and improving the energy efficiency existing fossil fuel plants is an important part of that.
Many energy companies have been moving towards ‘combined-cycle’ power plants that use both a gas and a steam turbine to produce energy. General Electric has estimated that up to 50% more electricity using the same fuel can be produced this way.
Natural gas is still a fossil fuel, but it is cleaner. Burning natural gas for energy results in lower emissions for nearly all types of air pollutants. It also complements new energy well, because combined-cycle turbines are cheap to get going and can provide power at short notice or when renewable energy is not available. The two technologies used in combination could drastically cut greenhouse gas emissions.
Misconception #3: “New energy is only viable because of subsidies”
The new energy market has developed to such an extent that subsidies are no longer needed in most parts of the world. For instance, the feed-in tariff system used by European countries to accelerate investment into new energy technology has largely come to an end.
It is being replaced by a more dynamic power purchase agreement market (PPAs), which are agreements to supply energy at a fixed price and quantity. The result is that energy companies get a guaranteed cash flow, and clients receive a guaranteed price and supply of energy.
None of this would be possible unless new energy was cheap, reliable and profitable to produce. Thanks to technical improvements and more competitive marginal costs – led by the ‘learning curve’ of renewable energy that reduces costs as more is produced – this sector needs less and less subsidy.
In our view, this is a structural shift, because the cost of renewables will decline over time. Fossil fuel costs will not decline over time – they may even increase over time, as most of the accessible sources have already been extracted. Now, fossil fuel Exploration & Production (E&P) companies must increasingly target controversial reserves that are harder to extract, such as those in the Arctic, tar sands, or shale gas.
Finally, the EU ‘Green Deal’ will also drive capital towards new energy companies, while the EU is thinking of significantly reducing fossil fuel subsidies as they undermine the efforts to reach carbon neutrality by 2050, as enshrined in the Paris Agreement.
While we at Lyxor talk a lot about the Paris-Aligned and Climate Transition benchmarks for net zero investing, these are not the only relevant strategies. Trends to be financed by green deal are broader than that, including sustainable mobility and smarter city infrastructure.
How to get investment exposure to new energy
One way to gain a targeted investment exposure to new energy is through the Lyxor New Energy (DR) UCITS ETF. It tracks the world’s 40 largest companies operating in three key areas of the new energy industry: renewables, distributed energy, and energy efficiency.
Ørsted – Renewable energy
Danish power company Ørsted (formerly DONG Energy) is a global leader in the offshore wind market. It is in a strong position to capitalise on the soaring demand for new energy needs in Europe due to the emission quotas defined in the Paris Agreement.
What’s fascinating about this company is that it was once fossil-fuel focused. In 2017, the group sold its oil and gas business to British chemicals company Ineos. More recently, it offloaded its liquefied natural gas operations to Glencore. Instead of returning the cash from the sale of these businesses to investors, the company chose to make a big push into offshore wind.
Ørsted was one of the first energy companies in the world to have a greenhouse gas emissions reduction target approved by the Science Based Targets initiative, and it estimates its target is 27 years ahead of schedule compared to the 2°C scenario for the energy sector as projected by the IEA.
Plug Power – Distributed energy
Distributed energy is the concept of global decentralised electricity production close to the point of consumption. Hydrogen is part of this, and green hydrogen in particular can be an extraordinary zero-carbon source of electricity.
As a result, an important area of development in new energy is storage – stationary storage stations, or onboard vehicles, vessels, planes, and so on. American company Plug Power develops hydrogen fuel cells to replace traditional batteries in electric vehicles and supplies these cells to major clients including Amazon and Walmart.
Distributed energy is what can bring resilience, contrary to hyper centralised production and grid systems. It’s also a game-changer for renewables, whose main drawback is that they are intermittent, and unable to – for example – provide 24/7 power to a hospital. With distributed energy systems, renewable energy can become a more stable energy source.
NIBE Industrier AB – Energy efficiency
Swedish company NIBE builds and sells solutions to reduce energy consumption and improve efficiency. It develops, manufactures and markets a range of energy-efficient solutions for climate comfort in all types of property, plus components and solutions for intelligent heating in industry and infrastructure.
This includes heat pumps and solar cells for private houses, the renovation of old buildings, public buildings, and even development of products for efficient energy utilisation in cars, such as elements for battery heaters and interior heaters that use sources such as braking energy.
