The ECB’s July Meeting Arrives With No Forecast of Changes in Rates, Discourse, or Stance

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The European Central Bank (ECB) will hold its July monetary policy meeting tomorrow. According to asset managers, it is likely to proceed without major surprises and, most notably, without new interest rate cuts as market expectations suggest.

“The ECB’s July monetary policy meeting is likely to pass without incident. Similar to market expectations, we do not anticipate any interest rate cuts. Data dependency remains high, decisions are made meeting by meeting, and there is no prior commitment to a possible rate cut in September,” acknowledges Ulrike Kastens, economist for Europe at DWS.

This probable pause in July, according to Kevin Thozet, member of the investment committee at Carmignac, “will allow the institution to better assess the region’s inflation and growth trajectory and confirm that the path forward is as desired. However, the prospects of a new rate cut in September, along with the Fed, are high.”

Currently, data indicate that eurozone inflation fell to 2.5% year-on-year, while core inflation remained unchanged at 2.9%. In the opinion of Jean-Paul van Oudheusden, market analyst at eToro, as long as interest rates stay above 3%, it is likely that the ECB’s monetary policy will remain restrictive. “The current base interest rate is 4.25%, which provides room for further rate cuts despite the latest adjustment to interest rate expectations made by the central bank in June. Recently, the central bank has been cryptic about its interest rate path, but its goal is not to surprise the markets. Christine Lagarde could prepare the market for a rate cut in September or October in her press conference on Thursday,” comments van Oudheusden.

Regarding what to expect from tomorrow’s meeting, Germán García Mellado, fixed income manager at A&G, adds: “Regarding the reduction in bond purchase programs, no significant new developments are expected, since in July, reinvestments of the special program launched during the pandemic (PEPP) began to be reduced by 7.5 billion per month, with the aim of fully reducing reinvestments by 2025.”

Already stated by the ECB

In line with what the ECB has explained so far, given that there are no new growth and inflation projections, it is unlikely that the communication will change. According to Philipp E. Bärtschi, Chief Investment Officer of J. Safra Sarasin Sustainable AM, the ECB’s rate cut in June was accompanied by comments suggesting that the ECB will also cut its rates gradually rather than quickly. “However, due to the weaker growth momentum and the projected inflation path, we expect three more rate cuts in the eurozone this year,” notes E. Bärtschi.

“The messages issued in Sintra are consistent with previous communications, and barring surprises in the data, September is the preferred date for the next action by members. What is reaffirmed is the trend of rate cuts. This meeting will take place after the French elections, and although there is still some uncertainty around the composition of the next French government and the prospects for fiscal policy, we do not rule out seeing Lagarde addressing questions about what the ECB could do to protect French sovereign bonds and under what circumstances,” adds Guillermo Uriol, Investment Manager and Head of Investment Grade at Ibercaja Gestión.

Additionally, according to President Lagarde, the strength of the labor market allows the ECB to take time to gather new information. Consequently, in the opinion of Konstantin Veit, portfolio manager at PIMCO, the ECB is in no rush to cut rates further, decisions will continue to be made meeting by meeting, and the data flow in the coming months will determine the speed at which the ECB removes additional restrictions.

“Given the ECB’s reaction function, whose decisions are based on inflation outlooks, core inflation dynamics, and monetary policy transmission, we foresee that the ECB will continue cutting rates in expert projection meetings, and we expect the next rate cut to occur in September,” emphasizes Veit.

Forecast of new cuts

The market currently expects a 25 basis point rate cut in September and another in December/January. However, they identify that the ECB remains open to a slower rate cut process based on the data being published, with a meeting-by-meeting approach.

For their part, investment firms agree that the market is pricing in another 45 basis points of rate cuts for this year and consider that the current terminal rate, around 2.5%, above most estimates of a neutral interest rate for the eurozone, indicates a high concern about last-mile inflation. “Overall, the market valuation seems reasonable and broadly aligns with our baseline of three cuts for this year,” points out Veit.

On the possibility of rate cuts resuming in September, Peter Goves, Head of Developed Markets Sovereign Debt Analysis at MFS Investment Management, argues that it is not yet fully priced in, which leaves some room for an uptick in the event of a 25 basis point cut at that meeting. “This keeps us optimistic about eurozone duration in the short and medium term. European government bond spreads remain relatively tight given the risk of events in France (which turned out to be relatively brief and more idiosyncratic than systemic). We see this as a possible topic to address in the press conference, but we doubt Lagarde will comment on France’s domestic political situation. Additionally, Lagarde is likely to affirm that monetary policy transmission has worked well,” explains Goves.

