Taking a Peep Into 2020

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Pixabay CC0 Public Domain. Carlos Bastarreche, nuevo asesor externo de AEB y CECA para asuntos europeos

As a new decade looms ahead, let us take a peep into 2020 based on the trends observed over the last 18 months. The strong performance in bond and equity markets of 2019 have wiped away the sorry tale of investment markets just a year before. Much of this turn around can be attributed to a change in Central Bank policy, notably in the United States and Europe.

The disruption of 2018 has shown us that the road to monetary normalization is a sure way to hardship for asset markets. After 10years of world Central Bank accommodation, normalization could never be considered as just ‘watching paint dry’. In effect since 2009, Central Bank intervention has become too preponderant for it not to have an upsetting incidence on its way out. This point was clearly demonstrated in the Fall of 2018.

More of the same…

Looking into 2020, central bank accommodation is likely to be more of the same. But there are limits to this monetary approach. 2019 has revealed some of the undesired side effects of such a policy treatment. The US repo financing stress of September, as well as European bank profit warnings from negative interest rates are an indication of this collateral damage.

To counter balance these negative effects, central bankers have been pushing governments to engage in Keynesian fiscal stimulus. Japan has already announced its intention to go down this road with a 120 billion dollar package. In 2020, we could see a combination of continued monetary accommodation with fresh fiscal support in different parts of the world. Together, these interventions would join forces to juice assets markets even further, increasing the possibility of a financial ‘melt-up’.

With so much liquidity chasing too few investable assets, is this imbalance to be wished for? Not really. Ever higher asset markets funded by money printing and increased government deficits, is likely to bring back the great divide between holders of financial assets and the rest, invariably leading to social tension. This trend is already apparent with the unrest in Latin America, Europe, and the Middle East.

 In addition, levitated markets require perpetual central bank intervention to sustain them. A highly valued financial system is inherently unstable and vulnerable to ‘Black Swan’ shocks. Therefore, markets could become even more monetary accommodation dependent. The persistent intervention by the Bank of Japan with its Quantitative Easing forever policy is already an example of this.

The Fixed Income world

The fundamental risks to fixed income instruments are Interest rate changes and credit default. Interest rates are unlikely to rise for the reasons already mentioned above. To add to this, monetary support gives the region implementing it a competitive advantage on the currency markets by keeping its value weak. In the current context of currency wars, it is increasingly improbable the accommodation policy of one Central bank will be modified all on its own.

Therefore, the central bank policy choices of 2019 are likely to continue into 2020. This could keep bond asset prices high and moving higher. As the returns from fixed income instruments remain meager, investors relying on the revenue stream from their capital investments will face an increasing conundrum, which could make the ‘chase for yield’ even worse next year.

Credit risk is likely to become an important investment theme for 2020. Up to now, many industrial economic models have been sustained by low interest rates, investor support and moderate growth. If the fiscal and monetary stimuli mentioned above where to be insufficient to prevent a generalized economic slowdown, low funding costs will not counterbalance losses in top line revenue for these same businesses. Investor support for weak problematic balance sheets could then disappear overnight.

Small is beautiful

Large credit funds in search of yield are desperately looking to invest. However, the fixed income instruments of quality issuers are highly sought after by every investor under the sun. Larger funds are having increasing difficulty in sourcing sufficient product in quality and quantity, under these circumstances. The result has been a tendency, on their part, to tiptoe into lower quality instruments or delve into niche markets. With an increasing probability of rising credit risk moving forward, due to a possible economic downturn, this new investment space is likely to be very uncomfortable place for the larger funds.  

On the other hand, smaller credit funds have demonstrated a real competitive advantage to create value without taking on undue risk. Their size does not impose on them the sourcing constraint seen in larger funds. Therefore, their allocation can be made on their investment conviction. Their choice to acquire fixed income instruments is based on common financial sense criteria, rather than a mandate to accommodate a regulatory investment template. After all, this is how asset management should really function… Isn’t it?

Finally, the positive and negative impact of monetary and fiscal stimuli 2019/2020 requires management nimbleness to navigate through unknown consequences, in what are unchartered financial times. Only smaller funds have this flexibility still available to them.

Column by Steven Groslin, Executive Board Member and Portfolio Manager at ASG Capital

Alberto D’Avenia (Allianz GI): “2020 Will See Full Deployment of Our Service Model and Investing in Our Advisory Approach”

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Alberto
Foto cedidaAlberto D'Avenia, Managing Director y Head of US Non-Resident Business (NRB) y Latam Retail en Allianz Global Investors.. Alberto D’Avenia (Allianz Global Investors): “Para 2020, desplegaremos nuestro negocio y profundizaremos en nuestro enfoque de asesoramiento”

Alberto D’Avenia, Managing Director and Head of US Non-Resident Business (NRB) and Latam Retail at Allianz Global Investors, makes a positive balance of 2019. Throughout the year investor’s main concern has been to achieve returns, and preserving capital. D’Avenia considers that that objective has been fulfilled at Allianz GIobal Investors, where the work they do together with private bankers and financial advisors has been fundamental. This and more in the following interview with Funds Society.

What were the main worries that the investors had this year? 

