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The Fed Insists on Higher Rates for Longer and Aims for Only One Cut In 2024

Yesterday’s meeting of the U.S. Federal Reserve (Fed) went as expected, with no changes to interest rates yet, but it did convey some clear messages. One of the most relevant was that the Fed sees less need and urgency to ease its monetary policy but still leaves the door open for cuts this year. The key point is that, in the short term, it expects inflation figures higher than anticipated at the beginning of the year, although its long-term projections still show inflation returning to 2%.

“Central bankers delivered a seemingly aggressive surprise at the June FOMC meeting. The updated median projection for the federal funds rate, or dot plot, now indicates a single rate cut by the end of the year, compared to three expected in March. This change of opinion was likely due to a slight improvement in inflation expectations for this year and next,” says Christian Scherrmann, U.S. economist at DWS, regarding his overall view of yesterday’s meeting.

Regarding this change of opinion, Jean Boivin, head of the BlackRock Investment Institute, points out that the Fed has done this several times before, so they don’t give much weight to its new set of projections. “Powell himself said he doesn’t consider it with high confidence, emphasizing the Fed’s data-dependent approach. Regardless of the Fed’s forward guidance, incoming inflation surprises, in any direction, will likely continue to lead to significant revisions in policy expectations,” he explains. Boivin believes that given the lack of clarity from central banks on the path forward, markets have become prone to reacting strongly to individual data points, as we saw again today with the post-CPI jump in the S&P 500 and the sharp drop in 10-year Treasury yields.

For Raphael Olszyna-Marzys, international economist at J. Safra Sarasin Sustainable AM, Powell’s message was very balanced. “Although the dot plot shifted upwards, and most officials do not expect any cuts or only one this year, they are also very aware that maintaining a restrictive policy for too long could unduly harm the labor market and the economy. So far, the labor market is much more balanced, which should allow for a downward trend in inflation,” he argues.

What does this mean?

In the opinion of David Kohl, chief economist at Julius Baer, the updated summary of economic projections suggests that only one rate cut in 2024 and higher rates in the long term are appropriate. “The increase in inflation forecasts and the maintenance of growth expectations confirm the view that the FOMC wants to keep interest rates high for longer. The latest U.S. inflation figures, which were surprisingly low, were well received and increase our confidence that the Fed will cut its benchmark rate at its September meeting. We expect the Fed to pause from then and cut rates once more in December in response to a cooling labor market and easing inflation.”

For Kohl, the appropriate path for the federal funds rate has changed significantly for 2024: “Four FOMC participants do not see the need for rate cuts in 2024, seven advocate for one rate cut, and eight for two rate cuts.” This means, as he explains, that the median projection for 2024 has moved towards one rate cut and a preference for cuts in 2025. “The longer-term rate projection has increased, confirming the view that the FOMC wants to keep interest rates high for longer. The adjustment of the long-term rate path is an important acknowledgment that the U.S. economy is withstanding higher interest rates much better than feared,” says the chief economist at Julius Baer.

This view is also shared by James McCann, deputy chief economist at abrdn. “In reality, the median FOMC member now expects only one rate cut in 2024, compared to the three expected in March. This change in stance is likely due to higher-than-expected price growth in early 2024, which forced FOMC members to revise their inflation forecasts upwards once again. However, yesterday’s lower-than-expected CPI inflation surprise was much more encouraging, and with most members divided between one or two cuts, we wouldn’t be surprised to see the market continue to flirt with the option of multiple rate cuts this year,” adds McCann.

Alman Ahmed, global head of macro and strategic asset allocation at Fidelity International, emphasizes that during the press conference, Chairman Powell stressed the importance of incoming data flow, especially on the inflation front. “We have seen the Fed completely abandon any dependence on forecasts to set its policy, so we continue to expect it to maintain its current data-dependent approach,” he notes.

Forecast on rate cuts

In Ahmed’s opinion, his base case is that there will be no cuts this year, but “if inflation progress continues during the summer months or labor markets begin to show some signs of strain, the likelihood of one increases,” he explains. That said, he adds: “The U.S. economy continues to hold up, and yesterday’s release was affected by vehicle insurance components and airfares, meaning the bar for starting cuts remains high.”

Conversely, from Julius Baer, Kohl points to September, followed by another cut in December, and gradually reducing the official interest rate in 2025 with three more cuts. “The latest U.S. inflation data, which surprised to the downside in May, increase our confidence in a rate cut at the September FOMC meeting, while further cooling of the labor market in the second half of the year should motivate another round of policy easing at the December meeting,” he argues.

According to Scherrmann, more time will be needed for the term “progress” to move from the press conference to the post-meeting statement, where it would serve as a definitive signal for a first rate cut. Meanwhile, he believes the Fed must avoid scenarios like those in the fourth quarter of 2023, when financial conditions experienced unnecessary easing due to rising rate cut expectations. “Given the inconsistencies observed during the June meeting, we conclude that this goal has been successfully achieved for now: markets have discounted slightly less than two cuts in 2024, a slight decrease from pre-meeting expectations. As we connect the dots, we are likely to agree with this assessment,” defends the DWS economist.

