CC-BY-SA-2.0, FlickrPhoto: Luckycavey, Flickr, Creative Commons. Brexit May Prove Not to Be a Watershed
The latest round of central bank interest-rate cuts and quantitative-easing extensions will bring some relief to asset managers suffering in the wake of the Brexit vote by further strengthening the case for buying into funds instead of holding cash, according to the latest issue of The Cerulli Edge-European Monthly Product Trends Edition.
While global analytics firm Cerulli Associates is confident that the UK’s decision to leave the European Union is not a game changer, it acknowledges that the fund groups worst affected by the summer’s outflows may have to increase marketing efforts to convince investors to return and to find new investors.
“Most firms are not expecting the outflows, which admittedly were very large, to be magically reversed in the next month. However, they have already stabilized and most industry watchers expect the second half of the year to show a more positive trend,” says Barbara Wall, Europe managing director at Cerulli Associates, adding that the resultant shakeout may intensify the pressure on fees.
Cerulli does not believe that the passporting and UCITS-labelling rights of UK firms with funds domiciled in Luxembourg and Dublin, but managed out of London, will be withdrawn. Any new conditions attached to these rights will, it says, be minimal.
“The EU would have little incentive to deprive itself of the expertise of Europe’s biggest financial center, or to risk restrictions being placed on the export of EU goods and services into the UK,” says Wall, who believes that providers of passive vehicles may be the biggest beneficiaries as the market returns to some sort of normality.
CC-BY-SA-2.0, FlickrPhoto: DonkeyHotey. With Election Looming, Fundamentals and Fed Matter More for Investors
The United States presidential election in November will be historic in many ways, but the long-term implications of either Hillary Clinton or Donald Trump winning will likely have less of an impact than many market participants are anticipating. If history is any guide, election results have had a relatively minimal impact on longer-term U.S. or global equity returns, according to Bloomberg data and the BlackRock Investment Institute. It also hasn’t seemed to matter much whether the president belongs to the Republican or Democratic Party.
Instead, factors such as inflation, interest rates and global growth are much more important to markets. And while these areas are a focal point for Federal Reserve (Fed) policy, they remain largely outside of presidential control, except to the extent that the president nominates (and the Senate approves) the Fed chairman and governors.
Nevertheless, we do expect some short-term market volatility leading up to the election and will keep an eye on certain sectors — health care, financials and infrastructure, for example — which thus far have been hot topics for the candidates. Since real policy changes wouldn’t likely occur until 2017 (and beyond), this short-term volatility may create more attractive entry points in select areas that appear attractive.
The potential for higher volatility comes against a backdrop of an unusually quiet month for U.S. stocks. We expect volatility to pick up from these extremely low levels and the election rhetoric may just be the trigger.
Careful with health care and financials
Although volatility is likely to persist across the broad market, specific sectors may be particularly vulnerable, or conversely, offer some opportunity. Among those to be cautious on is health care. The sector has historically underperformed in election years (source: Bloomberg), due in large part to concerns over pricing pressure on the biotech and pharmaceuticals subsectors. The latest headlines over EpiPen pricing have renewed this focus and brought with it increased volatility.
Over the short term, we don’t believe that the election and a new president will have a big impact on health care stocks’ fundamentals. Given the two candidates’ opposing views on health care, however, there could well be longer-term implications on policy changes. But remember that implementing any real, significant changes to the health care system will need to pass through Congress and will likely take years, not months. That said, volatility and fundamentals aren’t always aligned and a selloff triggered by regulation rhetoric may create selective buying opportunities in the near term.
Financials could also be impacted in a similar fashion. Again, meaningful regulations could take time, but campaign rhetoric may increase volatility. The path of the Fed’s rate hike policy will likely have a bigger effect on the sector’s fundamentals. While we can expect one more interest rate hike this year given Fed Chairwoman Janet Yellen’s most recent comments at Jackson Hole, financials may benefit from widening net interest margins (the spread between what banks make on loans and what they pay for deposits.)