Generating income with capital preservation are in general the 2 main features that non-resident private client in the non-resident business require. The year has been positive even for moderate balanced portfolios, and the average low volatility has had  the risk management component take a back seat like it always happens in those occasions, but risk management must keep playing a crucial role in a 2020 year that has the making of a more complex financial scenario.

And how did you manage it?

We have seen favour from clients in our more traditional fixed income and balanced solutions like Income and Growth built to this aim, but we have also worked with our distribution partners to introduce diversification solutions in the liquid alternative space, like our option-based Structured return, providing a favourable decorrelation from traditional markets and absolute return, all weather approach, that we believe will come in handy once volatility spikes.

For the next year (2020), what do you think that will be the principal events to consider? How can you take advantage of it or transform into an opportunity?

We position a trio of major economic and political factors as key events to monitor: US elections, trade developments and central banks liquidity – on a lesser extent, but still significant, we have a second trio made of oil supply, food-security fears and growing US-China competition which could create additional risks for portfolios. This in a 2020 that we see characterised by a deceleration in global growth (triggered by slower US and Chinese economies) and continued uncertainty about how monetary policy and politics will move markets.

These factors will offer a number of “risk-on/risk-off” movements, especially in an era where a single tweet can determine significant volatility shifts; in these occasions, beta returns are normally flat. Hence, risk management will be paramount. In this environment, investors should aim to keep their portfolios allocations consistent to their convictions and actively manage risk – not avoid it. These are, in fact, moments where Money weighted return (what clients are getting out of each own’ s investments) tend to differ from Time weighed returns (returns of investments “on paper”) because of trades dictated by fear and greed. The support of the private bankers and advisers will be paramount to consistent investment approach in those volatile phases, and this is why we keep investing in significant communication on topics like behavioural Finance and risk advisory with our dedicated unit risklab.

Investment opportunities in highly valued markets will be rarer and searching for cheaper ones that also generate return potential from dividends or income might be the right approach. Attractive returns can be pursued from less volatile dividend-paying stocks in value sectors such as energy and from themes that capture global, disruptive trends.

We will keep pursuing the benefit of alternative investments such as private credit, infrastructure debt and equity, and absolute-return opportunities tend to be less correlated to fixed income and equities over time, offering an additional source of diversification potential.

AllianzGI is also a recognised leader in ESG informed and integrated investments; we believe in the merits of long-term sustainability of companies that can be best assessed when incorporating ESG factors into investment decisions.

Choose carefully among over-owned US equities; consider undervalued European stocks and emerging-market debt; look to alternative investments for less correlated returns; keep up the hunt for income against a backdrop of low yields.

Finally, careful on passive investment – their backwards looking nature (indexes and funds tracking them are determined in the past) can be significantly tested by news headlines. They can be part of a general portfolio allocation, but in the light of an actively managed strategy set  to invest with conviction

During 2019, which were the most popular funds or demanded by the investors?

As said before those favouring a more cautious approach to high yield like Allianz Short Duration High Income and Global Selective HY, those clearly aimed at a risk managed process to ensure a consistent income, like Income and growth and finally thematic investments, offering access to stories with long-term global growth potential, like Allianz Global Artificial Intelligence.

In this way, what do you think that will be the trend in 2020?

We do not believe private clients (and hence, our distribution partners) needs will change dramatically – probably, after 2019 good results, a more cautious approach will be required but still with income generation at the helm. Diversification and risk management will become even more important going forward.

During this year, did you implement some new services or solutions for the investors?

2019 has been a seminal year, after all our office in Miami has been up and running around summer, so we have invested in establishing our brand and its core value proposition: partnership approach oriented to advisory and consultative  partner relationships, risk management support with our dedicated unit risklab, ESG integration in our investment process. As far as investment solutions go, we have  positioned Allianz Structured Return (it is more a suite of solutions than just one fund, that is the pure portable alpha strategy) and we believe it will be a real game changer especially in high volatility scenario going forward. Same for our socially responsible solutions (SRI) which are available by the main platforms our partners work with, Pershing and Allfunds bank.

Do you have any plan or idea to develop new services for the clients?

If 2019 has been the year of fitting in the market, 2020 will see full deployment of our service model. We have ambitious plans of investing with our partners in our advisory approach, putting risklab, our ESG research and behaviour finance at the core of our offer, together with our best investment solutions.

As a company, what have been your main successes this year? 

Our main goal this year has been positioning our brand in the full US non-resident and Latina America Wealth management markets, and our decision to open an office in Miami has been crucial to that. We have signed a number of new distribution agreements with US local independent and Latin America partners, and we have been able to increase the level of cooperation with those we were already working with. Due to our physical absence from the market, we were being looked at in terms of “best of” investment opportunities in our Ucit and while we are obviously thrilled to be able to provide the market with best in class funds, our partnership approach and the richness of above described solutions is now fully available to our partners, getting our relationships to the next level.

Alternative Investments as a New Tradition

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Foto cedida. Foto cedida

Younger, wealthier, and coming from Asia. The profile of typical buyers in the premium second home resort market is dramatically changing. According to the latest Luxury Portfolio International research, while the baby boomers are traditionally buying second homes more often, the new group under 40 is fueling the premium market, creating a spotlight opportunity for sellers. That younger crowd accounts for almost half of interested buyers or at least half of those looking.

