CC-BY-SA-2.0, FlickrFoto: Lunita Lu. ¿Se van a mantener los tipos eternamente bajos?
In his latest monthly outlook, titled Curveball,Bill Gross mentioned that to his mind, free will is the key to our unique position among life’s animals. Without it, this business of living is reduced to a meaningless game.
He also makes the case that monetary policy in the post-Lehman era has resembled the gluttony of long departed umpire John McSherry – they can’t seem to stop buying bonds, although as compulsive eaters and drinkers frequently promise, sobriety is just around the corner. In his opinion, “The adherence of Yellen, Bernanke, Draghi, and Kuroda, among others, to standard historical models such as the Taylor Rule and the Phillips curve has distorted capitalism as we once knew it, with unknown consequences lurking in the shadows of future years.”
“But the reliance on historical models in an era of extraordinary monetary policy should suggest caution. Logically, (a concept seemingly foreign to central bank staffs) in a domestic and global economy that is increasingly higher and higher levered, the cost of short term finance should not have to rise to the level of a 10-year Treasury note to produce recession.” And notes that commonsensically, a more highly levered economy is more growth sensitive to using short term interest rates and a flat yield curve, which historically has coincided with the onset of a recession.
“Just as logically, there should be some “proportionality” to yield curve tightening. While today’s yield curve would require only an 85 basis increase in 3-month Treasuries to “flatten” the yield curve shown in Chart 1, an 85 basis point increase in today’s interest rate world would represent a near doubling of the cost of short term finance. The same increase prior to the 1991, 2000 and 2007-2009 recessions would have produced only a 10-20% rise in short rates. The relative “proportionality” in today’s near zero interest rate environment therefore, argues for much less of an increase in short rates and ergo – a much steeper and therefore “less flat” curve to signal the beginning of a possible economic reversal.
How flat? I don’t know – but at least my analysis shows me that the current curve has flattened by nearly 300 basis points since the peak of Fed easing in 2011/2012. Today’s highly levered domestic and global economies which have “feasted” on the easy monetary policies of recent years can likely not stand anywhere close to the flat yield curves witnessed in prior decades. Central bankers and indeed investors should view additional tightening and “normalizing” of short term rates with caution” he concludes.
Grant Cambridge, courtesy photo. “We are Underweight US Financials, but the Pending Deregulation Could be an Interesting Catalyst"
To avoid companies that are overvalued in a stock market such as the US, which since February 2009 has revalued 280%: is the goal of Grant Cambridge, fund manager at Capital Group, which explains in this interview with Funds Society its management keys. He says that this American strategy, which has recently been offered to European investors with the launch of its Luxembourg version, offers long-term returns through a fundamental analysis of companies. And that he is not afraid of the Fed, which he hopes will continue with his gradual upward path, and that it will remain as transparent as possible to avoid surprises.
1. The first thing which nowadays comes to my mind when speaking about US equities is high valuations. Do you agree? If not, or at least partially not, in which sector valuations are still attractive?
When I think about the US, I actually don´t necessarily think about high valuations. Although there are companies in the US which are getting a tremendous amount of attention that do have high valuations. That´s why it is important to think about diversification through a fund like ICA and avoid areas that are overvalued.
If I had to guess what the best industries were over the last twenty years, they are a highly diverse set of sectors. This is to show that I can find in all sectors companies that are attractively valued. But I can also find in all sectors companies that are not attractively valued. The real objective is to try to avoid the names which are overvalued.
Right now, a lot of attention is put on large tech companies and the top five stocks right now, in terms of market cap, are equal to the bottom 250 stocks. That speaks about how concentrated is the market. This fund can invest in growth, but also looks for growth and income. So we have the flexibility to invest in a company like Amazon, with no dividend income, but we also might invest in a company like Verizon, which has lower growth but a really attractive absolute yield, almost 5%. ICA provides a dividend yield of around 2.2%, which is better than the S&P 500. Most of the companies we have in the fund are domestically domiciled and we can invest up to 15% outside the US. However, we actually get our exposure through US companies that have revenues and earnings around the world.
2. Which factors could support the continuation of the rally in the stocks you have in your portfolio? Will it come from earnings, from economic growth or from Trump fiscal policies?
Just to put in perspective, since February 2009, the US equity market is up 280%. So I look for companies that have reasonable earning growth, with that you need fundamental analysis to make sure you have that fundamental growth. In other words, I´m worry about the macro, I mean I can worry on the top down, but I build the portfolio on a bottom-up basis. One company at a time. And all of the companies that we invest in are analyzed on fundamental basis. Many times we meet with the companies. Many of them we have met with the companies in their local activities around the world. So, we are doing a true global fundamental research. This gives us the confidence to invest in those companies for a long term period.
The turnover of ICA is around 25%. That means that 40% of the fund asset has been in companies we held of more than eight years.
3. Based on your long experience, would you say macro or fundamentals are more important in the performance of your portfolio? What do you need to find in a company to invest in it?
