BlackRock: “Thematic ETFs Allow The Fund Manager To Engage In a Different, And Forward-Looking Narrative With The Client”

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BlackRock: “Los ETFs temáticos son productos fáciles de entender que permiten al gestor tener una narrativa distinta, de futuro, con el cliente”
CC-BY-SA-2.0, FlickrAitor Jauregui, Head of Business Development for Spain, Portugal & Andorra at BlackRock / Courtesy Photo. BlackRock: “Thematic ETFs Allow The Fund Manager To Engage In a Different, And Forward-Looking Narrative With The Client”

The use of ETFs has evolved a lot in recent years, not only because of the number of products, but also because of the different uses already given to those products by investors. An example of this is the tactical movement of investors following Donald Trump’s victory in the November presidential election in the United States. “Following Trump’s speech, the market began to accept that there could be opportunities in equities, and began to produce sales in the long stretches of the yield curve. One way for the long-term investor to adjust his losses was by selling long-term bonds and buying ETFs with durations of 1.5”, explains Aitor Jauregui, Head of Business Development for Spain, Portugal, and Andorra at BlackRock, in an exclusive interview with Funds Society.

At BlackRock, they are convinced that this greater diversity and extension in its use is key for its growth in Europe, despite the six-year gap in the sector with respect to its US counterpart; and points out such positive aspects as its contribution to liquidity: “At a time when, as a consequence of financial regulation, it’s not as simple for market makers to provide liquidity to the fixed income market, the ETF goes on to play a role which it did not have before,” he explains.

Another growth driver for the ETF industry will be MiFID II, in view of “the clear trend to package investment solutions and offer clients model portfolios where management fees are kept low.”

Their good behavior in times of stress is another argument in favor of their future development. “The investor resorts to them in times of market stress because of their excellent behavior. For example, following the referendum in the United Kingdom, ETF trading reached $ 5 billion and after Trump’s victory it reached $ 3.15 billion. This far exceeds what is traded daily.”

Their growth, however, may seem excessive. But for Jauregui it is not, since “of the 3.4 trillion dollars in these investment vehicles, only 600 billion are in fixed income, 0.6% of total debt issued in capital markets. When it comes to high-yield, only 3% of the bonds asset class is traded through ETF.” That is, there is still great potential for growth ahead.

Growing competition

Within the framework of this growth, and in a context in which increasingly more fund management companies offer exchange-traded funds, at BlackRock they take competition in the universe of indexed funds and ETFs in their stride, although they are quiet clear as to its added value. “It is understandable that there is competition, it’s good and it’s healthy. However, this is a business where scale is important, having efficient and liquid vehicles is usually closely related to the assets of the funds; having many small ETFs is not always the best solution for the investor,” says Jauregui.

Five megatrends to capture future growth

And in this environment of increasing competition, BlackRock continues to focus on innovation, with the aim of delivering value to its clients. An example of this are their thematic investment ETFs, which invest in megatrends. Megatrends in the investment world are transforming forces that have the power to change the global economy and business, and to influence investment decisions. In its latest report, BlackRock identifies five key megatrends that relate to four investment themes: aging demographics, healthcare innovation, digitalization and automation, and robotics. That is why, since last September, there are four ETFs in the market that, in collaboration with iSTOXX and FactSet, seek to capture growth in these megatrends.

“We believe that it fits in well in client portfolios and demand has been growing on the part of SICAVS managers and thematic fund managers,” explains Jauregui.

The iShares Ageing Population UCITS ETF (Aged) focuses on the aging of the population, and invests in companies that offer from health services for the elderly to cruises. As Jauregui points out, “by 2030 more than 13% of the population will be over 65, and there are sectors and companies that will benefit from it.”

Meanwhile, the index replicating the iShares Healthcare Innovation UCITS ETF (Heal) fund has exposure to very specific segments within the industry such as healthcare treatments, patient care, or diagnostic tools.

In terms of digitalization, the iShares Automation & Robotics UCITS ETF (Rbot) focuses on companies of both cybersecurity and financial technology or payment processing. “Investment in financial technology has gone from $ 1.8 billion in 2010 to $ 19 billion in 2015 and this is going to continue to grow,” says the expert.

