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Luiz Ribeiro, DWS:“Once the reforms are approved, we could see a ’rerate’ in the Brazilian equity markets similar to the one experienced in India”

The social security reform proposed by Bolsonaro’s government and its chances of success have the whole region in suspense. Luiz Ribeiro, CFA Managing Director Head of Latin American Equities of DWS, is an expert in the field who shared in an exclusive interview with Funds Society his vision on this and many other topics.

Ribeiro informs us that DWS has recently changed its recommendation for emerging markets to overweight, due to, on one hand, the change in the FED’s tone that is willing to maintain low rates for longer and, on the other, the growth expectations for emerging markets compared to developed markets that are currently at the end of the cycle.

“Market consensus for earnings growth in EM in general is 5% for 2019 and 12% for 2020. If you look at Latam is 22% this year and 10% next year. You don’t see that in developed markets any more, it is difficult to find”, emphasizes Ribeiro.

For Ribeiro, the situation in Brazil explains the fall in expected earnings in the Latin American region from 2019 to 2020, although he believes that it is very likely that the market consensus will change if the reforms are approved.

The Bolsonaro’s government change

Ribeiro stresses the important change that Bolsonaro’s new government has meant for the country since it is the first center-right government since the end of the dictatorship. “We have an ultraliberal economist leading the economy now, we never had that before. The economic team led by Paul Guedes is very strong and as such he has even been able to attract people from the previous government who are excellent technicians. The team is great with a liberal mindset and that makes a difference” explains Ribeiro.

Among other things, he highlights the importance that the new economic team gives to the fiscal deficit and to reducing the size of the state in general, which to Ribeiro, are the main challenges the Brazilian economy is facing. However, approving these reforms is not going to be an easy process, since, for example, the social security reform is a constitutional change that requires the approval of the 3/5 of the lower house.

In spite of everything, Ribeiro is optimistic and trusts the capacity of the Brazilians to react when they are against the wall. “Both this government and the previous one have done a very good job explaining the reasons why we need to do it. Among the population there is a growing consensus that this need to be done. “

Reforms and savings proposal

Spending on social security accounts for more than half of government expenditure and is growing at a good pace. “We believe that in a few years it can reach 100% if we do not stop that growth,” says Ribeiro. Thus, the reform presented by Bolsonaro is a very aggressive reform in terms of objectives, with expected savings (less expenses), even higher than what the market expected and above the 500.000 million reals of the reform presented by the previous government.

“The proposal considers a saving of about 1.1 billion reais for the next 10 years. It is a very comprehensive reform that, if approved, assumes that there will be no more worry in the next 10 years. Maybe it’s a negotiation tactic and this number will be diluted somehow. Anything above 600,000-700,000 million reals is great in our opinion. “

Among the challenges that the reform faces, Ribeiro points out the unfairness of the system that benefits a few, and that minority is very well represented in Congress and therefore can exert much pressure in the lower house. To this we must add that the government is using a new strategy that implies not giving anything in return in the negotiations and implies that the different parties give in for the common good. “We do not know how this will work, it is generating a lot of noise in the congress and the parties are mentioning they are not happy “

The reform needs 316 votes to be approved in Congress, and the market currently discounts that it is approved in June to which Ribeiro adds that “if it is delayed, the market in the short term will suffer”.

Privatizations and tax reform

But this is not the only important reform that the Brazilian government must carry out. Privatizations and tax reform are also very necessary, according to Ribeiro. Thus, he expects that a value of privatizations “between 90,000-100,000 million dollars in the next three years is feasible” despite the fact that Guedes has estimated the value of state companies at 1 billion reais.

Some of these privatizations have already been carried out such as the subsidiaries of Petrobras and the recent auction of 3 groups of airports, thank to which, the state obtained 2,000 million reais at a price 10 times higher than the minimum price and with a significant participation of foreign investors, what has been considered a success. But there’s still a lot to do.

