The Ups and Downs of Markets Affect Long-Term Institutional Investors like Afores

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Los altibajos en los mercados afectan a los inversionistas institucionales de largo plazo como las Afores
Photo: Keviinbarrios1993. The Ups and Downs of Markets Affect Long-Term Institutional Investors like Afores

Assets under management of the Afore smaller and larger in Mexico are between 2 and 32 billion dollars (bd). This is the case of Afore Azteca and Afore XXI-Banorte respectively. Managing these portfolios, with turmoil in financial markets, it is not easy and requires focusing on the horizon and making decisions with a cool head and fluctuations that can act in favor or against the portfolio.

In the first half year, high volatility in financial markets was observed and everything indicates that the second half will prevail. In international markets the S & P index had a variation of 16% in dollars between its lowest and highest level and the return in the period was 4%; while the QQQ (ETF technology stocks) 15% in dollars between low and high and -2% in the period.

In Mexico, the Mexican stock Exchange index moved 15% in pesos, while the peso dollar exchange rate was fluctuating between its lowest and highest level of -12% and increase 7% in the first half of 2016. In the case of interest rates, the long-term rates moved 60 basis points between its highest and lowest so government bond (mbono) that matures in 22 years (2038), had a change in its price of 6%.

These strong fluctuations some long-term investors have been able to exploit the situation and others not.

Afores have 74% in debt securities in local currency (54% in government debt and 20% in corporate); 19% in equities (7% in local and 12% foreign) and 7% in others (6% in alternatives as CKDs an mexican REITs known as Fibras and 1% in international debt).

The observed volatility was reflected in the results of the Siefores that for the first half of 2016 had a direct average yield in pesos of 3.52% at the aggregate level where the results of last June explained one third (1.23% in pesos).

Reviewing cumulative returns for the first half of the Siefores, you can see contrasting results. The basic Siefore 2 (SB2) that is the one that has the largest amount of assets under management (AUM) by concentrating 36% (50 bd), has workers in the age range between 46 and 59 years and have 17% in equity (at May); yields were between 2.07% paid by the Siefore of Afore SURA and 5.34% direct performance in six months in pesos of Afore Coppel. The average return was 3.52%.

In the case of sb3 which is the second biggest having 32% of assets (45 bd), aged between 37 and 45 years and have 20% in equity, direct yields to six months Siefore in pesos they were between 1.76% of Afore SURA and 5.46% of Afore Coppel. The average return was 3.55%.

For sb4 which has 28% of assets under management (39.8 bd), ages are less than 36 years and have 26% in equity, ranges were from 0.82% of Sura to 5.46% of Afore Coppel. The increased presence of equities in this Siefore originated yields with more variation between the highest and lowest. The average return for this Siefore was 3.40%.

As for the sb1 which has only 4% of assets under management (6.3 bd), has workers above 60 years of age (where remember that retirement is at age 65) and 4% in equity, returns ranges fluctuated between 3.16% of Afore Banamex and 4.60% Afore Coppel. The average return for this Siefore was 3.79%.

It is interesting to note that the three largest Afores are XXI-Banorte (23% of AUMs), Banamex (18%) and Sura (15%) are in the last places of performance in sb2, sb3 and sb4,while some of the small and médium Afores are located at the top as in the case of Coppel (5%), Azteca (2%) and Principal (6%).

What contrasts these yields in the first half is that in long-term yields presenting CONSAR 3, 5, 7 and 7 years for SB1, SB2, SB3 and SB4 respectively, the Afores that are now at the top in six months, are not those in the first places in the long term and vice versa. SURA for example that appears in the last places in the first half, is in the top two places in long-term yields in the 4 Siefores and counterpart COPPEL contained in the first places in yields in the first half is in places 8 and 10 long-term returns in its 4 siefores.

There are few opportunities given to markets to change long-term positions, where the important thing is to know when to approach a competitor or maintain a different strategy for leaders.