Finally, the iShares Digitalisation UCITS ETF (Dgtl), which has attracted the most investment flows since its launch, invests in innovative companies in production robotics under the premise that “up to 45% of global labor activity can be automated.”

The four ETFs are physically replicated, that is, they acquire the securities of the underlying index and, to avoid concentration of risk, each index consists of a minimum of 80 components. For Jauregui this type of investment is clearly “strategic because we are talking about trends that are going to have greater relevance starting from 2020 or 2030. They are easy to understand products that allow the fund manager to engage in a different, and forward-looking narrative with the client.”

Passive… and active management, in megatrends

A strategy that BlackRock does not want to approach from passive management alone, but which can also extend to active management. “What has started from passive management will most likely develop into the active management business, it’s not exclusive, although investing in these megatrends through ETFs is very efficient for the investor,” the expert points out.
 

“Emerging Currencies Could Fall Further, But We Are Already At A Point Where Benefits Derived From The Latest Depreciations Can Already Be Seen”

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“Las divisas emergentes podrían caer más, pero ya estamos en un punto en el que se pueden ver beneficios derivados de las últimas depreciaciones"
Foto cedidaMatthew Michael, Emerging Market Debt & Commodities Product Director at Schroders. Courtesy Photo. “Emerging Currencies Could Fall Further, But We Are Already At A Point Where Benefits Derived From The Latest Depreciations Can Already Be Seen”

Uncertainties in the United States about Trump’s upcoming policies, developments in inflation, Fed rate hikes, and the strength of the dollar, as well as investors’ continued negative sentiment toward emerging markets are all reasons why Schroders’ managers are still cautious and hold defensive positions regarding these assets. But, as there are very positive factors within these markets, at the management company they are convinced that their positions will become much bolder over the next year … especially in emerging debt in local currency, and always very selectively.

In an interview with Funds Society, Matthew Michael, Emerging Market Debt & Commodities Product Director at Schroders was constructive with emerging debt where, in his opinion, the bottom line is the fundamentals. “We are constructive with the fundamentals of emerging debt, but not in all countries. In some markets, crises have brought opportunities,” he explains, referring to markets where political changes open up opportunities (such as India, Indonesia, Argentina, Brazil or South Africa). Thus, government change and the establishment of reformist policies are one of the aspects of improvement.

Secondly, currencies have fallen sharply and allowed many markets to adjust their current accounts: “Currencies have fallen 40% in four years. It is true that there is risk of further falls but we are already at a point where we can see benefits derived from the last depreciations,” in markets such as Indonesia or Brazil, he explains. In some of them you can get a carry of 3% to 4% as a result of selling dollars and buying emerging currencies… hence his commitment to debt in local currency. “External sovereign debt is not as attractive because it is linked to US Treasury bonds, which could fall if interest rates rise,” he adds.

The third factor in favor are the valuations, which are at levels even down to 2003 in countries like South Africa – with yields of 7.5%. “There are some markets that have never been so cheap,” he says. Markets like India, Brazil or Russia offer carrys of between 5% and 10%, he adds. “Profitability is above the historical average,” he explains.

Selection: the key

However, it’s not all rosy, and selection is the key: “In some countries, investors are underestimating the risks. Indonesia and Turkey are at the same level of profitability but the first country has a pro-growth agenda and has no debt problems, while the second is of international concern,” he warns.

In order to select the positions of the Emerging Markets Debt Absolute Return Fund, a fund with a philosophy of absolute return that is generating a lot of interest among investors, fund managers focus on the fundamentals, as well as a risk note given to each market, and also in technical aspects and sentiment. Factors that make him positive towards markets like Brazil, but as yet they do not advise investing in Mexico (where the technical factors are not supportive).

And the timing is key, argues the expert: “We reached the US elections with very defensive positions on the behavior of commodities, the strength of the dollar, and the market consensus on Trump’s defeat, factors that led to reduce risk”. But now, facing the end of this year and 2017, he explains that the time will be ripe to invest again, thanks to the attractive yields offered by emerging debt and the attractive fundamentals. “It’s a matter of timing; if we enter too soon we will suffer,” he explains. Hence his positive outlook regarding the asset but his current caution (at the end of October the fund had 36% in liquidity) and the premise of being very selective.