Regarding the tax reform, the government’s objective is to simplify the system to reduce tax evasion, in addition to granting more collection power to municipalities and regional governments. Thanks to this, Ribeiro affirms that the government “is going to receive a lot of support from mayors and regional governments to do it. This also helps social security reforms because they will put pressure on their congressmen to vote in favor of the reforms. “

Equity markets

Specifically, and turning into the equity markets, Ribeiro estates that local investors are more optimistic than foreigners, as for example shows the increasing percentage of mutual funds portfolios that are allocated to equities. However, he points out the importance of investment as an element of growth and estimates that it will not pick up until the uncertainty regarding the reforms is mitigated, so he expects that “Brazilian economic activity will remain slow during the first half of the year and only pick up during the second half of the year. “

With respect to market valuations, the PE ratio of the Brazilian market is more or less in line with the historical average of the last 4 years, which for Ribeiro means “it is not a bargain, but it is not expensive”.

Ribeiro compares the current situation in Brazil to what happened in India after the elections and believes that there is a possibility of “rerate” in the Brazilian market. “Once the reforms are approved, the risk perception goes down and we have probably a higher growth that will lead the markets to trade at a higher PE than before. 13-15 times benefits is feasible if the reforms are approved.”” We will have a market that will trade at higher multiples together with higher earnings. That combination will lead to good returns for investors and the equity markets, we think “, concludes Ribeiro.

Regarding their preference for sectors, Ribeiro explains that because they are positive regarding the Brazilian economy, they like domestic companies. The consumer sector, “utilities”, and smaller players in the Fintech segment are among their favorites.

Finally, Ribeiro acknowledges that volatility will remain high in the region for the next 3-6 months, but in his opinion “exploring volatility is positive, bargains may appear from time to time. If you know how to navigate that volatility is not necessarily negative, “concludes Ribeiro

Interest Rate Differentials Increasingly Tight

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Los diferenciales de los tipos de interés, cada vez más ajustados — Pixabay CC0 Public Domain. Interest Rate Differentials Increasingly Tight

March 2019 saw 10-year bunds dipping into negative yield territory. The difference between German sovereign short-term rates (2 years) and the long-term ones (10 years) now stands at 0.50%, half the level of a year ago. A similar move can also be seen in US government debt over the same period.

Several factors lie behind these recent rate changes. Central bank monetary accommodation continues in certain parts of the world, notably in Europe and in Asia. In addition, there is a growing anticipation of slowing world economic activity which would indicate that future global interest rates are likely to remain low. With longer dated European government debt now at around 0%, these bonds join the already significant stock of Japanese sovereign instruments currently showing similar levels of yield.

European and Japanese bond returns are dwindling. As a consequence, more of the world’s savings pool could migrate towards US Dollar (USD) denominated debt assets in search of the positive yield these instruments still provide. If these capital flows were to rise significantly in the coming months, the effect would be to drive down US interest rates from their present levels.

In sum, both short- and long-term yields in Europe and Japan are converging towards 0%, while at the same time the differential in interest returns between large economic blocs is being reduced. In this kind of environment, US Dollar bond investors will have to seek out yield where they can find it.

This generalized ‘world hunt’ for yield could lead to a tightening of spreads between private sector debt and US government bonds. Subordinated dollar instruments (especially those of large systemic issuers) stand to benefit very favorably from this up and coming trend.

Column by ASG Capital

Allianz GI Will Talk About Active Management for Structured Products at the Investments & Golf Summit 2019

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Allianz GI hablará sobre gestión activa en productos estructurados durante el Investments & Golf Summit 2019 — Foto cedidaGreg Tournant, courtesy photo. Allianz GI Will Talk About Active Management for Structured Products at the Investments & Golf Summit 2019

With one of the largest stand-alone equity-index options managers team in the field, at Allianz GI they use simple, liquid instruments to pursue returns regardless of the performance of the S&P 500 Index. Their nine-member investment team is tenured and experienced, managing options-based strategies for institutional investors since 2005.

On May 7th, during the Investments Day at Funds Society’s Investments & Golf Summit Greg Tournant, Managing Director, Portfolio Manager and CIO US Structured Products, will talk about the benefits of this asset class.