Fed vs. ECB

In the opinion of Wolfgang Bauer, manager of the fixed income team at M&G Investments, these days we are witnessing a strange “mirror world” between central banks. “After the ECB cut interest rates and revised up its inflation forecasts last week, the Federal Reserve did exactly the opposite. Just hours after the release of surprisingly low inflation data, the Federal Reserve decided to keep interest rates at current levels and, more importantly, revised up its dot plot, indicating that it would only cut rates once this year. The Federal Reserve’s caution is likely to help the ECB hawks delay further rate cuts for now. Although the economic situation in Europe is different from that in the U.S., it seems unlikely that the ECB will proceed with monetary policy easing while the Federal Reserve remains on hold,” comments Bauer.

From eToro, they believe that this latest update also underscores that the Fed does not feel pressured to lower rates, as other G7 central banks (such as the BoC and ECB) have recently done.

Fixed Income and Technology: Alternatives to a Strong Economy That Delays Interest Rate Cuts

| For Amaya Uriarte | 0 Comentarios

From left to right: Tiago Forte Vaz, María Camacho and David Hayon | photo: Funds Society

The Rise of Artificial Intelligence and Central Bank Rates in the U.S. and Europe open opportunities for investments in both technology and Fixed Income, said experts from Pictet and Edmond de Rothschild at an event in Montevideo.

The experts, Tiago Forte Vaz, CFA, Head of Intermediaries at Pictet for Uruguay, Brazil, Portugal, and Argentina, and David Hayon, Head of Sales Latam at Edmond de Rothschild Asset Management, commented on the macroeconomic scenario, agreeing that the U.S. economy is strong, which is delaying interest rate cuts.

“The resilience of the U.S. economy is noteworthy. Even Fed members weren’t this optimistic. There was talk of a recession. Rate cuts were expected, and everyone was wrong,” commented Hayon.

Forte also emphasized that inflation is the most important issue to address and noted, “The year started optimistically, but central banks didn’t adjust until September.” The expert added that this is a significant risk as the Fed “lost credibility and is willing to tolerate a greater slowdown to avoid inflation.”

Hayon, for his part, supplemented the comment by explaining that Europe has more control over inflation but will try to align rate cuts with the U.S. to avoid generating inflation.

Geopolitical Risks

Both experts said that “it is impossible not to talk about geopolitical risks.” It is a latent conflict that could escalate, commented Forte.

However, Hayon tempered this by stating that they do not believe Europe will intervene militarily in the conflict. “We don’t imagine French troops in Ukraine,” said Hayon, adding that it is believed “the conflict will be played out in negotiations to achieve an end to the conflict and avoid escalation.”

Another geopolitical risk is that 70% of the population will have elections this year. Among the most notable countries are the U.S., India, Mexico, and Russia. “This environment creates tension and uncertainty that is difficult to diversify at the portfolio level,” added Forte.

The event, moderated by María Camacho, founding partner and director of strategy at LATAM ConsultUS, also included time for strategy presentations.

Pictet: Artificial Intelligence, Bubble or Opportunity?

Forte began by asking the audience, consisting of financial advisors from the Montevideo industry, whether it is still a good time to invest in Artificial Intelligence (AI).

The regional representative emphasized the concept that technology is overvalued in the present and undervalued in the future. Forte added that it is expected that spending on technology as a percentage of GDP will double.

He also noted that although the world has already been revolutionized by AI technologies, they are still in an early stage. However, “it is growing at an exponential rate.”

Regarding investment challenges, he mentioned the tension over semiconductors between China and Taiwan and “sufficient opportunities” in public markets for these strategies.

Edmond de Rothschild: Fixed Income Still Attractive

From Edmond de Rothschild, Hayon highlighted the importance of fixed income, especially in developed markets.

The expert pointed out that although spreads have narrowed significantly, total returns are good due to high rates and warned, based on the rate context explained, that there is still time to invest in these assets and achieve very good returns.

He also commented on the benefits of subordinated fixed income. Hayon emphasized the possibility of buying hybrid bonds, where the investor buys bonds with the security of investment grade but with the yield of high yield. “Buying subordinated debt from banks and insurers will pay well,” he elaborated.

During the presentation of the EDR SICAV Millesima select 2028 investment strategy, the expert highlighted the high risk of losing reinvestment when in cash.

Today, rates can provide good returns over a year, but fixed income exceeds that return over four years.

When and How: The Great Debate on Interest Rate Cuts in the U.S.

| For Amaya Uriarte | 0 Comentarios

The latest macroeconomic data confirm the robustness of the U.S. economy, presenting a significant debate for the U.S. Federal Reserve (Fed). From today until Wednesday, the Fed will hold its meeting, according to asset managers, with all the necessary ingredients: updated labor market and inflation data; economic projections; various perspectives within the FOMC; and Jerome Powell’s press conference. What should we pay the most attention to?

According to Erik Weisman, Chief Economist and Portfolio Manager at MFS Investment Management, perhaps the most important thing will be whether the Fed considers the April consumer inflation figures to be low enough to mark the start of a weakening trend. “The Fed has indicated that it needs to see several consecutive months of significantly more controlled inflation before beginning to cut interest rates. It is unclear whether the April data on the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) meet these criteria. This may be clarified during the press conference,” he notes.

