All-Consuming Asia: A Retail Revolution Story

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Los elevados niveles de consumo asiático
CC-BY-SA-2.0, FlickrPhoto: jo.sau . All-Consuming Asia: A Retail Revolution Story

Did you know that Chinese online shoppers spent some $5.7 billion on a single day in November last year; that more and more well-heeled Indian consumers prefer to buy their tea from a pharmacy; or that urban Thais visit a hypermarket at least once a week and spend around half their monthly bills on groceries?

For most of us this is the sort of random information usually reserved for a pub quiz, but for fund managers these are valuable insights into consumer behaviour that reflect some of the changes that have occurred in Asia over recent years.

China’s meteoric rise has changed the world from the price we pay for consumer goods, to the global demand for natural resources, and even the flow of international capital. Much has been written about how policymakers there are promoting domestic consumption as a future driver of growth, but in fact the nation’s consumers have been flexing their muscles for some time.

E-commerce crazy China also happens to be the world’s biggest smartphone market with some 98.8 million shipped in the first three months of this year alone. The country is the world’s biggest car market and, with India, vies for the title of the world’s biggest market for gold.

However, it’s easy to get overly fixated on China. India is another country where reform is on the agenda and where a growing urban middle class is changing the way people spend their money. This is important because people who live in cities tend to earn and spend more.

While only three-in-10 Indians are classified as ‘urban’ in census statistics, urban consumers account for more than 70 per cent of the market for so-called fast moving consumer goods (FMCGs). These consumers are developing new patterns of retail behaviour.

For example, pharmacies have emerged as the fastest growing ‘old economy’ sales channel for FMCGs. Chemists attract a more upmarket customer who seems to prefer buying packaged teas, fruit juices and healthy foods from a man in a white lab coat.

Elsewhere, the 10-nation Association of Southeast Asian Nations, better known as Asean, has developed into something resembling a single market of some 625 million consumers. This has helped the region to emerge quietly from China’s giant shadow.

There has been a shift away from raw materials extraction towards economic activities further up the value chain. Where China talks of rebalancing, Asean has mainly found a happy medium of exporting and recycling wealth at home in the form of growing consumer demand.

Populations are young

Incomes have grown from a low base and there is a huge pent-up demand for housing, consumer durables, transport and banking services. Populations, as is common throughout the emerging markets, are young.

Domestic consumption accounts for around 70 per cent of economic growth in the Philippines, and has done so for some time, according to Jaime de Ayala, chief executive and chairman of Ayala Corp, the country’s oldest conglomerate. Remittances from overseas Filipinos have been a strong driver of middle income consumer markets such as telecoms, real estate and other services.

Meanwhile, the investment case for Indonesia, Asean’s biggest member, is closely tied to its population of some 254 million people. Over half of all Indonesians live in cities and this number increases by some 300,000 every year.

What makes all this even more attractive to us is that consumer businesses aren’t subject to stifling government controls, as tends to be the case with more ‘strategic’ sectors such as defence, utilities or aviation. This means competition exists and innovation can follow.

Clearly not everything is perfect. For one, Chinese growth is decelerating. This may be a good thing in the long run because double-digit growth rates were, in hindsight, unsustainable. But in the short term the whole world suffers.

Asia is struggling to regain momentum in part because of its reliance on Chinese demand. While growth rates are still higher than in other parts of the world, corporate earnings are falling, which may affect jobs and wages.

In particular, Asian economies that are more reliant on foreign investment are being penalized by indiscriminate capital outflows from the region. However, there are lots of people in Asia who are getting richer. Many have a disposal income for the first time in their lives and want to spend this money. The most successful companies have already figured out a way to tap into these fundamental changes.

While Asia must overcome many immediate challenges, an investor would do well to remember the longer term trends that are changing the lives of billions of people across the region every day. That’s because these changes will end up making someone some decent money. 