“We believe the demand for premium units in the domestic and international resort market will continue to get stronger. We already see an influx of demand for branded residences with value-added services such as building maintenance, housekeeping, concierge facilities, etc.,” shares his insights on the research Daniel Kodsi, CEO of Royal Palm Companies, a leading South Florida developer. “As individuals increasingly become global citizens with diverse business interests, time is becoming a rare commodity. They want the most amenities in the world in one place.”

Another advantage of ownership resort property is holiday rental and investment yield potential. Now, 60-80% of buyers put their property in the rental pool, which is double what it might have been ten years ago. These rental programs tend to be a bigger driver in resort locations as those buying in cities tend to use them more regularly. It’s the right time to take advantage of this need by investing in mixed-use products providing the services and amenities of a full luxury hotel to the vacation residence users.

According to the latest report compiled by UBS and Campden Wealth Research, premium real estate gained the greatest traction in family offices portfolio this year, with allocations rising more than any other asset class, by 2.1 percentage points. That dynamic signals that most of these buyers are beginning to inherit substantial amounts of money from their parents and invest in real estate.

Where do millennial millionaires want to buy? In Florida, of course. The ‘sunshine’ state ranks among the top seven states (after California and New York) where young and wealthy buyers look for property, based on the most recent “A Look at Wealth” study by Coldwell Banker Global Luxury and data surveyor WealthEngine. Downtown Miami is a rising star on a global map. While New York and Los Angeles are stagnant, the Downtown population has increased by 40% since 2000, according to the local authorities. Last year, Miami broke tourism records – 16.5 million overnight visitors and 6.8 million day-trippers came through – and 2019 is likely to top those. All of this bodes well for the city’s hospitality industry.

The $4 billion mixed-use Miami Worldcenter is underway on almost 30 acres that are poised to become a magnetic destination for tourists and business visitors in the heart of Downtown Miami, with its impressive collection of historic landmarks, world-known museums, and waterfront parks. This is the most significant mixed-use development in the U.S. after New York’s Hudson Yards.

This year, PARAMOUNT Miami Worldcenter, a condo tower designed with a “residential Skyport” for a future of flying cars, has been completed and already roughly 90% sold to buyers from around the world – from Turkey, China, the UAE to Brazil, Venezuela, and Sweden. The next global debut at Miami Worldcenter is Legacy Hotel and Residences, with 278 branded condos above 255 hotel rooms, the city’s first enclosed rooftop atrium, and a first-of-its-kind medical and wellness center. Royal Palm Companies’ plan is to break ground in June and complete the building within almost three years. The tower will join a wave of new projects with rental options for buyers.

Stocks Are On Track for Solid 2019 Returns

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Photo: Pxfuel CC0. Stocks Are On Track for Solid 2019 Returns

The U.S. stock market started November with a sharp two-day rally sparked by a strong October jobs report that calmed recession fears. This set the stage for stocks to move higher for the month and to continue the 2019 series of record closing highs.
 
During the month, there were temporary sell offs from negative trade war related news but these were followed by positive headlines that moved stocks higher. On balance, improving trade negotiations, Brexit clarity, a resilient U.S. consumer and an accommodative Fed kept stocks on track for solid 2019 returns.
 
The M&A event catalyst for the three day pre-Thanksgiving spike in stock prices was ‘merger Monday’ when a flurry of large deals were announced including: Charles Schwab’s $26 billion transaction for TD Ameritrade, LVMH with a $16.2 billion deal for Tiffany, and drug maker Novartis in a $9.7 billion takeover of The Medicines Co. The global M&A volume wave that started in 2014, as measured in U.S dollars, continues to roll along with $2.73 trillion in 26,321 announced pending and completed transactions through November 30, 2019 versus $3.07 trillion in 30,225 deals in 2018 according to Bloomberg data.
 
Relatively unknown hotel operator Unzio Holdings (3258.T) was targeted with a rare domestic hostile bid from Tokyo travel agent H.I.S. Co (9603.T) in July.    This catalyst has surfaced intense interest from prominent global private equity firms, banks, and hedge funds, all attracted  to Unzio’s Japanese and other real estate properties selling at a discount, while also testing Prime Minister Abe’s efforts to boost shareholder returns for foreign buyers with revamped corporate governance and disclosure. The unprecedented cross-border hostile and friendly bidding war for Unizo heated up on November 24 when it said it had received six more buyout offers in addition to the deal proposed by Blackstone Group. More M&A activity to come…

Column by Gabelli Funds, written by Michael Gabelli

__________________________________

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GAMCO MERGER ARBITRAGE

GAMCO Merger Arbitrage UCITS Fund, launched in October 2011, is an open-end fund incorporated in Luxembourg and compliant with UCITS regulation. The team, dedicated strategy, and record dates back to 1985. The objective of the GAMCO Merger Arbitrage Fund is to achieve long-term capital growth by investing primarily in announced equity merger and acquisition transactions while maintaining a diversified portfolio. The Fund utilizes a highly specialized investment approach designed principally to profit from the successful completion of proposed mergers, takeovers, tender offers, leveraged buyouts and other types of corporate reorganizations. Analyzes and continuously monitors each pending transaction for potential risk, including: regulatory, terms, financing, and shareholder approval.

