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The Future of Sustainable Finance: Catalysing ESG Investing in Asia

El futuro de las finanzas sostenibles: catalizar la inversión ASG en Asia — Pixabay CC0 Public Domain. Catalizar la inversión ASG en Asia

In order to meet the demands of urbanisation, population growth and moving to a more sustainable use of scarce natural resources and a lower carbon future, most analysis suggests developing countries in Asia will need between 20 and 30 trillion dollars in infrastructure investment over the next 15 years, says Aberdeen Standard Investments in a recent publication.

To put these numbers in context, between 1960 and 1973, the United States spent some 288 billion dollars (in today’s money) on the space programmes that put men on the moon. The upper end of that range is around the same as the current forecast for all assets under management in Asia-Pacific in 2025.

“These are huge sums of money well beyond the capacity of the public purse on its own. In fact, Asia will have to attract significant amounts of private capital, including from outside the region. What’s more, this investment has to fund growth in a sustainable way or the region risks repeating the mistakes of the past; expensive mistakes to rectify and with global implications”, points out the global asset manager.

In that line, ASI maintains that despite rapid urbanisation and the rise of a middle class, Asia has still to address some of the most serious development issues: a significant number of people still live at a subsistence level; in many countries there is insufficient and inefficient infrastructure; and some 70 of the 100 most polluted cities in the world are in Asia.

The good news is there is increasing momentum towards getting this right. For example, the Asian Infrastructure Investment Bank (AIIB) has a mandate to develop infrastructure as an asset class; develop bond markets for infrastructure investment; and promote the integration of environmental, social and governance (ESG) principles into fixed income investments in emerging Asia.

“This should serve as a catalyst for mobilising additional private capital from institutional investors”. he China-led ‘Belt and Road’ Initiative has similar objectives with a broader footprint.

Supporting this, institutional investors around the world have now also adopted ESG analysis as a mandatory, rather than optional, component of their investment process. “Sustainability is now irrefutably recognised as an issue of global importance. Influential asset owners are leading the call for change and allocating capital to fund managers who can demonstrate ESG sensitivity and tangible action”.

Regulatory pressures are also supportive by pushing for greater ESG transparency. ASI emphasizes that there is growing evidence that ESG integration does not imply lower investment performance. What used to be seen as a trade-off – doing the right thing meant lower returns – is no longer the case. The performance of selected sustainability indices has been largely on par with benchmark indices over different investment horizons.

This is why the asset manager thinks that Asian infrastructure investment offers “a real opportunity to embed ESG principles to enhance the long-term social and economic value that such infrastructure investment can deliver to far-sighted Asian countries and communities”. Beyond fund managers incorporating ESG analysis into their investment process, Asian demographics and the growing democratisation of savings will play important roles in driving assets towards these strategies.

“The younger generation is venturing into financial markets with different priorities from its predecessors. These changing preferences, combined with public policy shifts and technology facilitation that place greater control into the hands of underlying beneficiaries, will help propel the shift towards ESG-friendly investments“, says ASI.

In Asian markets, these changes will be felt in three key areas. The first area relates to climate change mitigation: sustainability-linked infrastructure will transform how governments finance and build power infrastructure, energy efficiency, sustainable transport and waste management.

The second relates to air quality improvement: East Asia has the world’s highest mortality rate from air pollution. Industries involved in the development and manufacturing of clean-air related products will have important roles to play.

The last relates to ethical and sustainable palm oil and natural rubber: the Association of Southeast Asian Nations is the largest producer of palm oil and natural rubber in the world. However, this industry has been linked to deforestation, biodiversity loss, land grabs and forced labour. “Clearly, this has to change and the leading companies are doing so”, asserts ASI.

“By incorporating ESG principles into Asian development finance, we have a once-in-a-lifetime chance to build a market ecosystem that will benefit investors, issuers, the people of Asia, and the rest of the world. We must not let this historic opportunity slip away”, assures ASI.

