Foto cedidaMichael D'Arcy, new CEO of the Irish Association of Investment Managers (IAIM) . Irish Association of Investment Managers appoints Michael D’Arcy as New CEO
The Irish Association of Investment Managers (IAIM) has announced in a press release the appointment of former Minister of State with Responsibility for Financial Services Michael D’Arcy as its new CEO. He will work closely with IAIM Chairman, John Corrigan, on the development of the IAIM strategic plan in the context of the challenges and opportunities facing the investment management industry.
The IAIM stated that in his role as CEO, D’Arcy will be responsible for re-setting the IAIM agenda and priorities, given the changing landscape post-Brexit. His role will entail growing the presence of IAIM and the voice of investment managers in the context of the broader domestic financial service sector and helping to promote Ireland worldwide as a pre-eminent destination for investment management firms.
He will also be responsible for leading the contribution of the IAIM around key areas, such as sustainable finance and ESG, collaborating with the other key local and international stakeholders.
Corrigan said that they are “delighted” with D’Arcy’s appointment and pointed out that the industry is growing exponentially in Ireland, a trend they expect to continue. “This is our first step in onboarding the necessary expertise and competencies to face the challenge”.
“Ireland is one of the world’s leading centers for investment management, and the industry is uniquely positioned to play an integral role in the economic and social recovery post-COVID-19. However, we need to ensure that the regulation, policies and joined-up industry thinking in Ireland support this growth”, he added.
In his view, we are moving into “unchartered waters” in a post-Brexit environment, both domestically and internationally, and Ireland has “a once in a generation opportunity to make real changes and be at the very heart of new initiatives” such as ESG and sustainable financing.
Meanwhile, D’Arcy believes that crucially now there is a “huge opportunity” for Ireland, as the UK exits the EU, to help shape the future agenda of not just investment managers and firms where these is considerable growth potential, but even more broadly for the funds industry as a whole and become a global center for the industry.
“In that regard Ireland will need to continue to develop its skills base, and the promotion of education and training will be key in equipping students with the required skillsets, as will be the need to create a greater awareness among graduates and school leavers of the industry’s diverse employment opportunities. In my role as CEO, a vital goal will be in helping to make Ireland the premier destination for the advancement of sustainable and Green finance, and to form strong links and grow our relationships abroad”, he said.
Half of the top ten global investment managers have operations in IAIM, with its members and associate companies in Ireland managing over €1 trillion in assets.
Pixabay CC0 Public DomainMatt Horward. Matt Horward
As the COVID-19 pandemic cast its shadow over our economies, the high yield debt market has seen considerable changes of its own – not least the glut of downgrades bringing formerly investment grade (IG) issuers into the sector. However, this presents signs of resilience and opportunities for investors.
Two fundamental aspects of the high yield (HY) market have given issuers a chance to weather the storm. First, HY companies tend to ‘term-out’ debt – habitually moving shorter-term arrangements to longer-term. Second, firms typically have a degree of flexibility from revolving credit facilities (RCFs) which allow them to access cash, up to a predetermined limit, at any time. In short, there is no widespread and sudden refinancing requirement on the horizon. In a sector used to stressful conditions, the wiggle room is already incorporated.
That said, damage is inevitable. The hard stop in parts of the economy has seen activity slump – in some cases to near zero and for month after month. It has been dramatic for retailers, restaurants, airlines and many more. In high yield, the energy sector, and particularly US oil, has taken some of the hardest hits.
Bridging the gap
Spreads have narrowed from their peak, but remain well above pre-crisis levels, which AXA Investment Managers thinks offers good value for UK insurers and pension schemes. As of 22 July, spreads in Europe were 483 basis points (bps), compared to 533bps in the US and 559bps globally (1). This is tighter than the peak in March (by 383bps, 554bps and 535bps respectively) but still about 200bps wider than the start of the year. US issues still dominate – accounting for more than half of the global high yield market. For UK and European investors looking to access the US market, it is worth noting that hedging costs (see Figure 1) have tumbled. After historical highs in late 2018, effective zero rates from the Federal Reserve mean currency hedging costs are now at lows not seen since 2015.