He joined Allianz GI in 2002. He is also head of the Structured Products team. Tournant has 23 years of investment industry experience. From 2007 to 2008 he served as co-CIO at Innovative Options Management, where he worked with the team in a sub-advisory capacity. Before that, Tournant worked at Eagle Asset Management, McKinsey & Co. and Raymond James. He has a B.S. from Trinity University and an M.B.A. from Northwestern University.

Allianz Global Investors has over 730 investment professionals in 25 offices worldwide and manages $577 billion in assets for individuals, families and institutions.

For more information and/or to register for the Investments & Golf Summit 2019, follow this link.

AXA IM Will Talk About Opportunities Created by Digital Disruption at the Investments & Golf Summit

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AXA IM hablará de disrupción digital en el Investments & Golf Summit — Foto cedidaMatthew Lovatt, Global Head of Framlington Equities, AXA IM. AXA IM Will Talk About Opportunities Created by Digital Disruption at the Investments & Golf Summit

AXA IM will talk about investment opportunities in the evolving economy as a result of the digital disruption at Funds Society’s sixth Investments & Golf Summit.

Changing demographics and technological disruption have accelerated the trend towards thematic investment in recent years as the historical boundaries of sectors have become increasingly less relevant. According to the firm, global equity unconstrained investors looking through this thematic lens can clearly identify the disruptors from the disrupted; or as they term it the ‘old economy,’ where companies maintain more traditional approaches, and the ‘evolving economy,’ which consists of firms who have embraced these fast changes.

AXA’s Digital Economy strategy is focused on the e-commerce value chain and digital transformation of traditional businesses.

Matthew Lovatt, Global Head of Framlington Equities, AXA IM, will be at the summit to explain everything regarding the strategy. Appointed in June 2018 as Global Head of Framlington Equities, the active stock picking expertise of AXA IM, Matthew is also a member of the Management Board of AXA IM. Matthew has 30 years of investment experience and joined AXA IM in 2004. He started his career in Equity Research at Henderson, before developing an equity hedge fund business. He holds a BSc in Economics with Statistics from Bristol University.

AXA Investment Managers (AXA IM) is an active, long-term, global multi-asset manager. We work with clients today to provide the solutions they need to help build a better tomorrow for their investments, while creating a positive change for the world in which we live. With approximately $860 billion in assets under management as of the end of September 2018, AXA IM employs nearly 2,400 employees around the world and operates out of 30 offices across 21 countries. AXA IM is part of the AXA Group, a world leader in financial protection and wealth management.

The sixth edition of Funds Society’s Investments & Golf Summit will take place on May 6th-8th at the Streamsong Resort and Golf. For registration follow this link.

M&G to Talk About Multi-Asset Allocation at the Investments & Golf Summit

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M&G hablará de inversiones multiactivo en el Investments & Golf Summit — Foto cedidaChristophe Machu, courtesy photo. M&G to Talk About Multi-Asset Allocation at the Investments & Golf Summit

The sixth edition of Funds Society’s Investments & Golf Summit will take place on May 6th-8th at the Streamsong Resort and Golf.

On May 7th, at the Investment day, participants will be able to take the opportunity to discuss about Global Markets as well as the latest portfolio management strategies and investment ideas from top-performing Asset Managers.

Amogst them is M&G’s Christophe Machu. He will talk about the benefits of multi-asset allocation, and how one can achieve a flexible asset allocation process that looks to manage risk and volatility by constructing a diversified portfolio that can invest in a variety of asset classes.

Machu joined the Multi Asset and Convertibles teams as an associate investment specialist providing support for M&G’s multi-asset fund range and the M&G Global Convertibles Fund in September 2014. He initially joined M&G in 2012 as a sales support in Paris before moving into the International Marketing team in London. Christophe has an MSc in risk and finance from EDHEC Business School.

With over 85 years experience, M&G is one of Europe’s leading asset managers.

For more information and/or to register for the Investments & Golf Summit 2019, follow this link.