The chinese equities journey of Aberdeen Standard Investments (Part I)

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El viaje de Aberdeen Standard Investments por la renta variable china (Parte I) — Pixabay CC0 Public Domain. Hong Kong

Aberdeen Standard Investments has been investing in Chinese equities since 1992. It has been a journey punctuated by caution and careful consideration during which the asset manager had to overcome significant reservations along the way, contending with government interference across sectors; the inexperience of Chinese entrepreneurs; a legally ambiguous fund structure; and poor corporate governance. Nonetheless they found, and continue to find, good companies to invest in, points out ASI in the first part of its analysis about this market.

Starting point

For almost two decades ASI preferred to invest in Hong Kong-based companies, mostly privately owned firms whose management teams were subject to strict regulatory oversight and demonstrated high standards of governance. Increasingly this included ‘China plays’: businesses which benefitted directly or indirectly from rising prosperity and strong economic growth in mainland China. “This approach afforded us both comfort as an investor and access to strong potential growth”.

State ownership

Backed by rigorous research, frequent company meetings and engagement with managements, ASI gained sufficient comfort to invest in mainland-headquartered companies listed in Hong Kong known as H-shares and red chips. Initially they favored well-run state-owned enterprises (SOEs) exposed to secular growth trends that we considered less susceptible to government policy and interference.

Hong Kong listing requirements ensured their reporting and disclosure standards aligned with international norms. Intuitively, investors may think to avoid SOEs on the assumption that privately run firms have superior execution capabilities and profitability. “But, in practice, some SOEs have sound management teams and operate in high-growth industries where they enjoy ‘protective moats’ against competition”, says the asset manager.

In China’s property sector, for instance, there are a range of SOEs and private companies. ASI invested in one state-owned developer which focuses primarily on first- and second-tier cities. It was one of the first Chinese developers to diversify into shopping malls, where rental payments offer steady and recurring income streams. As an SOE it enjoys one of the lowest borrowing costs in the sector, helping it to maintain one of the healthiest balance sheets.

As such it is better positioned to weather a downturn or consolidate opportunistically. By contrast, we have steered clear of privately owned developers that have excessive leverage, weak balance sheets and extensive investments in non-core assets.

Structural integrity

Over the past decade there has been an explosive growth of China’s internet sector in segments such as gaming and e-commerce, which presented promising new opportunities to invest in growth stocks listed in Hong Kong and the US. But, assures ASI, it came with a snag: “direct foreign ownership is restricted by law because China treats its internet technology sector as sensitive”.

As a result, many of these companies were structured as Variable Interest Entities (VIEs), which consists in a contractual agreement with the company’s domestic entity designed to circumvent domestic laws on foreign ownership. “We viewed it as a risky legal structure from a shareholder’s point of view. Licences, and in some cases operating assets, are held by a VIE rather than by the listed entity. They also offer weighted voting rights, which we are not in favour of”.

After a huge amount of due diligence on the structure over many years, ASI concluded that the government was unlikely to declare VIE structures illegal or impose disruptive changes that would be negatively perceived by global investors. Already VIEs had become such an integral part of the domestic stock market and economic activity.

“Moreover, we discovered that not all VIEs were the same. Some were friendlier to minority shareholders than others. At the same time, relative comfort with one VIE structure does not equate to comfort with all of them”, notes the asset manager. But by taking account of the ownership structure, country of incorporation and listing, voting structure and person in charge, we felt able to discern quality among VIEs.

In 2017 ASI invested in a Chinese internet technology company that, while it operated as a VIE, it had a one-share, one-vote structure. Over time they grew more comfortable with its management team, plus it was listed in Hong Kong, which historically has provided strong regulatory safeguards for minority shareholders. “In the end we felt confident enough to invest .Of course, we continue to monitor the regulatory environment closely. But our familiarisation with the VIE structure offers a salient example of the need for adaptability in this market”.

In the second and final instalment of this series, ASI will explore the evolution of our investment into Chinese A-shares, from its earliest steps to today, in conjunction with the market’s increasing accessibility and incremental improvements in corporate governance.