Henderson: “Still Fundamental Value in Euroland Equities”

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Henderson: "Aún hay valor fundamental en los títulos en euros"
CC-BY-SA-2.0, FlickrNick Sheridan is european equities manager at Henderson. Henderson: “Still Fundamental Value in Euroland Equities”

Henderson european equities manager Nick Sheridan explains why he tries to set aside the sentiment of short-term uncertainty when looking for value, and why he believes that the eurozone remains a prime area to seek out investment opportunities at the start of 2016.

What lessons have you learned from 2015?

Probably the most important lesson from 2015 is the importance of trying to look beyond the emotional impact of short-term news flow, when it comes to valuing stocks. Investors have had to deal with a bewildering series of ‘big news’ events, from the optimism surrounding the European Central Bank’s QE programme to unexpected shocks (the Greek debt crisis; uncertainty over Chinese growth, Volkswagen’s emissions bombshell). As ever these short-term sell-offs provided good buying opportunities for those discerning investors willing to focus on what matters: value.

Are you more or less positive than you were this time last year, and why?

While it is true that the recovery in Europe has been slower and more erratic than hoped, recent news has been reasonably upbeat. Eurozone PMIs are a 54-month high, German industrial output is improving and regional consumer prices are up – all signs that suggest solid growth in the region over the next few months. Although recent earnings in Europe have on the whole been a touch disappointing, many companies have upgraded their expectations for 2016. The question now is whether investors will be patient enough to wait for this earnings recovery to come through.

What are the key themes likely to shape your asset class going forward and how are you likely to position your portfolios as a result?

Our bottom-up strategy is designed to set aside the sentiment and incorporate in-depth analysis of meaningful measures to help identify those stocks that are best placed to outperform. Market volatility, short-term news flow and unexpected events can contribute to a degree of change, but we tend to focus on measurable factors, such as earnings/cash flow, dividends and the balance sheet.

At the heart of the process is very much a focus on value. What price you pay at the beginning of a holding period ultimately dictates your returns. Should market volatility continue to increase, this will create pricing disparities, offering a potentially rich vein of opportunities to invest in quality companies at attractive valuations.

 

 

Safra Sarasin expands Total Return team

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Safra Sarasin potencia su equipo de Total Return
CC-BY-SA-2.0, FlickrPhoto: Rosanna Galvani . Safra Sarasin expands Total Return team

Swiss private banking group Safra Sarasin has announced the appointment of Stéphane Decrauzat, and Vincent Rossier to head its Total Return team as of Janaury 2016.

Decrauzat joins from RAM Active Investments, where he spent the last eight years as fixed income manager. Rossier joins from Pictet Wealth Management, where he held a number of positions in the fixed income asset mamangement team.

In addition, the group also confirmed the hire of Yann Schorderet as quantitative strategist to the CIO office. He joins from Mirabaud & Cie, where he was also responsible for investment strategy.

Serge Ledermann, member of the Bank’s Executive Committee and head of Asset Management Switzerland, comments on the appointments: ”We are very pleased to welcome these managerial appointments and new skill sets, which not only will enable us to strengthen our existing teams but above all will allow us to provide new asset management expertise. The current financial market environment, with the virtual disappearance of positive yield curves, in fact calls on us to adapt our product range both within the fixed income space and in multi-asset management.”

Santander Totta, Portugal ́s Second Private Bank After Banco Banif’s Acquisition

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Santander compra el portugués Banco Banif por 150 millones de euros
CC-BY-SA-2.0, FlickrPhoto: Ana Patricia Botín, Chairman of Banco Santander. World Travel & Tourism Council . Santander Totta, Portugal ́s Second Private Bank After Banco Banif's Acquisition

With the aim of providing continuity to Banco Internacional de Funchal (Banif) and safeguarding the interest of its customers, the Bank of Portugal, the resolution authority, decided to award Banco Banif’s business to Banco Santander Totta, a subsidiary of Banco Santander. Following this decision, as of today, the businesses and branches of Banco Banif will become part of the Santander group.