Secondly, Weisman adds, “Another interesting point is the long-term dots, which indicate what the Fed considers its nominal neutral policy rate. Last quarter, the long-term median dot increased for the first time in a long time. Most market participants believe that the nominal neutral long-term Federal Reserve funds rate should be considerably higher.”

Cristina Gavín, Head of Fixed Income and Fund Manager at Ibercaja Gestión, believes that over the past few months, the Fed has been moderating its discourse regarding the path of rate cuts. “The most interesting thing, as with the ECB, will not be the announcement of maintaining the intervention rate, but Powell’s subsequent speech, where he will assess the country’s economy and what we can expect for the second half of the year. It is most likely that he will emphasize the need to be patient and wait for more convincing data to begin the rate-cutting process,” Gavín argues.

Main Forecasts

According to DWS, the big debate is about how much and how the Fed will cut rates. “Monetary policy is clearly restrictive from the labor market perspective. However, current inflation metrics do not yet justify a cut. It is no surprise that the Fed sees balanced risks and maintains close vigilance, as well as an open mind about incoming data,” argues Christian Scherrmann, U.S. Economist at DWS. The asset manager believes that in the real world, full of complexity and measurement errors, chaining the Fed to a single policy rule has always seemed like a bad idea. “But arguably the other extreme is even worse: letting elected politicians directly interfere in rate-setting, instead of having an independent central bank publicly committed to a stable framework and accountable for achieving its monetary policy goals,” they state.

“After strong employment data on Friday, expectations regarding rate cuts have cooled, and the market now only prices in one and a half cuts by the end of the year. Since the Fed is not expected to cut rates this week, the summary of economic projections should also reflect that the Committee has reduced its forecast for cuts this year. That is where the focus will be. We believe the dot plot will place the median reference rate closer to 5% by the end of the year, compared to the previous 4.6%. We will also be attentive to the language the FOMC may use to describe its growth and inflation outlooks,” says John Velis, Macro Strategist for the Americas at BNY Mellon IM.

According to Enguerrand Artaz, Fund Manager at La Financière de l’Echiquier (LFDE), market actors’ forecasts for the Fed’s trajectory have rarely been so disparate: some still predict a first cut in July and several more in the coming months, while others do not expect any cuts in 2024. “However, the U.S. is perhaps the country that could offer more visibility soon. Indeed, April inflation data were reassuring after negative surprises in the first quarter; price increases are now only driven by a few components that have little correlation with demand; growth was slightly below forecasts in the first quarter, and the labor market is slowly deteriorating, so the economic outlook, if confirmed, could outline a well-marked path for the Fed,” Artaz notes.

For the Head of Fixed Income and Fund Manager at Ibercaja Gestión, there have been voices that even ruled out cuts for this year. However, her forecast is that “in 2024 we will see a shift in the Fed’s monetary policy bias, with the first cut occurring after the summer. From there, and as long as price developments show a downward trajectory, we would bet on another intervention rate cut by the end of the year, once electoral uncertainty is behind us,” she argues.

Meanwhile, Deborah A. Cunningham, Chief Investment Officer of Global Liquidity at Federated Hermes, notes that despite the warnings at the May meeting, they do not anticipate a rate hike and expect one or two cuts for the remainder of the year. “One thing to note is that the idea of the Fed avoiding rate cuts in September to avoid appearing to interfere with the general elections, foregoing rate action when the data justifies it, could also seem politically motivated,” she explains.

“Canada and the Eurozone have started the cycle of rate cuts in developed markets, following the trend of emerging markets. But it is likely that this week Jerome Powell will confirm that the U.S. will arrive late to the party, as the Fed is not expected to cut rates before September, at the earliest. Global fixed-income investors are already benefiting from rate cuts, while those only exposed to the U.S. will have to keep waiting,” concludes Brendan Murphy, Head of Fixed Income, North America, at Insight (part of BNY Mellon IM).

Data Flows

According to Gilles Moëc, Chief Economist at AXA IM, the market will focus on the new “dot plot” from the FOMC this week. “We expect a change in the median forecasts to two cuts this year, compared to three in March. There is a risk that it will be reduced to just one, but we believe this would eliminate too much optionality, as it would send the message that the Fed cannot cut before the elections,” he explains.

In his opinion, market prices for the Fed changed drastically again last week in response to higher-than-expected job creation data in the U.S. in May, according to the Establishment survey (+272K, compared to a consensus of +180K), accompanied by faster wage increases (+4.1% on a three-month annualized basis, well above April’s 3.0%). Before the publication, two rate cuts were almost fully priced in for December (48 basis points), with 22 basis points already in September. “After the publication, the market was only pricing in 14 basis points of cuts in September and a total of 34 for December. But more than the directionality, it is the confusion that, in our opinion, is the main ‘message’ of the recent data flow from the U.S.,” he nuances.