NIBE’s heat pumps are being used in a new housing project in the Kortenoord district of Wageningen, The Netherlands, where around 1,000 homes are being built without a gas pipeline. The houses have optimum insulation and are equipped with energy-saving products such as heat pumps, solar panels and solar water heaters.
A megatrend in progress
New energy is part of a megatrend – one that will radically shape the society and business models of the future, underpinned by the global effort to achieve net zero by 2050.
This imperative explains the significant amount of investment flowing into the new energy industry. $282 billion of renewable energy capacity was financed in 2019, led by onshore and offshore wind with $138 billion, followed by solar at $131 billion.
And yet, this shift is just beginning. A revolution is underway in the energy market. It wasn’t started by the pandemic – this is a structural movement towards new energy that has developed over several years, backed by falling costs. It was recently accelerated by the events of 2020, that reduced demand for fossil fuels and related industries such as steel and cement.
Ultimately, renewable energies are on a declining cost trajectory, while fossil fuels have high and fixed costs. That cost trajectory implies that renewables will be cheaper than fossil fuels, which is already true in many cases, with or without disruptive global events.
The pandemic accelerated what was already happening in the new energy industry. It has acted as a catalyst for more rapid change. For investors, the Lyxor New Energy ETF, which recently passed $1 billion in assets under management, could be a great way to get involved in this change and become part of the new energy revolution.
A column by Paloma Torres, Associate, ETF CRM and Sales for Iberia and Latam in Lyxor Asset Management
Foto cedidaSasha Evers, responsable de distribución minorista para Europa en BNY Mellon Investment Management.. Sasha Evers, nuevo responsable de distribución minorista para Europa de BNY Mellon IM
BNY Mellon Investment Management has announced this week changes in leadership roles at a global level, starting with the appointment of Sasha Evers as head of retail distribution for Europe. Based in Madrid, he will report to Matt Oomen, global head of distribution, and Ralph Elder will take over his role as head of Iberia and Latin America.
In this newly created role, Evers will be responsible for leading, defining and executing the firm’s distribution strategy in Europe’s retail segment. He will work closely with its investment firms, including Newton Investment Management, Insight Investment and Walter Scott, “to provide clients with high quality, relevant investment strategies that meet their needs and objectives”, the asset manager pointed out in a press release.
His appointment comes after Hilary Lopez, head of European intermediary distribution, announced that she has decided to leave the company after 11 years “to pursue other opportunities”.
Evers has been with BNY Mellon IM for more than 21 years and was most recently head of Iberia and Latin America. Now, Ralph Elder, formerly director of sales for the Iberian region, will assume the leadership of those businesses. Elder has been with the company two decades and has been key in the development of the Iberia business.
Strengthen European presence
“The retail market in Europe is a strategically important part of our business. Sasha has a proven track record of building successful businesses and teams, developing longstanding client relationships and growing assets. I am thrilled to be working more closely with him as we drive further growth in the segment and strengthen our presence across Europe”, said Matt Oomen, global head of distribution at BNY Mellon IM.
He also claimed to be “delighted” that Elder will lead the Iberia and Latin America businesses because he has played “an integral role” in building them alongside Evers over the past 20 years. “I would also like to thank Hilary for her many contributions to the firm and wish her the very best in her future endeavours”, he added.
Meanwhile, Evers commented: “I am very excited by this opportunity to lead our retail distribution strategy in Europe. I look forward to working with all our businesses across the Continent to drive further our growth in this key client segment. Ralph has been a key driver of our success in the Iberia region and I am delighted that he will lead our Iberia and Latin America businesses going forward.”
Pixabay CC0 Public Domain. HMC Itajubá apoya a CD&R en uno de las recaudaciones de fondos de private equity más grandes de la región
Clayton, Dubilier & Rice (“CD&R”), a global private investment firm advised by HMC Itajubá, a leading financial LatAm advisory and investment firm, closed on 1.2 billion dollars from Latin America investors for the firm’s latest flagship fund. Investors from the region accounted for 7% of the new fund (CD&R XI) and the capital committed represents one of the largest fundraises for a buyout manager in Latin America to date.