The transaction will be carried out via the transfer of a large part (the commercial banking business) of Banif’s assets and liabilities to Santander Totta. Banco Santander Totta will pay EUR 150 million for Banco Banif’s assets and liabilities, which are transferred having been adequately provisioned. Meanwhile, other assets and liabilities remain in Banco Banif, which is responsible for any possible litigation resulting from its past activity, for their orderly liquidation or sale.

The acquisition of Banco Banif’s businesses positions Banco Santander Totta as Portugal’s second privately-held bank, after BCP-Milenium, with a 14.5% market share in loans and deposits. Banco Banif contributes 2.5 points in market share and has a network of 150 branches and 400,000 customers. Banco Banif is particularly important in the archipelagos of Madeira and the Azores, where it has very high market shares.

Ana Botín, chairman of Banco Santander, said today: “The acquisition of Banco Banif is another example of Banco Santander ́s commitment to Portugal, one of the group ́s main countries. We are fully committed to the economic development of Portugal and make available all our capacity to help people and businesses prosper in the communities where we operate.”

This transaction has an immaterial impact on the Santander group’s capital and a slightly positive impact on profit as of year one.

Old Mutual Global Investors Brings Emerging Market Debt Fund in House

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Old Mutual Global Investors trae de nuevo a la firma la gestión de su fondo de renta fija de mercados emergentes
CC-BY-SA-2.0, FlickrPhoto: Andy Morffew . Old Mutual Global Investors Brings Emerging Market Debt Fund in House

Old Mutual Global Investors, part of Old Mutual Wealth, has announced that John Peta, Head of Emerging Market Debt, will take over as fund manager on the US$168 million Old Mutual Emerging Market Debt Fund, effective from 21 January 2016, subject to regulatory approval.

The Fund, which is currently sub-advised by Stone Harbor Investment Partners LP is a sub-fund of the Dublin domiciled Old Mutual Global Investors Series. Its objective, to achieve asset growth through investment in a well-diversified portfolio of fixed and variable rate debt securities issued in emerging markets, will remain unchanged.

OMGI believes investors in the fund will benefit from John’s wealth of emerging market debt investment experience.  He joined the business in March 2015 and has managed the US$115 million Old Mutual Local Currency Emerging Market Debt Fund since April 2015. He started his career in fixed income in 1987 and has spent 18 years specialising in emerging market debt investing.

OMGI has also proposed a change to the investment policy of both the Old Mutual Emerging Market Debt Fund and the Old Mutual Local Currency Emerging Market Debt Fund. This change, which will be effective 21 January 2016, subject to regulatory and shareholder approval, will allow the manager to increase the use of derivatives.

John Peta comments: “I look forward to taking on the management of the Old Mutual Emerging Market Debt Fund and identifying areas for growth opportunities. As we move into 2016, I believe emerging market debt will be an appealing investment for those looking to benefit from attractive yields across various regions, including Asia, Latin America and the Middle East”

Warren Tonkinson, Managing Director, Old Mutual Global Investors comments: “John Peta has a great deal of experience managing emerging market debt funds, which investors in the Old Mutual Emerging Market Debt fund are set to benefit from. By increasing his flexibility to use derivatives, John will have greater freedom in his portfolio management style; something we believe will deliver additional client value.

“I’d like to take the opportunity to thank Stone Harbor for their support in managing the fund until now.”

“Earnings Are Forecasted to Grow Double Digits, Measured in Euros, and Should Be Very Supportive of Equity Valuations in 2016”

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“Se prevé que los beneficios empresariales crezcan dos dígitos, medidos en euros, y deberían respaldar la valoración de las acciones en 2016”
Marco Pirondini, Head of Equities – US at Pioneer Investments.. "Earnings Are Forecasted to Grow Double Digits, Measured in Euros, and Should Be Very Supportive of Equity Valuations in 2016"

Marco Pirondini, Head of Equities – US at Pioneer Investments, discuss with Funds Society, in this interview, his outlook for 2016.

In the current environment, do you consider the premium offered by equity markets attractive? Is it worth investing in this asset class rather than in bonds or cash?

