Pixabay CC0 Public Domain. Un gestor de activos especializado en acciones locales
The Azimut Group, one of the largest independent asset managers in Europe, through its subsidiary AZ Mexico Holding, signed today an agreement to acquire 51% of the capital of KAAN Capital, an independent asset manager and advisory firm specializing in Mexican equities. KAAN is made up of a group of senior managers and analysts with a solid track record, and offers asset management and advisory services to institutional and HNW clients. Upon completion of the transaction, KAAN will be renamed Azimut-KAAN.
Headquartered in Mexico City, KAAN was founded by Alberto Rodriguez and Josè Fierro – current General Manager and Investment Director of Azimut-KAAN – who together have over 50 years of experience in the Mexican equity market as well as in the management of local funds and mandates for institutional clients, international sovereign funds, pension funds and HNWIs.
Thanks to this partnership, Azimut enters the investment advisory sector in Mexico, thus expanding the range of asset management services for local clients and strengthening its presence in a country where it has operated since 2014 through Más Fondos, the leading Mexican multi-manager company operating through an integrated and independent business model. Más Fondos continues to grow in financial advisory through the recruitment of financial advisors. The partnership with KAAN has effectively been already in place, since KAAN is the advisor of Más Fondos’ local equity fund, AZMT – V1 launched last December, with assets of 330 million Mexican pesos. Thanks to the expertise of over 120 managers in 18 investment hubs that make up the Azimut Global Asset Management Team, Mas Fondos is about to launch three new funds that will be listed on the Bolsa Institucional de Valores (BIVA).
The mutual fund industry in Mexico totals approximately 130 billion dollars and accounts for just under 10% of total GDP, a small percentage when compared to those of the major Latin American economies. More than 70% of assets are concentrated on low-risk fixed income strategies, while exposure to local equities has reached some of the lowest levels in recent years, which can be an interesting opportunity following a value approach.
Mexico, with a population of 130 million, is the second largest economy in Latin America and the largest in Central America with a purchasing power parity GDP of approximately 1,3 trillion dollars in 2019 (15th globally). With a debt-to-GDP ratio below 60%, Mexico is among the most virtuous countries in Latin America. The Mexican economy has private consumption and high export as its main growth drivers, while more than 60% of its GDP comes from the service sector and just under 30% from the industrial sector3 .
Giorgio Medda, CEO and Head of Asset Management of Azimut Group, comments: “The transaction with KAAN confirms Azimut Group’s constant interest in investing in asset management capabilities, continuing to improve services to its customers, both locally and globally, and further consolidating the presence and skills of the Global Team in Latin America. In addition, the partnership with KAAN fits perfectly with the development of our integrated financial advisory platform in the asset management industry in Mexico “.
Alberto Rodriguez and Josè Fierro comment: “We are thrilled to join forces with one of the world’s leading independent asset managers who shares our core values and investment approach. This partnership will allow KAAN to grow at a faster pace and, above all, will benefit our customers as the global approach and expertise of the Azimut Group will complement our knowledge and experience of the Mexican market.”
Foto cedida. Santander Private Banking acuerda la compra del negocio de banca privada de Indosuez en Miami
Santander Private Banking has reached an agreement with Indosuez Wealth Management –the global wealth management brand of Crédit Agricole group– to purchase 4.3 billion dollars in client assets and liabilities. The firm has announced in a press release that the transaction is subject to regulatory approval and is expected to close by midyear 2021.
“This transaction, which leverages our geographic presence and our capabilities as a leading financial group, is another step toward our goal of becoming the best global private banking platform. We want to keep growing our business –especially in geographies where we see major commercial potential like the US– and elevate our position as a growth engine for Grupo Santander”, said the Global Head of Santander Wealth Management & Insurance, Víctor Matarranz.
Meanwhile, Jacques Prost, CEO at Indosuez, commented that, after close evaluation of a number of international bidders, Santander’s proposal for the Miami business stood out to Indosuez thanks to the bank’s high quality and strong reputation.
“We are confident that this is the right fit to meet the interests of our clients and our people in Miami, ensuring a smooth transition and building on Santander’s sizeable footprint and 42-year long experience in the region. Indosuez’s decision to leave the Miami market was carefully considered due to our longstanding presence in the region, but was made in line with Indosuez’s strategy of focusing and expanding its presence in its key markets”, he added.
Santander US CEO Tim Wennes also assessed the acquisition, pointing out that it is part of the growth strategy for Santander US, which includes organic and inorganic opportunities. “I am confident that the team will provide world-class services to our new clients from Indosuez”, he said.
The bank has explained that the transaction will be executed through Banco Santander International (BSI), part of Santander Private Banking, Grupo Santander’s business unit dedicated to the private banking segment. Santander Private Banking manages a volume of 230 billion euros in customer assets and liabilities. BSI is a wholly owned subsidiary of Santander Holdings USA, Inc., Banco Santander’s intermediate holding company in the U.S.