Better LatAm than Asia

Currently, the aforementioned fund’s portfolio favors the Latin American region, with about 40% exposure. “Until a few years ago, we had no exposure to the continent in our portfolio. Currently, we are defensive, but by the end of October the exposure was around 40%,” explains Matthews. The reason? Reformist agendas seen in markets such as Argentina or Colombia, as well as the recovery of commodities (which benefits these markets, along with others such as Chile or Peru). In addition, if Trump pushes the issue of oil and gas again, it could be positive for countries in the region, the most sensitive to these issues.
On the other hand, Asia only weighed just over 9%, less than the emerging Europe (at 13%): “A few years ago, Asia was the region that weighed 40%. Today we like markets like Indonesia, the Philippines or India, where returns are high, but China has yet to implement a major reform, and it still remains to see what its model will be,” explains the expert.

A very expensive dollar

On the dangers of a strong dollar for the asset, emerging local currency debt (in which it invests 56.7% of the fund, with only 7% being in external debt), he admits that it will not help. “There are great opportunities for emerging currencies but buying should still be tactical, for example, in markets sensitive to bullish commodity developments, such as South Africa,” he says. Still, his view is that the dollar is too expensive, at levels of the 1990s.

“The Main Risks For 2017 Concern Trump’s Economic Program And Its Implications On Growth, Inflation And The Fed”

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"Los principales riesgos para 2017 conciernen al programa económico de Trump y sus implicaciones sobre el crecimiento, la inflación y la Fed"
Christophe Morel, Chief Economist at Groupama AM. Courtesy Photo. "The Main Risks For 2017 Concern Trump’s Economic Program And Its Implications On Growth, Inflation And The Fed"

Trump and oil prices – with their effects on inflation – will be two important benchmarks for markets throughout this year. Christophe Morel, Chief Economist at Groupama AM, explains in this interview with Funds Society that if oil crosses the $ 60 barrier, inflation would skyrocket and that would have key effects on fixed income and equity markets.

What are the major risks in 2017?

The main risks or uncertainties for 2017 concern Donald Trump’s economic program and its possible implications for growth prospects, inflation, and the Fed’s reaction. Obviously, anything that is likely to change the expected pace of monetary adjustment affects available liquidity and hence the evolution of financial markets.

The other big risk is the price of oil. It is expected that the oil market will rebalance in the spring of 2017, in line with a Brent price of around $ 45 to $ 55, depending on the correct implementation of the agreements on the reduction of production, and the hypothesis that US producers are not too motivated to restart production. In any case, a barrel of oil crossing the $ 60 barrier (WTI reference) would push European inflation towards 2% in 2017 and US inflation to 3%. Obviously, breaking that barrier could influence investors’ perceptions of inflation and would undoubtedly be a market mover in fixed income markets and risky assets.

In Europe, the elections, the negotiations on Brexit, and the treatment of bad loans in bank balance sheets are factors to be taken into account. It should be borne in mind that business trends surveys announce a significant improvement in employment in 2017, which could help contain the populist threats in France, Italy, and Germany.

Why is Trump the main risk?

As yet, there is not enough visibility on his protectionist orientation, or his program of economic support. At this stage, we can only observe the appointments, which suggest that Trump will preside over the US as if it were a company. Without visibility on the protectionist orientation, however, it is difficult to imagine a generalized increase in tariffs, which would affect the competitiveness of American companies and their profitability. A simple questioning of the Trans-Pacific Partnership Agreement would reconcile his campaign promises without this being a cost to businesses, as this agreement has not had sufficient time to be put into practice.

With regard to his growth support program, we must once again distinguish between the “candidate” and the “president”. The launch of the program would potentially be a significant support for growth, which we estimate to be around 0.5% of GDP per year. But, we should put this into perspective. First, the plan faces political constraints on funding, as many Republican members of Congress do not agree with tax cuts without a parallel reduction in public spending. Thus, we should not overestimate the “multiplier” effects on growth that are always lower in growth periods (as compared to recession periods), and when infrastructure spending is financed by the private sector. Evidently, a very expansive policy could lead the Fed to an upward revision of  its perceived productivity growth, and therefore, also of growth potential and, ultimately, its estimate of neutral rates (of 0.3% according to an average scenario).

How will the transition to fiscal policies be?