The spreads have been seen are almost equivalent to the tech crash in 2002. The only period with dramatically wider spreads was the global financial crisis where they briefly hit 2,000bps in US HY (see Figure 2). In that regards, AXA Investment Managers believes that the swift action and the sheer scale of monetary and fiscal policy announced to combat the coronavirus around the world – and the willingness to do more in future – has helped to avoid this outcome.
Avoiding defaults
Defaults will rise in the global HY space. AXA Investment Managers thinks a first wave will continue over the next few months, with a second possible as we move through 2021, when the effect of stimulus and intervention wanes, and when the true impact of the outbreak is more clear. This doesn’t rob the HY sector of its appeal, but it does mean that care is needed when taking advantage of these market conditions. AXA Investment Managers expects an overall default rate of 5-8% in US HY this year. The demand picture in HY has been a curious beast, with liquidity holding up well at the more distressed end of the market, and among issuers who were well shielded from the virus impact or which even have a positive crisis story to tell (such as in healthcare). In the latter group, some companies are trading not far below where they traded before, but there may well be reasonable value here as the default risk remains low. In the middle group, however, where visibility about prospects is relatively low, liquidity has been weaker, and prices suffered early in the crisis. That means the potential for both risk and value is perhaps highest here, in our view. And it is here, too, that good credit analysis will be able to add the most value, although it may take time to position portfolios.
Within these groups, across sectors and within sectors the effects of the pandemic have been uneven. Balance sheet liquidity has always been a key part of our credit research tools, but it is particularly relevant now to determine which individual companies may have trouble bridging to the other side of this crisis in both a base case and a more stressed case where lockdowns persist or return. AXA Investment Managers has been reviewing individual holdings for short-term liquidity needs in both scenarios, while our analysis is adapting daily to factor in the unique characteristics of national intervention and support measures. This issuer-by-issuer approach applies equally to the influx of so-called fallen angels from the IG segment into HY – the dollar volume of fallen angels hit a record $91.5bn in March. This ongoing effect of the crisis is having a material impact on the size and structure of the HY market and will bring buying opportunities as the market adapts. AXA Investment Managers believes there should be no blind rush to snap up fallen angels, especially in weaker sectors. Value is possible because there may be forced sellers and the companies concerned may be larger and more resilient. However, fundamental analysis and valuation remains the starting point for any individual trade. In an unprecedented crisis, barely a decade from the last one, markets have rightly been rattled. But as volatility softens, attention should turn to the value on offer. AXA Investment Managers can see good reason to increase duration and risk positioning, where appropriate, while controlling risk for more stressed situations that may arise. History suggests that entry into the HY market at these sorts of spreads has a good probability of a strong return over a one-year view providing good opportunities for investors.
To learn more about this topic, please contact Rafael Tovar, Director, US Offshore Distribution, AXA IM.
Notes:
Source: Inter Continental Exchange 22 July 2020
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Hamish Chamberlayne, director de renta variable sostenible global en Janus Henderson Investors. Hamish Chamberlayne, director de renta variable sostenible global en Janus Henderson Investors
Focusing on sustainable investment and ESG factors, Janus Henderson Investors held its “Invested in Connecting” virtual forum, a three-day event designed to connect clients with sales teams and investment managers on a single platform, sharing ideas, perspectives and knowledge through live presentations and discussions on market issues and perspectives.
The event began with a welcome speech by Ignacio de la Maza, Head of EMEA Intermediary and Latam, who explained that during the sessions, emphasis would be placed on how managers perceive ESG factors and how they incorporate them into their strategies.
On the first day, the focus was on equities, with Alex Crooke, Co-Head of Equities for the EMEA and Asia Pacific regions, delivering a presentation on the prospects for the asset class and the three issues to be considered in the future. The first is a possible reflationary scenario in which central bank and government intervention to rescue the economy produces inflation. The second topic would be a process of stock issues or “re-equitization”. There is concern among company directors that they have incurred in over-leveraging to overcome the crisis. It is expected that once this debt matures, they will opt to issue more shares, something that could lead to a decrease in the return on equity, but which could also translate into better P/E ratios. Finally, the British equity market is discounting the fact that there will be no Brexit deal at the end of the year and some good companies are trading at attractive valuations.
