Pixabay CC0 Public Domain. Negative Interest Rates are Forever?
European interest rates are edging further into negative territory bringing down Fixed Income yields across the board. Returns on certain investment maturities are now negative from government bonds to junk debt instruments. In the Eurozone, the remuneration of time and credit risk has become a thing of the past. Euro bond investors grapple to capture some short-term capital gain from this downward interest rate trend, knowing full well the losses facing them over the long term by holding these instruments to maturity.
As the European Central Bank (ECB) awaits its new president Mme Lagarde, the rhetoric from its outgoing management is for more accommodation, through lower interest rates, a return to Quantitative Easing, maybe both. Negative rates in Europe seem set to continue past Mr Draghi’s mandate.
It is difficult to see the point of such a policy. If this intervention provides support to European markets on the one hand, it destroys the existing savings pool through negative absolute and real interest rates on the other. Surely, the idea behind any Capitalist system is the creation of wealth through the remuneration of Capital, and not some absurd artificial liquidity injections, which ultimately work to undermine it.
So why has the ECB chosen this approach? Their announced objective has been to stabilize the European financial system. This institution’s policy intervention has also greatly reinforced their direct and indirect monetary control. The ECB oversees the European banking industry as its regulator. It influences bond and other asset prices in European financial markets through its interventionist monetary policy. It provides most of the funding for individual sovereign Eurozone member states.
However, the ECB is now subject to a certain number of constraints. By putting itself in the financial driving seat, this institution is in the spotlight to avoid disorderly European financial markets (a role the Bank of Japan knows all too well), as well as having to contend with internal political resentment to this ‘monetary control’ paradigm. Over time, this situation could trap the ECB into providing never ending accommodative support thereby condemning European savers to suffer from negative interest rates for a very long period of time.
Column by Steven Groslin, Executive Board Member and Portfolio Manager at ASG Capital
Foto: Dennis van Zuijlekom. In The First Half Of The Year Mexico Saw 7 New Ckds And Cerpis
A total of 7 CKDs* were issued in the first half of 2019, of which 5 were CERPIs. Together, they add up to 1.595 million dollars of which only 366 million dollars have been called.
The 7 issuers of the first half of 2019 were five CERPIs: Mexico Infrastructure Partners (energy); SPRUCEVIEW MEXICO (private equity), Blackstone (fund of funds), ACTIS GESTOR (fund of funds) and Harbourvest Partners (fund of funds). And two CKDs: Walton Street Capital (real estate) and ACON (private capital).
Of these issuers:
For Walton Street Capital, is its fourth CKD that issues individually to reach total commitments of $ 1.274 billion USD in the real estate sector without considering the CKD that they jointly issued with FINSA in 2015.
In the case of Mexico Infrastructure Partners, is its fifth issue (3 CKDs and 2 CERPIs) to complete total commitments for 728 million dollars in the infrastructure and energy sector.
For Blackstone is its fourth CERPI as an issuer in the fund of funds sector that allows it to add commitments for 717 million dollars.
Finally, the issuance of ACON, it is an option to acquire Series B certificates for AFOREs holding the previous CKD (ACONCK 14).
The number of issuers for the same period of 2018 (first half) was 10 (9 CKDs and one CERPI) out of a total of 38 that were issued throughout 2018. The total amount placed in 2018 was 1.649 million dollars and commitments for 6.869 million dollars. After the explosive offer of CERPIs observed in 2018 (18 in total), in the first six months of 2019 (5) it is observed that the offer takes a slower pace of growth.
The 13.098 million worth of the CKDs and CERPIs market through 133 issues represent 0.9% of GDP. The 109 CKDs in circulation are equivalent to 80% of the resources committed, while the 24 CERPIs in circulation represent 20% of the total.