In many countries, fiscal policy is clearly increasingly accommodative: in Japan, with a policy of public works and increased military spending, in the Euro zone with less fiscal orthodoxy by the European Commission, and obviously in the United States. And this would not be possible without the unconventional monetary policy that reduces the cost of public debt, makes the debt path more sustainable, and liberates “fiscal pockets.” For example, we have estimated that the ECB’s asset procurement policy allowed France to create budgetary margins of 0.1% of GDP in 2015, 0.3% in 2016, and 0.5% in 2017 Therefore, the decline in debt services helps to revitalize the primary deficits.

Will there be tapering by the ECB, or will we see a disconnection between US and European monetary policies?

The ECB’s asset purchases policy supports growth in Europe: we have estimated that QE would improve growth by almost 0.5% in two years. Therefore, since there is a profit, at least in theory, we believe that the ECB will do everything possible to maintain its policies and to not undertake any risks with recovery, ensuring as low rates as possible, whenever possible. The ECB’s monetary policy surprised investors with the use of unconventional instruments. It should still surprise by the more sustainable use of what is expected of QE Therefore, we believe it is too early to consider “tapering,” especially since core inflation is not expected to touch the “comfort” zone of 1.5% -2% before the end of 2018.

How many rate hikes will the Fed make and what will their impact be?

The Fed’s monetary policy scenario continues to depend on Trump’s economic announcements. Pending future announcements, a number of principles should always guide the Fed’s decisions: At least at the beginning, it should not accelerate the pace of rate hikes in order not to cause a rise in the dollar and in rates long-term that would lead to a restriction on financial conditions likely to weigh on growth. This should be supported by a governance that would be relatively less aggressive in 2017 than in 2016 (the most aggressive members in 2016 will not participate in the FOMC in 2017). In total, we anticipate two additional interest rate hikes in 2017, knowing that the risk is slightly upward if the hypothesis of a more expansive fiscal policy is effectively confirmed.

What are your expectations for emerging markets?

We should not put all emerging countries in the same basket. On the one hand, there are exporting countries in Asia (Hong Kong, Singapore, Taiwan…) that will benefit from the positive dynamics of international trade and of a still favorable economic situation in China. On the other hand, there is a synchronization of the specific risks that penalize some large emerging countries, in particular Turkey and especially Brazil, which is undoubtedly the “weak link” of the emerging zone. For investors, the emerging asset class is often the subject of a global and undifferentiated investment; this synchronization of specific risks is likely to weigh on the assets class as a whole.

Michael Zelouf: “We Have A Strong Conviction That The Interest Rate Curve Will Normalize

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Michael Zelouf: “Tenemos una fuerte convicción en que la curva de tipos se normalizará”
Foto cedidaMichael Zelouf, Business Director for EMEA at Western Asset Management. / Courtsey Photo. Michael Zelouf: "We Have A Strong Conviction That The Interest Rate Curve Will Normalize

Michael Zelouf, Business Director for the EMEA region at Western Asset, Legg Mason‘s global fixed income subsidiary, believes one must separate the US debt market outlook from the one for the debt market in general. In an exclusive interview with Funds Society, he explains that in the US, the uncertainty surrounding Donald Trump’s economic policies could increase market volatility, but the truth is that, after the December rate hike, “the market has already largely factored in the likelihood that the Fed will adopt a more aggressive stance this year.”

In this regard, Zelouf says: “Markets move very fast and, as fixed-income investors, we must rely on the slope of the forward rates curve to determine whether yields are going to go up or down. In the short end of the curve, everything depends on the Fed, and we cannot forecast it, so we will not take too much risk in this segment because the Fed could adopt a more aggressive stance. “

The normalization of the rate curve is, therefore, the most probable scenario and the one most expected by the expert. “If the Fed, at this late stage of the cycle in which rates are usually rising, is normalizing its monetary policy – and we believe it is doing so – the 10 to 30 year rate curve should normalize . We firmly believe that, in relative terms, returns at 10 to 30 years will be reduced,” says Zelouf.