More attention on infrastructure
So where can investors find potential opportunities? Perhaps infrastructure spending, a rare area of agreement between the two candidates (although they disagree on how to fund such spending). As the campaign debate continues to discuss job creation and economic growth, there has been a renewed investor focus on infrastructure spending and transportation. Additionally, Fed Governor John C. Williams of San Francisco recently published a paper suggesting a shifting focus from monetary policy to fiscal policy and an emphasis on economic growth and a higher inflation target. This likely bodes well for the sector. But keep in mind: There could be significant delay from a proposal of greater infrastructure spending to passage of a bill and actual disbursement of money.
Some strategies to consider
While this election season is likely to be filled with surprises, investors may also want to consider strategies that aim to minimize equity market volatility and potentially provide downside protection. Or take a look at quality companies, characterized by high profitability, steady earnings and low leverage, which have typically outperformed when market volatility rises, according to a paper by Richard Sloan.
Investors interested in health care and financials may want to consider the iShares U.S. Healthcare ETF (IYH) and the iShares U.S. Financials ETF (IYF). To gain access to infrastructure, consider the iShares Global Infrastructure ETF (IGF), the iShares Transportation Average ETF (IYT) or the iShares U.S. Industrials ETF (IYJ). For minimum volatility and quality, take a look at the iShares EDGE MSCI Min Vol USA ETF (USMV) or the iShares Edge MSCI USA Quality Factor ETF (QUAL).
Build on Insight, by BlackRock written by Heidi Richardson
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“Reforms may create opportunities to capture economic profits being ceded by banks” say Christian Stracke, global head of the credit research and Tom Collier, product manager – alternative investment strategies at PIMCO, in their latest insight.
It’s been nearly a decade since the global financial crisis prompted an onslaught of regulations intended to abolish excessive risk-taking and make the financial system safer, they remember. “Yet the implementation of reforms – and their disruptive effect on financial business models – will peak only over the next few years.” They state.
As Dodd-Frank and Basel regulations come into force and a further wave of regulatory reform is announced, they believe banks will exit more non-core businesses, specific funding gaps will become more acute and dislocations between public and private markets will become more frequent. “Each will create investment opportunities for less constrained and patient capital to capture economic profits being ceded by banks.”
The experts highlight that banks are facing higher capital requirements, higher loss provisioning and higher compliance costs – pressures that they believe will prompt banks to exit more non-core businesses. “The result, we believe, will be more acute funding gaps and more frequent dislocations between public and private markets – all of which will create investment opportunities for less constrained and more patient capital.”
You can read the full article in the following link.
CC-BY-SA-2.0, FlickrPhoto: Carl Aufrett (left), Emmanuel Bourdeix (centre) e Isaac Chebar (rigth), portfolio managers at Natixis. Two Distinct Ways To Diversify With European Equities
Growth and portfolio diversification potential – along with attractive valuations, euro vs. US dollar and accommodative monetary policy – are reasons why investors may find European equities attractive. Consider these two distinct equity approaches provided by Natixis Global Asset Management.
High-conviction European equity investing
Award-winning European specialist boutique DNCA Finance has followed a consistent investment process based on fundamental active management for more than 15 years. Their philosophy remains focused on high-conviction European securities with an eye toward long-term risk-adjusted returns.
Seeking value across European companies
European Value team manager Isaac Chebar believes DNCA’s rigorous stock selection through fundamental analysis across all market capitalizations is a key differentiator for the firm.
“Consistency in the investment process throughout various market environments, in-depth analysis and special attention to volatility control is integral to our success,” said Chebar. Being benchmark agnostic and focused on mid- and long-term performance is critical, too.
Growth momentum in European equities
European Growth team manager Carl Aufrett thinks European equities remain one of the most attractive asset classes. “We take a highly active approach to find attractive growth potential among quality companies. Most of the companies we follow, we believe, have little or no correlation to the European economic cycle and tend to follow more independent growth trends,” said Auffret. These companies are European, but they generate a large amount of their sales internationally.
More information on DNCA’s high-conviction value and growth approaches can be accessed at www.ngam.natixis.com.