The largest number of CERPIs issues continues to be funds of funds (13 of the 24 total CERPIs that have been placed), while 6 are private equity, 3 of infrastructure and the ones with the least supply have been those of energy and real estate of which only one of each has been placed. According to the quarterly publication of CKDs & CERPIs made by 414 Capital as of July 2019, ), there is a total of 38 CKDs in pipeline that have made the process as issuer with the Mexican regulator (National Banking and Securities Commission or CNBV) of which 7 are CERPIs. With the intention of issue since 2016 there is one, while there are 11 of 2017, 14 of 2018 and 12 of 2019 which reflects the interest of many to issue. Historically there are few CKDs and CERPIs that issue in the first year.
Although this year is the beginning of a new public administration, the offer of alternative investments has been maintained through CKDs and CERPIs.
Column by Arturo Hanono
*CKDs are private equity funds that are issued in the stock market through a trust, which allows institutional investors such as AFOREs and insurance companies, among others, to participate in this asset class. In 2009 the first CKD (RCOCB_09) was issued. CKDs only invest in projects in Mexico. Although the first CERPI arises in 2016 (MIRAPI_16) it is in 2018 when 90% of the projects in which they invest are allowed to be abroad and 10% in Mexico. This situation is what causes the rise of CERPIs.
Foto cedidaFrom left to right: Rafael Mendoza, CFA; Pablo Jaque, CFA; Magdalena Bernat; Luis Fernando Pérez y Diego Chomali, CFA. Oaktree Acquires Strategic Stake in Chilean-based Singular
Oaktree Capital Management announced on July 29th that it has agreed to acquire a 20% strategic stake in Chilean-based asset management firm and placement agent Singular. This is Oaktree’s first corporate acquisition in Latin America.
Howard Marks, Co-Chairman of Oaktree, stated, “We have worked with the people of Singular for seven years. We respect them; their work in the region has been excellent; and most importantly they embody Oaktree’s culture. We are very glad to take this next step in extending our relationship and deepening our commitment to Latin America.”
“I am pleased to continue our work with the Singular team,” said Daniel Saieh, a Managing Director at Oaktree specializing in distribution of funds in Latin America. “They have been great partners for Oaktree and our clients and I look forward to expanding this important relationship throughout the region.”
Singular will continue to operate independently. Oaktree will have the right to appoint one representative to Singular’s board of directors.
Singular Chairman Pablo Jaque said, “We are thrilled to partner ever more closely with Oaktree. We welcome the expertise and best practices Oaktree has to offer to our platform as well as their additional support as we continue developing our asset management business across Latin America.”
Oaktree is a leader among global investment managers specializing in alternative investments, with 119 billion dollars in assets under management as of March 31, 2019. The firm emphasizes an opportunistic, value-oriented and risk-controlled approach to investments in credit, private equity, real assets and listed equities. The firm has over 950 employees and offices in 18 cities worldwide.
Singular is an asset management company based in Chile bringing a long track-record in managing institutional money to the Latin American market and extensive experience as Oaktree strategies’ institutional distributor in the region.
Foto: MaxPixel CC0. Attributes And Inadequacies Of The New “Generational Funds” Of The Mexican Pension System
Target date funds (TDF), renamed “Fondos Generacionales”, Generational Funds (GF) by Consar, the Mexican regulator, involve more qualities than the Siefores Básicas (SB), those restricted regime pension funds. As is known, in the United States, TDF are considered for the “401 (k)” pension plans, as one, not the only one, of the good products to be chosen by the employees, who decide how to invest their savings.
To gauge how important they have become, we can see their weight in the balance of the accounts: 20% at the end of 2016, according to www.ici.org. It should be considered that they are the investment by default, the fate that is given to the money of those who do not choose any product, and that were enthusiastically promoted by the Obama administration.
How do the TDF work? What will the GF be like?
TDF are funds of funds to balance risk and return. At the beginning of the working life, when the employees are young, portfolios are 100% invested in equity (“E”) under the premise that, the younger, the more tolerance to risk and more time to recover from debacles. TDF point to a defined year, which usually carry by name, for example, Vanguard Target Retirement 2040 Fund, “VFORX”, for workers to retire between 2038 and 2042. Halfway through the cycle its composition reveals the pendulum or sense: the equilibrium of risks: 83% in “E” (index funds with more than 10,000 shares) and 17% bond funds (“FI”).