In this “data fog,” Moëc sees it likely that the Fed’s forecast of its trajectory will be the focal point of this week’s FOMC meeting. “We believe the median of FOMC voters will forecast two cuts in 2024—which happens to be our base case—compared to three in March. Of course, there is a debate around the possibility of maintaining only one cut in the framework, but we believe this would send too harsh a message, indicating that the Fed has given up on cutting before the elections (a solitary cut for 2024 would be interpreted as no easing before December), which we believe would leave the Fed with very little optionality. While time is running out, we still see the possibility that the data flow will clear up enough over the summer to allow the central bank to begin removing some restrictions in September,” he concludes.

In the opinion of Raphael Olszyna-Marzys, International Economist at J. Safra Sarasin Sustainable AM, slower economic growth and a more balanced labor market should reduce inflationary pressures. In his view, the problem is that inflation will take time to return to its target, requiring a gradual approach to monetary policy easing. Nevertheless, given that the labor market has returned to where the Federal Reserve wants it, some Fed members will point to the risk of waiting too long. He believes that the Fed’s new projections could point to two rate cuts this year, but the distribution seems likely to tilt downward.

“The distribution of market participants’ expectations for the federal funds rate at the end of the year will likely shift to the right (a higher official interest rate). While the median ‘dot’ could point to two cuts this year, we believe a greater number of officials will forecast that the official interest rate will only be cut once or not at all this year. Overall, the slower-than-expected progress of inflation could limit the speed and promptness with which the Fed wants to cut rates,” argues Olszyna-Marzys.

While Europe Changes Course, the Markets Focus on the Key Event of the Week: the Fed Meeting

| For Amaya Uriarte | 0 Comentarios

The European Parliament elections have yielded three clear conclusions: far-right parties with an anti-establishment nuance have gained influence; a centrist majority persists; and the results have significantly impacted local politics in France and Belgium. The market’s immediate concern, however, remains on the upcoming decisions by the U.S. Federal Reserve.

According to the initial official results published by the European Parliament, far-right political groups have increased their presence. Nevertheless, the European People’s Party (EPP) emerged victorious with 191 seats, followed by the Socialists and Democrats (S&D) with 135 seats, and the Liberals (Renew) with 83 seats. These results have prompted a snap election in France, as President Emmanuel Macron dissolved the National Assembly and called for legislative elections later this month, and the resignation of Belgian Prime Minister Alexander de Croo, both due to their parties’ losses and the rise of more extreme right-wing parties.

According to Gilles Moëc, chief economist at AXA Investment Managers, the results of the European elections were not expected to trigger a significant shift in the EU’s stance. “Although the overall political space of the major parties is shrinking, the European Parliament has a long tradition of cooperation among the main groups – center-right, liberals, and social democrats – which, based on the national results seen so far, will likely maintain a comfortable majority of the seats together. It may be more difficult to reach the necessary compromises, and changes in public opinion will need to be considered, but a radical change of course is not to be expected. However, the decision of the French president to dissolve the National Assembly, the lower house of the French Parliament, in response to the European vote, changes the perspective,” he says.

Regarding Macron’s decision, Lizzy Galbraith, a political economist at abrdn, explained that “while these elections won’t affect Macron’s presidency, they might force him to work with opposition parties in Parliament, complicating his legislative agenda”. Axel Botte of Ostrum AM highlighted the uncertainty in France, questioning whether the far-right RN could secure a majority government, potentially leaving Macron’s centrist party as the viable option.”In any case, these elections are extremely important with a view to the upcoming presidential elections in 2027.”

According to Mabrouk Chetouane, head of global strategy at Natixis IM Solutions, “the economic and financial consequences of this political thunder are already palpable” in France, where the main stock index, the CAC 40, opened with sharp declines, reflecting market operators’ concerns about the visibility of the French economy’s trajectory. “Reform plans could be abruptly halted by the likely formation of a coalition, which would result in a coalition government in a context where the state of public finances leaves no room for maneuver for the future government. France, a pillar of the eurozone, could find itself in a possible deadlock. This would reduce investor visibility, increase national stock market volatility, and raise the cost of debt… A deleterious trio that would temporarily deter foreign investors from French markets,” Chetouane points out.

Where is the Market Looking?

Against this new political backdrop, the markets are currently calm and focused on what they consider to be the key event of the week: the monetary policy meeting of the U.S. Federal Reserve. The crucial question is whether the Fed will announce its first rate cut of the year this Thursday, following the ECB’s rate cut last week.

To understand what the Fed might do, it’s essential to look at the data. “The latest U.S. employment data gave mixed signals. The ratio of job openings to unemployed workers fell to 2019 levels, suggesting a relaxation in labor market tension. However, the strong growth in non-farm payrolls and the 0.5% increase in average hourly earnings for production and non-supervisory workers could indicate wage inflation pressures. This week’s CPI could help clarify whether the U.S. is enjoying a Goldilocks moment of slowing inflation combined with resilient employment or if inflationary pressures persist,” says Ron Temple, head of market strategy at Lazard.

According to Javier Molina, senior market analyst at eToro, following the latest data on the state of the U.S. economy, the Fed faces significant challenges in achieving its 2% inflation target, given the solid performance of the economy and labor market. “At the next Federal Open Market Committee (FOMC) meeting on June 12, it is unlikely that the Fed will change its guidance on future rate cuts given the lack of confidence in the sustainability of the current disinflationary trajectory,” Molina notes.

