CC-BY-SA-2.0, FlickrAnabel Vidal and Jorge Rovira. Compass Promotes a New Co-Country Head and Regional PM
Jorge Rovira, who, until recently, led Compass‘ commercial effort in Colombia, assumed responsibility as Co-Country Head, along with Anabel Vidal, of Colombia and Panama.
In addition to this change, Anabel Vidal assumes the leadership of the regional PWM area, with the responsibility of deepening the process of integration, consolidation and growth of the firm’s offshore and services platforms for private clients in the region.
Before starting his career at Compass, Jorge worked at BlackRock where he led the Institutional / Retail business effort in Mexico, Central America and Colombia. He was also a Portfolio Manager for Global Strategies at GBM Mexico, Head of Investments for Corredores Asociados in Bogotá, and Head of Institutional Sales for Colombia and Peru in LarrainVial as well as Senior Strategist at BBVA Provida in Santiago de Chile.
Vidal has more than 19 years of experience in the financial industry. She joined Compass Group in 2007 and was Product Development Manager, in charge of Product Allocation and Portfolio Management for private clients at Compass Group in New York and Miami. Shortly after, she was in charge of the Miami offices and in the year 2015, also Panama and Colombia. Before joining the firm, she worked in the consulting area for the financial sector in Accenture and Procuradigital.
. Investec Launches an Investment Grade Corporate Debt Fund in Association with Compass Group
Compass Group is the sub-manager of the new Investec Latin American Investment Grade Corporate Debt Fund, recently launched in Luxembourg and included in Pershing.
The strategy is almost a year old and will be managed by Tomás Venezian and Mathew Claeson, who have more than 15 years of experience in the industry, and currently the portfolio is built through a bottom-up process of ‘best ideas’.
Latin America is at a turning point, where growth and inflation stabilize, which has allowed an expansive monetary policy in the region. On the business side, a process of deleveraging has begun to be observed since mid-2016, which should result in much lower default rates than those observed in recent years.
On the technical side, Compass Group experts expect a negative net bond offer in Latin America this year, in an environment in which demand for interest rates continues strong, and therefore, global investors have appetite for the region.
US investment grade debt spreads and emerging market spreads remain at attractive levels compared to their historical average. Latin America is the most attractive region in terms of spreads adjusted by risk classification, says Compass.
The fund’s objective is to generate income with the opportunity to obtain long-term capital gains by investing in Latin American fixed income assets rated as investment grade. The spectrum of bonds includes sovereign, quasi-sovereign and corporate, the latter having the greatest participation in the portfolio.
Compass Group LLC has a history spanning over 20 years, specializing in asset management in Latin America, where it has more than 40 specialists based in the main cities in the region.
Wikimedia CommonsSantiago de Chile. Larrainvial Answers Three Questions About the Progress of the Agreements with Vontobel and Columbia Threadneedle
LarrainVial Estrategia has been promoting its funds’ offer and currently maintains contacts with two new administrators. The Chilean firm responded to three questions from Funds Society about these negotiations:
1. At what stage are the discussions between Vontobel Asset Management and Columbia Threadneedle Investments?
We are constantly monitoring the market in search of managers to complement the 36 fund managing companies with whom we currently have an agreement, with the idea of improving our availability of products to incorporate our asset allocation through the best instruments for each asset class.
We do indeed have contacts, however, agreements must be approved by our Compliance area, which may take some time due to the exhaustiveness of the review process of the counterparts that is carried out, both by us, and by the aforementioned managing companies.
2. What are the main advantages of these funds and what do they contribute to LarrainVial’s existing offer?
In Vontobel’s case, what caught our attention was its consistency in funds related to emerging markets, especially in fixed income.
In Columbia Threadneedle’s case, what caught our attention was its diversified range of products globally, with interesting alternatives mainly in European equities, where they have various diverse strategies.
3. How does the work of LarrainVial Estrategia fit into the company’s regional expansion policy?
LarrainVial Estrategia was designed to be an easily scalable model for the rest of the region, with a team characterized by absolute independence, open architecture, ability to combine national and international investments, plus renowned experience in combining traditional investments with the most complete range of alternative investments.