The GF of Mexican Pension System (SAR) will invest directly in equity, bonds and other assets. Its non-mandatory cap of “E” will be 60%. By adding structured assets (“SA”) and local Reits (“R”) could reach 90% in high risk. Yes, the non-mandatory nature means GF could be composed just with “FI” assets, 100%, all the time. New funds will be identified by the range of years –properly, the “generation” – in which the workers were born; for example, “Sociedad de Inversión Básica 75-79”, for contemporaries of the Americans of the 2040 target.
In a simple way: instead of moving the employee by age in a staggered way from SB4 to SB1, from higher to lower risk (from 45% to 10% maximum in “E”), his only GF will be the one that adjusts the equity parameters, from maximum of 60 % to limit of 15%, according to its productive stage. What is the disputable of the TDF?
The large load on risk assets, potentially the most profitable, is carried out over low balances. As the balance swells the load falls. Thus, the higher profitability is expected on sums that influence little to increase the savings. Several studies reveal that if the percentage of risk is not altered or if it is increased gradually (contrary to what is intended), better results are achieved.
The analysis and exercises of Javier Estrada (“The Glidepath Illusion: An International Perspective”, 2013) are enlightening: “simple alternatives… contrarian, equity-driven, and balanced strategies… provide investors with higher expected wealth at retirement and generally higher upside potential, than lifecycle strategies”. The uncertainty, concludes the meticulous Estrada, is “…about how much better, not how much worse, investors are expected to fare with these alternative strategies”.
“Generational Funds” of SAR: more controversial than TDF
Observations on the incidence of “E” and “FI” in TDF will apply to GF. The optional cap of 60%, without considering “SA” and “R”, of slow maturation, will influence a meager balance, given by few weeks of history and small/medium contributions; meanwhile, the “FI” will apply on a large balance, the result of years of accumulation and substantial contributions for higher salary, and consequently will weigh much more.
Those who are going to retire around 2040 could today have up to 30% of “E” in SB2. As of December of this year they could have 53% to 47% (without “SA” or “R”), if the Afores exploit the permitted ceiling, which seems difficult, considering the evolution of the system’s investments. Meanwhile, their US counterparts assume 83% of pure “E” with VFORX, and 66% broadly and weighted, according to 401 (k) *.
What remains unchanged: Investment in “E” and other highly risky assets will continue to be optional, contrary to the sense of the TDF and differentiated from Chilean pension funds that maintain high mandatory minimums.
See that Mexican pension system’s exposure to risky assets in May (“E” + “SA” + “R”) was 26.4%; that of SB4, the riskier, 33%. On the other hand, to March, the equity of the Chilean pension funds was 39.4%; that of the riskier, “A” fund, 80%.
** Calculated with the equity composition of VFORX and data from the table “Average Asset Allocation of 401(k) Plan Accounts. 2016”: [(83% x 11.90%) + 43.10% + 6.50%] = 66.07%
Following his G-20 meeting with Xi Jinping, Donald Trump went well beyond the trade truce I had expected, as he downplayed the national security tensions between the U.S. and China while describing the bilateral relationship as one of “strategic partners.”With that characterization of the relationship and his apparent decision to lift his administration’s recent ban on the sale of American technology to Huawei, Trump threw his national security team under the bus.
Returning to his transactional roots, Trump favored selling more goods to China over his advisers’ attempts to constrain the rise of that nation (and its leading telecom company). If the president sticks with this approach—which is not a sure thing—that would be positive for the future of the bilateral relationship and for the near-term health of Chinese consumer and corporate sentiment.
Partners rather than adversariesIn an article on our website last month, I wrote that “Far more than trade will be on the table when the two leaders next meet. . . In short, [Trump and Xi] will have to agree that rising competition between the two nations does not have to be a zero-sum game, and that it is cooperation and concessions, rather than confrontation, that will leave both sides better off.”