We think that equities are fairly valued on an absolute basis but are attractive relative to other asset classes such as bonds, which are for the most part overvalued. In other words, equity risk premium are high by historical standards and this tend to correlate with future long term returns. For this reason, we like the long-term outlook for equities better than bonds.

Double digits returns have been seen last years… do you expect this trend to be continued or must investors lower their expectations on global equities?

We expect that equities could continue to offer double-digit returns measured in euros. That is partly because of improving earnings and partly because the euro should continue to depreciate.  With respect to earnings, we think earnings globally will grow modestly next year despite headwinds from lower commodity prices and weak industrial demand as consumers continue to spend. Earnings are forecasted to grow double digits, measured in euros, and should be very supportive of equity valuations in 2016.

Divergent monetary policies in the U.S. and Europe will likely result in continued depreciation of the euro vs. the dollar, which will benefit European investors in U.S. and global equities, as the U.S. is the largest portion within global equity asset allocations.

We have also started to notice higher volatility levels, is it likely to see this trend on the coming year or you expect the opposite?

Volatility has increased in the last few months but is still relatively low by historical standards.  We do not expect volatility to change significantly.  If volatility does increase, we would view declines as a buying opportunity as we believe we are in a secular bull market for equities.

What are the main risks for the asset class: the Chinese transition, rate hikes by the FED…? How might these factors affect?

On top of the usual geopolitical risks, which include terrorism, the civil war and dislocation in Syria, and instability in some emerging market countries, a credit crisis generated by low commodity prices is probably the most imminent risk.  While we believe there will be severe credit issues with companies in or exposed to the energy industry, we do not believe this will result in a global credit crisis, which would negatively impact equities as well as bonds.

Alternatively, we believe one of the risks investors have been most concerned about, a FED increase rate hike, will be a positive for U.S. equities, as equities usually rise in the first year of a rate increase. In particular, owning high quality companies with strong fundamentals is usually to best way to invest in a rising rate environment as they are typically growing and have strong enough fundamentals to cope with the unexpected.

Talking about regions, what are your winner bets? Which ones are properly valuated and offer the best opportunities?

We think that Japan is the most interesting region.  It offers a unique combination of low valuations and improving earnings driven by better corporate governance.  We also think the while the U.S. is fairly valued overall, there are opportunities to own world class health care and financial services companies at attractive valuations relative to international peers.

Is this a good moment to  invest in the emerging markets?

We believe emerging markets are still risky because many of the countries have accumulated substantial amounts of dollar debt in the last few years. The emerging markets picture remains extremely varied. We expected modest growth in some countries supported by a pick-up in demand from developed markets and by some stabilization in countries that experienced strong contractions in 2015.

Is the long bull market cycle in US equities set to continue and if so, why?

Well definitely it has been a very long bull cycle. In the last 100 years this is the longest period of market expansion without a 20% correction, so that’s a very very high bar. A correction is possible, someone would say even likely, though it’s very difficult to see in the markets the reasons why we should have that correction. We haven’t seen excesses in valuations, we haven’t seen excesses in investments, the bullishness of investors towards equities is not particularly high…. So it’s very difficult to see what could cause a correction. What I can say is that every time the market in the US has passed its previous peak – and this has happened in 2013 in the US – it was the beginning of a very long bull cycle with some big corrections in them, but usually cycles that lasted 15 – 20 years. Honestly, I think that we may have corrections but the bull cycle in the US is going to last for a long time.

On a sector basis then, where do you see the main opportunities for US equity investors over the next twelve months?

When we look at 2016, we see opportunities in sectors where the US market has companies that are global leaders but are also exposed to some very powerful long-term trends like innovation, and like the ageing population in developed markets. In particular, we like companies in the technology sector, companies in the pharmaceuticals sector, I would say more established larger cap companies – in general we prefer large cap to small cap in the US in 2016. But we also see other opportunities, for example in financials. Financials has been a sector that has underperformed for many years, since the financial crisis really, and we think that 2016 could surprise a little with interest rates going up, we think that more financial companies could actually improve their earnings and start to pay some dividends and this will probably help their performance. Generally speaking though, we tend to prefer stable growth companies over value investments.