The debate with the Global Technology team:
Alison Porter, Graeme Clark and Richard Clode, portfolio managers with the Global Technology team, then discussed the fundamentals that have enabled the technology sector to outperform the rest of the market over the past decade. The team argued that the valuations are still explained by the robustness of their balance sheets, after a crisis that has particularly benefited the sector.
“There are fundamental differences between the current situation and the 2001 technology bubble that should give investors some peace of mind. Firstly, in the last five years, the technology sector’s increased performance has not been as extreme as it was then. In the period before the technology bubble burst, we saw compound annual returns of over 43%, while in this period we have seen less than half.
Secondly, in the area of stock market listings, since January 2018, some 36 companies have been listed on the stock exchange, a figure which in the two years prior to the bursting of the technology bubble exceeded 230 companies, indicating that we are in a more rational environment. In addition, the leaders of today’s technology companies are more future-oriented; these companies have become platforms that benefit from the network effect they have created. Now 40% of the technology sector is related to software and obtains recurring profits, a percentage that was only 20% in 2001, this allows these companies to obtain higher margins and structural returns,” commented Alison Porter.
“Finally, on the subject of valuations, interest rates are currently about 600 basis points higher than they were in the year 2000. We tend to say that technology adoption and inflation are inversely correlated, because the adoption of a new technology generates price transparency and is cheaper, faster and allows for better results. The current environment of low interest rates favors high valuations. In terms of profits, shares used to trade with a 53x premium over the rest of the market, while currently they trade with a 20x premium. In terms of free cash flow, shares used to trade at a premium of 118x and now trade at a premium of 31x. But that does not mean that there are not certain areas of concern in terms of valuation, we know that 30% of the sector is not generating profits and that is similar to what happened in the 2000s,” she added.
The importance of ESG factors in the current global environment:
Hamish Chamberlayne, Head of Global Sustainable Equities team and portfolio manager of the Global Sustainable Equity strategy, Andy Acker, portfolio manager of the Global Life Sciences and Biotechnology strategies, Denny Fish, portfolio manager of the Global Technology and Innovation strategy, and Guy Barnard, portfolio manager of the Global Property Equities strategy, then discussed the changes in their respective funds’ investment universe following the pandemic crisis, the acceleration of existing trends, and the growing role of sustainable investment.
“In recent years, the trend towards the digitalization of the economy has had a strong influence on the global context, both on the consumers as well as on the companies. But, during the pandemic, perhaps the degree of consumer penetration has been accelerated, not only in the younger generations, such as Generation Z, which consumes mainly online, but for all cohorts of generations, including the older ones, who now find in the Internet the way to make their purchases and payments,” explained Denny Fish.
“While, on the corporate side, the pandemic has highlighted the importance of digitizing all processes within an organization. As well as the importance of creating virtual infrastructures for their workers,” he added.
Meanwhile, Andy Acker, argued that the defensive characteristics of the health care sector mitigated the impact of the coronavirus crisis on his portfolio. “Investor demand for the healthcare sector tends to increase in market downturns, in the last downturns over 15%, the sector only experienced half of the drop. We have also seen areas of higher returns, such as in telemedicine and sectors on the frontline of the fight against the pandemic,” he mentioned.
Hamish Chamberlayne also discussed how this year, along with technology and the health sector, investment in ESG factors is also benefiting from strong secular trends. “The goal of the Global Sustainable Equity strategy is to build a highly differentiated portfolio with a multi-thematic focus on sources that contribute to performance. While both the technology sector and the health sector contribute positively to the portfolio, there are also other areas that have contributed to performance. Among them, two areas that I would like to point out are companies that are aligned with sustainable modes of transport and a healthier way of life, and companies related to the green economy, renewable energies and electrical infrastructure,” he said.
“Just to mention a few examples, Tesla has had a good year and there is a high degree of enthusiasm about the pace of innovation it has achieved in the automotive sector. On the other hand, Shimano, a leading supplier of bicycle powertrain technology, has benefited from increased demand for alternatives to public transportation and the increased desire for more exercise among consumers in the wake of the pandemic.
On the green economy side, we expect to see an increase in electricity use from the current 20% to 50% of the energy mix in the next decade. As a result, there has been an increase in investment in this area, an excellent example is the European recovery plan, which places the green economy and renewable energy at the center of its stimulus package,” he completed.