Merger investments are a highly liquid, non-market correlated, proven and consistent alternative to traditional fixed income and equity securities. Merger returns are dependent on deal spreads. Deal spreads are a function of time, deal risk premium, and interest rates. Returns are thus correlated to interest rate changes over the medium term and not the broader equity market. The prospect of rising rates would imply higher returns on mergers as spreads widen to compensate arbitrageurs. As bond markets decline (interest rates rise), merger returns should improve as capital allocation decisions adjust to the changes in the costs of capital.

Broad Market volatility can lead to widening of spreads in merger positions, coupled with our well-researched merger portfolios, offer the potential for enhanced IRRs through dynamic position sizing. Daily price volatility fluctuations coupled with less proprietary capital (the Volcker rule) in the U.S. have contributed to improving merger spreads and thus, overall returns. Thus our fund is well positioned as a cash substitute or fixed income alternative.

Our objectives are to compound and preserve wealth over time, while remaining non-correlated to the broad global markets. We created our first dedicated merger fund 32 years ago. Since then, our merger performance has grown client assets at an annualized rate of  approximately 10.7% gross and 7.6% net since 1985. Today, we manage assets on behalf of institutional and high net worth clients globally in a variety of fund structures and mandates.

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GAMCO ALL CAP VALUE

The GAMCO All Cap Value UCITS Fund launched in May, 2015 utilizes Gabelli’s its proprietary PMV with a Catalyst™ investment methodology, which has been in place since 1977. The Fund seeks absolute returns through event driven value investing. Our methodology centers around fundamental, research-driven, value based investing with a focus on asset values, cash flows and identifiable catalysts to maximize returns independent of market direction. The fund draws on the experience of its global portfolio team and 35+ value research analysts.

GAMCO is an active, bottom-up, value investor, and seeks to achieve real capital appreciation (relative to inflation) over the long term regardless of market cycles. Our value-oriented stock selection process is based on the fundamental investment principles first articulated in 1934 by Graham and Dodd, the founders of modern security analysis, and further augmented by Mario Gabelli in 1977 with his introduction of the concepts of Private Market Value (PMV) with a Catalyst™ into equity analysis. PMV with a Catalyst™ is our unique research methodology that focuses on individual stock selection by identifying firms selling below intrinsic value with a reasonable probability of realizing their PMV’s which we define as the price a strategic or financial acquirer would be willing to pay for the entire enterprise.  The fundamental valuation factors utilized to evaluate securities prior to inclusion/exclusion into the portfolio, our research driven approach views fundamental analysis as a three pronged approach:  free cash flow (earnings before, interest, taxes, depreciation and amortization, or EBITDA, minus the capital expenditures necessary to grow/maintain the business); earnings per share trends; and private market value (PMV), which encompasses on and off balance sheet assets and liabilities. Our team arrives at a PMV valuation by a rigorous assessment of fundamentals from publicly available information and judgement gained from meeting management, covering all size companies globally and our comprehensive, accumulated knowledge of a variety of sectors. We then identify businesses for the portfolio possessing the proper margin of safety and research variables from our deep research universe.

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Disclaimer:
The information and any opinions have been obtained from or are based on sources believed to be reliable but accuracy cannot be guaranteed. No responsibility can be accepted for any consequential loss arising from the use of this information. The information is expressed at its date and is issued only to and directed only at those individuals who are permitted to receive such information in accordance with the applicable statutes. In some countries the distribution of this publication may be restricted. It is your responsibility to find out what those restrictions are and observe them.

Some of the statements in this presentation may contain or be based on forward looking statements, forecasts, estimates, projections, targets, or prognosis (“forward looking statements”), which reflect the manager’s current view of future events, economic developments and financial performance. Such forward looking statements are typically indicated by the use of words which express an estimate, expectation, belief, target or forecast. Such forward looking statements are based on an assessment of historical economic data, on the experience and current plans of the investment manager and/or certain advisors of the manager, and on the indicated sources. These forward looking statements contain no representation or warranty of whatever kind that such future events will occur or that they will occur as described herein, or that such results will be achieved by the fund or the investments of the fund, as the occurrence of these events and the results of the fund are subject to various risks and uncertainties. The actual portfolio, and thus results, of the fund may differ substantially from those assumed in the forward looking statements. The manager and its affiliates will not undertake to update or review the forward looking statements contained in this presentation, whether as result of new information or any future event or otherwise.

 

iM Global Partner Hires Peter Stockall, Strengthening its International Distribution Platform

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Peter Stockall, courtesy photo. Peter Stockall se une a iM Global Partner, fortaleciendo su plataforma de distribución internacional

iM Global Partner, a leading investment and development platform focused on acquiring strategic investments in best-in-class traditional and alternative investment firms in the U.S., Europe and Asia, appointed Peter Stockall to lead sales in the US Offshore and Latin America region.

Peter, based in Miami, will enhance iM Global Partner’s international expansion, spearheading the business development efforts in this very important region within the Americas. He will offer US Offshore and Latin America investors access to a wide range of strategies managed by the outstanding partners of iM Global Partner, ranging  from US equities to liquid alternative strategies. Peter will report to Jose Castellano, Deputy CEO and Head of International Business Development.