Column by Arturo Hanono

Brexit: Outlook for Global Fixed Income & Credit

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Brexit: Perspectivas para la renta fija global y el crédito
CC-BY-SA-2.0, FlickrPhoto: Rob Brewer. Brexit: Outlook for Global Fixed Income & Credit

Following the initial shock of the Brexit, the critical issues for markets will now be the path that the UK will choose for exit and how the vote will affect the political backdrop in other European countries. We expect to see a continued ‘flight to quality’ in the fixed income market while uncertainty prevails. Risk premiums will likely remain high while the uncertainty of leadership in the UK remains an overhang. In the shorter term, emerging market debt seems relatively insulated; however, there are concerns over the potential for longer term problems. Global credit markets have reacted negatively, as might be expected, but this may provide investors with attractive buying opportunities.

UK growth likely to weaken, with interest rate cuts expected

In terms of the UK economy, until there is confidence in the UK’s position, there will be a drag on business confidence. This will see business investment and employment slow, which will inevitably be a drag on UK growth. As a result, we expect economic data in the UK to weaken in coming quarters. The Bank of England could react to this by reducing interest rates from 0.50% to possibly as low as 0%, but it will likely need some concrete evidence that the economy is being negatively affected before acting.

Most forecasters are still in the process of reassessing their outlooks, but Bank of America now expects the UK to have a mild contraction lasting three quarters, reducing its forecasts for UK growth to 1.4% in 2016 and 0.2% in 2017. Inflation will be affected by the move in British pound sterling, but further falls would be needed to increase inflation to a level where the Bank of England would potentially worry given the very low current levels.

Flight to quality in developed fixed income markets

We expect the uncertainty premium to persist for some time as the exit process will be negotiated over an indeterminate period. Overall, we have observed an initial flight to quality, with Gilts leading the bond market on an over 30 basis point (bp) rally in yields, while US Treasuries were a close second, rallying over 20 bps on the day after the vote. Gilts have continued to rally despite the indication that S&P will likely downgrade the UK’s credit rating. The European periphery was the hardest hit on the news, with Spanish and Italian government bonds selling off more than 15 bps.

A July rate hike for the US Federal Reserve (Fed) now seems very unlikely, with market implied expectations of a rate cut now exceeding the probability of a rise. The Bank of England will likely remain on the sidelines until the dust settles, but remains in play with increased market implied expectations for a rate cut within the next several meetings.

In currency markets, the British pound fell over 7% as of mid-day trading on June 24, and is off more than 3% mid-day on June 25, while the broader foreign exchange (FX) market sold off versus the US dollar. The Yen remained the top performer on the day, up over 3.5%.

Emerging market debt relatively insulated 

The impact on external debt has been limited so far. Spreads are 30 bps wider but US Treasuries are 20 bps tighter and overall the JP Morgan Emerging Markets Bond Global Diversified Index lost only 0.6% on 24 June. Local rates were 10 bps tighter in Asia and 10 to 20 bps wider in Latin America and Central & Eastern Europe, the Middle East and Africa (CEEMEA).

Most of the initial risk aversion shock was felt in the FX market and EM currencies are on average 2.75% weaker versus the US dollar.

Overall, as an asset class, emerging market debt has been relatively insulated from the initial Brexit surprise. However, in the long term, Brexit could have an impact on EM fundamentals through other channels, particularly for central and eastern European countries. Indeed, the UK is a significant trading partner and foreign direct investor in the region. Romania is the most exposed when we consider exports to the UK, while Russia, Poland, Czech Republic and Romania are exposed in terms of imports from the UK.

Beyond trade and financial considerations, we can also envision a rise of political risk in the region. Poland and Slovakia are already openly criticising the EU and the anti-EU rhetoric is likely to increase further. The Euro adoption process will likely be stalled as well. Ultimately, increased political risk may further delay the absorption of EU funds and Poland, Hungary and Romania are the biggest net beneficiaries from the EU budget.