The Latin America capital for CD&R fund was raised in all major markets and led by Andean Region with 74.1% of the capital, followed by Brazil with 16.6% and Mexico with 9.3%respectively. By type of investors, institutional investors, like Pension Funds and Insurance Companies, represented 70% and Private Investors, including Feeder vehicles, were the remaining 30%. The closing involves more than 90 investors from the region, demonstrating the increasing potential of the region for private equity fund investments.
“We are very proud of this closing because it shows the growth potential of Latin America into the alternatives ecosystem. HMC Itajubá team is working hard to make great things happen in this type of investment in the region,” said Ricardo Morales, Co-founder at HMC Itajubá.
“We are delighted to see how private investors move an important part of their portfolios to alternative investments and they represented a significant part of the commitments in this fundraise of CD&R,” commented Agnaldo Andrade, Co-founder HMC Itajuba.
“We are grateful to our investors in Latin America for their strong support and were delighted to work with HMC Itajubá team on this important project,” said Thomas Franco, CD&R Partner. “The success of the fundraise is a critical milestone and validates the growing and broad appreciation among asset owners for private equity-related investments in the region.”
Earlier this year, CD&R was recognized by Private Equity International Awards as the Firm of the Year in the Large-Cap North America category for 2020. “The firm has announced at least 10 new investments since March, making 2020 its most active year to date”, the Private Equity International Awards report said on the announcement. Clayton, Dubilier & Rice (“CD&R”), a global private
Pixabay CC0 Public Domain. Un gestor de activos especializado en acciones locales
The Azimut Group, one of the largest independent asset managers in Europe, through its subsidiary AZ Mexico Holding, signed today an agreement to acquire 51% of the capital of KAAN Capital, an independent asset manager and advisory firm specializing in Mexican equities. KAAN is made up of a group of senior managers and analysts with a solid track record, and offers asset management and advisory services to institutional and HNW clients. Upon completion of the transaction, KAAN will be renamed Azimut-KAAN.
Headquartered in Mexico City, KAAN was founded by Alberto Rodriguez and Josè Fierro – current General Manager and Investment Director of Azimut-KAAN – who together have over 50 years of experience in the Mexican equity market as well as in the management of local funds and mandates for institutional clients, international sovereign funds, pension funds and HNWIs.
Thanks to this partnership, Azimut enters the investment advisory sector in Mexico, thus expanding the range of asset management services for local clients and strengthening its presence in a country where it has operated since 2014 through Más Fondos, the leading Mexican multi-manager company operating through an integrated and independent business model. Más Fondos continues to grow in financial advisory through the recruitment of financial advisors. The partnership with KAAN has effectively been already in place, since KAAN is the advisor of Más Fondos’ local equity fund, AZMT – V1 launched last December, with assets of 330 million Mexican pesos. Thanks to the expertise of over 120 managers in 18 investment hubs that make up the Azimut Global Asset Management Team, Mas Fondos is about to launch three new funds that will be listed on the Bolsa Institucional de Valores (BIVA).
The mutual fund industry in Mexico totals approximately 130 billion dollars and accounts for just under 10% of total GDP, a small percentage when compared to those of the major Latin American economies. More than 70% of assets are concentrated on low-risk fixed income strategies, while exposure to local equities has reached some of the lowest levels in recent years, which can be an interesting opportunity following a value approach.
Mexico, with a population of 130 million, is the second largest economy in Latin America and the largest in Central America with a purchasing power parity GDP of approximately 1,3 trillion dollars in 2019 (15th globally). With a debt-to-GDP ratio below 60%, Mexico is among the most virtuous countries in Latin America. The Mexican economy has private consumption and high export as its main growth drivers, while more than 60% of its GDP comes from the service sector and just under 30% from the industrial sector3 .
Giorgio Medda, CEO and Head of Asset Management of Azimut Group, comments: “The transaction with KAAN confirms Azimut Group’s constant interest in investing in asset management capabilities, continuing to improve services to its customers, both locally and globally, and further consolidating the presence and skills of the Global Team in Latin America. In addition, the partnership with KAAN fits perfectly with the development of our integrated financial advisory platform in the asset management industry in Mexico “.