Low volatility European equity investing
Seeyond employs an active model-driven approach that seeks to capitalize on risk to create value. Its minimum variance approach is an investment style designed to provide equity market exposure but with less risk than the overall market by investing in low volatility stocks.
“We believe uncertain market conditions are driving a growing demand for minimum variance equity strategies,” said Emmanuel Bourdeix, head of Seeyond and Co-CIO at Natixis Asset Management. These minimum variance strategies focus on investing in low-volatility stocks that have little correlation to each other. They typically therefore have lower volatility than the market capitalization-weighted indices used by many investors. “I think many investors would be surprised that the most volatile stocks have typically underperformed the least volatile stocks over time,” said Bourdeix.
Low volatility doesn’t mean minimal returns
According to traditional portfolio theory, taking less risk by purchasing low-volatility stocks should reduce performance. But Seeyond’s research shows that low-volatility stocks have generated about the same long-term returns as the main indices, but with far less volatility. Why is that? “We believe this anomaly is directly linked to the bias in the financial behavior of equity investors. They tend to overpay for the ’glamour stocks,’ overpaying for discovering the next big tech name or rising star, at the expense of the so-called ’boring stocks.’ And typically, over a full market cycle, these low-volatility stocks tend to outperform the overall equity market.”
With volatility capable of rising at any time, it’s important to remember that there are ways to make the equity component of portfolios more resilient.
For more on Seeyond’s low-volatility approach to European equity investing, go to www.ngam.natixis.com.
*Seeyond is a brand of Natixis Asset Management, operated in the U.S. through Natixis Asset Management U.S., LLC.
Risks: Equity securities are volatile and can decline significantly in response to broad market and economic conditions.
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CC-BY-SA-2.0, FlickrFoto: 401(K) 2012. Tres factores clave que podrían determinar el rumbo de los mercados de deuda privada
The global private credit market, an alternative source of financing for small and medium sized enterprises, is flourishing, with institutional capital supporting increased lending in Europe in particular, according to a report by the Alternative Credit Council (ACC), a private credit industry body affiliated with the Alternative Investment Management Association (AIMA), and Deloitte, the business advisory firm.
The private credit market has grown from $440 billion last year, to $560 billion today. The research, Financing the Economy 2016, found that institutional capital is boosting lending in Europe and much of this growth has been driven by demand from European businesses. However, the US still remains the largest private credit market, both in terms of overall assets under management, and new assets raised in 2015.
The research is the second paper to be published by the ACC and Deloitte, and is based on a survey of alternative lenders, representing assets under management totalling $670 billion, of which $170 billion is allocated to private credit strategies.
Stuart Fiertz, the Chairman of the ACC and President of Cheyne Capital, said: “As the recovery from the financial crisis continues, business innovation and demand for credit shows no signs of slowing. Alternative lenders are primed and ready to continue to fill the lending gap, but this is not necessarily at the expense of the traditional lenders. We see a cooperative relationship occurring between banks and alternative asset managers.”
CC-BY-SA-2.0, FlickrPhoto: Live4Soccer. Spanish Revenge: Their Bonds Yield Lower Than Their Italian Counter-Parts
Amongst the 3 things Pioneer Investments’ European Investment Grade Fixed Income team talked about recently was Spain.
In the last 16 of the recent Euro 2016 football championships, Italy gained revenge for a 4-0 drubbing in the Euro 2012 final by beating Spain 2-0.
Tipped as one of the pre-tournament favourites, Spain’s exit prompted the departure of their coach Vicente Del Bosque and led to concerns that it might have been the end of a golden era for Spanish football that saw them win Euro 2008, the World Cup in 2010 and the Euro championships again in 2012. “However, Spain’s footballing woes are being offset by a stellar out-performance in European bond markets,” says Tanguy Le Saout, Head of European Fixed Income, Executive Vice President at Pioneer.