Global credit has reacted negatively, but could provide opportunities for investors

Credit markets reacted negatively to the UK’s decision to leave the EU. It started with Asian credit, but European markets soon followed suit, with credit default swaps (CDS) as well as cash and bonds trading down. Sterling credit issuers were most affected, while price effects for Euro credit were more muted, given the ECB’s bond buying programme. The basic resource sector and banks suffered heavily. We expect trading in US credit to take its lead from European markets. In our view, the correction in valuations and market volatility could provide buying opportunities in some fundamentally strong credits.

Andre Severino is Co-Head of Global Fixed Income at Nikko AM.

Commerzbank International in Luxembourg Becomes Julius Baer

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Julius Baer completa la adquisición de Commerzbank Luxembourg
. Commerzbank International in Luxembourg Becomes Julius Baer

The acquisition of Commerzbank International Luxembourg, announced in December 2015, was closed successfully on July 4th, 2016. Going forward, the acquired entity will operate under the name of Bank Julius Baer Luxembourg. The acquisition significantly strengthens Julius Baer’s presence in Luxembourg and provides further strategic flexibility for the Group’s European business.

At closing, CISAL reported approx. EUR 2.5 billion of assets under management and about 150 employees. Going forward, CISAL will operate under the name of Bank Julius Baer Luxembourg S.A., headed by CISAL’s former CEO Falk Fischer. Thomas Fehr, former Branch & Country Manager Luxembourg at Commerzbank AG, becomes COO and Member of the Executive Board of the Bank in Luxembourg.

The total consideration of EUR 78 million, which includes EUR 35 million of regulatory capital transferred as part of the transaction, was paid in cash. Total restructuring and integration costs are estimated to amount to approximately EUR 20 million.

According to a press release, an additional benefit of the transaction is CISAL’s banking platform which runs on the same system as Julius Baer’s target platform. “The acquired Temenos T24 platform and the related IT expertise will add relevant experience to Julius Baer’s currently ongoing worldwide platform renewal project. At the same time, the newly acquired booking centre will present Julius Baer with further strategic flexibility for servicing its European clients.”

Gian A. Rossi, Member of the Executive Board of Bank Julius Baer and Head Northern, Central and Eastern Europe, said: “I very much look forward to welcoming the new clients and colleagues to Julius Baer. CISAL is a high-quality franchise, which will enable us to further expand our footprint in this important financial centre. Additionally, the Luxembourg banking licence and CISAL’s T24 platform and expertise offer clear benefits for the Group as a whole.”

Falk Fischer, said: “My colleagues and I are excited to join Julius Baer. Thanks to the Group’s position as the leading Swiss private bank with a global reach and the great cooperation with the colleagues of the existing local franchise in Luxembourg, I am convinced that our clients will benefit from the unique investment knowledge, exceptional client focus and the enhanced offering the combined businesses will be able to provide.”

Will China’s Debt Bubble Burst?

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¿Explotará la deuda china?
CC-BY-SA-2.0, FlickrFoto: Carlos ZGZ. Will China's Debt Bubble Burst?

China is the second-largest economy in the world, with growth more than twice most others, facilitated by its willingness to lever up while others were deleveraging. Last year, China abruptly pulled back its credit-fueled growth, inadvertently slowing its economy far more than desired. The resulting ripples inexplicably weakened economies everywhere. From fall 2015 until March 2016, China reversed course and revived its lending growth to get back into its comfort zone. Can it be sustained?

China’s all-inclusive debt/GDP has now risen tremendously to 250%, equal to that of the US. No warning flag there, yet its interest rates are far higher so its debt service is also higher and rising. Most others have lower and falling debt service ratios. China’s is now at a level where some countries, but not all, have run into sustainability issues. Those who did had large foreign ownership of their debt; foreign investors can be fickle. China’s foreign ownership is tiny. Outside of China, market participants are worried about the quality of China’s outstanding debt, which has overwhelmingly taken the form of bank loans instead of bonds. Nonperforming loans and the number of bond defaults are both rising. While China’s borrowing probably hasn’t gone too far yet, we believe a restructuring lies ahead to keep it that way.