If to all of the above we add a great commercial capacity to lower our vision, and recommendations to our financial advisors, so that these can in turn be transmitted in a consistent way to their clients, we can see the leading role in our area within LarrainVial’s general strategy.
All this is being highly valued by our financial advisors and their clients, which is reflected by the fruits that our work has started to reap. This is evident by the extreme loyalty to the company shown by our clients, due to the consistency of their portfolios and the cohesion of the discourse within the sales force.
CC-BY-SA-2.0, FlickrMaria Ramos and Agustín Carstens. Agustín Carstens and Maria Ramos Join the Group of Thirty
The Group of Thirty (G30) announced that Agustín Carstens, Governor of the Banco de México, and Maria Ramos, Chief Executive Officer of Barclays Africa Ltd., have accepted invitations to join the membership of the G30.
Jacob A. Frenkel, Chairman of the Board of Trustees, stated: “The G30 is very pleased to welcome Agustín Carstens and Maria Ramos to membership and I look forward to their engagement in our program and projects in the years ahead.” Frenkel added: “I am delighted that Agustín is joining the Group. He brings decades of knowledge of international finance and economics to the G30, from his leadership of the Banco de México, as Chair of the IMFC of the International Monetary Fund, and from his previous work both as Minister of Finance of Mexico, and other roles. Maria will add diversity of perspective, and a strong and influential South African voice, to our deliberations. She has a breadth of private and public sector experience that will benefit our work and discussions, from her current positions as Chief Executive Officer of Barclays Africa, as Chair of the Banking Association of South Africa, and her prior role as Director General of South Africa’s National Treasury.”
Tharman Shanmugaratnam, Chairman of the G30, said: “Agustín and Maria are outstanding leaders. They each bring a wealth of understanding of the financial and economic challenges of the times, which the G30 seeks to address through our deliberations and ongoing work program of studies. The work of the G30 in international financial and economic thought leadership relies on its dynamic, engaged membership, drawn from across the globe and across public and private sectors. I very much look forward to Agustín and Maria’s contributions in the years ahead.”
Carstens stated: “I thank Jacob, Tharman, and the G30 members for the invitation to join the Group’s membership. I am honored to join the organization and look forward to participating in its discussions and activities.”
Ramos stated: “It is a pleasure to join the G30, which does such key work on international economics and governance. I look forward to working together on projects of common concern and to supporting the Group’s mission.”
The Group of Thirty was founded in 1978. The Group is a private, nonprofit, international body composed of senior participants from the private and public sectors and academia. The Group The Group is led by Jacob A. Frenkel, Chairman of its Board of Trustees, and Tharman Shanmugaratnam, Chairman of the G30. Amongst its members are Jean-Claude Trichet, Paul A. Volcker, Ben Bernanke, Mario Draghi, Timothy Geithner, Paul Krugman, Haruhiko Kuroda, and Jaime Caruana.
CC-BY-SA-2.0, FlickrFoto: Lunita Lu. ¿Se van a mantener los tipos eternamente bajos?
In his latest monthly outlook, titled Curveball,Bill Gross mentioned that to his mind, free will is the key to our unique position among life’s animals. Without it, this business of living is reduced to a meaningless game.
He also makes the case that monetary policy in the post-Lehman era has resembled the gluttony of long departed umpire John McSherry – they can’t seem to stop buying bonds, although as compulsive eaters and drinkers frequently promise, sobriety is just around the corner. In his opinion, “The adherence of Yellen, Bernanke, Draghi, and Kuroda, among others, to standard historical models such as the Taylor Rule and the Phillips curve has distorted capitalism as we once knew it, with unknown consequences lurking in the shadows of future years.”
“But the reliance on historical models in an era of extraordinary monetary policy should suggest caution. Logically, (a concept seemingly foreign to central bank staffs) in a domestic and global economy that is increasingly higher and higher levered, the cost of short term finance should not have to rise to the level of a 10-year Treasury note to produce recession.” And notes that commonsensically, a more highly levered economy is more growth sensitive to using short term interest rates and a flat yield curve, which historically has coincided with the onset of a recession.