Global Financial Assets Fell in 2018 for the First Time Since the Financial Crisis

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Allianz estudio — Pixabay CC0 Public Domain. Los activos financieros globales caen en 2018 por primera vez desde la crisis financiera

The tenth edition of Allianz‘ “Global Wealth Report”, which puts the asset and debt situation of households in more than 50 countries under the microscope, presents a sad premiere: in 2018, financial assets in industrial and emerging countries declined simultaneously for the first time; even in 2008, at the height of the financial crisis, this was not the case. Worldwide, savers were in a bind: On the one hand, the escalating trade conflict between the US and China, the endless “Brexit saga” and increasing geopolitical tensions, on the other hand, the tightening of monetary conditions and the (announced) normalization of monetary policy.

The stock markets reacted accordingly: Global equity prices fell by around 12% in 2018. This had a direct impact on asset growth. Global gross financial assets of households1 fell by 0.1% and remained more or less flat at EUR 172.5 trillion. “The increasing uncertainty takes its toll”, said Michael Heise, chief economist of Allianz. “The dismantling of the rule-based global economic order is poisonous for wealth accumulation. The numbers for asset growth also make it evident: Trade is no zero-sum game. Either all are on the win- ning side – as in the past – or on the losing side – as happened last year. Aggressive protec- tionism knows no winners.”

Convergence between poorer and richer countries comes to a halt

In 2018, gross financial assets in emerging markets not only declined for the first time, but the decline of -0.4% was also more pronounced than in the industrialized countries (-0.1%). The weak development in China, where assets fell by 3.4%, played a key role in this. However, other important emerging markets such as Mexico and South Africa also had to absorb significant losses in 2018.

This is a remarkable trend reversal. Over the last two decades, the growth gap between poorer and richer regions of the world still stands at an impressive 11.2 percentage points on average. It seems that the trade disputes have set an abrupt stop sign for the catching-up process of the poorer countries. Industrialized countries, however, did not benefit either. Both Japan (-1.2%), Western Europe (-0.2%) and North America (-0.3%) had to cope with nega- tive asset growth.

The price of low yields

At the same time, fresh savings set a new record. They increased by 22% to more than EUR 2,700 billion. The increase in the flow of funds, however, was solely driven by US households, who – thanks to the US tax reform – upped their fresh savings by a whopping 46%; two thirds of all savings in industrialized countries thus originated in the US.

But the analysis of fresh savings in 2018 reveals another peculiarity: Savers seemed to turn their backs on the asset class of insurance and pensions. Its share in total fresh savings has fallen from more than 50% before and immediately after the crisis to a mere 25% in 2018. And while US households increased in return their demand for securities, all other households preferred bank deposits (and sold securities): In Western Europe, for example, two thirds of fresh sav- ings ended up in bank coffers; worldwide, bank deposits remained the most popular destina- tion for fresh savings, for the eighth year in a row. This penchant for liquid and supposedly safe assets costs savers dearly, however: Losses suffered by households as a result of inflation are expected to have risen to almost EUR 600 billion in 2018.

“It is a paradox savings behavior”, said Michaela Grimm, co-author of the report. “Many people save more because they expect a longer and more active life in retirement. At the same time, they shun exactly those products that offer effective old-age protection, namely life insurances and annuities. Seemingly, the low yield environment undermines the willingness for long-term saving. But the world needs nothing more than long-term savers and investors to deal with all the upcoming challenges.”

Growth in liabilities stabilize at high level

Worldwide household liabilities rose by 5.7% in 2018, a tad below the previous year’s level of 6.0%, but also well above the long-term average annual growth rate of 3.6%. The global debt ratio (liabilities as a percentage of GDP), however, remained stable at 65.1%, thanks to still robust economic growth. Most regions saw a similar development in that respect. Asia (excluding Japan) is a different story. In the last three years alone, the debt ratio jumped by al- most ten percentage points, driven mainly by China (+15 percentage points).