Policy will push a terming-out of loans into bonds, in our view. Extending duration will lower debt service, resulting in a much larger debt market and smaller loan market. When your interest rates are higher than the rest of the world’s, and policy actions connect your bond market to the outside, your interest rates are prone to coming down. The mutual recognition of Hong Kong and Shanghai registered funds will enable such connectivity. For those who can get comfortable with the yuan’s stability versus a basket of currencies, in today’s yield-starved world, inflows into China’s bond market should lower its rates as well as its debt service. If China’s bond indices become recognized in global indices (a current lobbying effort), this too will help connect its bond market. State-owned enterprises will also be encouraged to issue equity in Hong Kong and bring back those funds to pay down debt. The country cannot maintain rapid debt growth forever – but it can for several more years.

One also needs to consider whether debt is being incurred for consumption or to enable investments: If you generate a return on those investments above the cost of debt, your debt is inherently more sustainable than consumption-driven debt binges. Today, China is trying to bridge its old economy to carry enough growth until its newer economy becomes large enough to pick up the baton. We think the new consumer, services, and higher-technology industries will be strong enough three to five years down the road to do just that. In our eyes, China is building a bridge to a pier, not a bridge to a cliff.

Michael J. Kelly, is Managing Director, Global Head of Multi-Asset at PineBridge Investments.

This information is for educational purposes only and is not intended to serve as investment advice. This is not an offer to sell or solicitation of an offer to purchase any investment product or security. Any opinions provided should not be relied upon for investment decisions. Any opinions, projections, forecasts and forward-looking statements are speculative in nature; valid only as of the date hereof and are subject to change. PineBridge Investments is not soliciting or recommending any action based on this information.

How do I Maximize the Consistency of my Return?

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¿Qué podemos esperar de los mercados en los próximos meses?
Photo: Colin Moore, director global de Inversiones de Columbia Threadneedle Investments.. How do I Maximize the Consistency of my Return?

Colin Moore, Global Chief Investment at Columbia Threadneedle Investments, discusses what was behind the volatile first quarter, where he sees opportunities and risks for the remainder of the year, and why he thinks investors should focus on maximizing consistency of returns.

What is your outlook for financial markets for the remainder of the year?

I wouldn’t say there can’t be positive returns in equities, but I don’t think the return relative to the volatility is going to be a particularly good trade-off. Investors need to understand that just getting a positive return isn’t enough if they have to take on too much uncertainty to get there. When there is volatility in the markets, investors often don’t behave well. They sell at the wrong point and buy at the wrong point, which is driven by their emotional response. Similarly, a lot of areas in fixed income don’t look particularly cheap to me. You will probably get the coupon in a number of areas, which is not particularly exciting, but at least the volatility will probably be less. In this challenging environment, I think the question investors should be asking is “How do I maximize the consistency of my return?” rather than “How do I maximize my return?”

What are some strategies that investors can use to maximize consistency of their returns?

Diversification is the standard strategy, but the mistake many investors make is assuming that if they own a lot of things, they’re diversified. What we’ve learned, particularly through the last crisis, is that a lot of things are diversified when you don’t need them to be, and when you need them to be diversified, i.e. in a crisis, they’re not. They act together.
With more study and analysis of how to get proper diversification, investors can pursue opportunities beyond conventional asset classes. These may include alternative investments and accessing the futures market to hedge exposure to conventional asset classes. With help from their financial advisor, investors can implement strategies designed to generate reasonable returns while reducing overall portfolio volatility. I strongly recommend that we focus on ensuring that our clients are properly diversified.

What impact did the US Federal Reserve have on financial markets?