Having traded as high as 20bps above similar-duration Italian sovereign bonds at end-March 2016, Spanish 10-year government bonds now yield over 20bps lower than their Italian sovereign counter-parts. “Why has this happened? ” Asks Le Saout. “We think there are a couple of reasons”
Firstly, he believes the Spanish economy is experiencing relatively rapid growth. Q2 GDP was revised higher to 0.83% quarter on quarter, suggesting that an annualised growth rate of 3% is on the cards for 2016. That would make Spain the 3rd fastest growing region in the Eurozone after Ireland and Slovakia.
Secondly, he mentions Spain has made much better progress in consolidating and recapitalising its banking industry than Italy.
Thirdly, Spanish banks were large sellers of Spanish government bonds in 2015 in order to reduce their large existing exposure, whilst Italian banks did not undertake the same action with respect to their holdings of Italian government bonds. “But since the start of 2016, Italian banks have been buying non-domestic Eurozone sovereign paper, and especially Spanish government bonds.”
Finally, according to the Pioneer expert, “the political situation had been looking a bit clearer in Spain, with the incumbent PP party accepting the conditions set out by a smaller party (Ciudadanos) for forming a coalition. That coalition would still fall short of an overall majority but a minority government could potentially be formed, ruling out the possibility of a third election within 12 months. Y Viva Espana.” He concludes.
CC-BY-SA-2.0, FlickrPhoto: Drew Barrymore. What Do Tony Robbins, Kevin O'Leary, Drew Barrymore, Jim Cramer, Ivanka Trump, and Cynthia Rowley Have in Common?
What do Tony Robbins, Kevin O’Leary, Drew Barrymore, Jim Cramer, Ivanka Trump and Cynthia Rowley have in common? They all experienced a “financial grownup moment” when they realized that they had to pay attention to money, and that the financial decisions they made had a significant impact on them and the people they cared about.
These financial Role Models, and 24 others, tell their financial grownup stories and share the lessons they learned in “How to Be a Financial Grownup: Proven Advice from High Achievers on How to Live Your Dreams and Have Financial Freedom,” the new book by award-winning Reuters journalist Bobbi Rebell.
“Most people don’t expect a personal finance book to mention a sex scandal, repeated battles with cancer, tales of living out of a car, or extreme childhood poverty—but these are the real, raw stories behind these inspiring Role Models’ financial grownup moments,” said author Rebell. “To add to the Role Models’ contributions, I also consulted a team of financial experts for actionable information and advice to help readers make immediate improvements to their financial lives.”
“How to Be a Financial Grownup” features:
Tony Robbins on owning the choices you make
Kevin O’Leary on making sacrifices to reach your goals
Drew Barrymore on pouring your heart into your work
Jim Cramer on the need to be financially literate
Ivanka Trump on the difference between spending and splurging
Cynthia Rowley on taking risks and trusting your vision as an entrepreneur
Elliot Weissbluth on good vs. bad debt
Terry Lundgren on choosing the best career for your financial goals
Amanda Steinberg on spending money without busting your budget
Roger Crandall on realistic investing strategies tailored to goals
Sallie Krawcheck on the financial impact of work/life choices
Spencer Rascoff on making the best real estate choices
Aaron Shapiro on mixing friends and finances
Alexia Brue on how healthy eating along with mindfulness pay off financially
And more
Though she began work on the book with millennials in mind, Rebell quickly determined that these skills and lessons are essential at every life stage – from setting up post-college, to getting married and having kids, to the often-scary prospect of retirement.
Northern Trust expects most investments to generate single-digit positive returns over the next five years, predominantly due to slow economic growth and persistent low interest rates.
This Slow Growth Angst – one of six key themes profiled in Northern Trust’s annual five year market outlook – is a key driver behind the company’s return forecasts for global investors of 5.8 percent for global equities and 2.1 percent for investment-grade bonds.
“While we expect markets may be volatile at times, we remain convinced the global economy is in a narrow and slow growth channel,” said Northern Trust Chief Investment Strategist Jim McDonald. “Current regulatory and fiscal policies have greatly restricted the boom-bust cycles and, although the risk of a recession increases, if one does materialize it should be shallow due to a lack of economic excesses and financial system stability.”