“Just as logically, there should be some “proportionality” to yield curve tightening. While today’s yield curve would require only an 85 basis increase in 3-month Treasuries to “flatten” the yield curve shown in Chart 1, an 85 basis point increase in today’s interest rate world would represent a near doubling of the cost of short term finance. The same increase prior to the 1991, 2000 and 2007-2009 recessions would have produced only a 10-20% rise in short rates. The relative “proportionality” in today’s near zero interest rate environment therefore, argues for much less of an increase in short rates and ergo – a much steeper and therefore “less flat” curve to signal the beginning of a possible economic reversal.
How flat? I don’t know – but at least my analysis shows me that the current curve has flattened by nearly 300 basis points since the peak of Fed easing in 2011/2012. Today’s highly levered domestic and global economies which have “feasted” on the easy monetary policies of recent years can likely not stand anywhere close to the flat yield curves witnessed in prior decades. Central bankers and indeed investors should view additional tightening and “normalizing” of short term rates with caution” he concludes.
Grant Cambridge, courtesy photo. “We are Underweight US Financials, but the Pending Deregulation Could be an Interesting Catalyst"
To avoid companies that are overvalued in a stock market such as the US, which since February 2009 has revalued 280%: is the goal of Grant Cambridge, fund manager at Capital Group, which explains in this interview with Funds Society its management keys. He says that this American strategy, which has recently been offered to European investors with the launch of its Luxembourg version, offers long-term returns through a fundamental analysis of companies. And that he is not afraid of the Fed, which he hopes will continue with his gradual upward path, and that it will remain as transparent as possible to avoid surprises.
1. The first thing which nowadays comes to my mind when speaking about US equities is high valuations. Do you agree? If not, or at least partially not, in which sector valuations are still attractive?
When I think about the US, I actually don´t necessarily think about high valuations. Although there are companies in the US which are getting a tremendous amount of attention that do have high valuations. That´s why it is important to think about diversification through a fund like ICA and avoid areas that are overvalued.
If I had to guess what the best industries were over the last twenty years, they are a highly diverse set of sectors. This is to show that I can find in all sectors companies that are attractively valued. But I can also find in all sectors companies that are not attractively valued. The real objective is to try to avoid the names which are overvalued.
Right now, a lot of attention is put on large tech companies and the top five stocks right now, in terms of market cap, are equal to the bottom 250 stocks. That speaks about how concentrated is the market. This fund can invest in growth, but also looks for growth and income. So we have the flexibility to invest in a company like Amazon, with no dividend income, but we also might invest in a company like Verizon, which has lower growth but a really attractive absolute yield, almost 5%. ICA provides a dividend yield of around 2.2%, which is better than the S&P 500. Most of the companies we have in the fund are domestically domiciled and we can invest up to 15% outside the US. However, we actually get our exposure through US companies that have revenues and earnings around the world.
2. Which factors could support the continuation of the rally in the stocks you have in your portfolio? Will it come from earnings, from economic growth or from Trump fiscal policies?
Just to put in perspective, since February 2009, the US equity market is up 280%. So I look for companies that have reasonable earning growth, with that you need fundamental analysis to make sure you have that fundamental growth. In other words, I´m worry about the macro, I mean I can worry on the top down, but I build the portfolio on a bottom-up basis. One company at a time. And all of the companies that we invest in are analyzed on fundamental basis. Many times we meet with the companies. Many of them we have met with the companies in their local activities around the world. So, we are doing a true global fundamental research. This gives us the confidence to invest in those companies for a long term period.
The turnover of ICA is around 25%. That means that 40% of the fund asset has been in companies we held of more than eight years.
3. Based on your long experience, would you say macro or fundamentals are more important in the performance of your portfolio? What do you need to find in a company to invest in it?
I look for ethical management. I look for reasonable valuations. I look for companies that have attractive capital allocation strategies and usually what it does mean is an orientation to return cash to shareholders through dividends or even better, dividends which are progressively growing over the time.
This fund is oriented towards larger caps companies. What we do is we think about the objective of this fund and we orient our investment universe towards that.