Castellano said: “I am delighted to welcome Peter to our international sales team to support our rapidly developing Latam and US Offshore platforms, which have already been in place for more than a year. His experience covering the Americas will be a valuable asset in helping to develop the operational distribution capability of our current and future U.S., European and Asian Partners.”

Peter has 16 years of experience working for leading asset managers. Before joining iM Global Partner, Peter was responsible for sales of the Carmignac Mutual Fund range in the US. He spent four years, between 2012 and 2016, as Offshore regional Sales Consultant for Pioneer Investments, where he was responsible for sales of offshore mutual funds and alternative investments to financial advisors across all channels in the Southeast, Caribbean, and Panama territories. Peter started his career at Merrill Lynch providing Financial Advisors with sales support and investment guidance in both New York City and Asia regions. Peter has also been part of the Oppenheimer Funds and Capital Group sales teams. 

Azimut Believes The Spreads on Hybrid Bonds and Subordinated Debt Can Tighten Further During Q120

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PHOTO-2019-12-06-07-09-55_0
Courtesy photo. Los diferenciales de los bonos híbridos y subordinados pueden estrecharse más durante el primer semestre de 2020, según Nicoló Bocchin de Azimut

A year ago, when Nicoló Bocchin, Head of Fixed Income of the Italian manager Azimut, started to manage the AZ Multiasset Sustainable Hybrid bonds fund, one of the main changes he introduced was to add subordinated bonds of financial companies, especially insurance companies, to its portfolio of corporate hybrid bonds.

“Hybrid bonds allow European issuers to finance themselves without jeopardizing their rating, if they follow the methodology established by the rating agencies, while insurance companies issue subordinated bonds for solvency reasons, but have features in common”, explains Bocchin in an exclusive interview with Funds Society.

Thus, by introducing insurance subordinated bonds, they enhance diversification thanks to instruments “that have almost the same structure as a corporate hybrid bond and provide the same spread,” explains the manager.

For this same purpose, the manager explains that recently they have also added AT1 instruments, known as CoCos in the portfolio, because it is “an asset class that we use tactically to enhance the return of the portfolio and that we like a lot. It is more volatile that hybrid and insurance but again it provides us with diversification nad coupon flows that are very helpful for the time being,” explains Bocchin.

Currently, the portfolio of the AZ Sustainable Hybrid fund is composed of 45% corporate hybrid bonds, 27% subordinated bank bonds and 24% insurers. Bocchin explains that there is generally one or two notches difference between the hybrid or subordinated bond rating and the issuer’s rating, depending on the degree of subordination and that in this type of asset “the investor is rewarded for the subordination, in a title with greater volatility, but with a spread similar to that of the High yield segment and an investment grade default risk.”

Short on underlying interest risk

Another characteristic of its investment style is that it is managed based on spreads, not yield, which implies that the two components that make up the total yield are broken down. The quality of the issuer and the macro environment and the impact on the government yield are analysed separately. Consequently, based on this approach and its current outlook for interest rates, they have recently reduced the sensitivity of the portfolio.

“In Europe we are in negative yield environment in the German curve which we think is not fully justified. We have mid to long term view in the way we manage our portfolio,we think that negative rates is a distortion of the market and perhaps in 2-3 years’ time with a bottoming out of growth and a pick up in inflation, which can occur, interest rates will slowly go from negative back to zero,” says the manager.

Consequently, its current position is that they have a long credit portfolio and short underlying interest rate risk Bocchin explains, “the current duration of our portfolio is 4.5 years, but the interest rate sensitivity of the portfolio is less than 3 years because I am almost 2 years short in futures both in the German curve and the small component in the Italian curve.

Implementation of ESG Criteria

Another differentiating aspect of his management style is the application of ESG criteria in selecting the securities that are part of the portfolio. “Since we started managing the fund, the percentage of issuers that meet ESG criteria has increased from 75% to 95%,” says the expert, who applies this filter based on the criteria established by his external provider Vontobel.

In the same line the manager adds that, although these types of instruments are mostly issued by European entities, he predicts a great development of ESG issuers in emerging markets in the coming years and confirms that Azimut has the necessary resources and experience to take advantage of this opportunity.

2020: A year to Benefit from the Carry

In terms of return of this type of assets, the fund has had a very significant one during the year, although Bocchin points out that the profitability of the year 2019 has to be seen together with that of 2018 due to the strong  spread widening at the end of 2018 and its subsequent recovery during 2019. Based on this good performance, in July 2019 they slightly reduced the risk of the portfolio by decreasing its exposure in AT1 and reinvesting in corporate hybrids and some insurers.

With respect to 2020, the manager points out that the profitability of 2019 will be very difficult to replicate. However, although the spreads are at levels close to 200 basis points, the manager believes that there is still room for further reductions, especially during the first half of 2020.

With the QE the ECB is buying Investment Grade credit so investors see a squeeze in spreads and yield among IG, and they need to look for yield in the lower part of the capital structure,” explains the manager.

In short, by 2020 they expect a return between 2-4% in euros (that is, between 4.6% and 6.6% in dollars) under optimistic scenarios, although they do not rule out periods of volatility caused mainly by disappointment regarding Chinese growth .“2020 is the year where you should appreciate the fact that this type of instruments have a carry. We don’t expect a big spread compression, although there will be some, and the performance will be basically the yield of the portfolio”, concludes the manager.