Alberto Rodriguez and Josè Fierro comment: “We are thrilled to join forces with one of the world’s leading independent asset managers who shares our core values and investment approach. This partnership will allow KAAN to grow at a faster pace and, above all, will benefit our customers as the global approach and expertise of the Azimut Group will complement our knowledge and experience of the Mexican market.”
Foto cedida. Santander Private Banking acuerda la compra del negocio de banca privada de Indosuez en Miami
Santander Private Banking has reached an agreement with Indosuez Wealth Management –the global wealth management brand of Crédit Agricole group– to purchase 4.3 billion dollars in client assets and liabilities. The firm has announced in a press release that the transaction is subject to regulatory approval and is expected to close by midyear 2021.
“This transaction, which leverages our geographic presence and our capabilities as a leading financial group, is another step toward our goal of becoming the best global private banking platform. We want to keep growing our business –especially in geographies where we see major commercial potential like the US– and elevate our position as a growth engine for Grupo Santander”, said the Global Head of Santander Wealth Management & Insurance, Víctor Matarranz.
Meanwhile, Jacques Prost, CEO at Indosuez, commented that, after close evaluation of a number of international bidders, Santander’s proposal for the Miami business stood out to Indosuez thanks to the bank’s high quality and strong reputation.
“We are confident that this is the right fit to meet the interests of our clients and our people in Miami, ensuring a smooth transition and building on Santander’s sizeable footprint and 42-year long experience in the region. Indosuez’s decision to leave the Miami market was carefully considered due to our longstanding presence in the region, but was made in line with Indosuez’s strategy of focusing and expanding its presence in its key markets”, he added.
Santander US CEO Tim Wennes also assessed the acquisition, pointing out that it is part of the growth strategy for Santander US, which includes organic and inorganic opportunities. “I am confident that the team will provide world-class services to our new clients from Indosuez”, he said.
The bank has explained that the transaction will be executed through Banco Santander International (BSI), part of Santander Private Banking, Grupo Santander’s business unit dedicated to the private banking segment. Santander Private Banking manages a volume of 230 billion euros in customer assets and liabilities. BSI is a wholly owned subsidiary of Santander Holdings USA, Inc., Banco Santander’s intermediate holding company in the U.S.
As has been well-documented, equity markets were quick to recognize the increase in demand for many online services and businesses ranging from Amazon to Zoom (with many more in between). Many, including the FAANG stocks, have escalated in value as retail investors with their stimulus checks, as well as institutions, have piled back into equity markets since the March 2020 plunge. However, the ability of many of those businesses to deliver their virtual goods and services is dependent on the infrastructure that they use.
Perhaps somewhat overlooked are data center and semiconductor businesses, particularly memory chips vital to facilitating the digital economy. Despite their criticality to the digital economy and their ability to generate attractive cash flows and returns on capital, memory stocks continue to trade at a discount to other semiconductor and IT-related stocks. There is also a shortage of supply of the chips needed for many applications, including automotive, which should increase producer value until supply catches up. It typically takes more than two years to build a fabrication facility and ramp up production.
While we are generally bullish on the digital economy, we are finding attractive prospects in ‘old’ economy companies as well. Large U.S.-based banks are well capitalized and have been conservative in provisioning for potential risks in their loan and credit card portfolios during the COVID crisis. Given the significant support from the Fed and the U.S. government through the crisis, the economy has held up relatively well, all things considered.
This suggests that banks may end up overcompensating for loan losses, which could drive provision reversals in later periods, further supporting earnings growth. Additionally, banks stand to benefit from a rise in rates over time. As we look forward, we are encouraged by banks that are investing materially in digital transformation and innovation, such as developing attractive and convenient-to-use apps and tools for consumers and businesses. We believe this should improve the value-add to customers while driving operational efficiencies at the banks themselves. Despite strong balance sheets, prudent provisioning, stable underlying trends and investments on innovation, some of these banks generally trade at a fraction of book value, making an attractive entry point for potential investors.
Long-Term Thinking During a Period of Rapid Change
In a period of great innovation, disruption and high valuations, like we are experiencing today, we need to look beyond the very near-term and consider the medium- to long-term opportunities for a business and how it is allocating capital to support those objectives. If a company is investing in a large market opportunity with attractive returns at maturity, we welcome them investing heavily today for a much larger payoff tomorrow. The investments often obfuscate the true earnings power of the business and may make it seem expensive on statistical measures, but those investments may end up creating significant value for shareholders over time.