As has been well-documented, equity markets were quick to recognize the increase in demand for many online services and businesses ranging from Amazon to Zoom (with many more in between). Many, including the FAANG stocks, have escalated in value as retail investors with their stimulus checks, as well as institutions, have piled back into equity markets since the March 2020 plunge. However, the ability of many of those businesses to deliver their virtual goods and services is dependent on the infrastructure that they use.
Perhaps somewhat overlooked are data center and semiconductor businesses, particularly memory chips vital to facilitating the digital economy. Despite their criticality to the digital economy and their ability to generate attractive cash flows and returns on capital, memory stocks continue to trade at a discount to other semiconductor and IT-related stocks. There is also a shortage of supply of the chips needed for many applications, including automotive, which should increase producer value until supply catches up. It typically takes more than two years to build a fabrication facility and ramp up production.
While we are generally bullish on the digital economy, we are finding attractive prospects in ‘old’ economy companies as well. Large U.S.-based banks are well capitalized and have been conservative in provisioning for potential risks in their loan and credit card portfolios during the COVID crisis. Given the significant support from the Fed and the U.S. government through the crisis, the economy has held up relatively well, all things considered.
This suggests that banks may end up overcompensating for loan losses, which could drive provision reversals in later periods, further supporting earnings growth. Additionally, banks stand to benefit from a rise in rates over time. As we look forward, we are encouraged by banks that are investing materially in digital transformation and innovation, such as developing attractive and convenient-to-use apps and tools for consumers and businesses. We believe this should improve the value-add to customers while driving operational efficiencies at the banks themselves. Despite strong balance sheets, prudent provisioning, stable underlying trends and investments on innovation, some of these banks generally trade at a fraction of book value, making an attractive entry point for potential investors.
Long-Term Thinking During a Period of Rapid Change
In a period of great innovation, disruption and high valuations, like we are experiencing today, we need to look beyond the very near-term and consider the medium- to long-term opportunities for a business and how it is allocating capital to support those objectives. If a company is investing in a large market opportunity with attractive returns at maturity, we welcome them investing heavily today for a much larger payoff tomorrow. The investments often obfuscate the true earnings power of the business and may make it seem expensive on statistical measures, but those investments may end up creating significant value for shareholders over time.
In today’s environment, a process that relies on deep fundamental research to narrow the universe of stocks by looking for strong companies driving idea generation, and which utilizes an intrinsic value framework in an attempt to understand the likelihood of a business’ ability to create long-term value, may have an advantage. Market commentators and investors often attempt to assess valuations and opportunities simply on near-term statistical metrics, such as a P/E or a P/B multiple. These can be useful datapoints but do not paint the complete picture of whether a business is fairly valued. We believe that investors should more thoroughly analyze and determine a security’s intrinsic value before placing it into a portfolio.
The recent increase in retail participation in equity markets means more investors competing in the market, which, ultimately, should make the markets more efficient with periods of excessive price moves. However, increased market efficiency also means that simple strategies utilizing easily accessed valuation multiples or other metrics will create little to no excess returns on average. In fact, greater retail participation will mean that achieving alpha returns consistently will require a well-thought-out investment philosophy and rigorous process to add value over time.
ESG Considerations Should Be Part of Any Investment Process
ESG (environmental, social and governance) considerations provide investors with an expanded toolkit for assessing whether a business is creating value for all its stakeholders, from employees to its community to shareholders. ESG also provides insight into analyzing a business’s go-forward prospects—a lens on whether that company is competing in expanding or contracting markets due to evolving environmental or regulatory considerations. Governance is another important set of issues where poor practice can lead to substantial corporate risk such as expensive legal actions and negative publicity. These insights about where risks lie are crucial in determining what the business is worth and providing effective stewardship of the investment.
So Where Do We Go from Here
While COVID accelerated many changes around the globe, equity markets rewarded many companies that were active in preparing for their future. We believe that investors should also be active and diligent with their investment allocations going forward. Opportunities abound for those that are doing the deep fundamental research on the securities that they own, who take a long-term view, and incorporate ESG considerations so that they have an even broader understanding of the risks and opportunities that each company faces.
Founded in 1982, Thornburg Investment Management is a privately-owned global investment firm that offers a range of multi-strategy solutions for institutions and financial advisors around the world. A recognized leader in fixed income, equity, and alternatives investing, the firm oversees US$45 billion ($43.3 billion in assets under management and $1.8 billion in assets under advisement) as of 31 December 2020 across mutual funds, institutional accounts, separate accounts for high-net-worth investors, and UCITS funds for non-U.S. investors. Thornburg is headquartered in Santa Fe, New Mexico, USA, with additional offices in London, Hong Kong and Shanghai.