The ECB’s challenge

For Thomas Hempell, Head of Macro Analysis at Generali AM, part of the Generali Investments ecosystem, the ECB sticks to its data-dependent approach and stressed that wage data plays a crucial role. “On the other hand, official interest rates remain well above the neutral rate. We believe that with the slow downward trend in inflation, the ECB will initiate quarterly interest rate cuts until the deposit rate reaches 2.5%. This broadly aligns with market expectations,” comments Hempell.

In the opinion of Gilles Moëc, Chief Economist at AXA IM, it is paradoxical that central banks are being harshly criticized just as they are about to declare victory over inflation at a manageable cost to the real economy. In fact, he considers that the ECB started cutting rates in June, before clear signs of recession began to accumulate. “We believe it will be tight, but there is a possibility that the ECB will remove monetary restraint quickly enough to avoid a recession phase. We do not expect an emergency cut at this week’s meeting; we believe there would have been clear signals to this effect at the annual conference in Sintra,” he states.

According to his forecasts, the ECB Governing Council meeting should be the occasion to make it clearer that the June cut was only the beginning of a process. “We expect the next 25 basis point cut to occur in September. The market is now pricing an 87% probability of a cut then, and we would put it even higher. It is true that disinflation has stalled, but surveys converge to paint a sufficiently moderate picture of underlying price pressure for the ECB not to wait too long. In June, Christine Lagarde energetically avoided engaging in a discussion about what would be a path to removing restrictions. We expect greater openness this week, largely validating current market prices,” he concludes.

Larry Fink Reaffirms BlackRock’s Commitment to Private Markets

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In the context of presenting the second quarter 2024 results, Larry Fink, Chairman and CEO of BlackRock, reiterated the company’s commitment to private markets. This commitment has been bolstered by the acquisition of Preqin earlier this month.

“BlackRock is leveraging the broadest set of opportunities we’ve seen in years, including private markets, Aladdin, and full portfolio solutions across both ETFs and active assets. At the same time, we are opening significant new growth markets for our clients and shareholders with our planned acquisitions of Global Infrastructure Partners and Preqin,” Fink stated.

In this regard, he highlighted that organic growth in this second quarter was driven by private markets, in addition to retail active fixed income and increasing flows into our ETFs, which had their best start to the year in history. “BlackRock generated nearly $140 billion in total net flows in the first half of 2024, including $82 billion in the second quarter, resulting in 3% organic growth in base fees. We are delivering growth at scale, reflected in a 12% increase in operating income and a 160 basis points expansion in margin,” he said regarding the results.

According to Fink, BlackRock’s extensive experience in engaging with companies and governments worldwide sets it apart as a capital partner in private markets, driving a unique deal flow for clients. “We have strong sourcing capabilities and are transforming our private markets platform to bring even more scale and technology benefits to our clients. We are on track to close our planned acquisition of Global Infrastructure Partners in the third quarter of 2024, which is expected to double the base fees of private markets and add approximately $100 billion in infrastructure assets under management. And just a few weeks ago, we announced our agreement to acquire Preqin, a leading provider of private market data,” he emphasized.

Finally, he insisted that “BlackRock is defining a unique and integrated approach to private markets, encompassing investment, technological workflows, and data. We believe this will deepen our client relationships and deliver value to our shareholders through premium and diversified organic revenue growth.”

Tax Cuts, Tariffs, and Immigration Are Three Key Points in the Event of a “Republican Wave”

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Estados Unidos (PX)

Polls for the U.S. presidential elections indicated a tie, but recent events have shifted momentum towards the Republican candidate, former President Donald Trump (2017-2021). Various hesitations by the current President and Democratic Party candidate, Joe Biden, along with an incident last Saturday where Trump was injured by a gunshot to the ear, have positioned the former president and magnate as the favorite in the race for the Oval Office.

The fixed income markets are reacting to this shift, as the implied volatility of Treasury bonds (measured by the ICE BofAML MOVE index) spiked following the presidential debate on June 27, according to a Morgan Stanley report.

Conversely, major stock indices have continued to rise to new all-time highs, suggesting that equity markets might be ignoring recent political developments.

Morgan Stanley’s Global Investment Committee warns, “Investors cannot afford to be complacent about potential political changes, especially at a time when U.S. debt sustainability is in question, the economy is slowing down, and the Federal Reserve is still looking for evidence that inflation is under control.”

According to analysis by Lisa Shalett, Chief Investment Officer of Morgan Stanley Wealth Management, the current proposals of a Republican triumph, both in the executive and in Congress, could have significant implications in three areas:

Tax Cuts

If Republicans sweep the November elections, the Tax Cuts and Jobs Act of 2017—which reduced tax rates for businesses and individuals and is set to expire at the end of 2025—could be extended and potentially enhanced. The extension of the Act could add around $1.6 trillion to federal deficits over the next decade, according to calculations by Morgan Stanley’s expert team cited by Shalett.