In today’s environment, a process that relies on deep fundamental research to narrow the universe of stocks by looking for strong companies driving idea generation, and which utilizes an intrinsic value framework in an attempt to understand the likelihood of a business’ ability to create long-term value, may have an advantage. Market commentators and investors often attempt to assess valuations and opportunities simply on near-term statistical metrics, such as a P/E or a P/B multiple. These can be useful datapoints but do not paint the complete picture of whether a business is fairly valued. We believe that investors should more thoroughly analyze and determine a security’s intrinsic value before placing it into a portfolio.
The recent increase in retail participation in equity markets means more investors competing in the market, which, ultimately, should make the markets more efficient with periods of excessive price moves. However, increased market efficiency also means that simple strategies utilizing easily accessed valuation multiples or other metrics will create little to no excess returns on average. In fact, greater retail participation will mean that achieving alpha returns consistently will require a well-thought-out investment philosophy and rigorous process to add value over time.
ESG Considerations Should Be Part of Any Investment Process
ESG (environmental, social and governance) considerations provide investors with an expanded toolkit for assessing whether a business is creating value for all its stakeholders, from employees to its community to shareholders. ESG also provides insight into analyzing a business’s go-forward prospects—a lens on whether that company is competing in expanding or contracting markets due to evolving environmental or regulatory considerations. Governance is another important set of issues where poor practice can lead to substantial corporate risk such as expensive legal actions and negative publicity. These insights about where risks lie are crucial in determining what the business is worth and providing effective stewardship of the investment.
So Where Do We Go from Here
While COVID accelerated many changes around the globe, equity markets rewarded many companies that were active in preparing for their future. We believe that investors should also be active and diligent with their investment allocations going forward. Opportunities abound for those that are doing the deep fundamental research on the securities that they own, who take a long-term view, and incorporate ESG considerations so that they have an even broader understanding of the risks and opportunities that each company faces.
Founded in 1982, Thornburg Investment Management is a privately-owned global investment firm that offers a range of multi-strategy solutions for institutions and financial advisors around the world. A recognized leader in fixed income, equity, and alternatives investing, the firm oversees US$45 billion ($43.3 billion in assets under management and $1.8 billion in assets under advisement) as of 31 December 2020 across mutual funds, institutional accounts, separate accounts for high-net-worth investors, and UCITS funds for non-U.S. investors. Thornburg is headquartered in Santa Fe, New Mexico, USA, with additional offices in London, Hong Kong and Shanghai.
Pixabay CC0 Public Domain. Focos de tensión en la rivalidad sino-estadounidense: quien controle el estrecho de Taiwán controlará la economía mundial
Mainly playing out across the vast Pacific Ocean, the great power rivalry between the US and China is the dominant geopolitical conflict of our time. There are deep-rooted economic, demographic, and geographic forces at work, reshaping the world’s most important bilateral relationship. A unipolar world where the global hegemon, the US, had unmatched global capacity and influence is morphing into a balanced, multipolar world where various countries have an ever-increasing impact on global decision-making and action.
At the end of World War II, the US accounted for a far larger share of global GDP than would be warranted given its population. To be sure, some of this was due to the US economy’s unrivaled level of productivity and innovation. The US will always punch above its weight because of these factors. But the main reason why the US was the overwhelmingly dominant economic engine of the world was that most major economies lay in ruins after that devastating conflict. In a famous study authored by the British economist Angus Maddison, the US’ share of global GDP reached a zenith of almost 40% in the early 1950s.
Since then, our share of global GDP has been steadily waning. To paraphrase economist Herbert Stein, that which can’t go on won’t. The other component to this relative slide has been China’s rising economic heft. For most of its history, the Mainland’s share of global GDP hovered between 30% and 35%, according to this same seminal work. In other words, China’s rise is merely a return to its normal, baseline level of economic clout. The previous century was the anomaly. China’s rise should and will continue.
So, what does this tell us about the ensuing power struggle between the two countries? Is confrontation inevitable? Can we avoid Thucydides’ famous trap? When paradigms shift, there will always be friction. With tectonic shifts, you might not always get an earthquake, but there are usually a few tremors. The 2018/19 trade dispute was but the first truly global spat between these two rivals. One can expect many more to come with Taiwan being at the vanguard of potential flashpoints. It is not an exaggeration to say that the Republic of China, the official name for the island nation just off the Mainland, is quickly becoming the most important and most-watched nation on Earth.