Another issue, he points out, is whatever happens in Germany and Japan with the Bank of Japan’s objective of keeping the ten-year bond yield at 0, and in Germany below 0.5%. In his opinion, “this is a strong attraction for Japanese and German investors, who opt for the US bond. It makes a lot of sense, and not because US long-term debt is better, but rather for the relative value it offers over Japanese and German debt. “

Corporate bonds: telecommunications and the US financial sector

Regarding corporate bonds, Zelouf points out the telecommunications, energy, and financial sectors which could register 2% differentials against US public debt. “We have companies like Verizon, which in addition to being global has a dominant position in the US market and has a quarterly turnover of $ 4 billion,” he explains.

As a specialist in the Legg Mason Western Asset Macro Opportunities Bond Fund, it’s in the US financial sector where he sees the greatest potential, with long-term credit growth and interest rate outlooks that will increase its profits. “The combination of these two aspects implies that the return on assets will be positive.” In European banking, its exposure focuses on the big names: Bank of Scotland, HSBC, Credit Suisse, Standard Chartered…, with reduced exposure to the Spanish banks BBVA and Santander.

Zelouf believes that, currently, cyclical companies’ credit has reasonable appeal, and points out other names such as Exxon Mobile or AB InBev. “We invest in companies with a long-term strategy, organic growth, an adequate degree of leverage and where we know the management well and this is going in the right direction.” The main sector that they avoid in USA is that of health, since “it is difficult to know what will happen with Obama Care, and there is uncertainty regarding its income…”

Regarding high yield, he reveals that one of the peculiarities of the current credit cycle is its long duration, which facilitates refinancing of debt. “Currently, 63% of the debt in the high yield market will not be refinanced before 2019, they will do so between that year and 2021,” he points out. A circumstance to which we must add the economic growth of the last few years; which has been sufficient to generate income to cover the debt and interests of this type of companies.

In our opinion, in the second quarter of this year, we’ll see a rebound in defaults, which are starting to remit gradually. Therefore, we believe that the overall level of defaults in the high-yield segment, including energy stocks, which represent about 15% of the universe, began to decline thanks to the recovery of oil prices and the fact that many oil companies have not incurred in default since they have been able to refinance their lines of credit, etc., which means that the risk of default is beginning to dissipate. It has not disappeared altogether, but it is beginning to shrink.”

In any case, Zelouf admits that his exposure to the energy and commodities sector was relatively low in high yield, at 1.5%, and is mainly concentrated in companies with investment grade.

Selective in emerging markets

In emerging markets, the main criteria used to identify assets are “reasonable valuations” and the search for short-term debt in dollars. “We also look at the strength of the institutions of each country. That’s why we did not invest in Venezuela and that’s why we did invest in Argentina after its change of government.” From a tactical point of view, there are two factors they watch out for: interest rates and oil and commodity prices.

The first presents a negative scenario for those countries with a high level of debt in dollars. The second is positive for some and negative for others. Following OPEC’s announcement of a cut in production and an oil price forecast of $ 60 / barrel, Zelouf said that importing countries such as South Africa, Turkey or India would not benefit from this, which would require them to be very selective. “We are positive in some and negative in others.” Finally, structural reforms must also be taken into account in the long term, which is why they are committed to Mexico and India, which are countries that have implemented positive structural reforms. “In emerging markets you have to be selective, you have to talk to politicians, even if they sometimes they also make mistakes.”
 

EXAN Capital Realty, in Charge of Selling PAYCO

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Exan Capital recibe el mandato de venta de PAYCO, parte del proceso de liquidación de Banco Espírito Santo Luxemburgo
CC-BY-SA-2.0, FlickrPhoto: El equipo de EXAN Capital Realty en Miami. EXAN Capital Realty, in Charge of Selling PAYCO

One hundred percent of the shares of a Luxembourg-based company known as Paraguay Agricultural Corporation S.A. (PAYCO) are being offered for sale. 

Through its Paraguayan subsidiary, PAYCO manages over 144,000 hectares (355,832 acres) of land throughout that country, where it conducts agricultural, cattle, and forestry activities. 

EXAN Capital Realty, a Miami-based real estate investment advisory firm, was engaged to carry out the sale process.

The portfolio includes 6 full-ownership properties amounting to more than 128,000 hectares (316,295 acres), representing 88.9% of the portfolio, and 8 leased properties adding another 16.000 hectares (39,537 acres), or 11.1% of the portfolio. PAYCO currently holds 38,500 head of cattle, 15,800 hectares (39,043 acres) of agricultural production (chiefly soybean, rice, corn, and wheat), over 5,000 hectares (12,355 acres) of forestry plantations, and 25,000 hectares (61,776 acres) of natural forest.