Pixabay CC0 Public Domain. Focos de tensión en la rivalidad sino-estadounidense: quien controle el estrecho de Taiwán controlará la economía mundial
Mainly playing out across the vast Pacific Ocean, the great power rivalry between the US and China is the dominant geopolitical conflict of our time. There are deep-rooted economic, demographic, and geographic forces at work, reshaping the world’s most important bilateral relationship. A unipolar world where the global hegemon, the US, had unmatched global capacity and influence is morphing into a balanced, multipolar world where various countries have an ever-increasing impact on global decision-making and action.
At the end of World War II, the US accounted for a far larger share of global GDP than would be warranted given its population. To be sure, some of this was due to the US economy’s unrivaled level of productivity and innovation. The US will always punch above its weight because of these factors. But the main reason why the US was the overwhelmingly dominant economic engine of the world was that most major economies lay in ruins after that devastating conflict. In a famous study authored by the British economist Angus Maddison, the US’ share of global GDP reached a zenith of almost 40% in the early 1950s.
Since then, our share of global GDP has been steadily waning. To paraphrase economist Herbert Stein, that which can’t go on won’t. The other component to this relative slide has been China’s rising economic heft. For most of its history, the Mainland’s share of global GDP hovered between 30% and 35%, according to this same seminal work. In other words, China’s rise is merely a return to its normal, baseline level of economic clout. The previous century was the anomaly. China’s rise should and will continue.
So, what does this tell us about the ensuing power struggle between the two countries? Is confrontation inevitable? Can we avoid Thucydides’ famous trap? When paradigms shift, there will always be friction. With tectonic shifts, you might not always get an earthquake, but there are usually a few tremors. The 2018/19 trade dispute was but the first truly global spat between these two rivals. One can expect many more to come with Taiwan being at the vanguard of potential flashpoints. It is not an exaggeration to say that the Republic of China, the official name for the island nation just off the Mainland, is quickly becoming the most important and most-watched nation on Earth.
Taiwan dominates sophisticated global chip manufacturing, and its comparative advantage should only increase. Earlier this year, the shutdowns in American and European auto manufacturing plants had less to do with Covid-19 and more to do with chip shortages in Asia. While these bottlenecks will sort themselves out in the near-term, they are emblematic of a broader problem: semiconductors are the new oil and Taiwan is the new Saudi Arabia. Worryingly, this market is even more concentrated than the oil market is because there are fewer producers. Whoever controls Taiwan can effectively influence the world’s global supply of microchips.
This is not hyperbole. Because the cost of achieving higher logic density has increased so exponentially, it means that new microchip technology entails massive capital investments that require producers to operate with a very high utilization rate. The barriers to entry are prohibitively high. Taiwan Semiconductor Manufacturing Company comprises half of the global semiconductor foundry market. Together with Taiwan’s other giant United Microelectronics Corporation and South Korea’s Samsung, the three companies account for 78% of global market share. In sum, the microprocessor market is highly and dangerously concentrated in Taiwan. From the West’s perspective, this is dangerous because China covets a reunification with Taiwan. Thanks to its actions in Hong Kong, everyone now knows what that would look like under Xi Jinping.
Every investor and policymaker worth their salt will have to account for the vulnerabilities inherent in a world should the situation across the Taiwan Strait deteriorate. An incident where chip production was disrupted or halted, or supply lines were permanently denied could be catastrophic for the global economy. If you think the US would not go to war over chip manufacturing in Taiwan, then you do not remember the US going to war in Kuwait over oil in the early 1990s. Of course, China would pack a stronger punch than Iraq ever could, and Taiwan’s importance means that all stakeholders around the world have incentives to de-escalate.
But as World War I showed us, rational actors can stumble into a conflict through a series of miscalculations after the assassination of an Archduke. Incidentally, World War I was the last time a rising, regional hegemon (Germany) confronted the entrenched global hegemon (the UK). To be sure, I am not saying that the result of this great power rivalry will be a third world war. I am also not precluding it from turning out that way either if the wrong policy mix makes us stumble in that direction. Certainly, Taiwan’s importance to the global economy means that all stakeholders, which in the extreme means all nations, are incentivized to cooperate, and maintain stability. Elementary game theory teaches how that decision-making process can go awry, and behavioral economics similarly suggests that not all decisions, even at the state-level, are rational and motivated by self-interest.
What are investors and market participants to do? Do we run to the proverbial risk bunker and wait out the coming conflict? Again, history provides a clear answer – an emphatic “no”. During the Cold War, broadly defined as 1947 till 1991, the S&P 500 rose 2,708% (7.70% annualized) despite enough missiles being pointed at each other to wipe out humanity many times over. Lest we forget, the world stood at the brink of doomsday several times during this now quickly receding era: The Berlin Airlift, the Korean War, the Soviet Invasion of Hungary, and the Cuban Missile Crisis. That was our conflict with the ideological and militant Soviets. Conflicts with the capitalist Chinese may turn out a tad less unnerving.