In his comments after meeting with Xi in Osaka, Trump seems to have opted for engagement over confrontation. When a reporter for Caixin, a Chinese financial magazine, asked if the two countries should view each other as strategic partners, competitors or enemies, Trump replied: “I think we’re going to be strategic partners. I think we can help each other.”
That was, for the moment, at least, a stark rejection of the more adversarial, “strategic competitor” approach that the president’s national security team has been advocating.Trump’s perspective was evident in his comments on two contentious issues: Huawei, a world leader in 5G technology and in mobile phone sales; and the status of Chinese students in the U.S.
“We’re letting them sell to Huawei”
The Trump administration recently placed Huawei on an “entity list,” limiting the company’s ability to purchase U.S. technology. But at Saturday’s press conference, Trump said he would roll back that restriction. “U.S. companies can sell their equipment to Huawei. I’m talking about equipment where there is no great national emergency problem with it. But the U.S. companies can sell their equipment. So we have a lot of great companies in Silicon Valley and based in different parts of the country, that make extremely complex equipment. We’re letting them sell to Huawei.”
The details of this decision are unclear, but Trump suggested that he may remove Huawei from the “entity list.” “We’re talking about that,” he said. “We have a meeting on that tomorrow or Tuesday.” Trump then raised the case of another Chinese telecom company which had been, briefly, sanctioned by his administration. “I took ZTE off, if you remember. I was the one; I did that. That was a personal deal. And then President Xi called me. And he asked me for a personal favor, which I considered to be very important. . . And they paid us a billion-two. $1.2 billion.”
The president’s comments appear to undercut his administration’s earlier statements that Huawei presents a national security threat and should be denied access to American technology, and should also be blocked from selling 5G networking gear to U.S. allies.
“We want to have Chinese students come”
The director of the FBI recently suggested that many Chinese students in the U.S. are spies, and the State Department has made it more difficult for Chinese citizens to obtain student visas, but Trump took a different tack at his Osaka press conference. Apparently, Xi raised this issue with the president, who told reporters:
“Somebody was saying it was harder for a Chinese students to come in. And that’s something if it were—it [sic] somebody viewed it that way, I don’t. We want to have Chinese students come and use our great schools, our great universities. They’ve been great students and tremendous assets. But we did discuss it. It was brought up as a point, and I said that will be just like anybody else, just like any other nation.”
“A brilliant leader and a brilliant man”
Trump, who is often reluctant to praise those across the negotiating table, called Xi “a brilliant leader and a brilliant man.” Trump added, without explanation, that Xi is perhaps the greatest Chinese leader “in the last 200 years.”In the same press conference, Trump described Xi as “strong” and “tough . . . but he’s good. . . I have a tremendous relationship with President Xi.”Trade talks “right back on track”In his G-20 press conference, Trump described the bilateral trade talks as “right back on track.” He didn’t lift the tariffs already in place on Chinese goods, but postponed additional tariffs he had threatened to levy.
Taking the same transactional approach as with Huawei, Trump told reporters, “China has agreed that, during the negotiation, they will begin purchasing large amounts of agricultural product from our great Farmers.”Signaling, perhaps, a link in his mind between concluding a trade deal and his re-election prospects, the president said, “(But) in the end, the farmers are going to be the biggest beneficiary. But I’ve made up for the fact that China was, you know, targeting our farmers. . . The farmers could not be happier…”
The following day, in South Korea, Trump added another optimistic note about a trade deal:“President Xi and I had a fantastic meeting. It was a great meeting. We get along. We also have a really, really good relationship. And he wants to see something happen and so would I. And I think there’s a really good chance of that happening.”
Cautiously optimistic
I remain optimistic about prospects for a trade deal in the near future, because Trump seems to recognize that a trade war with China would damage the U.S. economy and equity markets, and thus his re-election prospects.