What’s Next for China A-Shares Inclusion in MSCI Indices

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Pixabay CC0 Public Domain. Jeremy Murden

Since 2018 China A-Shares have been included in MSCI Indices. Improvements in accessibility are expected to accelerate further inclusion of the China A-Shares in the near term. In this Q&A, Matthews Asia Portfolio Strategist Jeremy Murden offers his views on this and China’s motivation to increase accessibility.

What Changes have been made to the MSCI Indices?

With the rebalance on November 27, 2019, index provider MSCI has completed the planned increase of both the weighting and breadth of China A-shares exposure in its emerging markets index as well as its China index and other regional indices.
 
In 2019, the inclusion factor rose to 20% from 5% through a three-step implementation process of 5% increments that began in May. In addition to the increase in allocation to the existing securities, MSCI also increased the breadth of the securities by including ChiNext shares as well as mid-cap stocks. Following the rebalance, Chinese A-share securities now make up approximately 4.2% of the MSCI Emerging Markets Index, an increase from 0.72%, and China exposure including A-shares now makes up approximately 33.6%.

Why were these changes made?

The move follows the successful implementation of the initial 5% inclusion of China A-shares in 2018 and wide support for the weight increase from international institutional investors. MSCI consulted with a large number of international institutional investors, including asset owners, asset managers, broker/dealers and other market participants worldwide as part of its review process. 

Additionally, there was significant growth in the adoption of A-share investment by international investors as the number of northbound Stock Connect accounts grew from 1,700 before the June 2017 inclusion announcement to over 7,300 in February 2019. The Stock Connect programs in recent years linked the Shanghai and Shenzhen stock exchanges to the Hong Kong Stock Exchange and enabled foreign investors to buy A-shares with fewer restrictions.

Are further increases expected?

Yes. While no future increases are currently scheduled, MSCI is in regular contact with the China Securities Regulatory Commission (CSRC) regarding the proposed improvements in market accessibility that would lead to an increase in the inclusion factor. 

What are key improvements the CSRC would need to make before inclusion is increased?

A key driver of the increase to 20% from 5% inclusion was the significant advancements in accessibility, including a tightening of the trading suspension rules and a quadrupling of the daily Stock Connect quota in 2018. MSCI highlighted nine potential improvements as a road map to a potential 100% inclusion.

The four areas that MSCI views as most pertinent to increasing the inclusion factor beyond 20% are: 

  • Access to hedging and derivatives as the lack of listed futures and other derivatives products hamper investors’ ability to implement and risk-manage a large-scale inclusion
  • Change the current settlement cycle of T+0/T+1 to the emerging market standard of T+2 as the current short settlement period presents operational risk and tracking challenges
  • Align the trading holidays of onshore China and Stock Connect as the misalignment creates investment frictions
  • Create the availability of Omnibus trading mechanism in Stock Connect to better facilitate best execution and lower operational risk.

The next tier of improvements that MSCI communicated to the CSRC are:

  • Further reduce trading suspensions. There have been visible improvement lately, but trading suspensions in the China A-shares market remain unique when compared to other emerging markets
  • Improve access to the Chinese renminbi for stock settlement as direct access to the renminbi for stock settlement could represent a more-efficient foreign-exchange option for global investors
  • Improve access to IPOs and ETFs as both remain outside the scope of Stock Connect.
  • Open stock lending and borrowing. While short-selling is technically allowed, there currently is no functioning stock lending and borrowing market
  • Improve the stability of the Stock Connect universe as changes can create turnover issues in the maintenance of indexes.

What are potential next steps?

According to Sebastian Lieblich, MSCI’s Global Head of Equity Solutions, MSCI has been pleasantly surprised by the pace of accessibility improvements that have been implemented by the CSRC over the past 12 to 18 months. Beijing has indicated that access to derivatives and the alignment of holiday schedules are likely to be addressed in the near term. The change in settlement time is more complex, but still could be implemented swiftly. If the present momentum continues, “in a relatively short time frame, the launch of a public consultation on a major change could be announced.”

While the 2019 increase has been a move from 5% to 20%, Mr. Lieblich felt that given the pace of improvements, moving forward there is no need to grow the inclusion factors in 15% to 20% increments. He stated there is no prescribed path from here and the timing and extent of further inclusion will be directly driven by the timing and extent of accessibility improvements. While nearly all of the second-tier steps would need to be completed to reach 100% inclusion, incremental improvements will accelerate inclusion in the near term.

In addition to an increase in the inclusion factor, MSCI could continue to broaden the universe of A-shares to include the small-cap universe in indices to align China A-shares with the global standard of 85% of adjusted free float market cap. Beyond that, the securities trading on the new Shanghai Stock Exchange’s Science and Technology Innovation Board (STAR Market) could be included if they meet requirements of the MSCI GIMI Methodology and the eligibility of the stock connect programs linking the mainland markets and Hong Kong.

Finally, the exposure of Chinese A-shares in MSCI indices is still limited by the current 30% foreign ownership limit. Any opening from that limit would result in an increase to the adjusted free float market cap of all A-shares at the next index rebalance without any action by MSCI. Depending on the scale of the increase, it could have a multiplicative effect on the increase in A-share inclusion.