4. Are Fed rates hikes impacting on in any way in the equity market in general and in your portfolio in particular? What do you expect from the Fed? Will you implement any change in your portfolio accordingly?
For the Fed, I expect a continued measured pace of interest rates increases and I think up until now we have seen that. They have been increasing rates for the right reasons. The market has tolerated the increases in interest rates. And actually if you see interests rising for the right reasons is not a bad backdrop for equity markets. So I expect the Fed to continue to be measured, to be as transparent as possible and to not have any surprises.
If you go back to 1994-1995 time frame, rates gone up very rapidly, there were a lot of surprises and impacted both the fixed income and the equity market. Right now I see the Fed ´patrons being very transparent; they are trying to give as much indication of direction as possible.
In sum, I don´t expect interest rates to go up and up an up.
5. What are the keys for being able to protect investors’ capital in down markets? For instance, in the current environment, is it better to have a more defensive bias or a more aggressive one? Why?
We have already talked about this, but for us, the key is the diversification. In our Capital System we do not only apply diversification within the portfolio but we have diversification of styles. We have eight portfolio managers in this fund; we have a variety of styles. We have been able to find general defensive sectors which in weak market, these kinds of companies have hold up very well. Two of our larger sectors now are consumer staples and consumer discretionary, both of which are defensive sectors overall.
For us this not only diversification per se, is diversification but with convictions. We do not add companies just for the purpose of diversifying. Every single position in the portfolio is a conviction. Our investment process involves more than one decision maker. We have eight portfolio managers assigned to this fund and we also have a research portfolio, which is managed by the specialists or industry analysts. The industry analysts are looking for high conviction ideas. They only make a small number of decisions per year and when they invest, the portfolio managers who are in the fund will also co-invest. This process is very transparent, it is granted in trust, in communication and in collaboration.
6. Which sectors do you like the most from a fundamental standpoint? Which ones are you currently overweighting?
We are slightly overweight energy. As said before, consumer staples, energy and telecommunication companies we are overweight relative to the S&P benchmark. We are underweight financials.
7. Energy and financial sectors, which have been in trouble, are they an opportunity now?
Energy is a cyclical commodity and we have seen an ample amount of supply which offsets the demand. So, basically, as a result, the commodity has weakened. We don´t have a wide company view on oil. Each person has his own opinion. My opinion is it will take some time before the supply and demand comes back into balance. Demand has been fairly stable and supply has been ample. OPEC has shown they wanted to set a floor on price and the US is producing more energy, natural gas and oil than it has historically.
It was only a few years ago when we were worry about peak oil and we were discussing oil at $200 a barrel. So this goes to prove that this is a commodity cyclical and where there is more supply there is pressure on the commodity. One thing we are particularly interested in are the low cost providers and the companies that can earn their dividend thanks to this weakness of the commodity.
Concerning the financial sector, we have been underweight in ICA, there may be a general feeling that interest rates will be lower for longer and you really need interest rates to go up two-three hundred basis points to make a meaningful impact on earnings. So we haven´t had enough increase in interest rates to make a material impact to earnings. We also have a tremendous amount of regulation in the US and the new Trump Administration is talking a lot about deregulation and we will have to see whether or not it really ends up impacting, particularly the banks.
The discussion around the Trump Administration considering deregulation will be one that we will continue to watch because it could be an interesting catalyst after having a period in which regulation was put on the market since the financial crisis.
Deregulation is a theme which goes beyond the financial sector and that could impact a number of sectors. President Trump has talked about removing two regulations for everyone that is audited, that goes very broadly across the economy so we will have to wait and see which areas are most affected. We do a lot of research about regulation and right now it is too early to tell what could be his priorities. The financial regulation is one which seems to be a priority.
8. Why do you overweight large caps and underweight small caps? Does it help to the portfolio stability?
This is a conservative fund launched by our founder. This is a lower volatility, larger cap fund. We refer it as core fund which invests in seasoned companies; companies which stability and which are leaders, many of them, in their fields. They are liquid companies and most of them have an income as contribution to total return. CGICA’s 83-year average return of 12% has proved rewarding for long term investors.