Additional deficits are a critical issue with current interest rates, as the cost of servicing Treasury debt has nearly doubled in the last two years. As federal debt and deficits increase, inflation-adjusted interest rates rise, likely putting pressure on U.S. corporate profits and stock valuations.

Tariffs

Current proposals from the Republican Party include sweeping trade barriers, potentially against historical allies and partners such as Mexico, Canada, and the European Union.

Historically, tariffs have caused a one-time price increase and supply chain disruptions that distort short-term growth. As a result, tariffs could disrupt recent progress toward containing inflation, potentially exacerbating consumer pain and increasing the prospect of “stagflation,” meaning persistent inflation amid stagnant growth, the report adds.

Immigration

Morgan Stanley’s chief U.S. economist, Ellen Zentner, and other researchers have noted that the increase of more than 3 million immigrants to the United States in 2022 and 2023 has had a dual economic benefit: higher population growth and a positive labor supply. This has helped drive higher GDP growth, stabilize housing prices, and reduce wage costs, contributing to lower inflation.

The adoption of radical measures at the border, as suggested in some proposals, could slow the growth of the U.S. working-age population, which could drag down the economy and reignite wage-based inflation.

Investment Implications

Considering all these factors, portfolio adjustments may be necessary, warns Morgan Stanley.

Investors should consider adding what could be leaders in a Republican sweep scenario, such as energy, telecommunications, and utilities.

Additionally, they should consider positioning portfolios defensively, focusing on investments that offer growth at a reasonable price, in areas such as healthcare, industrials, aerospace and defense, certain energy generation and grid infrastructure, the financial sector, and residential real estate investment trusts.

Additional exposure to Japan, gold, hedge funds, and investment-grade credit may also be beneficial, concludes the report.

Financial Advisors Remain Hesitant About Crypto as Blockchain Mining Hits Historic Lows

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Financial advisors continue to show reluctance towards cryptocurrencies, and the current landscape does not seem to favor a change in this trend as the profitability of mining these assets is at its lowest in the last six years.

According to The Cerulli Edge-U.S. Monthly Product Trends, 13.7% of financial advisors use or discuss cryptocurrencies with their clients, of which only 2.6% make recommendations. Another 26.4% hope to discuss or use cryptocurrency investments with their clients in the future, meaning that more than half do not expect to ever do so.

The report, which analyzes mutual fund and exchange-traded fund (ETF) product trends as of May 2024, explores the adoption of cryptocurrencies by financial advisors.

With $19.4 trillion in assets, the mutual fund structure remains an industry giant (even if product development focuses elsewhere), growing 3.3% in May through strong market returns. U.S. ETFs closed May with $9 trillion in assets, a new record for the structure, gathering strong flows ($89 billion in May) across a range of exposures, increasingly including active products.

With fees mostly within a narrow margin, brand familiarity is the differentiating factor that decides winners in the passive digital asset product ecosystem, and the same should be expected for future products.

In general, spot-priced Ethereum ETFs are not expected to achieve the same success as spot-priced Bitcoin ETFs, given the lesser acceptance of futures-based products and the lower expected total return relative to direct ownership of staked digital assets.

However, Kurt Wuckert Jr., CEO and founder of Gorilla Pool, warned about a massive shift in the Bitcoin mining economy while speaking to an audience in Miami at the Crypto Connect Palm Beach event.

“I cannot in good conscience ask you to spend your money on blockchain assets or mining equipment due to what is happening in the background right now. SHA256 blockchain mining is near its lowest profitability in six years, even though the price of BTC is still hovering near all-time highs,” Wuckert commented.

For many years, there has been an idea in Bitcoin that the price follows its hash rate as a kind of leading indicator. This notion has especially prevailed among BTC proponents, who have long maintained that as more computational power is dedicated to mining, the price of BTC will naturally rise. However, recent events, especially those observed in BCH and BSV, have debunked this myth, revealing a more complex and (in some cases) manipulated relationship between price and hash rate.

Although Bitcoin was never designed to deal with arbitrage between multiple SHA256 chains that refuse to orphan each other, the BSV blockchain has provided clear evidence that not all hash behavior is directly speculative. The fallacy that price follows hash is being exposed, particularly under the scrutiny of regulators, who are increasingly adept at identifying market manipulation in this area, adds the firm.

Evidence of this is that the largest hash companies in the U.S. are now publicly traded, and the price of their shares is added to the calculation of the company’s total profitability. Additionally, the simple fact of being a large consumer of electricity through hashing also creates profit opportunities in energy arbitrage, curtailment deals, and things like carbon credits, severely muddying the waters of Bitcoin’s basic hash economy, Wuckert explained.