What is China’s motivation to increase accessibility?

China is primarily driven by a desire to draw institutional assets into its domestic market, according to our MSCI source. While many developed equity markets are 80%+ institutionally owned, China remains the inverse with only 20% institutional ownership. That has led to higher volatility as annual turnover in the A-share market in 2017 was 222% versus 116% for the U.S. Access to a larger pool of institutional capital, which tends to be more stable and long term in nature, would help reduce volatility in the market.  

What would a move to 50% inclusion and beyond mean for the MSCI emerging market index?

Holding all other factors constant, a move to 50% inclusion from 20% inclusion would increase the exposure of A-shares in the MSCI Emerging Markets Index to 9.8% from its current level of 4.2% and increase China exposure to 37.5% from 33.6%. At full inclusion, China would represent 43.1% of the benchmark, 17.8% of which would come from A-share exposure. Looking ahead further, if South Korea and Taiwan, which are already considered to be developed economies, were to graduate to developed- market status per MSCI, China would make up 48.2% of the index at 50% inclusion and 54.0% at full inclusion.

How could this benefit investors?

The current Chinese exposure within the MSCI Emerging Markets Index and other indices is heavily weighted to mega-cap internet companies and large Chinese banks. This and future  increases in A-shares exposure, and a further broadening of the universe to include small-cap stocks, will allow the indices to better reflect the opportunity set within Chinese equities.
 
Additionally, there was an estimated $1.9 trillion in assets that track the MSCI EM Index as of March 2019. While flows into A-shares from active managers are difficult to predict, the growth of the benchmark weight is likely to translate to inflows to the space and larger exposure from active managers who track the index. 

Will pressure from U.S. politicians affect A-share inclusion?

While there has been pressure from U.S. policymakers, led by Florida Senator Marco Rubio, to remove Chinese stocks from indices, MSCI remains focused on the needs of global investors. Per MSCI, all indices use a fully transparent rules-based methodology. MSCI stated it will not make changes to existing indices or delay a planned allocation due to political pressure, only to changes in market access.

Additionally, the U.S. Thrift Savings plan at the center of the political pressure recently announced its decision to maintain its current benchmarks and China exposure after its board and consultant concluded maintaining the exposure to China was in the best interest of plan participants.

How much experience does Matthews Asia have with China A-shares?

Matthews Asia has extensively studied and invested in China’s domestic A-share companies for many years. In 2014, our firm was awarded a Qualified Foreign Institutional Investor (QFII) license and quota that enabled us to invest directly into China’s domestic securities market, including the market for China A-shares. We also have participated in A-shares via the Stock Connect programs. 

We continue to be attracted by the fundamentally sound merits of many local companies listed in China. We realize that many quality A-share companies in growing industries can be priced at rich valuation multiples, however, which makes our experience of carefully vetting them critical. We believe long-term investors can benefit from exposure to A-shares.

At Matthews Asia, our focus has always been on taking a fundamental approach to finding leading A-share companies that are poised to benefit from the country’s structural shift toward its domestic economy.

FIBA’s Women’s Leadership Committee Sponsors a Toy Drive for Visually Impaired Kids

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Toy Drive. El Comité de Liderazgo de Mujeres de FIBA prepara un Toy Drive para niños ciegos

The Florida International Bankers Association’s Women’s Leadership Committee (WLC), in partnership with the Next Gen and the Community Relations Committees, will be partnering with the Miami Lighthouse for the Blind and Visually Impaired this holiday season.

As they have done in the past three years, they will be sponsoring a Toy Drive, “so we humbly ask that you help us in our mission to bring holiday joy to the children served by this organization. The holiday events from the last years were true successes, which we would not have been able to accomplish without your generous support!”

All funds collected will be used to purchase the type of toys needed to fulfill the special needs of the children. The toys will be distributed by FIBA’s Committees to the children of Miami Lighthouse for the Blind and Visually Impaired during the December 21st Holiday event. They ask that you please make your donation by December 13th to allow them enough time to buy the toys for the children in time for their holiday event distribution on Saturday, December 21st.

Babies and children are among the most rapidly growing populations experiencing vision impairments in the Miami Lighthouse rehabilitation programs.  The Miami Lighthouse has developed specialized programs for visually impaired children from birth through 13 years of age. This includes the recently launched new learning center for visually impaired children from birth through pre-kindergarten that will provide specialized early intervention and training to help “level the playing field” when these visually impaired children enter the public school system.

“Please assist us in bringing joy to the Miami Lighthouse for the Blind and Visually Impaired children this holiday season. We thank you in advance for your generous contributions. We wish you a blessed and joyful holiday season to you and your families.” Concludes the WLC.

To make a donation, follow this link.

Aberdeen Standard Investments Expects “An L Not a V Shaped” Recovery in Global Growth in 2020

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Pixabay CC0 Public Domain. Aberdeen Standard Investments prevé una recuperación del crecimiento global en forma de L “y no de V” en 2020

Tentative signs have emerged that a trough in global economic activity growth is beginning to form, although the strongest evidence is coming from soft rather than hard data at present, says Aberdeen Standard Investments in a recent publication. Their global growth forecasts support that sentiment, driven by the expectation that geopolitical uncertainty will moderate at the margin, while the significant monetary support delivered this year supports the real economy. However, they expect any recovery in global growth to look “much more like an L-shape than a V”.