The Fed has been involved in extraordinary monetary policy for some time. I believe the first rounds of quantitative easing were necessary for reducing risk and stabilizing the financial system. However, I would argue that some of the subsequent elements of Fed policy were unnecessary and, in isolation, relatively ineffective in stimulating growth. The problem is that we did not see the appropriate response on the fiscal side of the economy, and, certainly, politicians failed to come forward with a comprehensive plan. That left the Fed trying more and more extraordinary measures with less and less impact. Last December’s rate hike shocked people, but I think it was the right thing to do, and I hope they raise rates at least one more time this year. Normalizing monetary policy will send the message that we no longer need extraordinary measures. Lower rates won’t make you spend money if you think there’s a crisis going on. But if you think the economy is relatively normal, then low rates may encourage you to spend on your business or yourself.

After a dismal start to the year, financial markets made a tremendous comeback, with US equities ending the quarter higher. How did we get there?

When there’s a lot of negative volatility in the marketplace, it’s usually because there’s a lot of fear. Expectations of growth were too high, and disappointing news caused investors to rethink those expectations. Then they became overly fearful that the world is going to melt down. As that fear is removed, markets bounce back. We believe that we will continue to see the modest economic growth rate we’ve been predicting for many years. In today’s low, slow growth environment, we’re going to have periods of over- expectation and over-fear. We’re going to have to learn to cope with that.

Do you think the market’s reaction to a slowing Chinese economy was correct?

It was good that the market began to realize that the transition of the Chinese economy would take longer and probably be less even than some had forecast. China is making a big transition from an investment, project-led economy to a better balance between that and the consumer. Like a supertanker turning around, the transition will take time, and it’s unlikely that both components will move evenly. But the market reaction to China, at times, has been exaggerated, partly because we’ve become overly reliant on China as an engine for world economic growth. Japan and Europe are barely growing, and the US looks to be on its current 2% growth trend for a long time.

We saw more central banks pursue a negative interest rate policy in Q1. What do you think of this trend?

I believe the negative interest rate regime is dangerous, and I don’t think it creates the right behaviours. While a negative interest rate policy should encourage banks to lend more, it does nothing to increase demand for money. In fact, the messaging around negative interest rates is that the economy could be facing a crisis. So while the amount of money available may increase, I don’t think the demand for money will change, materially. I think, ultimately, it fails. In the interim the policy is bad for savers and for financial institutions such as insurers.

Why haven’t low energy prices delivered a bigger boost to growth?

It’s been something of a conundrum for me. While I believe low energy prices are, on balance, a positive for the global and US economies, it’s not all good news. In my observation, consumers want to see if low energy prices persist before they change their spending patterns. Now that these low prices have been with us for a while, we hope to see people spending that extra money as they feel more confident that they can rely on it.

The world seems to be getting more dangerous by the day. What are the implications for markets around the world?

Geopolitical risk is ever-present, and it certainly looks like it is escalating. However, there is a major difference between how markets react and how human beings react to geopolitical tension. As investors, we need to differentiate between geopolitical risks that create short-term volatility versus those that change the direction of markets
if it’s determined that one or more of those three factors is involved.

Jean-Pierre Mustier, is Appointed New CEO at UniCredit

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UniCredit designa a Jean Pierre Mustier como nuevo consejero delegado
CC-BY-SA-2.0, FlickrPhoto: m.krema . Jean-Pierre Mustier, is Appointed New CEO at UniCredit

On June 30th, the Board of Directors of UniCredit SpA has co-opted Jean Pierre Mustier and unanimously approved that, starting from next 12 July, he will take on the position of CEO in replacement of Federico Ghizzoni.

One of his most important tasks in his new role will be to decide and execute on the fusion of Pioneer Investments with Santander Asset Management. Operation which, according to Reuters, will no longer happen once Ghizzoni left. The merger would create one of Europe’s leading asset managers with over 400 billion euros in AUM.

According to a press release, the Board Chose Mustier because of his international profile, the high quality of his professional skills as well as the excellent understanding of international financial services and the accrued deep knowledge of the Group structure he has.