Pixabay CC0 Public Domain. Amundi lanza un nuevo ETF de renta variable libre de combustibles fósiles con exposición a los mercados emergentes asiáticos
Amundi and the Asian Infrastructure Investment Bank (AIIB) have launched a new Climate Change Investment Framework. As announced by both firms in a press release, this benchmark investor tool will for the first time holistically assess climate change risks and opportunities in line with the three objectives of the Paris Agreement at the issuer-level.
Endorsed by Climate Bonds Initiative, a major international certifier and industry thought leader in the green and climate bond market, the framework translates the three key objectives of the Paris Agreement into fundamental metrics, equipping investors with a new tool to assess an issuer’s level of alignment with climate change mitigation, adaptation and low-carbon transition objectives.
While groups of leading institutional investors have responded to the climate challenge by integrating climate change into investment processes, AIIB and Amundi highlighted that this tool takes a holistic approach that current private capital mobilization efforts lack.
“Equity capital markets currently focus on thematic funds and commonly face strong sector bias, while low-carbon indexes have a pronounced focus on mitigation efforts. In fixed income, green bonds have been the main climate finance solution for debt capital markets, but they do not consider exposure to climate investment risks and opportunities from the viewpoint of an issuer’s entire balance sheet”, they stated in the press release.
Extra financial impact
Investors can expect portfolios aligned with this framework to deliver a potential financial impact by benefiting from any future repricing of climate change risks and opportunities in the capital market. It also enables them to measure issuer performance against the three objectives of the Paris Agreement, which allows investors to systematically include in their investment portfolio A list issuers (those that are already performing well on all three objectives) and B list issuers (those that are moving in the right direction but are not in the A list yet). An investment strategy targeting both A and B List issuers should be more resilient to climate change risk and more exposed to opportunities not yet priced in by the market.
In addition, they pointed out that the framework also delivers extra financial impact as it is designed to encourage the integration of climate change risks and opportunities into business practices by targeting the engagement of so-called “B-List” issuers to help them transition to “A-List” credentials.
Yves Perrier, CEO of Amundi, said they are proud to launch this tool with AIIB as they continue to make strides in the field of climate finance. “Mobilizing key stakeholders in supporting the Paris Agreement in Asia is in line with Amundi’s commitment to ESG investing and reflects our extensive commitment to the region. This new Framework will further help the investment community address climate change through the mobilization of capital to emerging markets where it is much needed”.
Jin Liqun, AIIB President and Chair of the Board of Directors, commented at the Climate Bonds Initiative international conference that in launching this framework they show their “commitment to playing an important role in the battle against climate change, by contributing to strengthening market capacity and driving the green agenda in Asia”.
A group of senior bankers from Santander Private Banking International has joined Wells Fargo in Miami. The team includes Gustavo Mariosa, Gastón Ricardes, Gabriel Patrich, Laureano Bello and Advisor Sebastián Ramírez. Sofía Fernández Morell and Nelson Rodríguez will also join Wells Fargo as Client Associate.
With this move, Mariosa concludes an employment association with Santander which has lasted almost 30 years. He began in 1991 as a representative in the Sao Paulo branch in Brazil, where he spent more than five years, and then held the same position in Mexico, where he worked for seven years. Later he held the same position in Peru for six years. In 2009 he was appointed Senior Vice President at Santander Private Banking International, a position he´s held until now.
Meanwhile, Ricardes and Bello both share a vast experience in private banking, starting with the Bank of Boston in Miami in 1993 and 1992, respectively, until they both joined Santander in 2007. In the Spanish company, they both held the position of Senior Vice President.
Patrich joined Santander in 2007 as an executive banker and senior vice president. He holds an MBA from the University of Pennsylvania.
Sebastián Ramírez, who has a CFA certification, worked at Santander as an investment advisor from September 2013 until this month, according to his LinkedIn profile.
“I am pleased to announce that as of September 18th, 2020, I joined Wells Fargo Advisors as Managing Director and Financial Advisor in their Miami, Florida office,” says Ramirez’s description. Prior to his work at Santander, Ramírez was an institutional sales and portfolio manager in several management companies in Buenos Aires and Miami.
The team will report to Martha Chinea, Senior Vice President, who reports to the International Market led by Mauricio Sanchez, Managing Director.