This year, 54% of all BTC blocks have been mined by just two mining pools: Foundry USA (29%) and AntPool (25%), while another 23% have been mined by the third and fourth pools. In other words, more than three-quarters of all BTC blocks can be attributed to four mining pools, concludes the Gorilla Pool report.

Ameris Converts One of Its Real Estate Debt Funds Into a Semi-Liquid Fund

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(cedida) Martín Figueroa, socio de Ameris

With six years of track record in the rearview mirror, the sixth real estate debt fund of the specialized manager Ameris Capital is entering a new stage. Taking advantage of market trends and aiming to expand its investor base, the Chilean investment boutique decided to convert the vehicle into a semi-liquid fund.

The vehicle in question, called Ameris Deuda Inmobiliaria VI – or ADI 6, as it is known at the firm – invests in financing real estate developers that require capital to carry out their projects under various structures. This includes preferred equity, mezzanine capital, cash flow advances, or any other structure with solid guarantees, as described to Funds Society by the firm’s partner, Martín Figueroa.

The fund, explains the executive, “had its contributions limited because the market conditions necessary to increase its assets were not present.” This led the manager to start reinvesting resources in new projects as previous ones matured. “Being a fund with a portfolio of 15 projects, in which it invests with different maturity dates and periodic cash flows, we were able to structure it to provide liquidity to investors,” he explains.

The key moment for the vehicle’s conversion came at the end of May this year, when the manager convened the fund’s investors – through an extraordinary shareholders’ meeting – to vote on extending the strategy’s term by four years and changing the regulations to provide liquidity. With the approval of the shareholders, these changes took effect on July 1st.

What prompted this decision? “The products demanded by investors have been changing, and we as an AGF must adapt to what investors demand. Today, interest rates are high, so the opportunity cost for investors is higher. If we don’t adapt, they will prefer other alternatives that, although yielding slightly less, offer liquidity,” he notes.

After over a decade of offering private debt investment alternatives, initially only to institutional and select private investors, Ameris is looking to expand the investor base for these strategies.

The Strategy

The ADI 6 vehicle aims to generate returns by supporting an industry that has been particularly impacted in recent years: real estate.

Its investment thesis, Figueroa explains, is based on the real estate market and its companies being in a state of stress, making it difficult for them to secure the necessary capital to develop their projects. “We want to help them continue developing their business in exchange for solid guarantees,” adds the Ameris partner.

Currently, the portfolio comprises 15 projects diversified across different geographical areas of Chile. “These are apartments that we believe will be sold without any issues because they are simple projects in good locations,” he explains.

The backdrop to this operation is a growing appetite for private debt funds, now that interest rates – and consequently, the returns on time deposits – have been declining. “Private debt was in high demand a few years ago, then it fell out of favor when deposits were paying 1% per month, and now that it has normalized, it is becoming attractive again,” Figueroa explains.

In this context, private debt is an area that Ameris Capital is keen to continue developing, not only for its role in the market and country’s development but also because “it is an asset that should be in every investment portfolio, just as it is in more developed countries,” according to the executive.

Larger Funds, Private Markets, Active ETFs, and Long-Term Themes: What Thematics AM Has on Its Radar

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Thematics AM, an affiliate of Natixis IM, is celebrating its fifth anniversary. The asset manager, specialized in thematic investing, has focused on developing a range of global, actively managed, high-conviction thematic equity strategies. Currently, they manage €4 billion in assets and have grown from a founding team of six people to 24. We discussed the firm’s future plans and their perspectives on thematic investing in this interview with Karen Kharmandarian, the firm’s CIO and co-manager of the AI & Robotics strategy.

What is your assessment of the firm’s first five years?

Overall, very positive. Firstly, the company has grown in terms of products. We started with the Water, Safety, Artificial Intelligence & Robotics strategies, and our Meta fund, a multi-thematic product. Over time, we have added new products: Subscription Economy, Europe Selection, which is a multi-thematic strategy focused on European companies, and Climate Selection, also a multi-thematic fund, but focused on companies that comply with the Paris Agreement in terms of temperature trajectory. So, five years later, we have eight products. The first four we launched have reached between €400 million and €700 million, while the most recent ones are smaller, such as the Subscription Economy strategy, which is around €85 million. Looking ahead, our intention is for these funds to continue growing until they reach a critical size. This means we need to build trust in all of them.

What is your outlook for the next five years?

Assuming we continue generating good returns and trust, we want to keep identifying attractive investment themes while maintaining our DNA. That is, not just ‘trendy’ themes, but products that truly make sense from an investment perspective for clients, and that, in terms of investment, we have an investable universe that makes sense, allowing us to be exposed to different drivers, with diverse growth engines, offering regional and sector diversification, and where we can move with agility and flexibility to manage with a long-term vision. Our vision is to build thematic strategies where we can offer what we call ‘thematic alpha,’ where our active management adds value compared to the general market performance.