We must learn how to interpret the decisions and actions of these two great nations within the framework of this great power rivalry: the US wants to maintain the status quo, its place at the center of the post-WWII order, while China wants to regain its historical place and displace said order. From the American side, you will see intensifying economic pressure, and support of borderland states like Taiwan as an attempt to limit China to the first island chain. One will see the US trying to encircle the Chinese through alliances and balance of power moves allowing Japanese remilitarization and an Indian rapprochement.
For China’s part, it must ensure that it can keep delivering the economic growth that its masses have come to expect and that underpin the government’s credibility. To that end, we will see attempts to bypass the global commons, the oceans that the ubiquitous US Navy still dominates. The Chinese have reconnected with the Russians, as a unified Eurasian landmass will better counter the seagoing Americans. There will be other, yet to be determined, manifestations of this global conflict. It is important that we recognize them when they arrive.The markets will have to learn how to discount this risk premium, and, as they have done in earlier eras of shifting paradigms, they will adjust to the new reality.
Foto cedidaPhilippe Couvrecelle, consejero delegado y fundador de iM Global Partner.. Philippe Couvrecelle, consejero delegado y fundador de iM Global Partner
iM Global Partner has entered a definitive agreement to acquire Litman Gregory, a wealth and asset management boutique with 4 billion dollars in assets under management and 2.2 billion dollars of assets under advisory.
Philippe Couvrecelle, CEO and founder of iM Global Partner, declared that the purchase is “a major step forward” as they continue their U.S. expansion. “This strategic operation allows us to add wealth management as a new key activity. Our clients will benefit from the synergies that result when like-minded organizations leverage their talents and resources to enhance the client experience”, he added in a joint press release.
The group expects the transaction, once completed, to bring assets under management to over 24 billion dollars (from 20 billion as at end of December 2020) and to enhance distribution capabilities in the U.S.. It also believes that it demonstrates its “commitment to continued cross-border growth in serving the needs of sophisticated investors”.
The operation is still subject to the approval of the SEC, but it’s expected to close in the second quarter of 2021. When this happens, iM Global Partner will double the number of employees and it plans to operate Litman Gregory Wealth Management as a separate business unit to preserve the “recognition, independence and expertise” that it has built over many decades with its cross-generational clients.
Steve Savage, CEO of Litman Gregory, said that they are “excited” to become a part of the group as it improves their ability to deliver on their mission to excel for their clients: “iM Global Partner brings complementary global research resources and strong alignment on total client focus. The combination of our organizations is a natural fit because of our shared research DNA, commitment to independent thinking, integrity and total client focus.”
All in all, the joint press release highlighted that combining Litman Gregory’s capabilities with iM Global Partner creates a “uniquely powerful set of high-quality investment solutions” to serve both institutional and private clients in the U.S. and internationally.
iM Global Partner intends to continue to grow in its priority markets -the United States and Europe- as well as Asia, where it plans to open and begin local distribution in 2022.
Foto cedidaArnaud Llinas, responsable de Lyxor ETF e Indexación en Lyxor Asset Management. Lyxor ETF quiere duplicar sus activos ESG y ser líder en ETFs climáticos y temáticos
In 2021, Lyxor ETF plans to accelerate its efforts to expand its range on three key ETF product pillars: ESG and Climate, Thematics and Core. In a press release, the firm explained that this will help meet “the long-term needs of the wealth management segment as ETF usage in Europe expands among individuals and to support its institutional client base”.
To achieve this, the asset manager has made building assets in these three key areas a strategic priority for 2021. As such, it aims to double the ESG ETF assets it had in 2020 to 10 billion euros by the end of 2021. To achieve this, Lyxor ETF plans to expand its ESG offering by switching several of its existing ETFs to equivalent ESG indices, thereby offering a simple alternative to traditional market capitalizations to meet its clients’ needs. Lyxor also continues to implement its program of fund labelling and intends to obtain the “SRI Label” for its entire thirty ESG ETF range by the end of the year. At the end of February, its ESG ETF assets under management totaled 6.5 billion euros.
As a pioneer in passive fund management, last year it became the first ETF provider in the world to launch an extensive ecosystem of ETFs in line with the Paris Agreement and carbon neutrality by 2050. In this sense, the asset manager believes interest in climate indices appears set to grow: “We are already seeing evidence of this in the flows towards regional (notably European and US equities) and global indices from various types of institutional investors (insurers, pension funds, asset managers), in part because of increasingly stringent regulations in Europe”, they said.