Meanwhile, Paolo Zanghieri, senior economist at Generali AM, part of the Generali Investments ecosystem, recalls that in recent weeks, members of the Federal Open Market Committee (FOMC) have called for more patience in easing policy, which will likely result in an upward revision of the median appropriate level for the federal funds rate by year-end. “Our baseline scenario remains two rate cuts (in September and December), with a single cut as the second most likely scenario. More important for long-term rates, the FOMC is likely to continue raising its estimate of the long-term neutral interest rate, an indicator of the level at which the easing cycle will stop. The current median of 2.6%, which corresponds to a real rate of 0.6%, is well below what most analysts think: market-based estimates are consistent with a rate above 3%.”

Implications for Investors

According to Reto Cueni, economist at Vontobel, the election results show a strengthening of far-right “anti-system” parties in Europe, but they have not exceeded expectations. This means the centrist majority remains intact in the European Parliament, likely securing more than 55% of the total votes, while green parties across Europe have lost parliamentary seats.

In his view, this has three implications for investors. Firstly, Cueni notes that this centrist majority provides stability in a Europe facing high geopolitical uncertainty. “For now, this is positive news for investors. However, in the coming weeks, it will be seen if the centrist parties can work together and elect a centrist president of the European Commission for the new five-year term,” he asserts.

Secondly, Cueni believes that the shift towards right-wing “anti-system” parties, which politically oppose the “Green New Deal” and prioritize national security and border control, demonstrates a change in Europe’s political focus. “Investors need to pay attention to the presentation of the programs of the candidates for the next EU presidency, scheduled for mid-July, to understand the parties’ agendas and the political momentum in Europe,” he advises.

Lastly, Cueni adds that the early parliamentary elections in France will increase uncertainty about the political course of Europe’s second-largest economy. Given that the country’s political system makes foreign and defense policy largely a presidential prerogative, “the uncertainty about France’s future cooperation in Europe and geopolitically remains controlled, at least until the spring of 2027, when the next French presidential elections are scheduled.”

Views on the European Elections

Experts from investment firms had already warned that there could be a greater presence of the far right, as some polls had predicted. Nicolas Wylenzek, a macroeconomic strategist at Wellington Management, noted before the elections that these could accelerate a shift in the EU’s political priorities, which could have potentially significant implications for European equities. However, he clarified that this adjustment would depend on several factors, such as the composition of the European Commission, changes in the political landscape of member states, and international events like the war in Ukraine and the U.S. elections.

“While a reduction in administrative burden could be clearly positive for EU companies, I consider the overall shift to be marginally negative. Reforms that promote greater integration, such as banking union and capital markets union, would strengthen the resilience of the EU economy and facilitate growth, while allowing and encouraging the immigration of skilled labor could be important to help limit inflation and improve trend growth,” he explained.

Similarly, John Polinski, vice president and fixed income portfolio manager at Federated Hermes, recently pointed out how the 2024 European Parliament elections could result in the first center-right coalition in the EU, with the European People’s Party joining forces with the European Conservatives and Reformists and Identity and Democracy. According to Polinski, this change could moderate environmental and migration policies and alter spending and debt dynamics within the EU. “We believe a political shift to the right will have a moderate effect on European fixed income markets in the short term. But in the longer term, a change could significantly affect the markets, especially concerning cross-border mergers and acquisitions, and industrial, ESG, and fiscal policies,” he asserted.

Lastly, Felipe Villarroel, a manager at TwentyFour AM (a Vontobel boutique), offered a clear reflection on not being swayed by today’s headlines: “In our opinion, the macroeconomic consequences are unlikely to be as significant as some of the headlines following the elections might suggest. While it is very likely that the average MEP will shift to the right, that does not mean that macropolitics will change drastically. Without a doubt, there will be microeconomic consequences for sectors heavily affected by climate policy, for example, if some policies are reversed. But we tend to think that most macroeconomic variables and aggregate company data, such as leverage or default rates, will not change too much as a result of the elections. The most disruptive theoretical macroeconomic impact would be a scenario in which European integration is questioned. Even if the far right achieves a massive victory next week, they will not have nearly enough seats to seriously threaten this. There may be incendiary headlines after the elections, but we believe that from a macro perspective and fixed income portfolio management point of view, the headlines will not translate into facts.”

9 out of 10 Financial Advisors Invest in Private Equity, According to Survey

| For Amaya Uriarte | 0 Comentarios

Hamilton Lane conducted a survey of 232 professional investors worldwide, in which over 90% reported allocating their clients’ capital to private markets.

The study, accessed by Funds Society, adds that nearly all financial advisors (99%) plan to allocate part of their clients’ portfolios to this asset class this year.

Additionally, 52% reported planning to allocate more than 10% of their client’s portfolios to private markets, while 70% of advisors plan to increase their clients’ allocation to this asset class compared to 2023.

Advisors cited performance and diversification as the primary reasons for the increased interest in private markets.

Regarding their own knowledge of private markets, 97% of advisors claim to have advanced knowledge. However, the report notes that their clients may not be as well-informed.

“The survey revealed that advisors recognize their clients believe alternative assets can benefit their portfolios but are not sufficiently informed about this asset class,” explains the Hamilton Lane report.