All signs are that Xi also continues to want to reach a deal. While tariffs are not a huge problem, as China is no longer an export-led economy, failure to conclude a deal would open up the risk that a full-blown trade war leads to restrictions on China’s access to American tech, everything from semiconductors to research collaboration. That would be a setback to China’s economic growth, which Xi wants to avoid.
The future beyond a trade deal is less clear, but after listening to Trump’s weekend comments, I am less pessimistic than I was a week ago about prospects for the broader bilateral relationship. We will soon see if the president turns his recent rhetoric into actions which promote engagement over containment.
In the meantime, Trump’s words are likely to be received positively by Chinese consumers and investors. Remember that real (inflation-adjusted) retail sales rose 6.4% in May, and the Shanghai Composite Index was up 19% during the first six months of the year. The business community, however, felt pressure from the tensions with the U.S., leading to weaker corporate investment and industrial output during the first five months of 2019. The June macro data will be out soon, while the impact of the Trump-Xi meeting will register over the coming months.
Column by Matthews Asia, written by Andy Rothman, Investment Strategist
Wikimedia CommonsCourtesy photo. Michael Blank Joins a Canadian MFO, to Lead its US Expansion
Holdun Family Office, a 5th generation Canadian family with offices in Montreal, Bahamas and The Cayman Islands, has opened its first US Office. Located at 555 Washington Ave., in Miami Beach, and lead by industry veteran and former Managing Director of Andbank, Michael Blank, the new office is considered by the firm, “as a major expansion into the United States.”
Joining Holdun Family Office in Miami will be a team of professionals with over 100 years of banking experience. It includes: Giuseppe Mazzeo as Chief Investment Officer, Marc Bonorino as Head of Global Compliance, as well as Ileana Torruella and Adilia Lugo, as Senior Relationship Managers.
Global CEO Brendan Holt Dunn of Holdun Family Office commented: “Our extensive family history has served us well in managing our client relationships worldwide. We are looking forward to working in partnership with our new U.S. families and bringing our expertise to the domestic U.S. market.”
Stuart Dunn, Chairman of Holdun Family Office added: “The guiding principles of our family which comprise of honesty, integrity and accountability are never compromised. We pride ourselves on our ethics which is reflected in client loyalty.”
The Holdun vision and services includes: Family Office Services , Wealth Management, Trust and Corporate Services, Financial Services, Concierge Services and a full digital financial platform and ecosystem operating under the Holt brand.
Mariela Arana joins Insigneo as Head of Operations and Technology while the company embarks on a growth strategy with a laser-focused plan on digitalizing operations to provide an enhanced client experience.
Arana brings over a decade of experience in the financial industry along with a solutions-oriented mentality that will propel the successful implementation of key initiatives to automate workflows. She will be overseeing both the United States and Uruguay’s operations as well as the firm’s IT department.
With the client experience at the core, Insigneo has embarked on a journey of growth and expansion as it seeks to scale and automate their operations by leveraging state-of-the-art technology to be more efficient and continue to meet their clients’ needs in an increasingly digital landscape. These initiatives will streamline workflows, including the implementation of cutting-edge programs which will be spearheaded by Arana.
“We are excited to welcome Mariela to the Insigneo family and we are confident that with her experience and talent, coupled with her solutions-oriented mentality, she is the perfect addition to our team,” said Javier Rivero, Chief Operating Officer of Insigneo. “We are counting on her to bring a fresh perspective and the expertise to better our processes and enhance our client’s experience.”
An industry veteran, Arana brings extensive experience in project and time management with a profound focus on risk and compliance and third-party vendor management. Most recently, Arana served as Head of CPII Operations at Citi International Personal Bank and previously as an Investment Associate at Citi Private Bank. Arana started in the financial industry in 2005 when she joined Merrill Lynch.
“I am extremely excited to join such a passionate and energetic team,” Arana shared. “I believe in the power of communicating your purpose with passion and energy, keeping the team motivated and engaged to achieve a common goal. This is what I plan on bringing to my new Insigneo family.”