Are you considering taking this same vision and thematic strategies to the private market?

Not at the moment, although it is something we consider in the medium to long term. It would give us the opportunity to leverage our experience and identify companies that are growing rapidly in the unlisted space early on. It would require a different skill set and fully dedicated teams because you can’t cover the same number of companies as in the listed space. For now, we still see some opportunities in the listed space, especially in the middle ground between these two worlds, between the unlisted space and what we do on the listed side. Maybe in these earlier-stage companies, recently IPO or post-IPO, where we have some emerging trends appearing, but we don’t have an investable universe with too many companies. We could perhaps combine different emerging trends into a single strategy with highly promising, high-growth companies, dynamically managing these different themes within the same vehicle.

As active managers, do you find the active ETFs business attractive? Many asset managers indicate that it is a way to implement an active strategy in a more efficient vehicle. Is this something you consider for your business?

The ETF business is something we didn’t consider in the past because they were mainly passive and index strategies. But today, with these active ETF vehicles, you can do practically the same as we do in our UCITS funds, just using a different wrapper for the product. Having said that, we are quite indifferent to the vehicle itself; we can use a UCITS as we could an ETF. What matters to us is that the vehicle allows us to do exactly what we do in terms of how we manage the strategies: active management, conviction-based, fundamental stock selection, and truly having this long-term vision. As long as we can do that, if the client wants an ETF instead of a UCITS fund, we’ll do it. What matters to us is not altering our philosophy, our investment process, and the investment approach we apply to a specific theme. This offers us another potential growth opportunity and opens up a new set of clients who might not have been considering UCITS products. Perhaps this is also a sign of the times.

We have seen some investor disenchantment with thematic investing; why has it lost popularity?

We have seen tremendous growth in thematic strategies over the last, say, 10 years. The level of commercial traction and interest from all types of investors, from retail to institutional, has grown dramatically over the last 10 years. This is also a recognition of the current market reality, where sector classification or regional allocation makes less and less sense. With the success of thematic investing, new fund managers and asset managers also considered thematic strategies as a commercial hook for their products. A context was created where global equity products had become thematic strategies, but without really adopting the DNA of what a thematic strategy is and without generating very attractive returns. This disappointed the market.

In this regard, what is your approach?

For us, thematic investment strategies need to be based on long-term trends. We need to ensure that we have powerful trends that support superior growth for many years and that have enough depth and breadth of investable universe. Some of the requirements we have for our thematic strategies are: it must be enduring, it must have a significant impact, it must have a broad scope, and it must be responsible. These four criteria are really key to considering whether we see the theme as viable or not.

From the perspective of clients and investors, how do they use these strategies in their portfolios?

It depends a lot. There are common characteristics among all investors, and then there are specific objectives or requirements of some clients. Initially, we saw that thematic strategies started with retail clients, as a response to a matter of convictions and also because they are easy-to-understand products. Now we have detected that it has spread to private bankers, family offices, and institutional investors. This profile considers thematic strategies as a ‘satellite’ within their core investment portfolio and also as a bet on a specific theme to drive and diversify their performance. Progressively, we have also seen that clients are becoming more sophisticated and have moved towards thematic strategies as part of their overall allocation.

Which themes are investors most interested in now?

I would say, without a doubt, that AI and robotics are very much on the clients’ radar today because they see how their daily lives are being radically changed by AI, generative AI, OpenAI, etc., and how this can bring significant changes in the way they interact with technology. Water is also becoming a relevant theme again. Although it seems like a mature theme that has been around for many years, we see that people realize that with climate change, it is gaining new momentum. And I would also mention safety, which is regaining relevance in a context of geopolitical tensions and wars.

Cocoa: The Price Volatility Does Not Diminish the Appeal of This Agricultural Commodity

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In the course of 2024, the price of cocoa has doubled, making one of the greatest pleasures we know, chocolate, more expensive. Specifically, in April, the price of cocoa on the New York Stock Exchange reached its historical maximum at $11,500 per ton, then moderated and slightly decreased in the following months. After reaching these historical peaks, prices reversed the trend and fell by 15%, but it seems they will surge again and continue to grow over time after this correction.

Investors recognize that this agricultural commodity has great long-term appeal, despite the price volatility driven by drought and climate change affecting production. According to Bank of America, it is likely that cocoa price volatility will continue in the short term. The uncertainty around supply and its implications for spot and future cocoa contracts is the main topic of discussion with their clients. According to their latest report, cocoa harvests for 2023/2024 are expected to decrease by 25% to 30% in West Africa, a region that represents half of the global supply.

In fact, the situation has even led the government of Côte d’Ivoire to limit the delivery of cocoa supplies during the mid-crop (May-July, approximately 20% of annual production) to companies with local grinding capacity. In this regard, Bank of America analysts consider that price and futures volatility for cocoa will continue until the end of August, when projections for the main 2024/2025 crop become clearer.