For example, 50% of advisors rate their clients’ knowledge of private market investments as beginner or having little to no knowledge of the asset class and needing basic education, despite their high interest in the asset class.

Only 4% of advisors rated their clients’ knowledge of private markets as advanced, meaning they understand the asset class well and feel confident discussing details, trends, and products in private markets.

“The conclusion of this survey is that as interest in private markets grows, there is a clear need for more education,” says Steve Brennan, Head of Private Wealth Solutions at Hamilton Lane.

When advisors were asked what tools and information about private markets they would find useful in their practice, they cited education, thought leadership, and events as the top three ways to improve their clients’ knowledge of the asset class.

The online survey was conducted from November 27 to December 22, 2023. Among the 232 respondents from around the world were private wealth firms, RIAs, family offices, and other professional advisors from the U.S., Canada, Latin America, EMEA, and APAC.

To view the full report and its conclusions, click on the following link.

Peru: The New Key Player in the Lithium Triangle

| For Javiera Donoso | 0 Comentarios

When talking about lithium, attention often goes to countries like Australia, Chile, Argentina, or China. However, a recent discovery brings prominence to Peru in this market, making it one of the main key players, according to an analysis by ActivTrades.

According to analyst Ion Jauregui, the discovery of an extensive lithium deposit by American Lithium Corp in 2018 at the Falchani project, in the Puno region, near the so-called Lithium Triangle (drawn between Chile, Argentina, and Bolivia) has “significant” implications for Peru.

“The findings from November 2023 revealed that lithium resources are four times greater than initially estimated, an increase of 476% since 2019. Falchani is now among the world’s leading large-scale hard rock lithium projects and also includes uranium deposits discovered by Macusani Yellowcake, a subsidiary of Canadian Plateau Energy,” explains the analyst.

The development of this project requires an investment of nearly $800 million and has garnered international attention, representing a “transformative milestone for the Peruvian economy,” comments Jauregui.

The discovery, first observed near the border with Bolivia, 150 kilometers from Lake Titicaca, promises economic benefits for the Andean country, such as job creation in mining and infrastructure development. This, according to ActivTrade, can stimulate economic growth and diversification.

“The government could obtain significant revenues from mining royalties and taxes, which would improve public services and infrastructure,” writes Jauregui, adding that companies like Tesla could secure agreements to guarantee a steady supply of lithium for battery production.

Additionally, the uranium found could be vital for local energy production.

“On the international front, Peru will enhance its economic relations and strengthen ties with other lithium-rich Latin American countries, leading to strategic collaborations and reinforcing the region’s influence in the lithium market,” notes the analyst.

Political Factors

However, amid the enthusiasm, ActivTrades calls for consideration of the political variables at play.

While they expect that global demand for electric vehicles and renewable energy storage will drive the lithium market, which is set to grow in the long term, investors must be aware of the country and region’s developments.

“Investors should be aware of risks such as political instability and regulatory changes in Peru and South America,” warns Jauregui.

Additionally, in a context of global competition for resources—especially between heavyweights China and the United States—there is an additional layer of complexity to the matter.

iCapital Launches First Fund on Firm’s New Distributed Ledger Technology

| For Marcelo Soba | 0 Comentarios

iCapital announced the successful launch of the first fund leveraging emerging distributed ledger technology (DLT) from iCapital. The fund is distributed by UBS Wealth Management, marking a significant technological advancement to increase scale and real-time connectivity across the alternative investment experience.

This launch delivers on iCapital’s commitment to technology that creates unmatched operational efficiency and convenience for more than 100,000 U.S. financial advisors, the release said.

iCapital’s DLT is designed to simplify and improve the lifecycle management of alternative investments. It aims to foster a safer and more efficient alternative investment management environment, connecting key financial players and enabling seamless data sharing and transaction processing.

This accounting technology is expected to eliminate more than 100,000 activity reconciliations over the average life of a private equity fund, improving visibility and efficiency of data processing, reducing errors, and improving overall investment management.

As a result, iCapital’s DLT is expected to not only save customers thousands of hours of manual data reconciliation and version sharing, but also generate significant cost savings and productivity gains, in addition to reducing the risks associated with manual data entry.

“Distributed ledger technology represents an important milestone for iCapital innovation. Our technological commitment and experience position us to lead this advancement in support of our clients’ investment lifecycle activities. We are dedicated to optimizing the entire alternative investment experience, enabling fund managers and wealth advisors to operate with efficiency, precision and ease,” said Lawrence Calcano, President and CEO of iCapital.

“We are excited to collaborate with UBS as our distribution partner for the historic launch of the first fund using iCapital’s Distributed Ledger technology. Additionally, we hope to launch more funds with other partners in the coming months,” added Calcano.

The first fund is distributed by UBS Wealth Management and managed by Gen II. All lifecycle activities, including subscriptions, capital activities, reporting and fund liquidity, will be organized through iCapital DLT, which automates data and document connectivity between companies and minimizes manual reconciliation of data.

“This is an important step towards creating greater efficiency and improving the quality of fund data,” said Jerry Pascucci, co-head of Global Alternative Investment Solutions at UBS Global Wealth Management. “We continually strive to make it easier for our financial advisors to manage and track their clients’ alternative investment holdings.”