Paraguay is one of South America’s most attractive agro-business markets, both because of its favorable climate and the quality of its lands.  Other significant factors are its political stability, fiscal regime, and its open-arms attitude toward foreign investment.

The presumably highly competitive sale process is scheduled to start during the first half of February.

Given the magnitude of the asset, its sale should fetch the attention of global investors, including sovereign funds and any other group that recognizes in PAYCO a magnificent upside and sustainability opportunity. 
 

PIMCO Launches an Absolute-Return UCITS Fund

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PIMCO lanza un nuevo fondo UCITS de títulos respaldados por hipotecas
CC-BY-SA-2.0, FlickrPhoto: Tadson Bussey. PIMCO Launches an Absolute-Return UCITS Fund

PIMCO, a leading global investment management firm, has launched the PIMCO GIS Mortgage Opportunities Fund, which aims to generate consistent, absolute returns across full market cycles by investing in a broad range of mortgage-related securities. The fund is managed by Daniel Hyman, Alfred Murata and Josh Anderson, a global team of Portfolio Managers.

The fund provides investors with a dedicated exposure to the global mortgage-backed securities (MBS) market. Untethered by a traditional benchmark, the fund has the flexibility to tactically allocate across various subsectors of the global MBS market, and actively manage exposure to a variety of risk factors, including interest-rate risk and credit risk.

The $11 trillion securitized market represents a meaningful portion of the global fixed income market and has historically provided attractive risk-adjusted returns with limited correlations to equity and credit.

Daniel Hyman said: “Given the historically low yields on core bonds, and the correlation of corporate credit to equities, a dedicated allocation to securitized assets can help investors improve the overall diversification of their portfolios while also potentially enhancing returns.”

PIMCO is one of the largest investors in securitized assets with more than 30 years of investment experience in the asset class. The team covers the entire spectrum of mortgage related assets from around the world, seeking out the best value investment for clients.

The PIMCO GIS Mortgage Opportunities Fund is available in a variety of share classes in different currencies. As of January 30, it is registered in Austria, Belgium, Denmark, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Norway, Singapore, Spain, Sweden and the UK.

 

Concise Capital Launches its Niche High Yield Corporate Bond Strategy

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Concise Capital lanza una estrategia nicho de deuda corporativa high yield con formato UCITS
Photo: Glenn Koach and Tom Krasner, co-founders at Concise Capital Management / Courtesy photo. Concise Capital Launches its Niche High Yield Corporate Bond Strategy

Concise Capital Management, an independent fund management company affiliated with Canepa Management, that has over US$ 250 million in assets under management, and that specializes in short-term, underfollowed high yield bonds, launched its first UCITS fund in November 2016.

The new UCITS fund, which invests in high yield corporate debt, focuses on Concise Capital’s investment philosophy and looks for value in the inefficient part of the high yield bond market. The result is a portfolio that generates a high level of income, while minimizing credit risk, reducing volatility, and adding diversification.

Glenn Koach and Tom Krasner founded Concise Capital in 2004. Concise Capital already runs a Cayman Islands domiciled hedge fund, sub-advises a 1940 Act mutual fund, and manages separate accounts. Mr. Koach and Mr. Krasner expects that the UCITS fund will fill a need for high current income while avoiding interest rate risk for European and other offshore investors who are seeking daily liquidity.
“We have gauged strong interest in alternative assets, such as short-term, under-followed high yield debt” said Tom Krasner, co-founder of the firm.
“At the moment, we are targeting institutional investors and retail investors in Europe, particularly in the UK and Switzerland. In the longer term, we expect to market the UCITS to LATAM investors and the US offshore market,” he added.

The fund’s management team is led by Tom Krasner, who has a track record of more than 25 years in evaluating fixed income, distressed debt, and high-yield bonds, and by Glenn Koach, who has over 30 years in experience managing short-term high yield bonds.