In other words, this fund, because of its nature, has been relatively conservative and is currently overweight large caps. Around 10% of the fund is in mid caps today. We do not have any small cap in the fund. It does help with portfolio stability and it also contributes to have liquidity in the company we invest in. Besides, it gives you exposure to earnings and revenues around the world.
We are managing the fund with a longer term horizon and our approach to investing in larger caps, stable, seasoned companies, as said before, helps to maintain a stable portfolio. Small and mid caps can go through dramatic changes, some times in the short term, some times in the long term and larger caps tend to be more stable. It does not mean they not move around, but generally they provide stability.
9. Why active management and having a high active share are key factors when investing in US equities? How does it help to long term results?
We look to focus on fundamental research into companies and consider their long term future prospects -their weighting within the index is not a primary consideration.
When we are investing we almost rarely use the words index, underweight and overweight. In our vocabulary, in our day to day jobs, we are not using them. But when we are sitting with advisors, we can describe the fund using these words despite this is not the way we describe it in our meetings internally. In other words, we are aware about the benchmark but don´t use it as a way to build our portfolios.
Apart from that I would like to highlight that because of we are looking for companies with dividend characteristics, we are many times invested in the higher dividend quintiles and that is an area which gives the stability of the fund ´returns. It also provides downside protection in the event of a correction.
We tend to be in the upper quintile of our peer group for consistent risk-adjusted returns, but we are in the lower volatility category of our peer group. Actually, we are in the lowest quintile of volatility of our peer group. What is exactly what we want to do for our long term shareholders: provide superior returns with lower volatility. We must not forget our mission which is to improve people´s life through successful investing. It is important also to bear in mind the investment management is our only business. We are focus on the long term interest of our clients. Finally, I would like to remember another key feature of CG is that portfolio managers invest their own capital in the funds they are managing.
10. Finally, is the Luxembourg strategy being well received in Europe? What does it strategy offer to European investors?
Yes. It provides to European investors the same thing we have been providing to US investors for 83 years. It provides long term investment returns through fundamental analysis of companies.
Now European investors can access to one of the most successful strategies and it represents what they are looking for a US equity fund: it is a conservative, first quartile, low volatility, easy to understand fund. And more than proved, with 83 year track record.
Francisco Murillo, CEO at SURA Asset Management Chile. Three Questions on Pension Reform Answered by Francisco Murillo, CEO at SURA Asset Management Chile
The pension reform in Chile is at the height of the consultation stage. The project will bring several new features to the pension system, including a 5% increase in contributions. The Chilean government has announced that the reform will reach parliament between March and April, and that its approval is expected by the end of the year.
Francisco Murillo, CEO at SURA Asset Management Chile, answered three questions about the reform.
1. How do you evaluate the announced incorporation of alternative assets among the investments of the AFPs?, Is it something positive for the markets and for the savers?
It is an excellent initiative, and addresses the need to seek new sources to ensure profitability, considering that the returns we have known in the past will hardly be repeated in the future. In fact, we were among those who raised the urgent need for this measure. In 2014, in the midst of the debate on the pension system reform, we presented 11 proposals to the Bravo Commission, one of which was precisely to make the investment in alternative assets possible, because of the strong impact they have on pension profitability.
It is shown that an additional 1% of the average annual return in the active life of a member can improve their pension by 20% to 25%. In the recent past, alternative investments have obtained higher returns, less volatility and, moreover, contributed to portfolio efficiency.
The retirement reality that we Chileans live today shows us that there is a gap between the expected pension and the one that is actually received at the end of the working life. Currently there is a broad consensus on the urgent need to apply changes to the system, and that is probably one of the great challenges we have as a country: closing that gap.
It is within this context that we must promote and encourage actions that generate a positive impact on the pension savings of Chileans.
2. One of the potential items of the pension reform could be the limitation of multi-fund movements: How do you evaluate that potential innovation?
It’s fundamental to know the proposed bill in more detail, since there are issues that would have to be analyzed from the technical point of view, in order to evaluate its implementation and impact.
We believe that fund management is relevant to pension construction and requires people’s involvement, so it is very important to have that freedom of choice and action, to decide in which multi-fund to invest your pension savings.