This year, Lyxor ETF intends to bolster its range of climate ETFs by extending it to certain fixed income segments and expanding its range of Green Bond ETFs. In total, it now manages close to 1.5 billion euros in climate-focused ETFs.
An enhanced and increased ETF range
Also, it plans to increase its Thematic ETF range to capture new global post-Covid trends. Following the success of its megatrend ETF range last year –over 700 million euros in net new assets collected in less than a year– Lyxor seeks to offer wealth managers in particular more ways to invest in the companies set to benefit from significant and lasting changes in the post-pandemic world. Having launched five Thematic ETFs in partnership with MSCI in 2020 –on Digital Economy, Disruptive Technology, Future Mobility, Smart Cities and consumer habits of Millennials– it is looking to offer investors exposure to rapid innovation in sectors such as healthcare and Clean Tech and in specific geographies.
The firm also wants to further enhance its Core range, which, since it was launched in 2017, has become a cornerstone of the firm’s product offering. In this sense, it has a raft of initiatives planned for 2021, notably within fixed income, where inflation products are key priorities with central banks and governments around the world spending freely to fuel a post pandemic recovery. “This builds on the success of the Lyxor Core ETF on US TIPS, which now totals 3.6 billion euros in AUM after a very strong 2020. Regional and single country allocations are also key areas of interest”, they explained.
In support of its repositioning around these three key pillars, Lyxor also plans to adapt and streamline the rest of its range to ensure it better reflects clients’ long-term investment and savings goals.
“Having started as tactical allocation building blocks for institutional investors, ETFs have since become long-term savings instruments for a much wider range of investors including in the wealth management segment. That is only going to accelerate. Our shift in focus aims at addressing investors’ long-term concerns -aiding the transition to a low-carbon economy, capturing new themes in a post-Covid world and ensuring maximum efficiency for their investments– and as such reflects the profound change in nature of the ETF market”, stated Arnaud Llinas, Head of Lyxor ETFs and Indexing at Lyxor Asset Management.
Markets are never at a standstill. However, since bottoming out last year, they have been pretty much on auto-pilot. The reason is simple, the pandemic has been ravaging the economy, but wartime fiscal and monetary stimuli have provided enough oxygen to avoid collapse and buy time until the long-awaited vaccines began to arrive. With them, the countdown to normalization began, but also the return of anxiety to the markets.
In normal times, markets constantly assess the health of the economy by looking at a myriad of macroeconomic indicators; but doing this today is pointless. We are almost certain that, by the summer, a tsunami of pent-up demand will give a once-in-a-century boost to the economy.
The situation is so unusual that it seems impossible to see beyond that point. We are in the early stages of a new economic cycle; one that will start with growth rates not seen in decades, and whose outcome is unpredictable. In a way, we are suffering from macroeconomic myopia.
However, market participants do not give up trying to see what comes next, since investing is, after all, an anticipation game. The most obvious danger that one can conceive of today is an acceleration of inflation; since supply will surely struggle to cope with a surge in demand (this year you better book your holidays well in advance). This is how inflation expectations have taken hold, roiling bond markets and threatening to derail the equity bull market.
This way of thinking is very short-sighted. After the bonfire is lit, we will surely see a red-hot economy, but combustible material will progressively decline as the fiscal stimulus (probably not the monetary one) is phased out. Inflation will go from flames to smoke, and the market will inevitably become concerned about whether the fire can be sustained, or whether it will be extinguished in a recession. Or in other words, the market will go back to its normal calibration mode.
Financial markets are a complex dynamic system with many interrelated variables. It is very hard to grasp how (and to what extent) one variable influences another at any given time, or if causality is reversed. But we are human beings and we try to make sense of it all by compartmentalizing the system and building narratives around the parts.
The current storyline is more or less the following: it is widely accepted that, of all variables, interest rates are the most important; since they are the key to valuing any cash flow-producing asset, from bonds to stocks to real estate. On the other hand, interest rates are a function of inflation, which in turn depends on the growth of the economy.
So far, bond markets seem to be following this train of thought. Plentiful stimulus and consumers with savings in their pockets, implies runaway growth; ergo inflation will accelerate and interest rates will have to rise.
This way of thinking assumes that it is the economy that determines the performance of financial markets. But the reality is much more complex. The direction of causality can quickly be reversed: higher rates can cause asset prices to tumble as well as financing costs to increase, that dents the wealth of households (particularly if it affects real estate prices) and the ability of corporates to borrow, threatening to bring the economy into a recession. The latter, lowers inflation expectations, and with it so decline interest rates; voilà!
The market is a kind of huge voting machine, where its participants constantly calibrate the different probabilities of the manifold variations of these two basic narratives. But the fact is that, after four decades with inflation and interest rates falling, thereby contributing to inflating asset prices, there is now enormous interdependence in the system. Therefore, a sudden big change in interest rates seems almost impossible.