It Really Is Different This Time

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¿Está cometiendo la Fed un error?
CC-BY-SA-2.0, FlickrPhoto: Seher Basogul. It Really Is Different This Time

Now that the US Federal Reserve has raised interest rates for the first time in nine years, investors want to know how this rate-hiking cycle might proceed and, more important, how markets will react. But searching past rate-hiking cycles for clues this time is like looking for your lost keys under a streetlight rather than in the dark, where you probably dropped them. It’s easy to see why investors would search somewhere familiar and convenient — but it’s still likely the wrong place to look. Fed tightening cycles over the past 30 or so years are simply not a good guide to what lies ahead. This time, the circumstances facing the Fed are far too different to rely on past economic cycles for any comfortable frame of reference.

Perhaps the biggest difference between this economic cycle and those past is that the Fed has just initiated a rate-hiking cycle while both real growth and inflation are very low. Historically, year-over-year nominal GDP growth rates have been above 5% at the beginning of a tightening cycle. Today, nominal growth stands at 3%. During past hiking cycles, CPI headline inflation has typically been around 3%, with core personal consumption expenditures (PCE) inflation usually above 2% — well above the current levels. Rate hikes generally come amid periods of rising corporate profits, not during an earnings recession such as the one we’re seeing now.

In another indication of how different this cycle is from any other, the Fed has now achieved liftoff amid a collapse in commodity prices, the primary catalyst for the drop in earnings. On the manufacturing side, this is the first time in 30 years that the central bank has started a tightening cycle while the Institute for Supply Management (ISM) manufacturing index has been below the breakeven level of 50, as it is now.

And while the global backdrop has generally supported the case for past rate-hiking periods, that’s clearly not the case at present. Growth and inflationary pressures remain sluggish in both the developed and developing world, so it’s no surprise that much of the globe is maintaining or enhancing monetary accommodation. Expectations of a tightening Fed have fueled robust US dollar gains, which run counter to a rate-hiking mentality, as these act to tighten US financial conditions. Indeed, if US rates had been a couple of hundred basis points higher, rather than brushing up against zero, we might have seen a rate cut rather than a hike.

Moreover, when was the last time the Fed raised rates after having been on hold —at zero— for seven years or with a $4.5 trillion balance sheet or when domestic and global debt burdens were this high and the global demographic profile was this unfavorable? The answer, of course, is never. This is the first time. So why are we so enamored with looking to the past for lessons? Perhaps because it is easier, but we would be better off looking at this episode as its own unique moment instead of applying the wisdom contained in dusty economic history books.

To be sure, large swaths of the US economy are performing well, highlighted by the robust service sector, strong vehicle sales and healthy income generation from a firm labor market. But what is markedly different here are the many areas of the domestic and global economy that are performing uncharacteristically poorly or are facing significant challenges as we progress with Fed tightening.

One direction?

What does all this mean for rate hikes that follow this one? A very different path. The terminal rate will likely be much lower than it has been in the past — nowhere near the average 600-basis-point rise in the federal funds rate we’ve seen since 1970. The likely outcome is lower for longer, with the front end of the yield curve rising with policy rates but the long end likely not moving very much. Will the Fed be able to tighten all the way into 2019, as it now projects? That seems doubtful, given that this business cycle is already seven years old.

We also see a risk in the Fed heading up one path while the rest of the world staggers down another. As a cautionary note, we recall that the European Central Bank and the central banks of Canada, Australia, New Zealand, Sweden and Norway all raised rates earlier in this cycle, only to lower them again before too long. Given the weak global outlook, the Fed may end up doing the same.

Now that the FOMC has met, we know when rate hikes will begin. But if we expect this knowledge to shed some light on the rate-hiking cycle further out, we could be in the dark for quite some time.

Column by Erik Weismann, Chief Economist & Fixed Income Portfolio Manager at MFS.