However, we must clarify that the changes that arise from so-called massive funds, or without adequate advice, can generate lower returns for fund members. Our mission as an AFP is to educate people to make appropriate decisions, according to their investment profile and their expectations for post-retirement life.
3. In general, who will win and who will lose with the changes?
Our expectations are that the changes are adjusted so as to achieve the great common goal: improving pensions.
Most likely, the final solution will not be perfect for any of the players involved, there are issues that are shared more strongly than others, but what is clear is that the pension system as such, I do not mean only that of individual capitalization, will better address the needs of an aging country.
In order for us Chileans to enjoy a retirement stage of life according to our expectations, we must act urgently, applying parametric changes and adjustments with greater savings as soon as possible, leaving decisions about the pension system out of the political cycle. The further we delay in acting, the later we will reach our goal of having better pensions.
We are convinced that once the pension reform takes shape, the role of individual capitalization will become even clearer as a key pillar of the pension system and that, outside the environment that has been generated in recent years, the AFPs have fulfilled a fundamental role, and are far from being the problem of the pension system in Chile.
CC-BY-SA-2.0, FlickrDennis Lai, Senior Manager at Allianz GI. Courtesy Photo. Emerging Within the Emerging: The Potential of the Asian Frontier Markets, According to Allianz GI
One of the core messages from the Asia forum recently held in Berlin by Allianz Global Investors is that investing in the Asian continent goes far beyond China. Although the Asian giant offers investment opportunities that cannot be ignored, and has risen strongly in recent months in tune with other markets such as India, a market which asset manager Siddharth Johri spoke about, or Korea, all of them revalued by about 30% in the last twelve months, there are also others that offer great potential.
Therefore, beyond the more developed Asian countries, there are emerging countries within the continent, emerging within the emerging, or frontier markets. Dennis Lai, Senior Manager at Allianz GI, spoke about the opportunities in Asian frontier markets, growing markets with very favorable demographic characteristics, consumption opportunities, infrastructure, and GDP growth.
Without taking into account the beneficial effects generated by China (and other more developed Asian countries) on some of these markets, the boom in development and research policies, and the improvement in their fundamentals and credit quality from an investment point of view (which improves the perception of risk). The Allianz GI strategy that invests in emerging and frontier Asian markets harnesses the potential of these markets and focuses on growth segments (such as consumption, services, technology, and infrastructures, which are less present in the indices but will be gaining traction) and avoids the traditional ones (utilities, financial, health…), in a strategy with conviction that selects between 60 and 80 names.
And it is also based on themes: for example, the asset manager likes the investment in automation theme, and the fact that Asia is a fundamental part of the supply chain for Western robotics firms; also the sale of automotive components to the OECD industry theme; or the aerospace theme, as the continent also provides components to large Western firms.
According to the asset manager, Pakistan, Vietnam or Sri Lanka are some of the next economies that will be among the fastest growing.
The Allianz GI strategy invests in names that also bring great diversification to the portfolios by their decorrelation with other Asian markets, since their fundamentals and their cycle are at a different, earlier stage, than that of other more developed Asian markets.
In addition, they are little-known markets and emerging outflows affect much less:
“We are positive in Asia and in the smaller markets, where we see very interesting opportunities,” remarked the asset manager.
Asia’s Potential
Stefan Scheurer, Asia Pacific Economist at the asset management firm, also pointed out during the event that Asia is not just China, but a vast continent stretching from Japan to Australia and including many, and varied, markets. Between them, the population is larger than that of Europe plus America together, with 4 billion people, 60% of the world’s population, and accounting for more than 35% of the world’s GDP… a trend which is rising, as by 2020 it could account for 42%.
In this context, China has become one of the major standard-bearers and advocates of globalization, and despite Trump and his protectionist attempts, experts estimate that international trade (intra regional and interregional) will continue to grow, driven by TPP (of which the United States is not a party).
According to the expert, the continent will continue to grow, driven by productivity and innovation in China’s or India’s case, with large amounts of patents; regarding the debt problem, he points out that there is potential to increase leverage, since it is a problem in China but not in other economies in the continent. In addition, the population and demographic profile is more favorable in countries such as India, Indonesia or the Philippines than in China, which leaves greater potential for growth in these economies. With all these factors, the expert predicts continued growth in Asia, above that of developed markets, and also driven by the continent’s status as a “relative winner of de-globalization”.