Better harvest production could translate into a price increase for final products such as chocolate. Bank of America believes that major cocoa and chocolate brands will increase their prices by double digits to compensate for cocoa inflation during this period, considering a future cocoa price of approximately $6,000 per ton by 2025. “Reflecting cocoa price inflation, the impact of chocolate price increases on volume (elasticity) and mix (shift to more affordable products) will be key. However, the current price waves occur after two years of double-digit price increases, questioning historical elasticity patterns, especially in the U.S. market, which has been weak so far,” Bank of America points out in its report.

According to NielsenIQ data in the U.S., chocolate market sales have been weak so far this year, with volume down approximately 5% (and value up about 1%), clearly showing some cracks on the elasticity side. In BARN’s opinion, the main culprit remains the structure of the U.S. chocolate market, which is overrepresented in the mass market. The low representation of private labels and value brands (4% and 10% of volume, respectively) means there is a limited supply of low-priced products to prevent consumers from “abandoning” the category. In Western Europe, chocolate market sales have been resilient, with volume down about -2% (and value up about +8%). The main strength of the European market, according to BARN, is its more balanced nature compared to the U.S.

In Bank of America’s view, one of the risks for BARN is the possibility that some of its clients might reformulate their recipes to reduce cocoa content, especially in the U.S. market, to limit their own cost inflation. Although BARN has reformulation capabilities, this would be a volume obstacle as it would cannibalize sales or lead to a net revenue loss if not recovered.

As seen in the first half of 2024 results, Barry’s balance sheet is very sensitive to cocoa price movements, predominantly affecting working capital through the margin call on their short cocoa futures (reflecting the forward purchase agreement). Although the pressure on free cash flow will be intense in FY24 (BofAe: CHF -1.4bn), BARN has the necessary liquidity to face it with: 1) CHF 700 million bonds issued on June 10; 2) CHF 730 million bonds issued on May 5, 2024; 3) a CHF 500 million RCF available; and 4) approximately CHF 430 million in cash available in the first half of 2024 results.

Although it may take time to rebalance the supply and demand of cocoa, this will happen eventually, according to the report. Beyond the positive volume elasticity in the chocolate category resulting from a deflationary environment, in our opinion, the key positive for Lindt will be its ability to retain price increases, which will imply a tailwind for gross margin, likely translating into increased spending on advertising and promotion to continue nurturing brand value. Conversely, Bank of America estimates the impact will be less beneficial for BARN beyond the positive elasticity of the category, as prices will mathematically decrease for them considering the cost-plus model structure.

*Harvests begin in October.

LarrainVial AM Expands Perspectives on the Chilean Economy at Its Seminar

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(cedida) XX Seminario LarrainVial Asset Management

How to get back on the growth path? This is a frequent question in Chile, and LarrainVial Asset Management, one of the leading investment houses in the Andean country, made it the central focus of the latest edition of its annual seminar. To address this, the event—celebrating the 90th anniversary of the investment house’s founding—offered a variety of perspectives, including reflections on the economy, society, and culture in the country.

After a welcome speech from Ladislao Larraín, the general manager of the firm, and an introduction by José Manuel Silva, partner and investment director of the firm, the audience at the W Hotel in Santiago received Sergio Urzúa, economist and professor at the University of Maryland and Clapes UC; María Olivia Recart, economist, former undersecretary of state at the Ministry of Finance and President of Comunidad Mujer; and Cristián Warnken, professor of literature, writer, and communicator.

The three guests at the event analyzed the factors explaining the weak performance of the Chilean economy in recent years and the measures that can be taken in response.

Lost Time

“We must hurry in the search for lost time,” warned Sergio Urzúa in his presentation, calling for “awareness” about the local economy’s situation and the “squandering” the country has done with it, in his view.

The deterioration of the economic momentum in the Andean country, the economist noted in his presentation, began in 2014 and is “a local phenomenon,” not a global one. Additionally, he pointed out, there has been a significant “institutional deterioration.” A reflection of this, he indicated, is the gradual reduction in the country’s credit rating.

What happened? “Anxiety is what played against Chile,” he said, referring to a change in the population’s mindset that led the economy “from jaguar to polar bear,” according to the economist’s analogy.

Some particular variables, he asserted, constitute “silent tax reforms”: the burden on human capital, with various factors impacting potential growth; organized crime, which is becoming a sort of tax equivalent to around 5% of GDP; and the “tax agreement in the living room,” where the fall in real income and the rise in the price per square meter have led 35% of people aged 25 to 35 to live with their parents or in-laws.

Looking ahead, the economist called for “accepting the loss,” acknowledging the lost economic dynamism to bring about change. Additionally, Urzúa urged focusing on three key factors: investment, employment, and education.