I look for ethical management. I look for reasonable valuations. I look for companies that have attractive capital allocation strategies and usually what it does mean is an orientation to return cash to shareholders through dividends or even better, dividends which are progressively growing over the time.
This fund is oriented towards larger caps companies. What we do is we think about the objective of this fund and we orient our investment universe towards that.
4. Are Fed rates hikes impacting on in any way in the equity market in general and in your portfolio in particular? What do you expect from the Fed? Will you implement any change in your portfolio accordingly?
For the Fed, I expect a continued measured pace of interest rates increases and I think up until now we have seen that. They have been increasing rates for the right reasons. The market has tolerated the increases in interest rates. And actually if you see interests rising for the right reasons is not a bad backdrop for equity markets. So I expect the Fed to continue to be measured, to be as transparent as possible and to not have any surprises.
If you go back to 1994-1995 time frame, rates gone up very rapidly, there were a lot of surprises and impacted both the fixed income and the equity market. Right now I see the Fed ´patrons being very transparent; they are trying to give as much indication of direction as possible.
In sum, I don´t expect interest rates to go up and up an up.
5. What are the keys for being able to protect investors’ capital in down markets? For instance, in the current environment, is it better to have a more defensive bias or a more aggressive one? Why?
We have already talked about this, but for us, the key is the diversification. In our Capital System we do not only apply diversification within the portfolio but we have diversification of styles. We have eight portfolio managers in this fund; we have a variety of styles. We have been able to find general defensive sectors which in weak market, these kinds of companies have hold up very well. Two of our larger sectors now are consumer staples and consumer discretionary, both of which are defensive sectors overall.
For us this not only diversification per se, is diversification but with convictions. We do not add companies just for the purpose of diversifying. Every single position in the portfolio is a conviction. Our investment process involves more than one decision maker. We have eight portfolio managers assigned to this fund and we also have a research portfolio, which is managed by the specialists or industry analysts. The industry analysts are looking for high conviction ideas. They only make a small number of decisions per year and when they invest, the portfolio managers who are in the fund will also co-invest. This process is very transparent, it is granted in trust, in communication and in collaboration.
6. Which sectors do you like the most from a fundamental standpoint? Which ones are you currently overweighting?
We are slightly overweight energy. As said before, consumer staples, energy and telecommunication companies we are overweight relative to the S&P benchmark. We are underweight financials.
7. Energy and financial sectors, which have been in trouble, are they an opportunity now?
Energy is a cyclical commodity and we have seen an ample amount of supply which offsets the demand. So, basically, as a result, the commodity has weakened. We don´t have a wide company view on oil. Each person has his own opinion. My opinion is it will take some time before the supply and demand comes back into balance. Demand has been fairly stable and supply has been ample. OPEC has shown they wanted to set a floor on price and the US is producing more energy, natural gas and oil than it has historically.
It was only a few years ago when we were worry about peak oil and we were discussing oil at $200 a barrel. So this goes to prove that this is a commodity cyclical and where there is more supply there is pressure on the commodity. One thing we are particularly interested in are the low cost providers and the companies that can earn their dividend thanks to this weakness of the commodity.
Concerning the financial sector, we have been underweight in ICA, there may be a general feeling that interest rates will be lower for longer and you really need interest rates to go up two-three hundred basis points to make a meaningful impact on earnings. So we haven´t had enough increase in interest rates to make a material impact to earnings. We also have a tremendous amount of regulation in the US and the new Trump Administration is talking a lot about deregulation and we will have to see whether or not it really ends up impacting, particularly the banks.
The discussion around the Trump Administration considering deregulation will be one that we will continue to watch because it could be an interesting catalyst after having a period in which regulation was put on the market since the financial crisis.
Deregulation is a theme which goes beyond the financial sector and that could impact a number of sectors. President Trump has talked about removing two regulations for everyone that is audited, that goes very broadly across the economy so we will have to wait and see which areas are most affected. We do a lot of research about regulation and right now it is too early to tell what could be his priorities. The financial regulation is one which seems to be a priority.
8. Why do you overweight large caps and underweight small caps? Does it help to the portfolio stability?
This is a conservative fund launched by our founder. This is a lower volatility, larger cap fund. We refer it as core fund which invests in seasoned companies; companies which stability and which are leaders, many of them, in their fields. They are liquid companies and most of them have an income as contribution to total return. CGICA’s 83-year average return of 12% has proved rewarding for long term investors.
In other words, this fund, because of its nature, has been relatively conservative and is currently overweight large caps. Around 10% of the fund is in mid caps today. We do not have any small cap in the fund. It does help with portfolio stability and it also contributes to have liquidity in the company we invest in. Besides, it gives you exposure to earnings and revenues around the world.
We are managing the fund with a longer term horizon and our approach to investing in larger caps, stable, seasoned companies, as said before, helps to maintain a stable portfolio. Small and mid caps can go through dramatic changes, some times in the short term, some times in the long term and larger caps tend to be more stable. It does not mean they not move around, but generally they provide stability.