Federico García Zamora, Director of Emerging Markets at Standish (part of BNY Mellon) / Courtesy Photo. Interest Rates, Oil, and the Dollar: the Three Factors that Convert Emerging Debt Into an Investment Opportunity
In 2017 the return of investors towards emerging market debt after several years of inactivity has become evident. The drop in oil prices, lower growth in China, and political problems were behind this disillusionment, which this year has been almost completely wiped out.
The investment spirit in emerging debt “is blowing in the wind”, as Bob Dylan would say, however, any cautious analysis would lead us to consider whether this trend is sustainable in the medium term or if, on the contrary, it has an expiry date.
This is the first question we asked Federico García Zamora, Director of Emerging Markets at Standish, BNY Mellon, during this interview with Funds Society in Spain. His answer is clear: “The context has changed and will be maintained for at least the next 12 to 24 months due to three fundamental factors: interest rates, the oil price, and the Dollar.”
In his opinion, the Fed’s rate-hike strategy is already embedded in long-term bond prices. “It will not come as a surprise to anyone that interest rates continue rising and, therefore, it will be perfectly accepted,” says the expert.
As for the second fundamental factor, the price of oil and commodities in general, García Zamora explains how they are analyzing both from the production side (companies in the sector) and from the demand side. His forecast is that the price will be much more stable in the next 12 months, at around 40-60 dollars. “The price cannot rise again too far above 55 dollars because the supply of unconventional oil would rise a lot, while below 40 dollars, a lot of the supply would be destroyed,” he explains.
Despite admitting that for investment in emerging markets it would be better for the price of oil to rise, “stable oil is going to be very good without it having to rise. We will see good results with price stability,” he argues.
Good results that, in terms of profitability, translate into 7% -8% annual returns for emerging debt, “which is very attractive when compared to any other fixed income asset in which you can invest worldwide, if nothing changes regarding currency exchange rates.”
As a matter of fact, the third factor that supports this interest for emerging countries is the evolution of the Dollar and here the expert’s forecasts point to a fall of the dollar during the next two years. “This adds appeal to this asset class as opposed to a few years ago when the dollar kept rising,” he explains.
An upward trend that the expert explains as due to the rapid increase of interest rates while they were falling in the rest of the world, as a result of the European crisis, stimulus withdrawal by the Fed, the collapse of oil prices, and Donald Trump’s election. According to García Zamora, all these elements contributed to placing US currency at highest levels during the last five years, but now he is convinced that it will continue to be come down because “that’s how the Trump administration will solve the country’s high trade deficit. Depreciating the dollar has always been his intention, but it was easier to explain to the average American voter that he would solve the problem by raising customs fees.” His forecast is that the dollar will stand at 1.25 to1.30 Euros.
From Russia and Brazil to South Africa and Turkey
Asset allocation from a geographical point of view has varied in the last twelve months. During 2016, Russia and Brazil have been the darlings of the Standish emerging portfolio, in which Colombia has also had some weight, despite being slower in its recovery.
“Another country that we liked a lot is Argentina due to its change of government. Its crisis was self-inflicted with a government that shot itself in the foot as much as it could. With a much more reasonable policy and investment, the potential of the country has changed completely.” In this regard, Garcia Zamora says that they have already taken profits in Argentina and have rotated their portfolio towards other issuers like Mexico, South Africa and Turkey, which are “cheap.”
The investor’s main concern in emerging markets is volatility, which the expert puts between 8% and 12% depending on whether the investment is made in local currency, Euros or dollars. “It is true that these assets have gone up quite a bit, but if you are a long-term investor it remains attractive. The fall that some expect may not arrive and my recommendation is invest now and, if there is a fall, invest further,” he concludes.
Pixabay CC0 Public DomainC3_0010_shutterstock. Will the Fed (and Other Central Banks) Normalise Monetary Policies?