She graduated from Florida International University with a Bachelor of Business Administration and Finance, has completed Certified Financial Planning courses at the University of Miami and holds Series 7, 66, 9 and 10 in addition to a Life, Health & Variable Annuities License (215).
Pixabay CC0 Public Domain. Aberdeen Standard Investments: “Some Of The Political Risks Which Plagued The Markets In 2018 Appear To Have Softened, At Least In The Short Term”
Current global economic growth prospects remain subdued. However, according to Aberdeen Standard Investments (ASI), some of the political risks that plagued the economies and markets in 2018 seem to have eased, at least in the short term. This has been accompanied by the ‘dovish’ tone of the Fed, which has generated some relief for the markets and has been reflected in the asset prices’ moves.
Speaking to Funds Society, ASI claimed that its medium-term outlook for traditional asset classes (developed government bonds, corporate bonds and equities) remains intact: “We believe that they are facing a challenging return environment given current valuations.” Therefore, they feel “comfortable” with their relatively moderate exposure to equities and see attractive opportunities elsewhere.
Within traditional credit markets, however, they are somewhat concerned about the fact that the level of credit spreads on offer is not commensurate with the risk at this point in the cycle. They therefore have a negligible direct exposure to corporate credit and assure that they will “patiently” wait for a more attractive point to reinvest.
Likewise, they continue to see ABS as a good instrument for an “attractive risk-return trade off.”
The management company believes that local currency emerging market bonds are “the most attractive of the larger liquid asset classes” mainly due to the nominal and real yield they offer as compared to that of developed markets. This is supported by inexpensive currency valuations and “decent” underlying fundamentals.
Finally, they also see attractions across a broad range of niche alternative asset classes, such as litigation finances, healthcare royalties and aircraft leasing.
“Economics and politics are interconnected; they always have been and always will be,” claims ASI, before pointing out that, nevertheless, the nature of that connection “changes over time.” In that regard, the management company predicts that geopolitical uncertainty will continue to drive markets.
In particular, it sees a confrontation between Italy and the EU, a hard Brexit, and an escalation of the US-Iran conflict as increasingly likely.
The management company points out that future outlook analysis is a key part of its risk management approach, since it ensures that they look beyond simple quantitative measures of investment risk. In that regard, some scenarios that have been assessed include a trade war, the rapid increase in interest rates and a liquidity crisis.
According to ASI, their scenario analysis reinforces their focus on diversification through its multi-asset strategy – which includes products such as the Aberdeen Standard SICAV I – Diversified Income Fund – and, in addition, provides a useful basis for “challenging base case assumptions with respect to asset class correlations and individual market liquidity.”
The objective of this analysis is to consider how their funds could respond to different extreme scenarios, which include geopolitical (e.g. war in the Middle East), economic (e.g. China’s hard landing), political (e.g. protectionist policies), market (e.g. major US treasury sell-off) and environmental (e.g. cyberterrorism).
“Although a scenario analysis is a highly subjective exercise and there are no right answers, we believe that by taking the time to think through these scenarios we have a better sense of how our portfolios may perform in a range of market conditions and some of the key sensitivities around this,” says ASI.
Wikimedia CommonsPhoto: PxHere CC0. CFP Professionals Have Another Nine Months to Comply with New Code of Ethics and Standards of Conduct
The Board of Directors of the Certified Financial Planner Board of Standards announced on Tuesday that it has set a date of June 30, 2020 when CFP professionals’ compliance with the new Code of Ethics and Standards of Conduct will be enforced.
The previously announced effective date of October 1, 2019 remains the same for the over 85,000 CFP professionals to understand and comply with the new rules. In setting a targeted enforcement date, the Board of Directors is providing CFP professionals additional time before compliance is enforced with the new Code and Standards.