9. Why active management and having a high active share are key factors when investing in US equities? How does it help to long term results?
We look to focus on fundamental research into companies and consider their long term future prospects -their weighting within the index is not a primary consideration.
When we are investing we almost rarely use the words index, underweight and overweight. In our vocabulary, in our day to day jobs, we are not using them. But when we are sitting with advisors, we can describe the fund using these words despite this is not the way we describe it in our meetings internally. In other words, we are aware about the benchmark but don´t use it as a way to build our portfolios.
Apart from that I would like to highlight that because of we are looking for companies with dividend characteristics, we are many times invested in the higher dividend quintiles and that is an area which gives the stability of the fund ´returns. It also provides downside protection in the event of a correction.
We tend to be in the upper quintile of our peer group for consistent risk-adjusted returns, but we are in the lower volatility category of our peer group. Actually, we are in the lowest quintile of volatility of our peer group. What is exactly what we want to do for our long term shareholders: provide superior returns with lower volatility. We must not forget our mission which is to improve people´s life through successful investing. It is important also to bear in mind the investment management is our only business. We are focus on the long term interest of our clients. Finally, I would like to remember another key feature of CG is that portfolio managers invest their own capital in the funds they are managing.
10. Finally, is the Luxembourg strategy being well received in Europe? What does it strategy offer to European investors?
Yes. It provides to European investors the same thing we have been providing to US investors for 83 years. It provides long term investment returns through fundamental analysis of companies.
Now European investors can access to one of the most successful strategies and it represents what they are looking for a US equity fund: it is a conservative, first quartile, low volatility, easy to understand fund. And more than proved, with 83 year track record.
Francisco Murillo, CEO at SURA Asset Management Chile. Three Questions on Pension Reform Answered by Francisco Murillo, CEO at SURA Asset Management Chile
The pension reform in Chile is at the height of the consultation stage. The project will bring several new features to the pension system, including a 5% increase in contributions. The Chilean government has announced that the reform will reach parliament between March and April, and that its approval is expected by the end of the year.
Francisco Murillo, CEO at SURA Asset Management Chile, answered three questions about the reform.
1. How do you evaluate the announced incorporation of alternative assets among the investments of the AFPs?, Is it something positive for the markets and for the savers?
It is an excellent initiative, and addresses the need to seek new sources to ensure profitability, considering that the returns we have known in the past will hardly be repeated in the future. In fact, we were among those who raised the urgent need for this measure. In 2014, in the midst of the debate on the pension system reform, we presented 11 proposals to the Bravo Commission, one of which was precisely to make the investment in alternative assets possible, because of the strong impact they have on pension profitability.
It is shown that an additional 1% of the average annual return in the active life of a member can improve their pension by 20% to 25%. In the recent past, alternative investments have obtained higher returns, less volatility and, moreover, contributed to portfolio efficiency.
The retirement reality that we Chileans live today shows us that there is a gap between the expected pension and the one that is actually received at the end of the working life. Currently there is a broad consensus on the urgent need to apply changes to the system, and that is probably one of the great challenges we have as a country: closing that gap.
It is within this context that we must promote and encourage actions that generate a positive impact on the pension savings of Chileans.
2. One of the potential items of the pension reform could be the limitation of multi-fund movements: How do you evaluate that potential innovation?
It’s fundamental to know the proposed bill in more detail, since there are issues that would have to be analyzed from the technical point of view, in order to evaluate its implementation and impact.
We believe that fund management is relevant to pension construction and requires people’s involvement, so it is very important to have that freedom of choice and action, to decide in which multi-fund to invest your pension savings.
However, we must clarify that the changes that arise from so-called massive funds, or without adequate advice, can generate lower returns for fund members. Our mission as an AFP is to educate people to make appropriate decisions, according to their investment profile and their expectations for post-retirement life.
3. In general, who will win and who will lose with the changes?
Our expectations are that the changes are adjusted so as to achieve the great common goal: improving pensions.
Most likely, the final solution will not be perfect for any of the players involved, there are issues that are shared more strongly than others, but what is clear is that the pension system as such, I do not mean only that of individual capitalization, will better address the needs of an aging country.
In order for us Chileans to enjoy a retirement stage of life according to our expectations, we must act urgently, applying parametric changes and adjustments with greater savings as soon as possible, leaving decisions about the pension system out of the political cycle. The further we delay in acting, the later we will reach our goal of having better pensions.
We are convinced that once the pension reform takes shape, the role of individual capitalization will become even clearer as a key pillar of the pension system and that, outside the environment that has been generated in recent years, the AFPs have fulfilled a fundamental role, and are far from being the problem of the pension system in Chile.