We must act now, in the economist’s view, noting that only 5% of countries that have had similar “economic slowdowns” to Chile have managed to reverse them. “Let’s start acting. Let’s set goals,” he indicated.

The Distribution Problem

“To grow again, we need to improve income distribution,” said María Olivia Recart as she took the stage. The issue of equity, she assured, is fundamental to achieving sustainable economic growth.

In this sense, the economist indicated that while it is necessary to address the issue of slow permits in the country, the business sector also has a role to play. “It’s not just about unlocking public policies,” she commented, but companies also need to have a long-term vision to prepare for future threats.

Regarding work, the professional emphasized that there is a “huge gap” in women’s labor participation, with career paths diverging from men’s after having children due to the burden of childcare. “We need universal daycare,” urged the professional.

Additionally, she noted, there is an education problem that goes beyond the public sector. “Our training systems are in crisis,” the economist indicated, adding that “it’s the system. Not just public education.”

Regarding the productivity problem in the country, Recart said that “we must start from the micro and go to the macro.” It’s not just about modernizing the state, she commented, but there are also shortcomings in business management. Especially considering the contextual factors on the table, such as climate change, artificial intelligence, labor market informality, and the deterioration of democracy worldwide.

What remains to be done in the short term, then? For Recart, five key points are: focusing on things that directly affect people, such as service quality in companies and ease of procedures; creating social value; more dynamic public policies; impacts on specific groups; and looking at resilience variables, such as water usage.

The Cultural Factor

The diversity of the panel was expanded by the participation of Chilean intellectual Cristián Warnken, who replaced PowerPoint presentations with a selective pile of books and opened his presentation with a quote from “The Divine Comedy” by Italian poet Dante Alighieri.

The writer and communicator used the protests that marked a long period of political turbulence in Chile, known locally as the “social outbreak,” as an illustrative case. “There is a relaxation of the elites,” he indicated at the LarrainVial event, emphasizing that the elites have “responsibility” in the upheavals.

For the thinker, in addition to a relaxation of “ethical barriers”—with notorious cases of collusion and corruption, for example—the disconnection of the ruling social classes meant that no one could foresee the advent of the protests. And the interpretations were also disparate in the political sphere: while the left saw the process as a demand for revolution, the right chose to deny the existence of popular discontent.

“We are left without a narrative, we are left without leaders,” Warnken said, adding that “crises are not just political and economic” but also spiritual and cultural. In this sense, the thinker assured that Chilean society is currently seeing the effects of phenomena such as the impoverishment of education and the deterioration of civic culture.

What comes next? For the literary figure, “we need order,” but one that is “framed within another order.” In this vein, he called for caution against authoritarianism: “We don’t need a Bukele. Get that out of your heads.”

Have The Elections In The U.S. Had Any Effect On The Performance Of Private Equity?

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In four months, American voters will go to the polls, and for now, the candidates are set with Republican Donald Trump seeking to return to the White House, and current President Joe Biden, who must decide whether to continue in the race after doubts about his candidacy emerged following the debate on June 27.

In this context, American and global investors are increasingly focused on the various aspects surrounding these elections and what has happened in other electoral periods, especially concerning the markets and their indicators. Along these lines, an analysis by Neuberger Berman Group explores what happened during past electoral processes with private equity, in a report prepared by Ralph Eissler, Managing Director and Head of Private Markets Research, and Yiran Wang, Private Markets Advisor.

Among the most important conclusions of the analysis is that while there was some seasonality in private equity performance, on average – the fourth quarter of the year has seen stronger performance and more private equity fund distributions – this effect does not appear to be related to the election cycle.

Moreover, while there is superficial evidence that private equity performs better under Democratic presidents, it does not hold up to deeper analysis, as both the seasonality of private equity returns and its long-term cyclical nature are more attributable to the broader economic and market context.

In the context of the U.S. election season – which will likely have consequences in many ways – it is concluded that investors should continue to follow their strategic private market allocation plans.

Finally, Neuberger Berman Group states that there may be valid inferences and headwinds for certain sectors and industries based on the results of the November elections, but there is little historical evidence that they will have a predictable effect on overall market performance or the relative attractiveness of private equity as an asset class.

A Bit of History

The analysis starts from 1984 and includes a total of 10 election years and 30 non-election years. The first data point indicates that, on average, the performance or volatility of private equity in election and non-election years is very similar, with a rate of 17.8% versus 17.3%, respectively. However, the volatility itself appears to differ, as the annualized standard deviation of quarterly returns during the 10 election years since 1984 is 8.36% versus 6.34% in the 30 non-election years.