Prior to founding Concise Capital with Koach, Krasner was Executive Vice President at Harch Capital Management, responsible for restructuring high yield debt and bank loans. Prior to that, Krasner was a Principal and Portfolio Manager at Riverside Capital Advisers, where he co-managed a short-term high-yield bond strategy with Koach.
In 1984, Koach co-founded Riverside Capital Advisers a boutique institutional investment management company that grew to US$ 400 million in assets under management.

The Experts Agree: The Fed Could Act Sooner Than The Markets Expect

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La renta fija estadounidense sigue a la espera de Trump
CC-BY-SA-2.0, FlickrFoto: Gage Skidmore. La renta fija estadounidense sigue a la espera de Trump

As Trump continues to carry out his campaign promises and prepares to launch his stimulus plan, the Fed meets in the midst of a complicated state of affairs. The meeting will bring no surprises, especially after Janet Yellen said that the trend in wages does not guarantee that the Board which she presides will take additional measures this time.

However, several analysts agree that the market may be underestimating the expected pace of interest rate hikes. One of these analysts is Frank Dixmier, Global Head of Fixed Income for Allianz Global Investors.

“The difference between the Fed’s forecast report – known as the ‘dot plot’ – and market expectations is of particular importance. The points show the FOMC consensus expectations on three rate hikes this year and a further three in 2018. However, the market expects only four rate hikes in total over the next two years – a significant difference,” he explains.

The problem is that this gap between market expectations and the future pace of rate hikes shows that there is some fragility in US markets, “particularly given the increasing pressure from the labor market”, says Dixmier. It is in the interest of the Fed to clearly explain the pace of increases to allow markets to adjust fluently.

Eric Stein, Co Director of Global Income at Eaton Vance, admits that he was somewhat surprised when the Fed boosted its ‘dot-plot’ at the December meeting. “I had expected this to happen in March this year, when the market might have more information on the specific policies of President elect Donald Trump,” he states in the management company’s blog

“That said, I do think we could get more hawkish surprises on the dot plot in 2017. The economy was accelerating somewhat before the election, and inflation and inflation expectations had also been picking up pre-election as well. If we get regulatory reform, tax reform and infrastructure spending from the Trump administration and Congress in 2017 and the economy really gets going, then the Fed is going to hike more than investors expect.” Stein summed up.

And it’s that at this time the meetings of the Fed have a certain tone of state of war, but without open confrontation. All indications are that Trump is going to enact policies that will force the Fed to act. Similarly, the people he chooses to fill vacancies on the committee will determine to some extent the way the Fed moves. However, nothing has happened yet so everyone is waiting to receive more information.

“Much of it has to do with the appointments he will make to the Committee. If he implements some draft fiscal reforms, this should lead to higher rates, and to the strengthening of the dollar. However, a stronger dollar would not help the American producers, on whom Trump shows so much interest. If he tries to appoint candidates who are sympathetic to his political ambitions, then we might see how little he likes the independence of the central bank,” says Luke Bartholomew, fund manager at Aberdeen AM.

Markus Schomer, chief economist at PineBridge Investments, also believes that the Fed’s position is largely tied to the policies put in place by the new president of the United States. “The market’s performance in the first half of the year will depend on Trump’s projects. If he focuses on tax cuts and deregulation, the economy and markets are likely to take off. If it comes to trade restrictions and reduced health care coverage, sentiment could turn around and growth could slow down.

What if Trump puts all these policies in place at once?

The expert at Loomis, Sayles & Company, a subsidiary of Natixis GAM, agrees with the rest of analysts. “The introduction of fiscal stimulus could push inflation, prompting the Fed to tighten its monetary policy sooner than the markets are discounting,” says Gregory Hadjian, member of the firm’s macro team.

Robert Wescott: “The Market is Not Evaluating the Risks Involved in Donald Trump’s Policy”

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Robert Wescott: “El mercado no está valorando los riesgos que implica la política de Donald Trump”
CC-BY-SA-2.0, FlickrRobert Wescott & Franceso Sandrini. Robert Wescott: “The Market is Not Evaluating the Risks Involved in Donald Trump's Policy”

Robert Wescott served as an advisor to President Bill Clinton in the late 1990s and for the last two decades has been a member of the Pioneer Investments Global Asset Allocation Committee. His long history analyzing the world economy does not preclude his surprise at the positive reaction of the markets after Donald Trump’s victory. Is it justified? During a lunch-conference with reporters in Madrid, Wescott pointed out that “the Dow Jones above 20,000 points reflects all the good news because the market expects Trump to make many economic decisions, but what are not being evaluated are the risks”.