“Debt dynamics in Asia and particularly in China are, at least, concerning”, commented Patri- cia Pelayo Romero, co-author of the report. “With a debt ratio of 54%, Chinese households are already relatively as indebted as, say, German or Italian ones. The last time, we had to witness such a rapid increase in private indebtedness was in the USA, Spain and Ireland shortly before the financial crisis. Compared to most industrialized countries, debt levels in China are still markedly lower. Supervisory agencies, however, should no longer stand by and watch. Debt-fueled growth is not sustainable – even China is not immune against a debt crisis.”

Because of the strong growth in liabilities, net financial assets i.e. the difference between gross financial assets and debt fell by 1.9% to EUR 129.8 trillion at the close of 2018. Emerg- ing countries in particular suffered a drastic decline, net financial assets shrank by 5.7% (in- dustrialized countries: -1.1%).

Just a bump in the road?

For the first time in over a decade, the global wealth middle class did not grow: At the end of 2018, roughly 1,040 million people belonged to the global wealth middle class – which is more or less the same number of people as one year before. Against the backdrop of shrink- ing assets in China, this does not come as a big surprise. Because up to now the emergence of the new global middle class was mainly a Chinese affair: Almost half of their members speak Chinese as well as 25% of the wealth upper class. “There are still plenty of opportuni- ties for global prosperity”, said Arne Holzhausen, co-author of the report. “If other heavily populated countries such as Brazil, Russia, Indonesia and in particular India would have had a level and distribution of wealth comparable to China, the global wealth middle class would be boosted by around 350 million people and the global wealth upper class by around 200 million people. And the global distribution of wealth would be a little more equal: at the end of 2018, the richest 10% of the population worldwide owned roughly 82% of total net financial assets. Questioning globalization and free trade now deprives millions of people around the world of their opportunities for advancement.”

When analyzing the movements between the wealth classes, the scars of the financial and euro crisis become visible again. Whereas emerging countries – particularly in Asia – can look back on two decades of mostly social rise, the picture for Western Europeans and Americans is bleaker. In fact, it’s only in these two regions that the ranks of the low wealth class have increased since 2000 – by 4% of the population in Western Europe – and those of the high wealth class have decreased – by 6% and 9% of the population in Western Europe and North America, respectively –, when adjusted for population growth. In Germany, on the other hand, the situation remained relatively stable.

UBS and Banco do Brasil Plan to Launch an Investment Bank in South America

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sugarloaf-mountain-1679285_960_720 — Pixabay CC0 Public Domain. Azimut continúa reforzando su presencia en la región con la adquisición de MZK Investimentos en Brasil

UBS and Banco do Brasil have entered a non-binding Memorandum of Understanding, with the intent of establishing a strategic partnership that would provide investment banking services and institutional securities brokerage in Brazil and in select countries in South America.

If a partnership agreement is executed, the intention of both UBS and Banco do Brasil is to jointly provide investment banking services in Brazil, Argentina, Chile, Paraguay, Peru and Uruguay through the partnership, which will have access to Banco do Brasil’s corporate clients and UBS’s global execution and distribution capabilities.

Both UBS and Banco do Brasil believe that the formation of a strategic, long-term partnership would create a leading investment bank platform in the region with global coverage by building on the complementary strengths of UBS and Banco do Brasil. The partnership is expected to provide its clients with comprehensive solutions and would provide additional benefits for its stakeholders.

It is envisaged that UBS would be the majority shareholder (50.01%) of the partnership, which would be established by the contribution of assets by both parties in accordance with the definitive terms and conditions of the partnership agreement, which is still under negotiation.

The effective implementation of the partnership is subject to the successful conclusion of the negotiations between the parties, on the execution of any binding transaction documents, as well as the relevant internal and external approvals.

Ardian Infrastructure Acquires Two Photovoltaic Plants In Peru From Solarparck

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Pixabay CC0 Public Domain. Ardian Infraestructura adquiere dos plantas fotovoltaicas en Perú a Solarpack

Ardian, a world leading private investment house, has acquired a 49% stake in two photovoltaic (PV) plants in Tacna and Panamericana, in southern Peru, from Solarpack, the Spanish multinational integrated management company. The deal is part of Ardian’s ongoing commitment towards investing in renewable energy.