Despite these subdued, yet positive, projections, Northern Trust believes the three-month German Bunds and Japanese Government Bonds will turn in negative returns during the next five years.
“Developed economies overall will continue their slow pace, expecting annual real economic growth of 1.4 percent over the next five years, and the outlook for emerging economies remains similarly subdued,” said Wayne Bowers, chief investment officer for Northern Trust Asset Management in Europe, Middle East and Africa and Asia-Pacific. “Ultimately, while concerns over slow growth are further impeding global growth, investors need to resist becoming bearish during market weakness or bullish when the economy appears strong and instead scrutinize any future dramatic swings – positive or negative.”
In addition to the theme of “slow growth angst”, Northern Trust has identified five more themes expected to shape the global markets over the next five years including:
CC-BY-SA-2.0, FlickrFoto: Chris Dlugosz. Por qué el euro ya no llegará a la paridad con el dólar
Over the recent weeks, the Federal Reserve has signaled its willingness to move ahead with a second rate hike. Such a move would follow the December 2015 decision to raise policy rates. Statements from Yellen and Fisher left opened the possibility of a rate hike as soon as September 21st, when the FOMC will meet next.
However, and according to Lyxor AM’s latest weekly brief, “the decision is not straightforward considering the disappointing US GDP growth figures in H1-16 and the associated falling labor productivity. Financial markets remain somewhat unconvinced but at the same time they cannot ignore the Fed guidance. As a result, short dated Treasury yields moved higher and the USD appreciated against major currencies.” Says a team headed by Jean-Baptiste Berthon, Senior Strategist and Jeanne Asseraf-Bitton, Global Head of Cross Asset Research.
Market movements related to the new Fed guidance had a differentiated impact on hedge fund strategies. CTAs underperformed last week as a result of their long fixed income and short USD positions. Meanwhile, Global Macro managers outperformed. They benefitted from their long USD positions, a stance they have maintained for some time on the back of the growth divergence thesis between the US and the rest of the world.
Contrasted views
Interestingly, most funds within each strategy share the same stance on the USD (i.e. most CTAs in our sample are short USD and most Global Macro are long USD). But there is a much wider disagreement across Global Macro managers on US fixed income. “The aggregate exposure of Macro managers on the asset class is close to zero, but at the fund level we see approximately half of the managers being long US bonds and another half being short. That reflects the conflicting signals on the US economy. A vibrant job market has fuelled household consumption but this is not reflected in GDP numbers.” They write.
Economic expansion was actually pulled back in H1-16 by declining capex as companies are not investing to expand production capacities. “All in all, we tend to be rather in favor of the CTA stance. We believe that the Fed is unlikely to move as soon as September. There are simply too many uncertainties regarding the strength of the US economy to act now. The Fed will probably err on the side of caution in our view and the USD upward pressure may abate, a support for CTAs over Macro funds.” Lyxor AM concludes.
CC-BY-SA-2.0, FlickrPhoto: Doug8888, Flickr, Creative Commons. Liquid Alternatives and Private Debt Likely to Benefit Most from Brexit
According to investment consultant bfinance, the list of asset classes benefitting through the Brexit is long with gold and govies being seen as safe havens. In their study “Brexit, One Month On-Working Through the Investment Implications” they stress that the US equity market also benefitted “to a certain extent” from a flight to quality from equity investors.
Overall, they believe that Brexit will probably have “a relatively mild impact on global equities and bonds, but to have a more direct impact on those asset classes within the UK,” the consultant estimates.
bfinance highlights that liquid alternatives and private debt are two asset classes which are likely to perform well in a Brexit landscape.
“Liquid alternatives will benefit from the increased dispersion associated with the greater uncertainty at both stock and sector level. Private debt, which includes corporate, real estate and infrastructure debt, is set to benefit from the relatively high yield, the reduced competition from banks and the resilience to a downturn in values and cashflows,” bfinance argues.
It specifies that this is particularly the case for more senior debt and less so for higher yield or mezzanine debt that has less of a cushion to protect loans from value declines.