Mustier, 55, began his career at Société Générale where he held various positions, primarily within the Corporate & Investment Banking from 1987 to 2009. In 2003 he was appointed as Head of the Société Générale’s Corporate & Investment Banking Division and member of the bank’s Executive Committee. Afterwards, from 2011 to 2014, he joined UniCredit Group as Deputy General Manager and Head of Corporate & Investment Banking Division. Currently he is partner at Tikehau Capital, an investment management company and member of the Board of Directors of Alitalia.

In compliance with applicable regulations, the appointment of Mustier as CEO shall be assessed by the ECB.
 

Sweet May for Event Driven Strategies

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Las estrategias Event-Driven registran un mes de mayo idílico
Foto: Tambako the Jaguar. Sweet May for Event Driven Strategies

Global financial markets showed a pleasant picture in May as risk aversion receded. Equity indices displayed positive returns worldwide, with the US, European and Japanese indices outperforming Emerging markets. The latter were hit by the hawkish Fed minutes, which revived fears of a US rate hike over the summer. As a result, the US dollar strengthened, advancing against both DM and EM currencies.

On the alternative side, the Lyxor Hedge Fund Index was up 0.8% through the month, with Event Driven outperforming. Strategies with more directionality contributed to the bulk of the gains while CTAs continued to suffer from shifting market trends.

Event Driven kept up the positive momentum with Special Situations (+2.5%) outperforming Merger Arbitrage (+1.4%). The month of May recorded an acceleration of M&A activity. This dynamic is supportive for merger arbitrage as it provides a broader set of investable opportunities. Managers also benefited from a number of successful deal completions (including Time Warner Cable vs Charter Communication), while spread tightening on various transactions added to the gains (Baxalta vs Shire, SAB Miller vs AB Inbev).

Special Situations funds, which are more sensitive to market directionality than their peers, extended gains in May with the improvement of risk appetite. They thrived on their core positioning on Akorn, Athabasca Oil and Dow Chemical stocks.

“The performance of Event-Driven strategies picked up in May after having experienced difficult quarters. The strategy recently benefited from the completion of large deals and the tightening of deal spreads. Managers have also adopted a dynamic approach to manage risks, moving away from longer dated soft situations and skewing their portfolio towards hard catalyst M&A situations”, point out Philippe Ferreira, Senior cross-asset strategist at Lyxor Asset Management.

Ampliar

 

L/S Equity funds outperformed the MSCI World index, with long bias managers leading the pack. L/S Equity managers stuck to their guns, maintaining a cautious stance, with a dwindling exposure to cyclicals. In May, long positions on the financial and technology sectors were rewarding, though the picture was different across regions. All European managers posted strong returns on the back of the quality bias on their long books. Yet, ahead of a number of uncertain macro events and the looming UK Referendum vote, managers held a tilt towards defensive sectors and kept a low net exposure. This explains that their participation to the market rally during the second half of the month was somewhat limited. On the other side of the Atlantic, outcomes were significantly disparate. US managers took advantage from the rebound in the healthcare sector but suffered from their long exposure to the industrials and materials.

Fixed income and Credit arbitrage performances were muted as the positive support from the ECB and oil price appreciation started to fade away in credit markets. Managers recorded contrasting results, underlining the fact that alpha generation made the difference. Asian managers outperformed on the back of their positions on the energy and basic materials sectors while the performance of European funds was milder than that of their peers.

Global macro managers recouped the bulk of losses incurred last month, up 1.2%, thanks to the strengthening of the US dollar and their fixed income portfolio. Yet, this picture hides disparate returns across managers due to different positioning. Overall, long exposures to the USD against the G-10 currencies were the most rewarding. Managers sharply increased their short allocation to the EUR. The picture was similar for the fixed income bucket as returns were fuelled by both short exposures to US and UK durations and longs on European bonds. Relative value trades were also beneficial.