The plants have a combined capacity of 48.6MW after repowering. The transaction is the latest development in Ardian’s successful partnership with Solarpack since 2016, when Ardian acquired four other Solarpack photovoltaic plants in Chile and Peru. Solarpack will continue to handle the plants’ operations and management services.

The investment cements Ardian’s position as a leading player in the renewable energy sector and will bring Ardian Infrastructure’s total installed renewable energy capacity to nearly 3GW across wind, solar, hydro and biomass in Europe and the Americas. Investing in energy renewable assets is part of Ardian commitment to fighting against climate change and building a sustainable economy.

Juan Angoitia, Senior Managing Director at Ardian Infrastructure, said: “This investment is a significant milestone in strengthening both our commitment to sustainability and our presence in Latin America, an increasingly important global hub for renewable energy. Our investment in Tacna and Panamericana expands our portfolio of renewable energy assets and strengthens our partnership with Solarpack and the high-quality assets investment opportunities they provide.”

Pablo Burgos, CEO of Solarpack, added: “The global need for renewable energy sources is increasing day-by-day, so our ability to continue to build, develop and operate solar plants at pace is more important than ever. Our ongoing industrial partnership with Ardian has been beneficial with a long-term investment approach and we look forward to continue working closely with Ardian.”

Ardian is a world-leading private investment house with assets of 96 billion dollars managed or advised in Europe, the Americas and Asia. The company is majority-owned by its employees. It maintains a truly global network, with more than 620 employees working from fifteen offices across Europe (Frankfurt, Jersey, London, Luxembourg, Madrid, Milan, Paris and Zurich), the Americas (New York, San Francisco and Santiago) and Asia (Beijing, Singapore, Tokyo and Seoul). It manages funds on behalf of around 970 clients through five pillars of investment expertise: Fund of Funds, Direct Funds, Infrastructure, Real Estate and Private Debt.

Solarpack is a Spanish multinational company specializing in the development, construction and operation of solar PV plants. The company’s team of more than 100 professionals is developing a pipeline of more than 1.2 GW. The company has commissioned 35 MWp in five sites in Spain, 37 MWp in Chile, 26 MWp in Uruguay and 62 MWp in Peru. Solarpack performs the operation and maintenance of the plants it develops, and manages own and third-party assets for a total of 230 MW.

Florian Komac Joins GAM

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GAM Investments appointed Florian Komac as investment manager on the Global Credit Team.

He joined the team on 16 September 2019. Komac is based in Zurich and works closely with Christof Stegmann and Dorthe Nielsen. The team reports to Jack Flaherty in New York.

Komac comes from AXA XL (formerly XL Catlin) in New York, where he focused on corporate bonds as a portfolio manager. Previously, he was a portfolio manager at Swiss Re in Zurich and London and a buy-side credit analyst at Activest (now Amundi) in Munich.

“According to Matthew Beesley, the incorporation of Florian highlights GAM’s commitment to have a global organization within its investment team, which positions the Global Credit to increase GAM’s fixed income experience in Zurich, New York and London. This offer complements GAM’s Global Strategic Bond team.

Miami Gets Ready for the Most Important Alternative Investments Event of the Year

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Screen Shot 2019-09-17 at 12 — . ALTSMIAMI

On November 7th, Miami will host the ALTSMIA Annual Investor Forum. ALTSMIA is developed and led by the CFA Society of Miami, CFA Society of South Florida, CAIA Miami and Miami Finance Forum.

With their guidance and oversight, this one-day event will provide participants with an educationally focused agenda and will feature leading practitioners from the fields of private equity, venture capital, real estate, hedge funds, cryptocurrency, artificial intelligence and other sectors of the alternative investment market

Over 700 participants will gather at the JW Marriott Hotel, on 1109 Brickell Avenue.

For more information, you can contact Paul Hamann at +1 347-308-7792 or Paul.Hamann@marketsgroup.org.

You can visit the ALTSMIA Annual Investor Forum page with this link.