Twentyfour AM Will Talk Global Fixed Income at the Investments & Golf Summit 2019

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Twentyfour AM hablará de renta fija global en el Investments & Golf Summit 2019 — Foto cedidaDavid Norris, courtesy photo. Twentyfour AM Will Talk Global Fixed Income at the Investments & Golf Summit 2019

For Twentyfour Asset Management, a multi-sector bond strategy provides an attractive level of income and an opportunity for capital growth by investing in a broad range of bonds from the diverse fixed-income universe.

On May 7th, the company will expose during Funds Society’s Investments & Golf Summit. They will talk about the benefits of a highly flexible approach, and how it provides them exposure to debt instruments from the whole range of fixed-income assets, including investment-grade bonds, high-yield bonds, government bonds and asset backed securities.

Both David Norris, Head of US Credit, and John Magrath, Head of Distribution will be at the event.

Based in London, TwentyFour AM is part of Swiss Vontobel Group.

For more information and/or to register for the Investments & Golf Summit 2019, follow this link.

Aberdeen Standard Investments: “Frontier Markets will Generate Good Returns: The Headwinds they Faced in 2018 Have Disappeared”

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Aberdeen Standard Investments: “Los mercados frontera van a generar buenos retornos: han desaparecido los vientos en contra de 2018” — Wikimedia CommonsKevin Daly. Courtesy photo. Aberdeen Standard Investments: "Frontier Markets will Generate Good Returns: The Headwinds they Faced in 2018 Have Disappeared"

Aberdeen Standard Investments currently manages 13 billion dollars in debt from emerging countries. Of these, 195 million come from its border market strategy, which has been underway since September 2013. “There are attractive profitability opportunities in this product by structuring a diversified portfolio of corporate and sovereign bonds in hard currency and debt in local currency,” states Kevin Daly, the asset management company’s Senior Investment Manager in emerging market debt.

In an interview with Funds Society, he assures that this approach allows them to minimize the risks of losses, as they were able to do in 2018, and, at the same time, capture the upside risks, as they forecast for 2019. In that regard, since the beginning of the year, Daly is convinced that the frontier markets will generate good returns during the coming months, since “the headwinds they faced in 2018 have disappeared,” such as the strong growth of the United States, the Fed’s harshness, and concerns about the commercial war.

Daly supports this with the performance of the Aberdeen Standard SICAV I – Frontier Markets Bond Fund, a sicav fund registered in Luxembourg. “So far, everything is going well: it has delivered returns of about 6% so far this year.” The fund obtained a gross negative return of -3.50% in 2018, outperforming the emerging general debt “and most other types of assets.” That figure rises to 8.12% if the average returns since the fund’s creation are taken into account.

The management company points out the short duration of this type of asset and of the fund, with an average of 3.4 years. The fund’s main attraction for investors lies in its ability to generate high revenues: its yield at maturity is 10.1%.

“We manage it with a total-return approach, without comparing ourselves with any reference index and we are committed to a diversified portfolio, which has generated attractive risk- adjusted returns since its creation,” the asset manager points out. According to his account, by not resorting to any reference index, they are not overweight or underweight in countries or regions “per se” but have an allocation limit of 10% per country and another 3% for corporate issuers.

Therefore, the positions of “greater conviction” are those that are around 5% and that, at present, would be countries like Egypt, Nigeria and Ecuador. Daly reveals that the first two provide double-digit returns with stable currencies. Ecuador, meanwhile, “is our strongest debt position in hard currency, as we believe that the country will benefit from the International Monetary Fund’s new support program.” In his opinion, this should help reduce its dependence on market financing.

As for the companies, he points out that there is “great value” in Nigeria and Ukraine. All in all, the portfolio is composed of 68% for debt in hard currency, 14% for corporate debt and 32% in debt in local currency, such as Egypt’s or Nigeria’s. Daly is convinced that the three assets offer attractive value.

The fund is also a good diversification option for Latin American investors who have local individual bonds. For Aberdeen Standard Investments, it can help reduce the volatility of their portfolios and, at the same time, continue to offer high performance.