Next October it will be 11 years since the first issuance of a CKD in the Mexican market. RCOCB_09 issued by Red de Carreteras del Occidente (infrastructure sector), was the first CKD that was placed on the Mexican Stock Exchange that gave institutional investors access to private equity through a public vehicle. RCOCB_09 presents a net IRR in pesos of 15.2% and if the inflows and outflows at the exchange rate of each movement are considered, the net IRR in dollars is 10.3% in accordance with own estimates prepared with public information from the issuer (august 31, 2020). These IRRs are good considering that the investment takes 11 years and that it will expire in April 2038, that is, in 18 more years.
Just as we have this success story for the 164 CKDs and CERPIs as of August 31, trying to assess the performance of an entire industry that is worth 31.538 million dollars in committed capital of which just over half has been called (57%) equivalent to 18.012 million dollars; The issue becomes more complex since when weighting all the CKDs and CERPIs, the net IRR in pesos does not reach two digits since the resource requirements and distributions are different and of course the valuation of the investments they generate in what individual issuers and the different sectors (7) to which they belong. In addition to the above, there is the problem that in the first three years (2009 to 2012), the CKDs were pre-funded at 100% (29 of the 164 CKDs and CERPIs).
So far only two CKDS have expired and another six are identified that could expire this year so these two CKDs and six to expire cannot tell the story of the 164 that there are. It cannot be ruled out that some of these CKDs exercise the possibility they have of postponing their expiration.
At an aggregate level, in the entire life of CKDs the best years have been 2009, 2013, 2014, 2018 and 2019, which present an IRR between 7 and 10% which has been improving as time passes. The years 2009 and 2013 practically already called 100% of the capital committed (100 and 96%), while in 2014 they are 71% and in 2018 and 2019 they are between 30 and 25% of the capital called, so as the new investments are made, the observed IRRs will be modified.
The sectors with the best IRR in pesos are the fund of funds, credit, infrastructure and real estate sectors as of August 31.
When reviewing the 15 highest sector IRRs per year from 2008 to date, we have IRRs that are between 8.0% and 16.5%. The infrastructure sector is the one that has had four very good years such as 2009, 2010, 2012 and 2015. The credit sector has had three good years (2012, 2014 and 2019), and with two good years are the real estate sectors , energy and private capital.
Although the IRRs shown are not yet outstanding in the averages, there are 36 CKDs (as of August 31) that present IRRs above 10% that represent 22% of the 164 CKDs. Another interesting fact is that only 46 CKDs have called 100% of the committed capital, which means 28% of the total supply of CKDs and CERPIs.
Several factors make CKDs underperform so far:
For the institutional investor (insurance companies and AFOREs, among others) to participate in private equity, it was necessary to create a public instrument that was listed on the stock market. This meant incurring issuance and placement expenses, among others, that a global private equity fund does not incur.
The money has not been called 100% so many of the investments are still in their initial phase. All CKDs and CERPIs are missing 9 years on average where 57 will begin to expire as of 2030.
There are 29 CKDs that were pre-funded (100% of the capital called in their placement).
The average supply of CKDs is 13 per year, where, for example, there was the case that 38 were placed in 2018. That year the offer was important since the CERPIs were allowed to invest 90% of their resources globally.
Of course, there are good and bad years; There are sectors that require more time to present results and it must also be recognized that there have been good and bad CKDs, but those can only be seen as they expire. The observed IRRs will continue to change and little by little results will be seen.
Foto cedidaEric Varvel, Global Head of Asset Management and Chairman of the Investment Bank at Credit Suisse. Credit Suisse AM and Qatar Investment Authority Partner to Create a Private Credit Platform
Credit Suisse Asset Management and the Qatar Investment Authority (QIA) announced a strategic partnership to form a multibillion dollar direct private credit platform. As they stated in a press release, it will provide financing primarily in the form of secured first and second lien loans to upper middle-market and larger companies in the US and Europe.
The platform is part of Credit Suisse Asset Management’s Credit Investments Group (CIG), which is led by Global Head and Chief Investment Officer, John Popp. The CIG team is one of the largest providers of leveraged finance solutions in the industry, with approximately USD 60 billion in non-investment grade credit positions. For more than 20 years through various market cycles, CIG has maintained a disciplined approach and demonstrated leading experience in sourcing and servicing credit relationships, highlights the press release.