Budget 2020: Risks Of Failing Macroeconomic Forecasts

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Foto: Banxico. Presupuesto 2020: Los riesgos de fallar en los pronósticos macroeconómicos

On September 8th, Mexican IRS (SHCP by its Spanish initials) delivered the 2020 Budget to Congress. As expected, most of the fiscal discipline lines remained unchanged: 1) Fiscal surplus of 0.7% (although below 1.3% presented in the pre-criteria); 2) Lower expected growth for this year (0.9% vs. 1.6% of the pre-criteria); 3) Financial requirements of the public sector (RFSP) deficit without much change (2.6% of GDP by 2020); 4) Indebtedness (Historical balances of the RFSPs) at 45.6% of GDP by 2020 (0.5% above those published in the pre-criteria).

A precise estimation of these macroeconomic criteria is of vital importance since income and expenditure relay entirely on them. To err when estimating them could mean falling short to carry out the spending program that the government wants to execute.

An example of the above was announced in recent months, which was endorsed in the text of the 2020 Budget: the use of the Budget Income Stabilization Fund (FEIP, by its Spanish initials) for an amount of $ 129.6 billion (43.8% of the resources available in the fund) to alleviate the lower income received during 2019. This means that the government errs in making its calculations of macroeconomic variables and revenues in the 2019 budget will fall short. However, there is no problem, that is the intention of the FEIP: to be a “cushion” that allows to stabilize the budgetary income if the calculations fail.

However, the FEIP has a limit, and to err constantly might carry out the extinction of the fund, leaving public finances to the sway of global and local shocks. In this sense, after the “bite” that the government will give to the FEIP this year, the stabilization fund will be reduced by 2020 and will have a balance of $ 166.4 billion. Is this enough to face the risks of a sharp fall in income the following year? The answer is not so obvious.

The General Criteria for Economic Policy (CGPE, by its Spanish initials) presents a sensitivity exercise of income and expenditures to the different macroeconomic variables (Graph 1). Let’s see how sensitive the numbers are to “realistic shocks” in the macro variables.

GDP growth

The relationship is quite direct. Greater economic growth means greater activity and, therefore, greater tax collection. In fact, for every 0.5% change in economic growth, revenues would move in the same direction $ 17,247.1 million.

I see a problem here. The SHCP is forecasting 2% growth of the economy by 2020, but I think that is a bit optimistic. In the latest Banxico survey, the forecast for 2020 is only 1.39%, and historically, growth forecasts have tended to fall as time goes by, which is not far-fetched to assume for the future if trade war problems continue. Therefore, for the purposes of this analysis, I will assume that next year’s growth turns out to be 1%. This would imply a reduction in estimated revenues of $ 34,494.2 million.

Oil price

If the price of a barrel increases by US$ 1, the oil-related revenue will increase by $ 13,775.80 million pesos. However, if we fall into an economic slowdown due to a slowdown in the US, prices will tend to fall. In fact, the government is assuming this could happen as they lowered the estimated price of a barrel from US $ 55 in the pre-criteria to US $ 49 in the 2020 Budget.

However, the downside risk should not be that worrisome because of the oil hedges that the government have bought this year. Now, if the exercise price of these hedges is at US $ 49 (same as the Budget), then the risk is minimal. If the strike price is lower, then there is a risk in which money could be lost if the price of the barrel falls.

For the purposes of this exercise, we will assume that the government has perfect coverage, and the estimated price of the barrel is what they will receive, that is, US $ 49. Therefore, this macroeconomic variable does not affect us for the calculation of sensitivities.

Exchange rate

The exchange rate plays a double role in income / expenditure sensitivities. On the one hand, a depreciation (appreciation) of the exchange rate would increase (decrease) oil revenues; on the other hand, the same depreciation (appreciation) would increase (decrease) expenditures in the form of financial cost due to the interest that must be paid in foreign currency. What effect is stronger?

The effect related to oil revenues is greater, in fact, the size of the effect of the financial cost represents only 10% of the total effect of the change in oil revenues. Given this, that the exchange rate depreciates is positive for the 2020 Budget.