Inflation has dimmed due to a combination of structural factors: demographics, excess debt, globalization and digitization. And the pandemic will only accentuate this trend. The only conceivable way to experience a sustained rise in inflation would be a sharp swing in taxation. One that causes a redistribution of wealth from capital to workers, as happened during the 70s. That episode coincided with another redistribution, from oil-importing countries to oil-exporting ones. It is highly unlikely that something like this will happen again, as the context has radically changed since then.
Communism collapsed spectacularly and globalization took off, thereby evaporating the bargaining power of workers. The market economy has been so dominant that even the Chinese economic miracle is explained by adopting it. No one can seriously argue today that the public sector can be the engine of growth. And when it comes to oil prices, renewable energies bring us ever closer to a scenario of full abundance.
Only very bad policies can drive the system into a higher inflation regime. But the deflationary forces are so strong that we would need much more than gargantuan budget deficits. We would have to see the United States becoming Venezuela. Or just as likely, discover that an asteroid is on a collision route with Earth in a few years, and we set out to spend everything we have.
If the current status-quo holds however, it is almost certain that the economy will keep growing, technology will continue transforming our daily lives, and market forces will prevail over political experiments. In this environment, we think that a combination of quality stocks to capture growth, and US Treasuries to protect us from the occasional recession, are currently the best possible combination.
However, if the current status quo is maintained, the economy will almost certainly continue to grow, technology will continue to transform (and cheapen) our daily lives, and market forces will prevail over political experiments. In this environment, we believe that a combination of quality stocks to capture growth and Treasuries to protect us from the occasional recession is currently the best possible combination.
An article by Fernando de Frutos, Chief Investment Officer at Boreal Capital Management
Colchester believes that local currency EM government debt is particularly attractive today for both strategic asset allocation (in terms of capital preservation, liquidity and return), and tactical reasons (it offers attractive valuations at this juncture). Whilst hard currency EM sovereign debt has historically generated attractive returns, its characteristics are less conducive to the objectives of safety (i.e. capital preservation) and liquidity, given the lower credit ratings and poorer liquidity in this space. In the following analysis, they show that current valuations of the hard currency EM debt asset class are less attractive than those prevailing in local currency space:
Our analysis suggests that the US dollar remains fundamentally overvalued in real terms against many developed and emerging market currencies. The recent relative weakness in the US dollar may be the beginning of a significant depreciation, and if this is the case, historically such a backdrop has been a positive environment for EM assets. Such a depreciation would also benefit non-USD EM assets. With US interest rates depressed, and monetary policy unlikely to shift gears any time soon, the incentive to deploy capital in EM is strong, in the absence of significant negative shocks.
Our stance on the relative attractiveness of EM currencies is further underpinned by the strength of the external position of many economies compared to history. A vulnerability to external shocks and capital outflows has historically been a characteristic of EM economies, but at present we believe that such vulnerabilities are low – at least in the major issuers of local currency EM government debt
In our opinion, local currency EM debt offers structurally higher liquidity and lower credit risk. The diversification benefits are also somewhat better. Global factors tend to have more of an influence on hard currency debt markets while domestic drivers tend to impact more on local currency debt markets. Lastly, the cyclical outlook favours local currency assets given (i) the relative undervaluation of the currency component, as the US dollar remains fundamentally overvalued against most global currencies; and (ii) the accommodative stance of monetary policy in developed markets continues to act as a “push factor” for capital to seek higher returns in emerging markets.
Historical Returns and Correlations
Historically both EM hard and local currency debt (unhedged) have generated meaningfully higher returns than traditional defensive fixed income assets such as US Treasuries, albeit with higher volatility. The local currency asset class has comfortably outperformed US Treasuries, global developed market government debt, and US corporate debt since the inception of the standard index for local currency EM debt at the end of 2002. Hard currency debt has performed even better over this time period, generating similar returns to that of high yield corporate debt. Unhedged local currency EM debt has historically generated more volatile returns than hard currency EM debt. This is a function of exchange rate movements.
Furthermore, the diversification merits offered by local currency EM debt appear to be superior to that offered by hard currency EM debt, given its historically lower correlation to US Treasuries, investment grade corporate, and high yield corporate debt. Hard currency bonds are typically held by global investors and are valued and priced by the market as a credit spread relative to the US Treasury curve (as USD-denominated debt comprises the majority of this asset class). Local currency EM bond markets on the other hand, are typically dominated by domestic investors, and are therefore less sensitive to changes in global financial conditions and more sensitive to domestic economic conditions.
Relative Valuations
Both USD- denominated EM hard currency debt and US corporate debt are priced as a spread relative to US Treasuries. As US Treasury yields are close to historical lows and offering deeply negative real yields at present, and the yield on the standard EM hard currency index is also, not surprisingly, close to its historical lows. It is also questionable whether a nominal yield of around 4.5% sufficiently compensates for the underlying credit risk in the hard currency EM debt asset class.