Six Lessons We Learned About Bonds in 2015

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Seis lecciones que hemos aprendido sobre bonos en 2015
Photo: Taner Peets. Six Lessons We Learned About Bonds in 2015

In 2015, bond investors faced slower nominal global growth, less liquid markets and a looming US rate hikes. But with challenges come lessons: here are some takeaways from 2015 that should remain important in 2016.

1) The Fed tightened without raising official rates. It pulled this off mostly by winding down asset purchases. That means that when a quarter-point hike in the federal funds rate comes, it won’t be the first time the Fed will have tightened policy. The market spent the past 12–18 months adjusting to tighter conditions through a stronger US dollar and periodic sell-offs across bonds, stocks and commodities.

Things could get trickier in 2016 as the Fed’s balance sheet starts to shrink and rates creep higher. That will drain dollars from the global financial system—call it a decline in dollar liquidity—and it could pressure those who need dollars most, such as emerging-market borrowers. It could also be tough on asset prices and trading liquidity, which brings us to our second lesson.

2) Low liquidity is the new reality for bond investors. Fixed-income trading liquidity issues have been around since the global financial crisis. But most investors didn’t start paying much attention to them until this year. Expect these issues to stay front and center in 2016. And if Fed tightening keeps draining US dollar liquidity, trading liquidity may dry up further, making it even harder to trade bonds without having a big effect on their prices. Of course, investors who manage liquidity risk well may be able to profit. Having a manager who understands this will be critical.

3) The US economy has turned a corner. But will markets stay on track? After the global financial crisis, US banks spent years licking their wounds and refusing to lend. That’s changed recently, and the economy has shifted into a higher gear, paving the way for Fed rate hikes. But will global financial markets run into a rough patch if the Fed keeps tightening policy throughout 2016? Hard to say, but it’s definitely worth keeping an eye on.

4) China is successfully rebalancing. Sure, the Chinese economy is slowing, but it’s also evolving from an export-oriented economy to one in which consumption and services play a bigger role. A lot of observers have overlooked this, possibly because many Western companies are exposed to China’s heavy industry sector, which has struggled. Meanwhile, the renminbi’s new status as an IMF-designated elite reserve currency will augment China’s growing presence in global bond indices and draw a lot of investment dollars into China. We think there’s a good chance that China will experience a cyclical upswing next year.

5) If you’re investing in high yield, avoid passive ETFs. Investors rushed into high-yield exchange-traded funds (ETFs) this year. They may come to regret that haste. High-yield ETFs have a terrible track record and have underperformed most actively managed funds over the long run.

High yield has offered equity-like returns, with less volatility over time, and it isn’t highly correlated with interest rates. But the market is complex, relatively illiquid and hard to navigate, which gives skilled asset managers an advantage over index-tracking ETFs. Sure, ETFs can be useful for short-term tactical trades. But if you want to invest in high yield, ETFs are the wrong way to go.

6) When building a bond portfolio, go beyond your backyard. Investors tend to prefer home-country bonds. But global bonds—provided they’re hedged to the investor’s home currency—have delivered returns comparable to domestic bonds, with lower volatility. And global bonds help diversify interest-rate and economic risk, which is important now because monetary and economic policies are diverging. The Fed is on the verge of tightening policy, while Japan is holding steady and the euro zone is in highly stimulatory mode.

Navigating the bond market won’t be easy in 2016. That doesn’t mean investors should turn their backs on bonds. Instead, make sure your bonds are global, diversified and with a manager that has the flexibility to reduce risk without sacrificing opportunity.

Opinion column by Douglas J. Peebles, Chief Investment Officer and Head—AllianceBernstein Fixed Income.

QE in Europe and Japan Set to Benefit Higher Dividend Yielding Stocks

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El QE en Europa y Japón favorecerá mayores dividendos en los valores con alta rentabilidad
Photo: Alex Crooke heads Henderson’s Global Equity Income team. QE in Europe and Japan Set to Benefit Higher Dividend Yielding Stocks

Alex Crooke heads Henderson’s Global Equity Income team, which consists of twelve professionals with an average industry experience of 16 years.  In his case, he has been managing income generating strategies since 1997. In an interview with Funds Society, Crooke explains: “high dividend yielding stocks are not a fad, they have played an important role in the market for decades. Dividends are a very powerful strategy when investing in equities.”