Wikimedia CommonsPhoto: Kenneth Akintewe. Aberdeen AM: “India’s Debt has Such Low Correlation with Other Markets Given it is More Linked to Internal Factors”
The global economic context reinforces the argument for the Indian bond market. India’s transformation is mainly an internal growth story, in contrast with that of China, for example. India’s economy has a low correlation with international markets, and this extends to Asia.
A study conducted by Bank of America Merrill Lynch found that the average correlation of Indian bonds with the rest of Asia has been close to zero over the last 5 years. Indian bonds, therefore, offer a large source of diversification for investors in international debt.
Due to all of the above, Aberdeen is still quite bullish on India and if we ask its managers and analysts what their high conviction ideas are for the coming months, Kenneth Akintewe, Senior Investment Manager for the firm’s Asian fixed income team, is convinced that, almost unanimously, the answer would be precisely that one. Not surprisingly, the firm has positions in the country’s fixed income and equity products.
Its bond fund, launched in 2015, has been very well received in the US offshore market and in Latin America and already exceeds 200 million dollars, in assets under management. India’s bond market is a large and liquid market, with over one trillion in debt, and with an attractive return of 7.42% so far this year. The average duration of the Aberdeen strategy is 6.4 years and it has an investment grade rating of Baa3. Currently, there are only about five funds in the market competing within this asset class.
“Presently, India’s story is one of exceptional growth and reform, but that is not the only reason. There’s many. A key factor is that, if we think about the current global environment, there are multiple risks such as global policy, global demand, commodity market performance, geopolitics, as well as high correlations between most core markets, and we have very few options that help counteract these risks. Indian debt, however, is an asset class with low correlation with other markets,” explains Akintewe.
Growing Demand
The Indian bond market is a large, liquid market – over a trillion dollars – and Aberdeen has been investing there for about 10 years. They consider this an achievement when taking into account that, until a few years ago, India had the dubious honour of being part of the group of economies known as the ‘Fragile Five’, i.e. the five emerging economies which were very dependent on foreign investment in order to finance their growth, with high levels of fiscal deficit, current account deficits and a high degree of institutional corruption. Access to capital markets was very difficult for them.
But Akintewe explains the transformation: “Ten years ago, the context for bond investment was radically different. Capital market regulations made it very difficult to invest. International investors required a licence first, then they had to have a quota for government bonds and another one for corporate debt, which were subjected to multiple layers of other rules and restrictions. If you sold one of the positions you lost your quota and would have to wait for an undeterminable amount of time to get another one, meaning active management was impossible”, he recalls.
The reform of the capital markets, however, has been greatly simplified, and for Aberdeen that means that it now makes sense to market a fund of these characteristics. “Now we can actively manage risk,” the manager points out. But despite this opening, the exposure of foreign investors to the country is still small. This is partly due to the fact that, due to capital controls, India is not part of most bond indices, not even that of the emerging markets. Aberdeen examined about 160 emerging market local currency bond funds and found that the average exposure to India was less than 1%, a ridiculously small amount considering it has not only been one of the strongest reform stories in EM but one of the most consistently best performing trades over the last few years.
The main players in the domestic bond market are essentially institutional investors or Indian insurers, although Akintewe believes that as the market grows international investors will pay more attention to it. There are currently one trillion dollars in the Indian bond market, with $700 billion corresponding to the public debt market and $300 billion to the corporate debt market. The share of the government bond market that foreign asset management firms can access was 3.5% in 2015 but is being increased to 5% by March 2018. The market has seen increasing participation but, Aberdeen’s manager explains that for the overall bond market foreign exposure is still low at around 7.5%. . In other EM bond markets foreign exposure can be 30% or much higher in some cases, making them vulnerable to changes in investor sentiment.
“There is still room for growth. Progress is very gradual, but it is expected that in the long run the government will be more comfortable with international investors in its bond market. Therefore it is possible that the foreign quotas could be increased, particularly with respect to the 51 billion dollar corporate bond quota, as it is in the country’s interest that companies continue to have uninterrupted access to capital.
Risk Profile
Regarding the risk profile of the Aberdeen funds, the manager explains that it is an asset class with little correlation to issues that are very correlated with other emerging markets, such as oil, even with the global bond market, or with emerging debt. It is a market that is linked more to internal factors such as monetary, fiscal, deficit reduction or inflation control.
“Local insurers are increasing their assets by 20% annually thanks to the population’s wealth growth, so technically there is a very strong growth in demand from the local institutional sector. And it is a very liquid market particularly compared to other emerging markets with government, quasi-government and the more highly rated corporate issues trading with tight bid/offer spreads of 2-3bps and in large sizes.
The Aberdeen Global Indian Bond fund invests in local currency bonds. Akintewe explains that it is the most uncorrelated asset, because including Indian debt in hard currency in the portfolio means there is a certain correlation with US Treasuries.