Taiwan dominates sophisticated global chip manufacturing, and its comparative advantage should only increase. Earlier this year, the shutdowns in American and European auto manufacturing plants had less to do with Covid-19 and more to do with chip shortages in Asia. While these bottlenecks will sort themselves out in the near-term, they are emblematic of a broader problem: semiconductors are the new oil and Taiwan is the new Saudi Arabia. Worryingly, this market is even more concentrated than the oil market is because there are fewer producers. Whoever controls Taiwan can effectively influence the world’s global supply of microchips.
This is not hyperbole. Because the cost of achieving higher logic density has increased so exponentially, it means that new microchip technology entails massive capital investments that require producers to operate with a very high utilization rate. The barriers to entry are prohibitively high. Taiwan Semiconductor Manufacturing Company comprises half of the global semiconductor foundry market. Together with Taiwan’s other giant United Microelectronics Corporation and South Korea’s Samsung, the three companies account for 78% of global market share. In sum, the microprocessor market is highly and dangerously concentrated in Taiwan. From the West’s perspective, this is dangerous because China covets a reunification with Taiwan. Thanks to its actions in Hong Kong, everyone now knows what that would look like under Xi Jinping.
Every investor and policymaker worth their salt will have to account for the vulnerabilities inherent in a world should the situation across the Taiwan Strait deteriorate. An incident where chip production was disrupted or halted, or supply lines were permanently denied could be catastrophic for the global economy. If you think the US would not go to war over chip manufacturing in Taiwan, then you do not remember the US going to war in Kuwait over oil in the early 1990s. Of course, China would pack a stronger punch than Iraq ever could, and Taiwan’s importance means that all stakeholders around the world have incentives to de-escalate.
But as World War I showed us, rational actors can stumble into a conflict through a series of miscalculations after the assassination of an Archduke. Incidentally, World War I was the last time a rising, regional hegemon (Germany) confronted the entrenched global hegemon (the UK). To be sure, I am not saying that the result of this great power rivalry will be a third world war. I am also not precluding it from turning out that way either if the wrong policy mix makes us stumble in that direction. Certainly, Taiwan’s importance to the global economy means that all stakeholders, which in the extreme means all nations, are incentivized to cooperate, and maintain stability. Elementary game theory teaches how that decision-making process can go awry, and behavioral economics similarly suggests that not all decisions, even at the state-level, are rational and motivated by self-interest.
What are investors and market participants to do? Do we run to the proverbial risk bunker and wait out the coming conflict? Again, history provides a clear answer – an emphatic “no”. During the Cold War, broadly defined as 1947 till 1991, the S&P 500 rose 2,708% (7.70% annualized) despite enough missiles being pointed at each other to wipe out humanity many times over. Lest we forget, the world stood at the brink of doomsday several times during this now quickly receding era: The Berlin Airlift, the Korean War, the Soviet Invasion of Hungary, and the Cuban Missile Crisis. That was our conflict with the ideological and militant Soviets. Conflicts with the capitalist Chinese may turn out a tad less unnerving.
We must learn how to interpret the decisions and actions of these two great nations within the framework of this great power rivalry: the US wants to maintain the status quo, its place at the center of the post-WWII order, while China wants to regain its historical place and displace said order. From the American side, you will see intensifying economic pressure, and support of borderland states like Taiwan as an attempt to limit China to the first island chain. One will see the US trying to encircle the Chinese through alliances and balance of power moves allowing Japanese remilitarization and an Indian rapprochement.
For China’s part, it must ensure that it can keep delivering the economic growth that its masses have come to expect and that underpin the government’s credibility. To that end, we will see attempts to bypass the global commons, the oceans that the ubiquitous US Navy still dominates. The Chinese have reconnected with the Russians, as a unified Eurasian landmass will better counter the seagoing Americans. There will be other, yet to be determined, manifestations of this global conflict. It is important that we recognize them when they arrive.The markets will have to learn how to discount this risk premium, and, as they have done in earlier eras of shifting paradigms, they will adjust to the new reality.