The appreciation of the US dollar and the rebound in energy prices were detrimental to CTAs. Long term models (-3.1%) weighted on the overall performance, while short term ones (-0.5%) proved more resilient. The strengthening of the USD was harmful to their short stances, especially against AUD, JPY and EM currencies. Alpha generation on shorts in EUR, CHF and GBP helped mitigating losses. 

Hong Kong and Switzerland Ahead of the United States in the Competitiveness Ranking

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Hong Kong y Suiza superan a Estados Unidos en el índice de competitividad global
CC-BY-SA-2.0, FlickrPhoto: Barbara Willi . Hong Kong and Switzerland Ahead of the United States in the Competitiveness Ranking

The USA has surrendered its status as the world’s most competitive economy, which it has led for the past three years, after being overtaken by China Hong Kong and Switzerland, according to the IMD World Competitiveness Center Ranking.

The 2016 edition ranks China Hong Kong first, Switzerland second and the USA third, with Singapore, Sweden, Denmark, Ireland, the Netherlands, Norway and Canada completing the top 10.

Professor Arturo Bris, Director of the IMD World Competitiveness Center, said a consistent commitment to a favorable business environment was central to China Hong Kong’s rise and that Switzerland’s small size and its emphasis on a commitment to quality have allowed it to react quickly to keep its economy on top.

“The USA still boasts the best economic performance in the world, but there are many other factors that we take into account when assessing competitiveness,” he said.

“The common pattern among all of the countries in the top 20 is their focus on business-friendly regulation, physical and intangible infrastructure and inclusive institutions.”

A leading banking and financial center, China Hong Kong encourages innovation through low and simple taxation and imposes no restrictions on capital flows into or out of the territory.It also offers a gateway for foreign direct investment in China Mainland, the world’s newest economic superpower, and enables businesses there to access global capital markets.Taiwan, Malaysia, Korea Republic, and Indonesia have all suffered significant falls from their 2015 positions, while China Mainland declined only narrowly retaining its place in the top 25.

The study reveals some of the most impressive strides in Europe have been made by countries in the East, chief among them Latvia, the Slovak Republic and Slovenia. Western European economies have also continued to improve, with researchers highlighting the ongoing post-financial-crisis recovery of the public sector as a key driver.

Meanwhile, 36th-placed Chile is the sole Latin American nation outside the bottom 20, while Argentina, in 55th, is the only country in the region to have improved on its 2015 position.

 “One important fact that the ranking makes clear year after year is that current economic growth is by no means a guarantee of future competitiveness.” Added Professor Bris.

 

 

Brexit: Implications for Asia Stock Markets

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Implicaciones del Brexit para las bolsas asiáticas
CC-BY-SA-2.0, FlickrPhoto: Gilhem Vellut. Brexit: Implications for Asia Stock Markets

The recent announcement afirming the U.K.’s vote to exit the European Union has many ramifications—many of which affect millions of people in a negative way. Some refer to Friday’s announcement as a Black Swan event. Regardless of how the event is characterized, the fact is that the exact implications are largely unknown, the potential for a domino effect is real, governments and companies will need to re-think strategy and individuals will be impacted. Hopefully we will have more clarity in the days ahead, but it is always dificult to predict macro influences or investor sentiment. What is more apparent to us is that good businesses exist regardless of macro movements.

Reactions since Announcement

The FTSE 100, a cap-weighted index traded on the London Stock Exchange, has suffered signi cantly— down 15.79% in USD terms in two trading days since the announcement.

Initially, Japan certainly was Asia’s worst performing stock market with the Nikkei down the day after the announcement, almost 8% in local terms and 4.8% in USD terms. Japan was affected by worries that a stronger yen would negatively impact future earnings, especially for global exporters. The Japanese yen hit 100 vs. the U.S. dollar early in the trading session which sparked a stronger-than-anticipated equity reaction. The Nikkei recovered slightly overnight bringing its two day loss in USD terms to -2.10%.