Akintewe knows that the currency risk exists, it’s clear. “However India remains committed to fiscal reform, has built a high level of foreign exchange reserves, has seen its current account deficit come down significantly and moved to a positive basic balance of payments position thanks to very strong growth in foreign direct investment meaning that the rupee enjoys firm support from its underlying fundamentals., We estimate that the Rupee will be able to stay at current levels or even appreciate around 1% to 2% against the dollar, but the key is its low volatility which is half to a third of other G10 and EM currencies.”
“We must point out that the fund’s volatility is quite low compared to other emerging market bonds, and of course, much lower than any exposure to Indian equities. Since its inception, the fund’s volatility has been at 5.6%,” he concludes.
CC-BY-SA-2.0, FlickrDennis Lai, Senior Manager at Allianz GI. Courtesy Photo. Emerging Within the Emerging: The Potential of the Asian Frontier Markets, According to Allianz GI
One of the core messages from the Asia forum recently held in Berlin by Allianz Global Investors is that investing in the Asian continent goes far beyond China. Although the Asian giant offers investment opportunities that cannot be ignored, and has risen strongly in recent months in tune with other markets such as India, a market which asset manager Siddharth Johri spoke about, or Korea, all of them revalued by about 30% in the last twelve months, there are also others that offer great potential.
Therefore, beyond the more developed Asian countries, there are emerging countries within the continent, emerging within the emerging, or frontier markets. Dennis Lai, Senior Manager at Allianz GI, spoke about the opportunities in Asian frontier markets, growing markets with very favorable demographic characteristics, consumption opportunities, infrastructure, and GDP growth.
Without taking into account the beneficial effects generated by China (and other more developed Asian countries) on some of these markets, the boom in development and research policies, and the improvement in their fundamentals and credit quality from an investment point of view (which improves the perception of risk). The Allianz GI strategy that invests in emerging and frontier Asian markets harnesses the potential of these markets and focuses on growth segments (such as consumption, services, technology, and infrastructures, which are less present in the indices but will be gaining traction) and avoids the traditional ones (utilities, financial, health…), in a strategy with conviction that selects between 60 and 80 names.
And it is also based on themes: for example, the asset manager likes the investment in automation theme, and the fact that Asia is a fundamental part of the supply chain for Western robotics firms; also the sale of automotive components to the OECD industry theme; or the aerospace theme, as the continent also provides components to large Western firms.
According to the asset manager, Pakistan, Vietnam or Sri Lanka are some of the next economies that will be among the fastest growing.
The Allianz GI strategy invests in names that also bring great diversification to the portfolios by their decorrelation with other Asian markets, since their fundamentals and their cycle are at a different, earlier stage, than that of other more developed Asian markets.
In addition, they are little-known markets and emerging outflows affect much less:
“We are positive in Asia and in the smaller markets, where we see very interesting opportunities,” remarked the asset manager.
Asia’s Potential
Stefan Scheurer, Asia Pacific Economist at the asset management firm, also pointed out during the event that Asia is not just China, but a vast continent stretching from Japan to Australia and including many, and varied, markets. Between them, the population is larger than that of Europe plus America together, with 4 billion people, 60% of the world’s population, and accounting for more than 35% of the world’s GDP… a trend which is rising, as by 2020 it could account for 42%.
In this context, China has become one of the major standard-bearers and advocates of globalization, and despite Trump and his protectionist attempts, experts estimate that international trade (intra regional and interregional) will continue to grow, driven by TPP (of which the United States is not a party).
According to the expert, the continent will continue to grow, driven by productivity and innovation in China’s or India’s case, with large amounts of patents; regarding the debt problem, he points out that there is potential to increase leverage, since it is a problem in China but not in other economies in the continent. In addition, the population and demographic profile is more favorable in countries such as India, Indonesia or the Philippines than in China, which leaves greater potential for growth in these economies. With all these factors, the expert predicts continued growth in Asia, above that of developed markets, and also driven by the continent’s status as a “relative winner of de-globalization”.
Federico García Zamora, Director of Emerging Markets at Standish (part of BNY Mellon) / Courtesy Photo. Interest Rates, Oil, and the Dollar: the Three Factors that Convert Emerging Debt Into an Investment Opportunity
In 2017 the return of investors towards emerging market debt after several years of inactivity has become evident. The drop in oil prices, lower growth in China, and political problems were behind this disillusionment, which this year has been almost completely wiped out.
The investment spirit in emerging debt “is blowing in the wind”, as Bob Dylan would say, however, any cautious analysis would lead us to consider whether this trend is sustainable in the medium term or if, on the contrary, it has an expiry date.
This is the first question we asked Federico García Zamora, Director of Emerging Markets at Standish, BNY Mellon, during this interview with Funds Society in Spain. His answer is clear: “The context has changed and will be maintained for at least the next 12 to 24 months due to three fundamental factors: interest rates, the oil price, and the Dollar.”
In his opinion, the Fed’s rate-hike strategy is already embedded in long-term bond prices. “It will not come as a surprise to anyone that interest rates continue rising and, therefore, it will be perfectly accepted,” says the expert.