When asked about the risks faced by these markets, he points out that the largest of them is “idiosyncratic risk”, since frontier bonds and their currencies have historically had a low correlation with US Treasury securities. “Addressing country risk is key to the performance” of this product, says Daly, who says there is an “information gap” when investing in frontier markets.

“Our experience investing in them, which requires continuous diligence and frequent trips to these countries, allows us to take advantage of that gap when it comes to structuring the portfolios,” he says.

Vanguard is Preparing to Launch its First Mexican Domiciled ETF

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Vanguard se prepara para lanzar su primer ETF domiciliado en México — Foto cedidaPhoto BIVA. Vanguard is Preparing to Launch its First Mexican Domiciled ETF

Vanguard is seeking approval from local regulators to launch its first Mexican‐domiciled ETF that will seek to track the FTSE BIVA Index, providing investors access to a broad Mexican equity exposure.

This ETF will be the first local investment vehicle launched by Vanguard in Mexico and will complement their current ETF suite of international ETFs cross‐listed in the Mexican International Quotation System.

“The launch of this ETF reinforces Vanguard’s long‐term commitment to the Mexican market. Mexican equities are an important asset class in local portfolios and we strongly believe an ETF structure will enable our clients to efficiently access the local equity market. This product is unique as it seeks to track an inclusive and diversified index while maintaining a strong liquidity profile. Given its inclusiveness, this ETF will best serve investors – from large pension plans to individual investors ‐‐ who are looking to take a long‐term strategic allocation in Mexico.” said Juan Hernandez, Country Manager Vanguard México.

“This is a very exciting time for BIVA, as we are fulfilling our objective of contributing to the promotion, growth and modernization of the Mexican stock market. Receiving Vanguard along with their first local ETF, represents a great honor and reinforces our commitment towards providing investors with innovative products, as well as giving them exposure to companies of all sizes, not just the large ones, but medium and small as well.” Said María Ariza CEO BIVA.

The FTSE BIVA Index is designed to reflect the performance of liquid Mexican companies. The benchmark currently provides an unbiased representation of the Mexican equity universe, including FIBRAS (local REITs). All Mexican equity securities listed in the country are considered, allowing for new issues to be included as the local equity universe expands over time. This enables smaller companies to be part of the index contributing to a broader market liquidity.

BIVA, which is part of CENCOR, is considered among the most advanced stock exchanges due to its technology provided by NASDAQ who powers more than 70 markets worldwide, providing state‐of‐the‐ art standards. Its flagship index FSTE BIVA offers a modern, inclusive and representative benchmark of the Mexican market, comprised by companies of all sizes.

Vanguard has been conducting business in Mexico for more than 10 years. In 2017, the firm opened its first office in Mexico City to better support the Mexican Investors.Vanguard currently offers more than 70 US‐domiciled and UCITS ETFs cross‐listed in Mexico, and is the second largest ETF manager in the country.

Thornburg Investment Management Will Talk About MultiSector Fixed Income at the 2019 Investments & Golf Summit

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Thornburg Investment Management hablará de renta fija multisectorial en el Investments & Golf Summit — CC-BY-SA-2.0, FlickrDanan Kirby, courtesy photo. Thornburg Investment Management Will Talk About MultiSector Fixed Income at the 2019 Investments & Golf Summit

The sixth edition of Funds Society’s Investments & Golf Summit will take place on May 6th-8th at the Streamsong Resort and Golf.

Amogst them is Danan Kirby, CFA, Portfolio Specialist at Thornburg Investment Management. He will talk about how multisector bond portfolios seek income by diversifying their assets among several fixed-income sectors, usually U.S. government obligations, U.S. corporate bonds, foreign bonds, and high-yield U.S. debt securities, and asset-backed securities.

Danan Kirby works with Thornburg’s investment team and serves as a liaison for the team and key investment decision makers, communicating process and results of the firm’s investment strategies. He joined Thornburg in 2016.

Prior to Thornburg, Danan served as portfolio manager for the Strategic Growth Bancorp family of banks, managing various strategies for institutions and individual investors. Before that, he was a financial institution specialist with the FDIC. He is also a veteran of the U.S. Army. Danan graduated summa cum laude from the University of New Mexico’s Anderson School of Management with a BBA, concentrating in finance. He is a CFA charterholder.