The worst performing equity sectors within Asia ex Japan were energy, industrials and materials while the best performing sectors were consumer staples, health care and utilities. Asian currencies generally outperformed the Euro and GBP with export/commodity related currencies performing worst (Korean won, Australian dollar, and Malaysian ringgit). Interestingly, local Chinese shares, represented by the Shanghai Composite performed relatively well, down less than 1% in USD terms since the Brexit announcement.

Matthews Asia Investment Team Thoughts

A combination of an unexpected result not priced into markets and a likely prolonged period of uncertainty were the main negative drivers of markets across all asset classes. Risk-off sentiment could continue in the short term and because Brexit negotiations are expected to extend for many months, a period of ongoing uncertainty will keep markets unsettled for quite some time. That said, we also expect that global central bank coordination is ready to add stimulus as needed which should add liquidity— potentially mitigating market volatility.

In an already slow growth environment, added uncertainty will not help Europe’s fragile recovery. Prolonged uncertainty will cause a slow-down in investment, capex and European growth which in turn will increase the length of the current credit cycle, spur further central bank stimulus and liquidity, and ultimately drag out the “low growth for longer” thesis. In this scenario, we envision that cyclical sectors—especially those exposed to the EU—are most at risk. Winners could include defensive sectors and those that focus on domestic demand. Within Asia, we see both potential winners and losers if the turmoil in Europe continues to unfold.

Portfolio Implications

We believe successful investing in Asia includes an increased focus on domestic demand and regional growth— nding businesses that are less dependent on global growth and more dependent on regional growth of middle class consumers. And although growth may be increasingly dificult to find in Europe, our conviction for the long-term growth of Asia remains intact. We believe the ability to capture that growth—through domestic demand oriented businesses, attempting to mitigate macro influences wherever possible—have never been more important. While we don’t yet know what the long-term ramifications are for Europe and the U.K., we can be a little more certain about the future for Asia’s economy and its growing contribution to global growth.

David Dali is Client Portfolio Strategist at Matthews Asia.

Eaton Vance Launches a Multi-Asset Credit Fund

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Eaton Vance lanza una estrategia multiactivo de crédito
CC-BY-SA-2.0, FlickrPhoto: Giuseppe Milo. Eaton Vance Launches a Multi-Asset Credit Fund

Eaton Vance Management Limited. (EVMI), a subsidiary of Eaton Vance Management, today announced the launch of Eaton Vance (Ireland) Multi-Asset Credit Fund, a sub-fund of Eaton Vance Institutional Funds Plc, which is available to investors in the UK and Ireland, with forthcoming registration in other jurisdictions. 

In an uncertain market for traditional core fixed income asset class returns, this strategy seeks to provide investors with broad exposure to the global sub- investment grade credit markets, principally through higher yielding credit assets including global high yield bonds and floating-rate loans. Up to 40% of the fund’s assets may be allocated to opportunistic and risk-reducing fixed income asset classes. The strategy will also be available to investors as a customisable segregated mandate.

The Fund’s co-portfolio managers are Jeffrey Mueller, Vice President, Justin Bourgette, CFA, Vice President, and John Redding, Vice President. The Fund will be managed in a way that draws on Eaton Vance’s breadth of investment expertise and capabilities, based on the ‘intelligent integration’ of top-down and bottom-up inputs to optimise portfolio construction.

Payson Swaffield, Chief Income Investment Officer of Eaton Vance Management, commented: “Eaton Vance is an experienced manager of investments across the global credit spectrum. Bringing our multi-asset Credit capability to investors in a QIAIF structure is a natural evolution of our market leadership position in leveraged credit. I am confident that the combination of Jeff, Justin and John will allow us to provide an attractive strategy for investors seeking higher yields and strong, sustainable returns.”

The Fund is a regulated, Irish domiciled qualifying investor alternative investment fund (“QIAIF”) and complies with the Alternative Investment Fund Managers Directive (“AIFMD”).