In fact, over time, dividends are responsible for a highly significant proportion of the total returns on global stock markets. In 2014, listed companies worldwide paid more than $1 trillion in dividends. They are also a good indicator of corporate health. In recent years,  payouts of listed companies have continued to grow. The Henderson Global Equity Income team believes that this trend will continue as fundamentals in markets lagging the economic cycle, such as  Europe, improve.

“Our strategy is truly global,” says Crooke. The universe includes Asia and emerging markets, and stocks of all market capitalizations. “Right now we find better yield in Europe and Asia than in the United States, as well as better dividends among large-cap companies, compared to small and mid caps. Essentially, we have a yield of 3.4%.”

In a world where interest rates are at historically low levels, a dividend culture is warranted, especially in those areas of the world where  aging populations lead to increased demand for income-generating assets.

High and Rising Dividends

“Ours is a bottom-up investment process. The portfolio is constructed from a global universe of companies, which generate good dividend yields. In addition, we have found that companies that raise their dividend tend to perform better overall.”

Crooke’s team looks closely at  companies that deliver good dividends, with a focus on analyzing whether they are able to increase cash flows over the next two or three years. “At the end of the day, a dividend is cash leaving the company, therefore, in order to have a dividend, there must be good cash generation.”

During the investment process, the Global Equity Income team examines several factors, including balance sheet strength, capex needs, and cash generation, but without losing sight of the macroeconomic framework. An example of this is what’s happened with oil companies over the past year, “the macro environment suggested that the price per barrel could not be maintained above US$100 for a long period of time, but even at that price, we saw that many companies within the industry were financing dividend distributions with debt, instead of cash flow; they were handing out the results of future projects. For us, that was a warning sign indicating that it was best to steer clear of these companies, even though their dividend was high. “

A UCITS Strategy for a Three-Year Old UK Domiciled Fund

Alongside Andrew Jones and Ben Lofthouse, Alex Crooke manages the Luxembourg-domiciled SICAV strategy, which launched a year and a half ago as a mirror version of the existing Global Equity Income Strategy, domiciled in the UK. The launch of the UCITS Luxembourg version was driven by the low interest rate environment, which has seen increasing demand in Europe and Asia, as well as interest for such products in the US Offshore and Latin America market.

Overall, Henderson manages approximately US$15 billion in both regional and global Equity Income Strategies. Henderson began investing in income at the global level in 2006, and manages US$3.5 billion in its global dividend strategy domiciled in the United States, and about US$1 billion in the strategy domiciled in the UK.

QE in Europe and Japan should Act as Catalyst for Higher Dividend Yielding Stocks

This strategy, which has the MSCI World Total Return Index as its benchmark, typically has between 50 and 80 companies in the portfolio. “The United States represent 30% of the portfolio, an underweight position,” explains Crooke. This positioning is more the result of valuation rather than one of dividend growth. “Since the United States launched its QE program, the popularity of stocks offering a good dividend yield increased, raising the price of securities in both equities and fixed income.” Henderson’s Global Equity Income team, however, does see some interesting American companies, such as mature technology names like Microsoft and Cisco, which have “a good payout combined with strong cash flow generation.” Another sector in which they are beginning to focus is that of US banks “which we think will be in a position to start paying better dividends.”

But it is in Japan and Europe where Crooke sees the greatest opportunities. “The QE program is in its infancy, thus, the same rationale which pushed money in the US towards dividend stocks should also operate in Europe and Japan.”

The average forecast yield of the companies which form the strategy is 3.8%, with an estimated dividend growth of 5 to 10%. “In the UK, for example, we see interest rates at levels below the average yield of the equity market; this is the situation throughout most  developed world markets, except the United States. Now is the time to reconcile this difference.”