In mid-2013, the then chairman of the Federal Reserve, Ben Bernanke, suggested that America’s central bank should start to cut back on the purchase of bonds that had started in 2008. The turmoil resulting from this announcement on all markets in general, but on emerging markets in particular, put a curb on his intentions.
The baton was passed on to Janet Yellen, who in December 2015 approved a rise of 25 basis points on interest rates that had remained at 0% for seven years. The last increase had taken place in 2006, but with scant resonance – Twitter was yet to come into its own. In just a little over a month, between 22 December 2015 and 28 January 2016, the Chinese stock market adjusted by just over 27%, and plans to normalise monetary policies had to be postponed once again.
This time around, it seems that not just the Fed, but other major central banks such as the European Central Bank, the Bank of England and the Bank of Canada, are willing to normalise monetary policies, following almost ten years of emergency policies.
The global economy is now more settled. The OECD expects the world’s GDP to grow in 2017 and 2018 to levels of 3.5% and 3.6%, respectively, in comparison with the average of 3.9% between 1987 and 2007. However, developed economies will grow at slower rates, nearer to 2%. The United States has grown by an average of 1.47% over the past eight years, as compared with 3.4% since the Second World War, and the annual real growth rate since the last recession was just 2.1%, in comparison with an average of 4.5% in previous recoveries. Based on figures published to date, it does not seem that growth will even reach 2% in the first half of 2017.
The Federal Reserve’s task is further complicated by two historical facts: since the Second World War, the Fed has triggered 13 cycles of rises in interest rates, ten of which took the economy into recession. Secondly, since Ulysses S. Grant (1869) all republican presidents have experienced a recession during their first term of office. Nevertheless, as athletes often say, if faced with a challenge backed by past results against winning, records are there to be broken.
The desired rate of inflation (for the central bankers that govern us because, I do not know about you, but I like to buy things when they go down in price) closed at 1% in 2016 in developed economies and, unless there are new price rises in oil, it seems unlikely that the target of 2% will be reached.
Finally, global debt, far from dropping, has continued to grow. By the close of the first quarter of 2017, it was 217 trillion dollars, which meant that it increased by more than half a trillion dollars, 46% higher than ten years ago. Developed economies have built up a total debt of 160.6 trillion dollars, 1.4% down on the previous year, whilst the debt of emerging countries reached 56.4 trillion dollars, up by 5.4%.
In light of positive economic growth, although perhaps not sufficiently sound to deal with potential upheavals, a controlled rate of inflation still way off target and higher debt levels in the economy, what has made central banks act like this now?
Even the chief economist of Bank for International Settlements highlighted in its annual report published last month that: “Policy normalisation presents unprecedented challenges, given the current high debt levels and unusual uncertainty. A strategy of gradualism and transparency has clear benefits but is no panacea, as it may also encourage further risk-taking and slow down the build-up of policymakers’ room for manoeuvre.”
Perhaps central bankers have (at last) realised that inflation is in financial assets – the returns on the oldest bonds in history, those of the United Kingdom and the Netherlands, have seen the lowest in 322 and 500 years respectively, whilst the US had 10-year bond yields of 1.366%, the lowest since 1800. Maybe it has taken them too long to withdraw these measures that are now not only ineffective, but also encourage too much risk-taking, which puts financial stability at jeopardy. It could simply be that they are recharging their arsenal of weapons to shore up monetary policies should they need to use them in the near future.
Whatever the reason, the reality is that the market has let them get away with this so far. The question is: will this go on like this? Will they stay on course if the market does not take this well? If they do not keep a steady hand, will faith be lost in the omnipotence of central banks? It should not be forgotten that low interest rates have been the main driver behind the upturn of financial markets.
If Ben Bernanke was right about the positive effects of rolling out quantitative easing, he should be equally right about the effects of withdrawing it. Without going into specifics, what is important is that markets believe so, and think that central banks are responsible for the positive performance of markets.
In response to the appearance of another financial crisis, Janet Yellen was clear in a recent interview: “Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be.”
Overall, the four big central banks have purchased around $13 trillion in bonds ($13,000,000,000,000). It goes without saying that divesting this portfolio without messing things up is not going to be an easy task…