However, the estimated average exchange rate in CGPE is $ 19.9 per USD, slightly above that estimated by the market ($ 19.8 per USD). However, an appreciation greater than that estimated by the market is not difficult to imagine given the restrictive course the Fed has begun to follow. Remember that when the Fed cuts rates, emerging markets benefit. On the other hand, if the commercial war between the US and China continues, Mexico would benefit in terms of exports to the US, strengthening its currency.

In this sense, thinking of an average exchange rate of $ 19.5 per usd is not that difficult, so if we had an appreciation of $ 0.40 per usd in the peso, we would stop receiving $ 13,675.6 million.

Oil production

I believe that this is one of the most critical parts of the assumptions made by the SHCP. The Budget assumes an increase in oil production of 224 mbd, which implies a growth of 13%. Given the current conditions of Pemex, it is difficult to think of an increase of that size.

The government argues that the rounds made during the last government will begin to bear fruit, however, it is likely that this will only stabilize the drop in production we have experienced month by month.

For the sake of the exercise, and being more pessimistic than in the other points, I will assume that production stabilizes, that is, it does not grow in 2020. This would imply a loss of 224 MBD, that is, a decrease of $ 73,012.35 million in the income of 2020.

Interest rate

The interest rate directly hits the expenditures, especially, the part of the local debt that is referenced at a variable rate: the higher the rate, the higher the interest-derived expenditure.

The budget assumes that the average nominal rate in the year will be 7.4%. In this area I believe that the government has been quite conservative. The consensus expects that Banxico rate to be 7.5% at the end of 2019, with the possibility of continuing to lower its rate. In fact, the consensus assumes that by the end of 2020 Banxico will have the reference rate at 7%.

Given the above, thinking about a lower rate makes sense. For this exercise I will assume that the average rate of the year will be 7.10%, so the expenses will be reduced by $ 5,843.37 million.
Oil hedge

It should be remembered that the FEIP also serves to contract the oil coverages mentioned in the second point. These coverages have had an average cost of $ 16,000 million in the last 5 years, so we will assume that by 2020 this average cost remains.

Conclusion

We see that “small changes” in macroeconomic variables could bring a cost of $ 131,338.78 million in the 2020 Budget, which is no small matter. On the other hand, the balance of the FEIP will be 166,400 million, so, although it could help to alleviate the negative effects of a bad estimate in the Budget, it would leave the Public Treasury in a very precarious position to be able to take countercyclical measures in case the income decreases further.

The government is approaching a crossroads. Extraordinary measures to alleviate income shortfalls are limited and we are running out of them. In my opinion, the next logical step should be the implementation of a comprehensive tax reform that is not popular but is very necessary.

Column by Franklin Templeton México , written by Luis Gonzalí, CFA

Negative Interest Rates Increase the Attractiveness of Private Debt

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Jeremy Bishop Water Palm trees Unsplash — Pixabay CC0 Public DomainJeremy Bishop. Jeremy Bishop

Years ago, it would have been unthinkable to contemplate that Interest rates, which are the cost of money, could ever be negative. What this means is that the lender, or investor, will have to pay in order to lend his money, in short, he is assured of a loss, which doesn’t make any sense at all; yet the problem is that this is now a fact in developed economies.

Almost 1/3 of the global bond market (US $16 trillion) offers returns below 0%. Both short- and long-term bonds issued by the governments of Germany, Denmark, Finland and Switzerland offer negative rates. These governments are rewarded for issuing debt, as they will have to return to bond buyers less money than they collected. Even more surprising, the third largest bank in Denmark called Jyske Bank has begun to grant 10-year mortgage loans with annual rates of -0.5%, the bank must now pay consumers, and to put the cherry on the cake, approximately 3 % of global bonds offer interest rates greater than 5%, something never seen before.

How did we reach this point? It all started when, in 2012, Denmark’s central bank reduced its reference interest rate to 0.20%. Later, the European Central Bank and the Central Bank of Japan reduced their rate to –0.10% in 2014 and 2016, respectively. Today, “the negative interest rate policy” (NIRP) is another tool in the arsenal of unconventional monetary policies of central banks to face deflationary pressures, unwanted appreciation of currencies, and disappointing rates of economic growth. It’s no coincidence that central banks covering about ¼ of the world’s GDP have negative benchmark rates.