Securitization of Digital Assets: Exploring the World of Cryptocurrency ETPs

| For Romina López | 0 Comentarios

Cryptocurrency exchange-traded products (ETPs) have recently garnered significant attention and popularity as investors seek exposure to the growing world of digital assets. These innovative investment vehicles provide a more efficient way for retail and institutional investors to gain exposure to cryptocurrencies without the complexities of directly owning and managing digital wallets, highlights an analysis by the fund manager FlexFunds.

What is Cryptocurrency ETP?

Cryptocurrency ETPs are investment products that track the performance of one or more digital currencies. There are several types of cryptocurrencies ETPs available in the market:

Exchange-Traded Funds (ETFs)
Exchange-Traded Notes (ETNs)
Exchange-Traded Certificates (ETCs)

Each type has its unique structure and characteristics, offering different levels of exposure to the underlying digital assets.

According to the specialized consultancy firm, ETFGI, assets invested in the global ETF industry reached a record $12.71 trillion at the end of the first quarter of 2024, up 9.2% from the end of 2023, when the figure was $11.63 trillion, as shown in the following graph:

Furthermore, when examining exchange-traded products (ETPs) with digital assets as underlying collateral, Fineqia International revealed that assets under management (AUM) at the end of March 2024 reached $94.4 billion, reflecting a cumulative increase of 91% in 2024 compared to the beginning of the year when AUM was $49.5 billion.

From this, it can be inferred that cryptocurrency ETPs show an upward trend as an alternative form of participation in the digital assets market. Asset managers or investors interested in exploring the cryptocurrency market have three main ways to gain market exposure, summarized in the following table:

Cryptocurrency ETPs allow portfolio managers and investors to access the volatility and growth potential of cryptocurrencies without having to subscribe directly to one or more specific currency. One possible way to structure such digital asset ETPs is by the means of asset securitization programs like those offered by FlexFunds. As a leading company in designing investment vehicles, FlexFunds allows for the securitization of any underlying exchange-traded fund in less than half the time and cost of any other alternative in the market, facilitating distribution to global private banking channels and access to international investors.

Here are the advantages and risks that asset managers should consider when opting for a cryptocurrency ETP:

Main Advantages:

Diversification: Cryptocurrency ETPs allow portfolio diversification by gaining exposure to a wide range of digital assets, reducing the concentration risk associated with investing in a single cryptocurrency.
Accessibility: ETPs provide a nimble and effective investment vehicle that can be easily listed on secondary markets.
Liquidity: Unlike direct ownership of digital currencies, ETPs offer liquidity through their listing on regulated exchanges, allowing for buying or selling holdings at market prices during trading hours.
Exposure to different investment strategies: ETPs can replicate the performance of specific cryptocurrencies, while others may focus on specific sectors or themes within the cryptocurrency market. This allows asset managers to tailor their portfolios based on their preferences and market outlook.
Regulatory oversight: Cryptocurrency ETPs are subject to regulatory oversight, which raises compliance standards, offering investors a higher level of protection and transparency compared to other existing alternatives for participating in this type of asset.

Risks and Considerations:

Volatility: The cryptocurrency market is known for its high volatility, and ETPs tracking digital assets are not immune to this, as they reflect the value of the underlying assets.
Regulatory uncertainty: The regulatory landscape surrounding cryptocurrencies is evolving, and changes in regulations can affect the viability and availability of cryptocurrency ETPs.
Tracking error: ETPs aim to replicate the performance of their underlying digital assets, but tracking errors can occur due to various factors such as fees, market conditions, and rebalancing.
Lack of investor protection: Unlike traditional financial markets, cryptocurrency ETPs may not offer the same level of investor protection.
Technological risks: Cryptocurrencies depend on blockchain technology, which is still relatively new and evolving.
Tax implications: The tax treatment of cryptocurrency ETPs can vary depending on the jurisdiction.

The emergence of cryptocurrencies and the subsequent development of exchange-traded products (ETPs) for digital assets have opened a new realm of possibilities for asset managers, investors, companies, and the global financial landscape as a whole. An increasing number of investors are eager to delve into these types of digital assets, especially during bullish periods. This implies that asset and portfolio managers must find ways to offer their clients a means of participating in this market with minimal exposure to inherent risks and volatilities.

An example of utilizing a vehicle that securitizes digital asset ETFs is the recent issuance by FlexFunds for Compass Group, one of the leading independent investment advisors in Latin America. FlexFunds structured its first investment vehicle backed by cryptocurrency ETFs, securitizing assets with a nominal value of $10 million, making it easier and less risky for Compass Group clients to participate in such assets.

If you wish to explore the advantages of digital asset securitization, feel free to contact the experts at FlexFunds at info@flexfunds.com

Santander Names Javier Garcia Carranza as Head of Wealth and Insurance

| For Magdalena Martínez | 0 Comentarios

The Spanish press has described a “revolution” at Banco Santander this Wednesday. In any case, what the entity has announced constitutes a full-scale restructuring, with the merger of the Investment Platforms & Corporate Investments unit and the global Wealth Management & Insurance business.