Eric Varvel, Global Head of Asset Management and Chairman of the Investment Bank at Credit Suisse, believes this strategic partnership with QIA presents “unique opportunities” for borrowers seeking credit solutions to partner with their Asset Management and Investment Bank franchises. “The Credit Investments Group, within Credit Suisse Asset Management, has extensive industry and lending relationships that, when combined with Credit Suisse’s unmatched leveraged finance and financial sponsors franchises, uniquely positions us to provide capital and liquidity to the private credit market”, he added.
Meanwhile, Mansoor Al Mahmoud, CEO of QIA said they see “significant potential” in the growing private credit market and they are “excited” to work again with Credit Suisse. “This strategic partnership, with one of the foremost leaders in asset management, is aligned with QIA’s objectives as a long-term diversified investor across asset classes both in the US and globally”, he stated.
He believes this private credit platform is a natural extension of their business as a leading provider of capital solutions to non-investment grade companies in the US and Western Europe. “The current market environment presents an ideal entry point into the private credit space, with capital and liquidity now at a premium”.
Foto cedidaPIMCO, miembro del Consejo Asesor Global de PIMCO.. PIMCO incorpora a Michèle Flournoy a su Consejo Asesor Global
PIMCO announced in a press release that Mark Carney, economist and former Governor of both the Bank of England and the Bank of Canada, will join its Global Advisory Board. The Board provides PIMCO investment professionals with insights on global economic, political, and strategic developments and their relevance for financial markets.
Established over four years ago, it is “an important part of the firm’s investment process and is designed to provide a deeper understanding of the policies and institutions that influence financial markets”, says the document. Former Federal Reserve Chairman Ben Bernanke is the Chair of the Board, which is comprised of seven members including Carney.
“Mark’s extensive experience as an economist and central banker, combined with his focus on transforming climate finance, makes him an invaluable addition to this renowned group of thinkers,” said Emmanuel Roman, PIMCO’s Chief Executive Officer.
Meanwhile, Dan Ivascyn, Group Chief Investment Officer, pointed out that the Board “continues to be an important part of our investment process, providing unique global insight, and challenging our bias and assumptions, as we pursue the best investment outcomes for our clients around the world”.
Carney is currently UNSpecial Envoy on Climate Action and Finance. From 2013 to March 2020, he served as the Governor of the Bank of England and Chair of the Monetary Policy Committee, Financial Policy Committee and the Board of the Prudential Regulation Committee. In addition, he served as Chair of the Financial Stability Board (FSB) from 2011 to 2018, and First Vice-Chair of the European Systemic Risk Board. He was Governor of the Bank of Canada from 2008 to 2013.
Other members of the PIMCO Global Advisory Board are Gordon Brown, former U.K. Prime Minister and former Chancellor of the Exchequer; Ng Kok Song, former CIO of the Government of Singapore Investment Corporation (GIC); Anne-Marie Slaughter, former Director of Policy Planning for the U.S. State Department; Joshua Bolten, former White House Chief of Staff; and Jean-Claude Trichet, former President of the European Central Bank.
Foto cedida. UBS WM nombra a Anja Heuby-Egli responsable del área de soluciones de inversión sostenible
UBS Wealth Management has appointed Anja Heuby-Egli to lead a newly-created sustainable investment solutions function, reported Citywire Selector. She will be responsible for sustainable investing solutions at global wealth management, including general advisory, discretionary and advisory mandates, funds and alternatives.
According to an internal memo referred to by the publication, Heuby-Egli will join UBS chief investment office’s global mandates and investment content team (CIO GMIC) and will report directly to its head, Bruno Marxer. She will also become a member of the unit’s management committee.
Within global wealth management, her role only covers the CIO’s global mandates and investment content function. Andrew Lee will remain head of sustainable and impact investing for its other investment functions, which are known internally as the CIO investment office (IO), informed Citywire Selector. That unit is responsible for investment frameworks, for example asset allocation, methodologies and associated research and thought leadership.
Meanwhile, global mandates and investment content team is in charge of investment products, including those implementing investment views of the IO. When it comes to the 100% sustainable portfolios, Lee will continue to oversee the portfolio framework and methodology and any thought leadership associated with that.