“In order to best benefit the public, the Board wants CFP professionals to have time to adjust to the new Code and Standards. By setting this enforcement date, we are ensuring they have ample time to modify their policies, adapt systems and be in alignment with the new rules,” said Board Chair Susan John, CFP. “With these new standards, CFP professionals will be required to provide clients with fiduciary financial advice at all times.”
John specifically noted that none of the Code and Standards themselves had changed. This includes, what she called, the “iron clad” commitment of CFP Board to require CFP professionals – no matter their compensation method – to adhere to a fiduciary duty whenever delivering financial advice.
“Since the beginning of the nearly four-year process to review our standards, we said that CFP Board would not be led by what actions regulators take. But we won’t ignore them either,” John said.
“The Board, however, does believe that the alignment of the SEC’s enforcement date of Regulation Best Interest (Reg BI) is helpful to our CFP professionals in that there is significant overlap in the two sets of standards – with a notable exception that CFP professionals are required to act as a fiduciary whenever they are providing financial advice to clients.”
For conduct that occurs between October 1, 2019 and June 29, 2020, CFP Board will continue to enforce violations of the existing Standards of Professional Conduct. Starting June 30, 2020 and onward, CFP professionals will then be subject to potential disciplinary action for any violations of the new Code and Standards. Additionally, the exam starting with November 2019 exam will include material from the new Code and Standards.
“We appreciate the valuable input of CFP professionals, their firms, trade associations and membership organizations representing CFP® professionals in helping the Board come to this decision,” John said. “It is now time for all of us to pull together and comply with the new standards so that we can provide the public with the highest level of financial advice.”
Wikimedia Commons. The Approval of the Pension Reform in Brazil Opens the Door to Lower Rates and Foreign Inflows
With the broad vote obtained in Congress, the pension reform in Brazil seems to have entered a safe path, opening the possibility of a reduction in interest rates and new reforms, says Luiz Ribeiro, CFA Managing Director Head of Latin American DWS Equities, in an exclusive interview to Funds Society.
Interest rate cuts
In the opinion of the expert, the fact that the reform was approved so widely is very positive because it implies that opposition congressmen voted in favor.
One of the most remarkable aspects of the reform is the volume of expected savings that, according to his estimates, could be around 850,000-900,000 million reais in ten years. Thus, Ribeiro believes that this important volume will allow the Brazilian Central Bank to reduce interest rates by 100 bp before the end of the year. “We expect the central bank to cut rates by 50 bp at its next meeting to 6% and another 50 bp in the next. This reduction will have a very positive impact on the equity markets “, Ribeiro points out.
Regarding the next steps in the parliamentary approval process, Ribeiro is confident and does not expect big surprises: “This first vote has been the most important, and we do not foresee that there will be problems in the Senate voting. It is a done deal and we hope that the reform will be voted on in the Senate at the end of August. “
Door opened for further reforms and foreign investors inflows
In relation to how much of these positive reforms have already been priced in, Ribeiro states that while the Sao Paolo stock exchange is trading at PER of 12.2 times above the 7-year historical average (11 times), there is potential for further upside as the market has not yet priced in the next reforms that will came into place after to the approval of the pension reform.”The next reform to be addressed will be the tax reform and the market seems to start to discounting it for next year.”
Ribeiro also highlights the fall in country risk premium, resulting in 5 yrs CDS levels similar to the ones Brazil was when its rating was investment grade. This lower perception of risk may drive foreign investors back to the Brazilian equity market, although Ribeiro believes that they will wait until the parliamentary process is in a more advanced state.
In this regard, he points out: “The recent inflows that we have seen in Brazilian stock market come from a change in the asset allocation of local funds from fixed income markets equities. I think this trend will continue, but we will begin to see foreign investors in the coming to the market in a few months. “
After this important step in Guedes economic agenda, the manager states that the main risks that may affect Brazil come from the external sector and are basically: “Increase tensions in the trade war or the situation in Italy.” Consequently, in their portfolios they overweight sectors linked to the domestic economy such as the consumer sector and certain smaller financial companies.