The fundamental drivers of geopolitical risk are still in place, constraining business investment, and monetary policy efficacy is lower than at earlier stages of the current expansion. “Indeed, we expect the world’s two largest economies (the US and China) to actually slow further in 2020, which will lessen the scope for improvement in those economies that were much weaker in 2019″.

Although markets have priced in growth stabilisation, the asset manager doesn’t think they price in a moderate recovery in industrial output and corporate earnings. As such, it expects further gains in the price of risk assets as we roll forward into 2020.

The strategy in global markets

When it comes to global markets, ASI identifies an “upside asymmetry” for some higher carry investments. “Risk assets are rallying and diversifiers are selling off, but changes in ‘hard’ data seem too insignificant to be the catalyst yet”.

However, the direction of ‘soft’ information has been noticeably more positive as optimism is rising that US-China trade tensions will abate; monetary easing from the Federal Reserve and other central banks has been substantial; and there has been an uptick in some leading indicators.

“As investors, our perennial question is whether markets have accurately adapted to these changes or overshot economic reality”, the asset manager points out. Its “tactical asset allocation process” offers a useful way to consider this. 

Sentimiento inversorIn this respect, in August, they defined their ‘late cycle slowdown’ scenario as a world where the Global PMI was below 50, global EPS growth was somewhat negative and US core inflation was materially below target at 1.5%. “That was fairly close to the economic reality at the time and yet, under that scenario, we forecast equity returns of only a further 5% decline”.

By contrast, their ‘moderate recovery’ scenario began to reflect equity upside of 10-20%, depending on the region. This asymmetry had been widening at the same time that investors were widely considered to be bearish in mindset (AAII surveys) and positioned in quite a risk-averse way (BAML Fund Manager Survey).

The relief rally we have seen has therefore been in line with the modest improvement in trade rhetoric, the ongoing easing in monetary policy and the apparent basing in leading indicators that catalysed an improvement in investor sentiment”.

Looking forward, ASI thinks they must assess whether asymmetry still exists or whether further momentum can only come from hard-data improvements. Their economists forecast that growth is going to trough but that the recovery may look more L-shaped than V-shaped, so, for their tactical asset allocations scenarios, their expectation is for “an environment that looks more like a ‘moderate recovery’“. This would see the global PMI rise a little further, a return to modest earnings-per-share growth (single digit) and gently rising inflation.

PMIs globales“Despite this scenario being more optimistic than a continued slowdown, the rally we have already seen leaves us forecasting only a further 5% upside in the US, Japanese and European equity markets in the near term”. If growth does improve, the asset manager sees potentially more upside in UK and EM equities (10-20%) given their more elevated risk premiums.

Importantly, ASI considers the previous asymmetry of upside-to-downside equity returns has now evaporated and, at this stage of the recovery, sees more asymmetry in their credit forecasts than for equities. In that sense, they believe spreads in high-yield and EM are still fair and their carry returns more backstopped by monetary easing. “As a result, we see these credit markets as providing better risk-adjusted returns, even though we continue to benefit from some equity exposure in particular markets”.

CERPIs Dominate Over CKDs in the Amount Placed in the Last Two Years

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Pixabay CC0 Public DomainFoto: MarcusWoeckel. MarcusWoeckel

In 2018, 20 CKDs and 18 CERPIS were issued, totaling 7,584 million dollars in committed resources. In 2019 (as of November 25), only 4 CKDs and 6 CERPIs, totaling 1,818 million dollars, have been issued, which shows a significant drop in amount and number compared to the previous year.

The average committed amount of the last 5 years (2014-2018) has been 3,697 million dollars per year, which means that in 2018 it rose slightly more than double the average and in 2019 it takes half.

Much of the explanation for the 2018 boom is because it was the year on the eve of the presidential elections held in July 2018 and that in January 2018, CERPIs were allowed to invest 90% of the resources globally leaving only 10% locally. The fall in issues of CKDs and CERPIs in 2019 is explained by the change in the government where institutional investors are being more cautious in new investments in private equity.

CKDs vs CERPIs

Of the resources committed between 2018 and 2019, the General Partners (GP) have called only 27% on average and the rest, they will receive it in the coming years.

The value of the resources committed through CKDs and CERPIs is 24,767 million dollars of which 19,176 million dollars are CKDs and 5,590 million dollars are CERPIs which means that, with only two years of having authorized global investments for CERPIs, they already represent 23% of investments in private equity that reflects AFOREs remarkable interest in diversifying globally.

The number of CKDs, between 2008-2014 it did not exceed 10, while since 2015 the issuers fluctuated between 15 (lowest number) to 38 (highest last year).

Currently, CKDs and CERPIs represent 6.0% of the resources managed by AFOREs at market value and if the committed resources that will be delivered to the GPs are considered, the percentage almost doubles to reach 11.3 %. The maximum limit that the AFORE have for investing in this asset class is 18% on average according to the limits that each SIEFORE has, which leaves room for investments in private equity to continue growing.

With the numbers observed in 2019, we must recognize that CERPIs are being an option that competes with CKDs.

Column by Arturo Hanono