For more information and/or to register for the Investments & Golf Summit 2019, follow this link.

If Things Take A Turn For The Worse, Are There Expansionary Measures To Follow Those Adopted By The Central Banks? Modern Monetary Theory

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Si las cosas empeoran, ¿existen medidas expansivas que sigan a las adoptadas por los bancos centrales?: la teoría monetaria moderna — Courtesy photo. If Things Take A Turn For The Worse, Are There Expansionary Measures To Follow Those Adopted By The Central Banks? Modern Monetary Theory

At the start of 2019, we saw a rally in risk assets thanks to the fact that investors have been focused on the more dovish signals coming from the central banks rather than on the weakening growth trend. Recently, the OECD warned that economic outlooks were now weaker in almost all G20 countries, particularly in the euro zone, with the heaviest negative impact being seen in Germany and Italy. The organisation also lowered global growth by -0.2% to 3.3%.

In the last meeting of the ECB, Draghi indicated a weak environment full of uncertainty: the rise in protectionism that has brought about a slowdown in trade and global production; political risk, with an emphasis on Brexit; and the vulnerability of the emerging markets, in particular China. In this regard, Draghi announced new measures. These included maintaining rates unchanged until at least the end of 2019 (in a previous address there had been talk of this going on until the summer. As it is, Draghi will be the first ECB president not to change rates as his mandate ends in October), and a further series of targeted longer-term refinancing operations (TLTRO-III), which would begin in September 2019 and run until March 2021 with a maturity of two years and with a view to facilitating the continued flow of credit in the economy.

The extraordinary measures implemented by the main central banks to overcome the financial crisis are set to take hold. The Fed, which had begun monetary normalization, stopped the expected rate hikes in their tracks and it intends to bring an end to its balance sheet reduction sooner than planned; the Bank of Japan is continuing with quantitative easing and has kept rates around 0% for the last 10 years; and the ECB is implementing new measures in the hope of making the euro zone economy more resistant.

Although the central banks remain cautious in sticking to monetary normalisation, it seems that the available margin is smaller than when they began. Note the evolution of Draghi’s words, which have gone from his famous saying in 2012: “The ECB will do whatever it takes to preserve the euro, and believe me, it will be enough”, to his words in the last ECB meeting in March 2019 with reference to the economic context: “In a dark room you move with tiny steps. You don’t run, but you do move”. Can you see the difference? It was possible to run at the start, but now we can only take tiny steps.

Better coordination between fiscal and monetary policy would be helpful to the economy during a slowdown. In the US, Trump has already implemented an expansionist fiscal policy following years and economic growth and, in Europe, depending on the results of the European elections in May, there may be more pressure to adopt these fiscal benefits despite the mechanisms agreed to by European countries to contain the deficit and control the debt.

But nowadays the debate in the US focuses on the so-called Modern Monetary Theory, the greatest defenders of which come from within the Democratic party (Bernie sanders, who is leading the polls for the US presidency, and Alexandria Ocasio-Cortez, well-known activist and bright new star in Congress). They essentially propose printing money (or nowadays simply pressing a button) and, instead of buying bonds like during QE, using it to finance social, environmental and infrastructure projects and the like. Proponents of this theory argue that provided they borrow in their own currency and they can print money to cover their obligations, they cannot fail and the limit would depend on rising inflation.

In this scenario, in which fiscal spending would be injected directly into the real economy instead of using a more indirect QE route, inflation should rise. However, everything we know about macroeconomics is being called into question because, until now, the deficits have not caused out-of-control inflation or a flight from the bond markets. Even with this in mind, it seems reasonable that implementing these measures would mean higher debt, which would affect the solvency of countries. Also, with more debt, rates would move upwards and affect bonds and the assets that would predictably do better would be real estate and investments in infrastructure or commodities like gold.

Column by Josep Maria Pon, Director of Fixed Income and Monetary Assets at Crèdit Andorrà Asset Management. Crèdit Andorrà Financial Group Research.