As for the second fundamental factor, the price of oil and commodities in general, García Zamora explains how they are analyzing both from the production side (companies in the sector) and from the demand side. His forecast is that the price will be much more stable in the next 12 months, at around 40-60 dollars. “The price cannot rise again too far above 55 dollars because the supply of unconventional oil would rise a lot, while below 40 dollars, a lot of the supply would be destroyed,” he explains.
Despite admitting that for investment in emerging markets it would be better for the price of oil to rise, “stable oil is going to be very good without it having to rise. We will see good results with price stability,” he argues.
Good results that, in terms of profitability, translate into 7% -8% annual returns for emerging debt, “which is very attractive when compared to any other fixed income asset in which you can invest worldwide, if nothing changes regarding currency exchange rates.”
As a matter of fact, the third factor that supports this interest for emerging countries is the evolution of the Dollar and here the expert’s forecasts point to a fall of the dollar during the next two years. “This adds appeal to this asset class as opposed to a few years ago when the dollar kept rising,” he explains.
An upward trend that the expert explains as due to the rapid increase of interest rates while they were falling in the rest of the world, as a result of the European crisis, stimulus withdrawal by the Fed, the collapse of oil prices, and Donald Trump’s election. According to García Zamora, all these elements contributed to placing US currency at highest levels during the last five years, but now he is convinced that it will continue to be come down because “that’s how the Trump administration will solve the country’s high trade deficit. Depreciating the dollar has always been his intention, but it was easier to explain to the average American voter that he would solve the problem by raising customs fees.” His forecast is that the dollar will stand at 1.25 to1.30 Euros.
From Russia and Brazil to South Africa and Turkey
Asset allocation from a geographical point of view has varied in the last twelve months. During 2016, Russia and Brazil have been the darlings of the Standish emerging portfolio, in which Colombia has also had some weight, despite being slower in its recovery.
“Another country that we liked a lot is Argentina due to its change of government. Its crisis was self-inflicted with a government that shot itself in the foot as much as it could. With a much more reasonable policy and investment, the potential of the country has changed completely.” In this regard, Garcia Zamora says that they have already taken profits in Argentina and have rotated their portfolio towards other issuers like Mexico, South Africa and Turkey, which are “cheap.”
The investor’s main concern in emerging markets is volatility, which the expert puts between 8% and 12% depending on whether the investment is made in local currency, Euros or dollars. “It is true that these assets have gone up quite a bit, but if you are a long-term investor it remains attractive. The fall that some expect may not arrive and my recommendation is invest now and, if there is a fall, invest further,” he concludes.
Pixabay CC0 Public DomainC3_0010_shutterstock. Will the Fed (and Other Central Banks) Normalise Monetary Policies?
In mid-2013, the then chairman of the Federal Reserve, Ben Bernanke, suggested that America’s central bank should start to cut back on the purchase of bonds that had started in 2008. The turmoil resulting from this announcement on all markets in general, but on emerging markets in particular, put a curb on his intentions.
The baton was passed on to Janet Yellen, who in December 2015 approved a rise of 25 basis points on interest rates that had remained at 0% for seven years. The last increase had taken place in 2006, but with scant resonance – Twitter was yet to come into its own. In just a little over a month, between 22 December 2015 and 28 January 2016, the Chinese stock market adjusted by just over 27%, and plans to normalise monetary policies had to be postponed once again.
This time around, it seems that not just the Fed, but other major central banks such as the European Central Bank, the Bank of England and the Bank of Canada, are willing to normalise monetary policies, following almost ten years of emergency policies.
The global economy is now more settled. The OECD expects the world’s GDP to grow in 2017 and 2018 to levels of 3.5% and 3.6%, respectively, in comparison with the average of 3.9% between 1987 and 2007. However, developed economies will grow at slower rates, nearer to 2%. The United States has grown by an average of 1.47% over the past eight years, as compared with 3.4% since the Second World War, and the annual real growth rate since the last recession was just 2.1%, in comparison with an average of 4.5% in previous recoveries. Based on figures published to date, it does not seem that growth will even reach 2% in the first half of 2017.
The Federal Reserve’s task is further complicated by two historical facts: since the Second World War, the Fed has triggered 13 cycles of rises in interest rates, ten of which took the economy into recession. Secondly, since Ulysses S. Grant (1869) all republican presidents have experienced a recession during their first term of office. Nevertheless, as athletes often say, if faced with a challenge backed by past results against winning, records are there to be broken.
The desired rate of inflation (for the central bankers that govern us because, I do not know about you, but I like to buy things when they go down in price) closed at 1% in 2016 in developed economies and, unless there are new price rises in oil, it seems unlikely that the target of 2% will be reached.
Finally, global debt, far from dropping, has continued to grow. By the close of the first quarter of 2017, it was 217 trillion dollars, which meant that it increased by more than half a trillion dollars, 46% higher than ten years ago. Developed economies have built up a total debt of 160.6 trillion dollars, 1.4% down on the previous year, whilst the debt of emerging countries reached 56.4 trillion dollars, up by 5.4%.