Leading this new sector is one of Santander’s strongmen, Javier García Carranza, who is now responsible for Asset Management, Private Banking, and Insurance.

According to an internal memo accessed by the Spanish press, García Carranza replaces Víctor Matarranz, who previously led Wealth Management. From now on, Matarranz will work directly with the group’s CEO, Héctor Grisi, to “support him in executing the strategy,” according to the internal memo.

According to public figures, the Wealth Management & Insurance unit manages assets worth €482 billion ($523 billion). In the first quarter, the unit’s net profit rose by 27% year-on-year, representing around 13% of Santander group’s profits.

With this change, the group’s global areas are reduced to five (Retail & Commercial, Digital Consumer Bank, Payments, Corporate & Investment Banking, and Wealth Management & Insurance) at the expense of the division into geographical markets. The changes were announced at the end of 2023 and aim to simplify the entity’s offerings.

How can a structured note shape portfolio outcomes

| For Romina López | 0 Comentarios

The outcome of a portfolio is the result of many different aspects, such as commissions, time horizon, asset classes held, among others, and how they align to increase the value of an investment. One of the main determinants of the performance is the strategy that composes the holdings, which is molded by each portfolio manager’s risk appetite, that depending on the capital, goals, and approach, will range from conservative to aggressive, highlights an analysis by the fund manager FlexFunds.

Tracking a portfolio’s performance is a critical and reassuring component of the investment process, enabling investors and asset managers to gauge the efficacy of their strategies.

Typically, conservative portfolio approaches use a 60/40 strategy, which consists of assigning 60% of the value of the total allocations in equities and the remaining 40% in fixed income; the 60/40 model aims to harness the long-term growth potential of stocks while seeking stability via debt instruments. As reported by the 1^st Annual Report of the Asset Securitization Sector, gathering the input of 80+ asset management companies from more than 15 countries, more than half of the professionals interviewed believe that the 60/40 model will remain relevant. To implement this strategy, investors must buy many different securities (distributed in stocks and bonds) to have a diversified holding base. Nowadays, there is a comprehensive inventory of available securities that are integrated by different asset classes within a single instrument. An example of such securities can be a structured note.

What is a structured note? It is a hybrid financial product that combines features of different vehicles in the form of a debt obligation, and its performance is tied to the returns of these underlying.

Using flexible products that repackage different assets in a single security offers a significant advantage by accomplishing the desired weighting distribution without the need for multiple subscriptions, which ends up decreasing the total account value due to fees and commissions. For instance, FlexFunds’ FlexPortfolio allows structuring actively managed notes with no limitations on rebalancing or allocation. Since the securities that compose this product are not fixed or embedded, its composition can be adjusted by the manager depending on the prevailing market conditions and clients’ (investors) best interests, all these while being able to supervise the portfolio performance given that the notes have a NAV that is frequently distributed.

Despite the objective and weighting that each underlying (whether equity or debt) may have in a portfolio, there are a variety of ways in which a note can be designed, meaning that any financial goal can be pursued; it is up to the investor to decide what focus aligns the most with its desired outcome. The most common arrangements are the following:

Offer upside and growth potential.
Offer downside protection (hedging).
Offer an illiquid asset in the form of a marketable vehicle.
Offer periodic payments/disbursements in the form of coupons.

Structured investment targets and how they can make a portfolio more conservative/aggressive:

The preceding graph visually demonstrates how the constitution of a structured security can influence the overall risk-return relationship of an investment allocation, given the nature of its underlying. Equity-like instruments tend to augment portfolio volatility while potentially offering superior returns. Conversely, instruments exhibiting bond-like characteristics can introduce an element of price stability to the allocation.

Every investment process has an expected return for a certain level of risk; considering that we are assessing some of the structured notes’ pros and cons and the impact these may have on a portfolio’s outcome, let’s delve into some of the potential structured notes’ risks.

Limited Liquidity

They may have limited liquidity, making it challenging for investors to sell their notes before the maturity date due to a lack of a secondary market. There may or may not be buyers for the note, and investors may be forced to sell the securities at a discount on what they are worth.

Market Risk

While some offer protection against losses, this safety net has its limits. When the underlying experiences high volatility due to market fluctuations, investors can still experience losses. Linking the note to more speculative positions increase the market risk significantly.

Default

Structured notes can possess a heightened credit exposure compared to alternative options. If the issuer of the note files for bankruptcy, the entire investment could be rendered worthless, regardless of the returns produced by the underlying asset.

Although achieving complete mitigation of all potential structured notes risks, or any other risks associated with individual positions or financial instruments, may be challenging, mitigating at least one may provide an edge in the market.

FlexFunds asset securitization program is carried out utilizing Special Purpose Vehicles (SPV), which makes each issuance bankruptcy remote. This SPV framework ensures that the resources contained within the structure are isolated from the originator’s balance sheet, providing financial protection in the case of bankruptcy or default.

Empower your distribution and reach with innovative yet proven solutions. FlexFunds, a recognized fintech leader in the securitization industry, offers a program of global notes that can help you expand your client base while issuing a flexible investment strategy. Explore which of FlexFunds’ tailored solutions better adapt to your specific needs. Contact us today to schedule a meeting at info@flexfunds.com