The only one not currently treading this unchartered territory is the United States. However, interest rates in the world’s largest economy have fallen dramatically and are not indifferent to the global environment. The 10-year treasury note currently offers a yield of 1.7%, accumulating falls of about 100 basis points during the year, in August alone the fall amounted to 40 basis points.

At the moment, the inflection point is still out of sight, the fixed income market is becoming increasingly riskier and less attractive, and if you want to obtain good returns on traditional investments you must be prepared to assume a fair amount of risk. So where can investors find attractive returns? Private debt is an interesting option.

This asset class shines in an economic environment of high uncertainty, high levels of volatility, and low, and even negative returns, because it provides benefits such as low volatility with deviations below 2%, solid collaterals, excessively low default rates, stable returns, and low correlation with traditional markets.

The Katch Global Lending Opportunities (GLO) fund offers these and other benefits, such as short duration, as the term of the loans is normally between three and nine months, being little sensitive to the movement of interest rates and with a lower credit risk, with more predictable economic environment, financial stability and credit profile of the borrower. On the other hand, all the fund’s loans have solid guarantees and the amount borrowed does not exceed 70% of the value of the asset that backs it.

Loan terms, such as those mentioned above, largely help to explain the low default rates. For example, in the commercial financing strategy, the default rate in the last 15 years, including the Great Financial Crisis of 2008, has been 0.1% vs. 3.5% of that in high yield bonds. Additionally, the recovery rate is high, close to 75%.

Diversification is another great feature of the Katch GLO fund, with exposure to different strategies (factoring, bridge loans, commercial financing, amongst others) with no correlation between them and different geographies, such as Brazil, the largest economy in Latin America, which, although it contracted by 6% in 2015, during the strongest recession in at least 50 years, the default rates in factoring remained below 1%.

In conclusion, in an environment of low, and even negative, interest rates, private loan funds such as the Katch GLO fund, are quite attractive, thanks to their characteristics such as a very low correlation with traditional financial markets because they operate in completely different niches, the strong guarantees that substantially reduce credit risk and allow for very high recovery rates in cases of default, as well as to high and very stable returns with very little volatility, are a great option to complement investment portfolios.

Tribune of Pascal Rohner, CIO at Katch Investment Group, and Diego Agudelo, research analyst.

Participant Capital Bolsters Global Distribution Capabilities

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Foto cedidaPhoto: Bernardo Lozano is the new Senior Director of Global Distribution at Participant Capital. Photo: Bernardo Lozano is the new Senior Director of Global Distribution at Participant Capital

Participant Capital, a leading South Florida private equity real estate investment firm, with over US$2.5B in projects under development, has announced the appointment of Bernardo Lozano as the new Senior Director of Global Distribution. He will support the firm’s efforts in bolstering global distribution capabilities and building strategic partnerships with institutional and individual investors.

“Bernardo is a seasoned professional with a proven track record in building multiple internationally-focused sales teams,” said Claudio Izquierdo, Chief Operating Officer of Participant Capital. “I am confident that we have assembled a dynamic and experienced leadership team uniquely qualified to support our investment portfolio as well as help our company expand its focus across the globe.”

Prior to Participant Capital, Bernardo served as Head of Business Development at ASG Capital where he consulted an extensive network of investment advisors on securing and expanding third-party distribution. A significant part of his career was also associated with MFS International and its parent company Sun Life of Canada where he helped build a multibillion-dollar sales organization for offshore funds and investment contracts.

This year, Participant Capital expanded its operations and representatives throughout Latin America, Asia, Europe, and the Middle East. Its Growth Fund is being registered in Colombia, France, Switzerland, and is approved for distribution in the UAE.

About Participant Capital

Participant Capital is a private equity real estate investment management firm specializing in large-scale, mixed-use developments. As an affiliate of Royal Palm Companies, a developer with an extensive track record of more than 40 years, Participant Capital allows institutional or individual investors to invest in real estate projects alongside experienced developers from the ground-up at the developer’s cost basis.

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