Ampliar

The team’s outlook for emerging markets is very cautious. The strategy’s allocation is less than 5%, although exposure is also gained through certain developed market companies with emerging market business streams.

Restructuring Companies, a Recurring Theme in the Strategy

Around a third of the stocks included in the portfolio are undergoing some form of  restructuring. “Companies that have gone through a process of change to improve their fundamentals tend to behave well regardless of the economic cycle. Since we are not very positive about the global macroeconomic outlook, we focus on these types of businesses as well as companies in sectors uncorrelated with the economic cycle, such as pharmaceuticals or insurance.”

A recurring concern when investing in dividends is to avoid “value traps”. Some high-yielding equities can be more risky than their lower-yielding counterparts, particularly after a period of strong market performance when equity price rises push yields down. The high-yielding companies that are left can be structurally-challenged businesses or companies with high payout ratios that may not be sustainable. Crooke says that it is essential to analyse the sustainability of a company’s ability to pay income.”We avoid investing in companies whose dividend policy is vulnerable to regulatory changes, the interest rate environment, declines in commodity prices, etc”.

Does High Yield Debt Investment Compete with Dividends?

Crooke points out that investing in high yield bonds is currently not as attractive an option. “If you want high yields from fixed income, you have to look to heavily indebted companies. Those with a good credit rating don’t offer such attractive yields. In Europe, for example, 55% of companies offer better yields through dividends than through debt issues.”
 

Ampliar

Furthermore, if inflation returns, the risk of rising rates is still there, and it may damage the performance of a fixed-income portfolio. “If you’re counting on a gradual reflation of the economy, we believe that it’s much better to be in equities than in fixed income,” says Crooke.

Membership of the Reserve Currency Club is But Part of China’s Master Plan

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La siguiente fase del renacimiento económico de China ya está en marcha
CC-BY-SA-2.0, FlickrPhoto: Simon Pielow . Membership of the Reserve Currency Club is But Part of China’s Master Plan

Until recently, by maintaining a watertight capital account, China deliberately postponed its membership of the reserve currency club. A few years ago, China had grown to be a giant in the world of trade, yet remained a dwarf in the world of capital. More recently, the People’s Republic reached a point where – given its rapidly increasing economic size and trade footprint – this contradiction was no longer sustainable or sensible.

The next phase in China’s economic renaissance is now well underway. It is actively pursuing its twenty-first century manifest destiny to regain the mantle it lost in the 1830s: being the world’s largest economy. This means it must expand its role in global capital markets to match those it has already achieved in global trade. This will balance the two windows through which China looks at the world – and just as importantly through which the world looks at China. Being a member of the reserve currency club is but a stepping stone on the renminbi’s path to achieving that worldwide acceptance, and especially in China’s efforts to master the world of capital. Expect a new Shanghai-Hong Kong-Shenzhen triptych to become one of the world’s three main fountainheads of capital and the next pit-stop on China’s road to global economic pre-eminence.

For this to happen sustainably however, China will need to move from being an exporter of capital – born of running a current account surplus – to being an importer of capital – which follows on from running a current account deficit. This answers the Triffin Dilemma which says that to have a truly acceptable reserve currency, one needs to produce a surplus of that currency so that third parties can hold it. Only when the appetite of China’s consumers for foreign goods exceeds that of foreigners for China’s goods – when China runs a current account deficit – can this be truly achieved.

In the interim, China has to find a way of recycling its trade surpluses so that foreigners get easy access to its currency. Here Xi Jinping’s signature foreign policy doctrine – the One Belt One Road programme – achieves this aim. By forcing Chinese surplus capital abroad to revive the terrestrial Silk Road of Central Asia and its maritime equivalent through the Indian Ocean, China is repeating what Britain did in the late nineteenth century: establishing its reserve currency status first by investing its trade surplus abroad before, one suspects, the eventual rise of the import-hungry Chinese consumer spreads the renminbi worldwide ‘naturally’, after China’s current account stops being a surplus and instead becomes a deficit.  

Michael Power is Strategist at Investec Asset Management.