Heuby-Egli’s team will work on the implementation of that framework in products, in collaboration with other content teams. Her primary focus will be EMEA, APAC, and Switzerland, and she will also collaborate with the Americas sustainable investing solutions team.
Experience in sustainable investment
Heuby-Egli started at UBS in 2005 and has worked in the investment bank, group functions, and global wealth management, primarily in the area of risk and investment process methodology. She was in charge of CIO’s data innovation and also worked with the CIO sustainable investment team, where she and her team developed the proprietary ESG scoring platform at the core of the firm’s personalised sustainable investment advice offering. Her new role will be covering wealth management activities, opposite to those of the whole UBS group.
An economic recovery appears to be gathering pace. That means emerging market stocks, and some cyclical sectors, are looking more attractive.
It’s looking increasingly like a V-shaped economic recovery. True, in some regions the bounce back has been a little less robust. But in others, notably China, economic conditions are largely back to where they were pre-Covid – in July, industrial profits were up 20 per cent year on year. Meanwhile, after reviewing its approach to monetary policy, the US Federal Reserve has formally become a much more dovish institution at the margin, though it stopped short of a radical overhaul anticipated by some in the market.
Markets have noticed. Yet after a powerful rally across all assets during the past few months – sending leading US stock market indices to record highs – we feel that prospects for further broad-based gains are limited, with greater divergence among regional markets.
So while governments may yet offer more fiscal stimulus, not least in the US, liquidity provision is slowing worldwide. There are also political risks associated with US elections in November. And all the while there’s Covid-19. Not only is there the possibility of a significant second wave of the virus, but there is also little clarity on how soon a vaccine might be developed. At the same time, Shinzo Abe’s decision to step down after being Japan’s longest-serving prime minister introduces some uncertainty around geopolitics and the possibility that the world’s third largest economy will change its policy approach.
As a result, we remain neutral on all the major asset classes, though within equities we favour more cyclical sectors.
Our business cycle indicators show that the economic recovery is proving to be strong enough to warrant an upgrade to our 2020 economic forecasts. Our economists now expect full year global GDP to come in at -4 per cent from -4.2 per cent previously, but next year’s forecast has been cut to 6.1 per cent from 6.4 per cent.
In the US, retail sales have registered the strongest and fastest ever rebound after the deepest and quickest downturn in history to where they’re now – running at above pre-recession peak. Most past cycles have taken at least three years to play themselves out. This time, it’s been only a little more than three months. Retail sales are also back to trend in the euro zone.
However, it’s notable that only China’s real-time indicators are back to pre-Covid levels. Elsewhere, they’ve flattened out at between 10 per cent and 20 per cent below.
And while inflation could yet prove to be a risk if demand remains firm and supply fails to catch up, that’s not likely to be an issue until the back half of 2021.
Global liquidity conditions remain very supportive, with new liquidity creation running at 25 per cent of GDP, but there is clear evidence that monetary stimulus growth has peaked [see Fig. 2]. At the same time, banks are tightening credit standards. And the Chinese central bank is now at neutral, while the country’s credit surge has tapered back down.
One upside liquidity risk, though, is that US Treasury cash balances held by the central bank could be drawn down.
Our sentiment indicators paint a mixed picture. The balance of equity calls to puts suggests a degree of market complacency, and our indicators show hedge funds have crowded into a handful of concentrated positions, particularly in the largest of the large cap stocks. On the other hand, retail investors seem cautious about shares and sentiment surveys remain depressed, while fund manager positioning in the asset class is below historic trend. A “wall of cash” remains, with some recently flowing into bonds and credit – both appear overbought.
Finally, our valuation indicators suggest equity prices look stretched after a 50 per cent rally in the S&P 500 – on our models, they are at their most expensive in 12 years, trading two standard deviations above their 6-month moving average. Even relative to bonds, equity valuations no longer look particularly cheap. The gap between the global earnings yield and global bond yield is at its lowest in a decade at 4.5 percentage points. But we’re not yet into bubble territory. If current low bond yields, which have fallen 100 basis points this year, are sustained, this valuation impact on US equities exactly offsets the 20 per cent decline in earnings. Our valuation score on equities has moved from negative in January, to strongly positive in March and is back down to negative now.
Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented herein.
Important notes
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