Hard currency EM debt spreads widened meaningfully in early 2020 but have already retraced most of the maximum deviation from the average credit rating spread, with the “gap” relative to US Treasuries down to a relatively modest 60bps. This needs to be weighed against the increased default risk that has also risen materially over 2020. A number of issuers have already defaulted, and around 5% of the index by market value was trading at distressed levels at the end of 2020 i.e. with spreads of over 1,000bps. This suggests that the apparent attractiveness of the spread should be discounted by this changed default and stressed environment.
A closer look at the spread on the investment grade (BBB- and higher) segment of the index in isolation provides an insight into this effect. Instructively, the current level of spread is below the average of the past five and ten years, and is close to the lows observed in 2012, 2017 and 2019. This suggests that the relatively less risky segment of the index (i.e. with lower probability of default) is currently not offering compelling value. It also suggests that the spread on the index itself is being boosted by the lower-rated more speculative credits – hinting at a case of “spread illusion”.
Similarly, the nominal yield on the index itself, at 4.55% as at 31st December 2020, is somewhat boosted by the high spreads and the higher yields in these more distressed markets. The yield on the investment grade segment, which makes up over 50% of the total index, was only 2.72% as at the end of 2020.
Turning to local currency EM debt, Colchester values local bond markets in terms of their relative prospective real (i.e. inflation adjusted) yield, and currencies in terms of their real exchange rates. The bond element is simply the weighted average prospective real yield. In other words, the nominal yields in each market adjusted for Colchester’s forecast of future inflation. The currency element is the index weighted percentage over- or under-valuation in real terms relative to the US dollar, divided by -5. The over- or under-valuation is estimated by calculating the real exchange rate for the currency and comparing that to a measure of long-term equilibrium or “fair value”.
Combining today’s bond and currency valuations suggests that local currency EM debt is attractively valued compared to history. Whilst not at its widest observed valuation points, the intrinsic real value compares favourably to history.
This is largely due to EM currencies being generally undervalued in real terms today. By Colchester’s estimates the weighted average real exchange rate of the local currency index is 11% undervalued against the US dollar. Whilst currency valuation gains may be the largest potential contributor to potential returns today, potential bond returns are also making a meaningful contribution.
Capital Preservation and Liquidity
Default Probability
Local currency debt has a lower default rate across the board. Intuitively we would have expected this. Sovereign issuers typically have the unique ability to create (“print”) the currency of denomination of the bond, as well as an ability to raise taxes from their domestic economies to meet financing and servicing needs. Governments also face pressure from their local population, who vote, or implicitly have the power to remove those in government. It is therefore not surprising that, as most local currency EM debt is held domestically, there is a greater willingness to default on foreign rather than domestic creditors at a point of stress.
Credit Rating
Given the higher default probability on hard currency EM debt, asset allocators need to be aware of the different rating profiles of both EM fixed income sectors when comparing the two. Not only is the probability of default lower in local currency debt, the credit rating of the standard local currency EM index (JP Morgan GBI-EM Global Diversified) has a demonstrably higher rating profile than its hard currency counterpart (JP Morgan EMBI Global Diversified). The higher credit rating enjoyed by local currency debt is not surprising as economies with more stable currencies and inflation, as well as deeper domestic capital markets, tend to issue more debt in local rather than hard currency. Many of those countries included in the local currency index issue around 90% of their debt in local currency.
Liquidity
Liquidity is the final characteristic asset allocators need to consider. When we compare the depth and liquidity of each market, we observe that the local currency universe is significantly larger and more liquid. Currently, the market value of EM local currency government debt is estimated by the Institute of International Finance, to be around USD 14 trn, whereas the stock of hard currency debt is estimated at only USD 1.3 trn. This large and widening discrepancy is not surprising, as countries have an incentive to reduce their external vulnerability by developing local capital markets and issuing in domestic currency. This reduces their exposure to external shocks, a flight of capital, and a potential shortage of foreign currency to meet funding needs. The three largest issuers of government debt within the EM universe – China, India and Brazil – each issue more than 90% of their government’s debt in local currency.
The depth and liquidity of the local currency EM government bond universe has been significantly enhanced by the opening of the Chinese local bond market to foreign investors in recent years. Local Chinese renminbi (yuan) denominated government bonds offer liquidity (the market is over USD 7 trn in size), a relatively high credit rating, and a negative correlation to risk assets.
Additionally, the opening of the domestic Indian government bond market to foreign investors is also accelerating. It too offers lower correlations with other global bond markets and asset prices. India is expected to be admitted to various EM bond indices in the not too distant future, further enhancing potential return and diversification characteristics of the local currency EM debt asset class.