However, analysts point out that this is a figure that should not be considered highly relevant, as there has been some exceptional volatility since 2000 that increases the numbers. For example, in 2004 the electoral process went smoothly in terms of private equity returns, as did in 2012 despite the Eurozone debt crisis, and the same for 2016 despite Donald Trump’s unexpected rise as the Republican Party’s presidential candidate.

In contrast, volatility was associated with the year 2000, with a historic boom and bust in sectors heavily represented in private equity; in 2008, when one of the worst financial crises of all time hit; and in 2020, with the onset of the global COVID-19 pandemic.

Fourth Quarter, Clear Effect, But…

Another question the analysts who prepared the document ask is whether U.S. elections have affected private equity performance in the fourth quarter, considering that this process takes place during that period.

In this case, at first glance, there appears to be something: in five of the 10 years (1988, 2000, 2004, 2008, and 2020), fourth-quarter returns deviated significantly from the rest of the year’s performance. However, in three cases, there is a solid explanation: in the fourth quarter of 2000, the dot-com bubble began to deflate; in the fourth quarter of 2008, the consequences of the Lehman Brothers collapse were felt; and the fourth quarter of 2020 benefited from the rebound from the impact of COVID-19.

In the case of the 1988 and 2004 elections, the evidence suggests that the elections may have had an additional effect. In other words, there is specifically a fourth-quarter effect (as opposed to, say, a first-and-fourth-quarter effect, or a second-and-fourth-quarter effect). And most importantly, that fourth-quarter effect is clearly visible and of almost exactly the same magnitude, both in election years and non-election years.

Therefore, there appears to be something notable in fourth-quarter private equity returns, but it is evidently not related to U.S. presidential elections. Analysts point out that the fourth quarter is important regardless of whether it is an election year.

Long-Term Performance Effects

Due to the illiquid and long-term nature of private equity investments, it is also necessary to analyze what has happened over a broader time horizon. The firm’s experts analyze the 40 years from their baseline and define four categories: divided government led by a Democratic president, unified government led by a Democratic president, divided government led by a Republican president, and unified government led by a Republican president.

At first glance, there is no uniform picture of whether the stock markets in general perform better under a divided or unified regime. However, U.S. stock markets tend to perform better under Democratic presidents than under Republican presidents, despite the widespread belief that Republican policies are more business-friendly.

For example, unified Democratic governments were elected in 2008 and 2020, during the global financial crisis and COVID-19, and the immediate post-recovery years, 2009 and 2021, recorded an average annual return of 30.0% for the private sector and an average annual return of 27.6% for the S&P 500 index.

Meanwhile, unified Republican government coincided with more positive gains in the stock markets than a divided government under a Republican president. Under Democratic presidents, the markets performed better on average when the government was divided. Overall, the markets seem to have slightly preferred unified governments.

Still, they highlighted that ultimately, while politicians of all stripes may deserve some credit for supporting or at least not derailing economic cycles, it is the broader economic and market context that determines investment performance, rather than who runs the government or whether they are unified or divided.

AI and Climate Change Top the Priorities of the Insurance Industry

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The International Insurance Society (IIS) has published the results of its 2024 Global Priorities Survey, revealing that, for the first time, artificial intelligence (AI) has emerged as the top priority in Technology and Innovation. More than half of the respondents highlighted its importance, marking a significant increase compared to previous years.

Despite AI’s potential to enhance operational efficiency, over a third of executives reported that their companies are not prepared for its rapid advancement. Concerns include the “slow adaptation of the sector to technological changes and the need for extensive retraining due to an aging workforce.”

The survey, distributed to nearly 20,000 senior executives in the insurance industry worldwide, provides a comprehensive view of the sector’s top priorities. These priorities span Economic, Political and Legal, Social and Environmental, Operational, Technology and Innovation, and Business and Financial categories.

On the other hand, climate change continues to dominate the Social and Environmental agenda, with 60% of industry executives prioritizing it for 2024.

The increasing frequency and severity of natural disasters pose significant challenges, including difficulties in predicting future losses and rising costs that could destabilize insurers, governments, and consumers. These risks are exacerbated by the fact that a quarter of respondents feel their companies are not prepared to address this issue in 2024, the study adds.

Regarding economic concerns, inflation remains the top priority for the third consecutive year, although fears of recession have decreased since their peak in 2022.

Cybersecurity remains a critical concern, with executives emphasizing the need for robust protection against emerging cyber threats related to AI.

The survey also explores growth opportunities, revealing that product innovation is the main focus for two-thirds of executives.

Most respondents plan to target new customer segments or underserved segments, while more than half aim to improve consumer trust and engagement. Encouragingly, nearly all respondents feel prepared to pursue these growth strategies.

The Global Priorities Survey will inform discussions at the 2024 Global Insurance Forum, which will take place from November 17 to 19 at the Hyatt Regency Miami.