In light of positive economic growth, although perhaps not sufficiently sound to deal with potential upheavals, a controlled rate of inflation still way off target and higher debt levels in the economy, what has made central banks act like this now?
Even the chief economist of Bank for International Settlements highlighted in its annual report published last month that: “Policy normalisation presents unprecedented challenges, given the current high debt levels and unusual uncertainty. A strategy of gradualism and transparency has clear benefits but is no panacea, as it may also encourage further risk-taking and slow down the build-up of policymakers’ room for manoeuvre.”
Perhaps central bankers have (at last) realised that inflation is in financial assets – the returns on the oldest bonds in history, those of the United Kingdom and the Netherlands, have seen the lowest in 322 and 500 years respectively, whilst the US had 10-year bond yields of 1.366%, the lowest since 1800. Maybe it has taken them too long to withdraw these measures that are now not only ineffective, but also encourage too much risk-taking, which puts financial stability at jeopardy. It could simply be that they are recharging their arsenal of weapons to shore up monetary policies should they need to use them in the near future.
Whatever the reason, the reality is that the market has let them get away with this so far. The question is: will this go on like this? Will they stay on course if the market does not take this well? If they do not keep a steady hand, will faith be lost in the omnipotence of central banks? It should not be forgotten that low interest rates have been the main driver behind the upturn of financial markets.
If Ben Bernanke was right about the positive effects of rolling out quantitative easing, he should be equally right about the effects of withdrawing it. Without going into specifics, what is important is that markets believe so, and think that central banks are responsible for the positive performance of markets.
In response to the appearance of another financial crisis, Janet Yellen was clear in a recent interview: “Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be.”
Overall, the four big central banks have purchased around $13 trillion in bonds ($13,000,000,000,000). It goes without saying that divesting this portfolio without messing things up is not going to be an easy task…
Wikimedia Commons. World’s Largest Mutual Fund Company Expands Business Capabilities in Mexico
Vanguard Investments Mexico announced that Juan Manuel Hernandez has been named the head of Vanguard’s business in Mexico as the company expands its efforts to meet local investors’ needs for low-cost and broadly diversified investment products.
Hernandez joins Vanguard from Blackrock Inc. Mexico, where he served as head of institutional sales. He also held the head of sales position for iShares Mexico.
“Vanguard has been serving investors in Mexico since 2009 from our headquarters in the US, and we believe regulatory, fee, legal, and capital market structures are moving in the right direction to enable Vanguard to expand in Mexico,” said Kathy Bock, head of Vanguard Americas. “We are delighted to have someone of Juan’s caliber to lead Vanguard’s work to further increase access to our products to investors in Mexico.”
“Many companies talk about their client focus but Vanguard actually lives and breathes it as a result of its mission to take a stand for all investors, treat them fairly, and give them the best chance at investment success. It has a global reputation for offering products solely designed to serve investors’ needs and goals. Vanguard’s desire to deepen its business is a huge win for Mexican investors and I’m honored to have this opportunity to be part of the effort,” Hernandez said.
Vanguard, the world’s largest mutual fund company and one of the world’s largest investment management companies, has gained a global reputation for doing what’s right for investors. “We do that by advocating for low-cost investment products and transparency in what investors are paying for their investments,” Bock said.
“Our views of investing are straightforward, easy to understand and designed for the long term. With more than 40 years of experience in successfully managing money for individuals and institutions, we have helped millions of investors meet their investment objectives around the world. Our goal is to do the same for more investors in Mexico.”
Vanguard, the world’s second-largest ETF provider, offers 65 Vanguard US-domiciled ETFs cross- listed on the International Quotation System (SIC) of the Bolsa Mexicana de Valores and 26 ETFs approved as eligible investments for Mexican Sociedades de Inversion Especializadas para el Retiro (SIEFOREs).
Vanguard has worked with The Compass Group as its distribution partner since 2009 in Mexico, Chile, Colombia, and Peru. “Compass is a critical partner in our success in Latin America. The Compass team has been invaluable in helping Vanguard enter Mexico and in serving investors there and elsewhere in Latin America,” Bock said. “Its local expertise in representing Vanguard’s mission has contributed greatly to our success in serving the pension systems and in participating in industry forums that have served to strengthen the capital markets and pension systems for investors.” “We look forward to continuing our work with Vanguard to ensure that investors throughout Latin America have access to high-quality low-cost investment products,” said José Ignacio Armendáriz, Compass partner and country head of Mexico.
Juan Francisco Fagotti and Valeria Catania, courtesy photo. Juan Francisco Fagotti and Valeria Catania Join BECON IM
Third-party distributor BECON Investment Management adds two senior positions in a move to boost its presence among Latin America’s private banks, independent wealth managers, fund of funds, and family offices.