And it is precisely the small companies that are most optimistic about the increase in spending that could further boost economic growth. “Companies’ high profits combined with more public spending are good news for the market,” said Francesco Sandrini, Head of Multi-Asset Solutions at Pioneer Investments. He says that in this sense we find ourselves in a period of transition from the so-called “secular stagnation”, “from fear of deflation to fear of inflation.”

But the risk, although not perceived yet, is there, and is mainly called China. And, according to Wescott, is not only because of the evolution of its economy, but also because of the political tensions generated by Taiwan’s diplomatic recognition. Trump’s words during his recent interview with The Wall Street Journal in which he admitted that “everything is in negotiation” are as explosive as a lit wick near a barrel of oil.

But the nature of the new president’s relationship with Russia is also a source of uncertainty. It could even be the trigger for a process of “impeachment” if it were demonstrated that “secret connections” exist. Wescott acknowledges that during his lectures in Europe, “everyone has asked me about the possibility of this process being initiated against Trump.” But the truth is that the new president, ” surrounds himself only with people who always agree with him and who flatter him “

“The Mexican wall is a symbol, there are many ways to cross that border”

Trump, who since the election campaign, has been firmly anchored in transmitting the message that everything is terrible, and identifying immigrants as terrorists “who have come to kill our women,” has as his main objective to keep America safe. However, as Wescott admits, the wall he wants to build between the US and Mexico, has been in operation since the mid-1990s when, to be precise, the Clinton administration, for which he was an advisor, authorized its construction in small areas of the border, such as San Diego or El Paso. “The wall is only symbolic, there are many ways to cross that border, but the wall symbolizes that the US does not want immigrants,” he says.

Another point of friction will be with the Republican Party itself. According to Wescott, “Republicans want little regulation, low taxes, and little spending. Trump agrees on everything except spending, and this is what can create tension.” Expenditure which will be focused on infrastructures and that will seek the support of the private sector. “Everybody looks at the big infrastructures, but there are many other microprojects that can be put in place,” says Sandrini.

On the continuity of Janet Yellen at the helm of the Fed, Wescott is very clear: “The chances of Trump holding on to Yellen are zero” and he points to Jack Welles as a possible candidate, despite his advanced age. In his final message, the expert points out what, in his view, is an “imperative for the future, we need economic growth.”
 

The Future of Monetary Policy – Normalization or New Norms?

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El futuro de la política monetaria ¿normalización o nuevas reglas?
CC-BY-SA-2.0, FlickrPhoto: olnetchannel . The Future of Monetary Policy – Normalization or New Norms?

In its new report “The Future of Monetary Policy”, the Credit Suisse Research Institute looks at the transformative changes central banks in advanced economies have undergone since 2008. The report concludes that the key issue for decision-makers globally remains to consider which fundamental direction monetary policy ought to take next, assessing two alternative scenarios that may evolve: a return to a pre-crisis “normal”, or an extension or amplification of recent policy trends, leading to a further blurring of boundaries between monetary, regulatory and fiscal mandates.

In response to the extraordinarily challenging environment in the immediate aftermath of the global financial crisis of 2008, central banks in leading advanced economies have seen their mandates broadened from fairly narrowly defined macroeconomic targets, such as price stability and employment, to include financial stability.

Moreover, to achieve their targets, central banks have adopted an ever-broader range of previously untested “unconventional” policy tools, including quantitative easing and negative interest rates. As a result, central banks have become prominent providers of assets and liquidity for sovereigns, financial institutions and shadow banks, reflected also in a manifold expansion of their balance sheets.

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Oliver Adler, Head of Economic Research International Wealth Management, Credit Suisse: “Since 2008, central banks have changed their policy-making in dramatic ways, initially to prevent a major destabilization of the financial system in the immediate aftermath of the financial crisis, and thereafter to offset evolving deflation risks. The coming years will be decisive in relation to the future direction of central bank policy, depending on both economic and political developments. Even if the influencing factors are difficult to predict, we believe that the discussion of the future of monetary policy needs to be reinforced.”