This article should not be relied on as investment advice. Colchester Global Investors Limited is regulated by the UK Financial Conduct Authority, and only deals with professional clients. https://www.colchesterglobal.com for more information and disclaimers.
Foto cedida. Morgan Stanley completa la compra de Eaton Vance
Morgan Stanley has completed this week the acquisition of Eaton Vance, a stock and cash transaction announced last Augustfor an equity value of approximately 7 billion dollars.
In a press release, the firm revealed that Eaton Vance common stockholders were offered 0.5833 Morgan Stanley common shares and 28.25 dollars per share in cash for each Eaton Vance common share, and had the opportunity to elect to receive the merger consideration all in cash or all in stock, subject to proration and adjustment. As provided under the merger agreement, Eaton Vance shareholders also received a special dividend of 4.25 dollars per share, which was paid last December 18 to shareholders of record on December 4.
“This acquisition further advances our strategic transformation by continuing to add more fee-based revenues to complement our world-class, integrated investment bank. With the addition of Eaton Vance, Morgan Stanley will oversee 5.4 trillion dollars of client assets across its Wealth Management and Investment Management segments. The Morgan Stanley Investment Management and Eaton Vance businesses are delivering strong growth and their complementary investment and distribution capabilities will deliver significant incremental value to our investment management clients,” said James P. Gorman, Chairman and Chief Executive Officer of the company.
Thomas E. Faust, Chairman and Chief Executive Officer of Eaton Vance, will become Chairman of Morgan Stanley Investment Management and will join the Morgan Stanley Management Committee. “We are pleased to join Morgan Stanley to begin the work of building the world’s premier asset management organization. On a combined basis, Morgan Stanley Investment Management and Eaton Vance have unrivaled investment capabilities, distribution reach and client relationships around the globe“, he commented.
Lastly, Dan Simkowitz, Head of Morgan Stanley Investment Management, claimed to be excited to welcome Eaton Vance: “Our combined organization is exceptionally well positioned to deliver differentiated value to our clients and growth opportunities for our employees”.
Pixabay CC0 Public Domain. Mediolanum International Funds otorga a SGA y NZS Capital sendos mandatos de renta variable
Mediolanum International Funds (MIFL) has announced two new equity mandates with SGA and NZS Capital as the firm looks to expand its footprint with boutiques in the United States.
In a press release, the European asset management platform revealed that the agreement with SGA, a Connecticut based independent investment boutique, will see MIFL providing capital of 80 million to seed the SGA Emerging Markets equity strategy, which adopts the same investment approach that made the firm known for the quality of their flagship global equity strategy. The initial investment is expected to grow over the next 5 years.
“We are very excited to work with Mediolanum International Funds and offer our Emerging Market Growth portfolio to European investors at a time when many are seeking EM exposure in a bid to participate in the wealth creation of growing middle classes. This partnership will give us privileged and timely access to European distribution across different countries through MIFL’s local ties to distribution networks in Italy and Spain, and strong partnerships in Germany within the IFA business”, Rob Rohn, Founding Principal at SGA, commented.
MIFL will also back NZS Capital’s Technology strategy, with a 300 million euros mandate. Based in Denver, the investment boutique has a unique philosophy known as Complex Investing which identifies companies that best adapt to unpredictable outcomes. It is minority owned by Jupiter Asset Management which acts as the firm’s exclusive global distribution partner and introduced MIFL to the investment opportunity.
Brinton Johns, Co-Founder of NZS Capital, said that partnering with Mediolanum International Funds is a great step in the firm’s evolution: “This Sub advisory mandate offers European clients access to a portfolio of companies that we believe is best equipped to handle the accelerating pace of change in the global economy. The focus on innovation and disruption is a long-term trend an investment perspective, and one that is especially relevant in today’s environment”.
A 5-year plan
MIFL highlighted that its multi manager approach, which combines funds and mandates, is the engine of several mutual funds and customised investment solutions and services for insurance products and banking services distributed across Italy, Spain, and Germany. “We are delighted to have both SGA and NZS Capital LLC on board. Both managers have proven to generate great value over the time for their investors and by partnering with them in these new strategies we expect our clients to benefit as well”, pointed out Furio Pietribiasi, CEO of the platform.
He also revealed that their objective in the next 5 years is to invest at least one third of all their equity and fixed income assets externally managed in partnership with boutiques with strong track record by seeding new strategies or investing in existing ones. In his view, the evolution of the industry globally is offering “a unique opportunity” and they believe they are well positioned to take advantage due to their entrepreneurial culture and 23 years plus experience in multi management.
“We are looking to collaborate with boutiques where we can add value to their overall business. We think that the AUM in breadth of strategies we have, plus our flexibility and unique entrepreneurial culture is fundamental to success We already have a proven track record in helping start-ups or small asset managers to grow, it is now time to scale it up”, he concluded.