Juan Francisco Fagotti joined the firm as Senior International Sales Representative along with Valeria Catania in the role of Regional Office Manager. Fagotti’s educational background include a degree in accounting from the Universidad Catolica Argentina, and is currently completing a Masters in Finance at Universidad Torcuato Di Tella in Buenos Aires Argentina. Catania brings decades of experience in the financial sector having worked at firms such as Credit Suisse, Prudential Securities, Wachovia Securities, and Wells Fargo.
“We are very excited that Juan and Valeria have joined the team. BECON is experiencing rapid growth in the region so we expect to continue adding additional positions soon. We plan to double in size during the next 3 years by increasing headcount and offices strategically around the region. Latin America is large and clients expect high quality and consistent service. Adding key people, offices, and products is key to our strategy” says Florencio Mas, CFA who is Managing Director at BECON.
The firm plans to open additional offices in Santiago Chile and Miami in a move to take advantage of decades of client relationships in both North and Latin America. Frederick Bates, another BECON representative stated “It’s important to stay focused an ensure our clients’ needs come first and if that includes expansion then we will when the time is right. As a third party distributor we cater to the intermediaries we offer solutions to as well as the asset managers we represent. It is so important to ensure that the asset managers have confidence that BECON is extension of their firm and their products are top of mind every morning when we wake up. Our model is clear in that our true edge is 20 years of experience and relationships in the retail intermediary channel unlike other 3rd parties that primarily focus on pension funds. We also believe the less is more in terms of partnerships with asset managers because in order to represent their products well we can’t become a supermarket. We have space for one more asset manager and are in conversations with firms we believe compliments our current offerings”.
BECON went on to state that one of their true differentiators is the fact that their senior management is directly involved the servicing of client relationships. Also they are solely focused on third party distribution and have no intent to create their own asset manager, private bank, or multi-familiy office. The landscape for distributing cross border mutual funds in Latin America is getting competitive as firms flock to the region in search for growth opportunities beyond institutional channels such as pension funds.
BECON Investment Management is an exclusive 3rd party distributor. In 2017 they partnered with Schafer Cullen, a specialized high dividend value equity manager with $20 billion USD in assets under management. More recently BECON announced an addition partnership with Neuberger Berman, a global asset manager founded in 1939 with approximately $270 Billion in assets.
Pixabay CC0 Public Domain. Small- and Mid-Caps: Still Attractive Investments
Small- and mid-cap stocks in Europe, Switzerland and the US are being buoyed by solid fundamentals and the improving economic environment, and remain attractive as components of a long-term investment strategy.
Since the start of the year, equity markets have been supported by positive economic developments. Earnings are growing again: on aggregate, earnings per share (EPS) are expected to rise 13% this year as opposed to 2% in 2016. This positive environment is particularly beneficial for small- and mid-cap (“SMID-cap”) companies, although returns have varied between stocks in the US, Europe and Switzerland.
Fundamental strengths amplified by a supportive environment
In particular, SMID-caps currently have stronger balance sheets than large-cap stocks, with average net debt/EBITDA ratios of 1.1x and 3.9x respectively. These low debt levels, combined with the global economic upturn, mean that SMID-caps still have substantial growth potential, justifying valuations that may appear high in some cases. That growth potential is also underpinned on a long-term view by their impressive capacity for innovation and their ability to adjust to economic developments, which should deliver additional returns in the absence of any systemic risk.
SMID-caps also have other fundamental advantages. For example, many of them are family-owned companies, managed according to a philosophy that ensures the sustainability of their business. In addition, small companies are often driven by a highly entrepreneurial spirit, the effects of which can be seen most clearly when economic growth is accelerating.
Performance drivers that vary between countries
In Europe in particular, SMID-caps are still offering good investment opportunities because they are attractively valued. European SMID-caps slightly underperformed large-caps in 2016, even though their earnings growth remained positive. Their valuation ratios are currently lower than those of the rest of the market, and lower than their historic averages.
Swiss SMID-caps have had to contend with a strong currency for more than two years now. They have managed to do so by focusing on their competitive advantages and on innovation, while keeping costs tightly under control, which has enabled them to improve profitability. They have also continued to expand successfully in emerging markets over the last few years. For investors, therefore, they offer the stability of a developed market together with indirect exposure to emerging-market growth.
In the USA, the renaissance of the manufacturing sector and the upturn in consumer spending should benefit domestic companies for a long time to come. Unlike Switzerland’s internationally oriented companies, US small-caps are mainly focusing on organic growth on their local market.
US corporate tax reforms should be particularly beneficial to SMID-caps, which tend to pay higher tax rates than large corporations. As a result, US small-caps should continue to fulfil their potential, particularly in more cyclical sectors and finance.
Although these stocks have already made significant gains in 2017, they are still attractive investments, particularly for those wanting to put together a balanced portfolio for the long term. On both sides of the Atlantic, the global economic recovery should both support and boost the earnings growth of these dynamic, entrepreneurial companies.
