Erick Muller, Head of Strategy at Muzinich. The Time for Global Desynchronization in Monetary Policy, Taxation and Growth has Arrived
Much has been said about the unique phenomenon of global synchronized growth, the unanimity of a lax monetary policy, and the objective of having common fiscal policies by geographical regions. But what if all this had come to an end?
According to Erick Muller, Head of Strategy at Muzinich, an asset management company specializing in corporate fixed-income or credit, this may be the next market reality. Muller believes that a new macroeconomic environment is emerging in which the European and North American economy begin to take different paths. “2017 marked a new turning point since the great financial crisis as it brought about a scenario characterized by synchronized growth between emerging and developed countries, a stronger banking sector, very positive and growing corporate results, and a lower unemployment rate. Since then three things have changed: monetary policies, fiscal policies and the pace of global growth,” says Muller.
In Muller’s opinion, these three trends are the ones that are breaking the great synchronization that we had until now. Analyzing each one of them, Muller firstly points out the fiscal policy undertaken by the US and its announcement of tax cuts. In this regard, he stressed that these measures are not succeeding in making the US economy any more efficient; however, it could cause an increase in the budget instead.
“Donald Trump’s decision to redesign trade policy in order to benefit the US, could produce a certain shock in the market or short-term uncertainty in the business sector,” Muller points out, and points to protectionist policies as the clear difference with other economies. In this regard, he acknowledges that growth has slowed down, especially in developed countries, but it isn’t alarming because global and fundamental indicators are positive.
Finally, Muller refers to the fact that this desynchronization is more evident when it comes to talking about the monetary policies of central banks. “Inflation is not rising at the rate expected by central banks, which has a clear effect on the rate hikes they plan to make. The Fed has already started more firmly along this rate hike path, while the ECB is delaying the rate hike and lengthening the cuts to its asset purchasing program,” explained Muller.
Opportunities on the horizon
In this context of “desynchronization”, he sees investment opportunities in corporate bonds, mainly denominated in Euros. “We are convinced that the focus is on short duration and on being very selective, we believe that floating bonds, syndicated loans and private debt are interesting, although the latter has less liquidity,” says Muller, who explains that they have seen a growing interest in private debt by institutional investors.
When talking about geographical areas, Muller admits that they prefer Europe over the US. “It’s true that US high-yield can offer somewhat higher interest, but the currency exchange hurts it,” he concludes. In terms of emerging markets, he points out their attractive yields, especially in short durations.
Finally, Muller points to flexible strategies as the type of strategy that best adapts to an environment like the current one; In this regard, he also acknowledges that strategies of short durations and absolute return are among the most demanded, especially by conservative profiles. Instead, institutional investors have become more sophisticated, he added.
To the left Vladimir Colas, Member of Ardian’s Executive Committee and Co-Head of Ardian USA. To the right Nicolás Gazitua Senior Investor Relations Manager for Ardian . In a context of high demand, Ardian has confidence in Latin America
After the announcement of the opening of their first office in Latin America in Chile, Funds Society had the occasion to discuss the details of Ardian’s strategy in the region during an exclusive interview with Vladimir Colas, Member of Ardian’s Executive Committee and Co-Head of Ardian USA, and Nicolás Gazitua, leader of Chilean office and currently Senior Investor Relations Manager for Ardian in New York.
The election of Chile as the first country to establish is not only because of the stable economic and political environment but also because of the continued interest of the investors and clients in the country. “The growing demand of our LPs (pension funds, insurance companies, and family offices) in the region, particularly in Chile, Colombia Peru, has been the main reason for us to choose Santiago. Additionally, though our focus is to build stronger relationships with investors in these countries, we have seen significant interest from Brazil and Mexico to diversify their holdings outside of Latin America. We will be looking to fulfill that demand as well”, explain Gazitua.
When asked if the approval of the new investment act that expands alternative assets for pension funds has been a key drive in their decision, Gazitua states: “The internal decision was taken before the new regulation was approved. That being said, there is no doubt that the new regulation is a great push”
Ardian has since 2015 a distribution agreement with Volcom capital. In regards to the consequences that the new office might have in their relationship with the distributor, Colas explains: “We are extremely satisfied with our relationship with Volcom. The opening of Santiago will not change our agreement, it will strengthen and enlarge our collaboration”
Direct investment in Infrastructure
The immediate objective of the Chilean office, that will be led by Nicolás Gazitua, is to support the investor and LP relations across the region. Their view is that, due to both the improvement of foreign investment and the domestic economies, interest in infrastructure investment will increase, and as such, in the medium term, they are considering the possibility of managing direct investment from the Santiago office enlarging the team with the resources and expertise required.
Vladimir Colas explains: “our added valued lays in sharing with our investors and LPs, information, knowledge and strategies. We want to be close to the interests that our LPs and clients have in the region.”
Ardian is an approved asset manager for private equity and infrastructure assets by the Chilean risk rating commission (CCR), which makes them potentially eligible within the investment universe of the Chilean pension funds. Ardian is the sole foreign asset manager approved by the CCR for the infrastructure segment.
Interest in the Private debt segment
Gazitua stated that in the short term they will seek of authorization for the Private debt segment. Regarding the Real Estate segment, Gazitua adds “the requirements needed to gain the approval are demanding and we are considering asking for it once we are ready to meet them”. Colas adds that they have recently closed a fund that invest in European Real Estate assets with investor from the region, stating that there is evidence of real interest for this asset class.
Both executives end the interview by pointing out their competitive advantages versus local companies that already established in the local markets. Colas states: “We are a global and multilocal company, offering a wide variety of products (fund of funds, direct investments, infrastructure, private debt) with a significant expertise and business knowledge. We accompany our clients in their decision making process sharing our knowledge, experience and information of the different sectors.”
Gazitua adds: “Our main differentiating service is the possibility to offer our clients customized investment programs. Some investors are looking for a private equity solution where, rather than committing to a particular fund, they can invest in a number of fund and strategies combined over several years—and we have the ability to provide that solution.”
Pixabay CC0 Public DomainPhoto: Jarmoluk
. Record Number of Aspiring CFA Charterholders Sit for Exams as Program Marks 55th Anniversary
CFA Institute, the global association of investment management professionals, announced that a record 227,031 candidates registered for Level I, II, and III CFA exams at 286 test centers in 91 countries and territories. The exams, administered on June 23, mark the 55th anniversary of the first CFA exam, which was held in June 1963. Since then, the CFA Program has seen steady annual growth, with a notable 20% increase in exam registrations in the past year alone.
“From our humble beginning in 1963 when we administered the exam to 284 candidates, CFA Institute has grown dramatically around the world in pursuit of its mission,” said Paul Smith, CFA, president and CEO, CFA Institute. “We fervently believe that charterholders raise the standards of the investment management industry and contribute to making finance a noble profession, and we are gratified and humbled that so many candidates share that belief. The examination is the first step to a professional life dedicated to client service, continuing education, and engagement with regulators to protect investors and clients.”
The Asia Pacific region continues to generate the highest number of candidates, with 120,436 registered for the June 2018 exam, accounting for 53 percent of the total. Registered candidates numbered 63,368 in the Americas, 28 percent of the total, and 43,227 candidates registered in Europe, Middle East, and Africa (EMEA), accounting for 19 percent of the total. The exam was administered at 286 test centers around the world, including new test center locations in Barcelona, Spain; Dalian and Hangzhou, China; Hyderabad, India; Ulaanbaatar, Mongolia; Rio de Janeiro, Brazil; and Lagos, Nigeria.
CFA Institute has more than 154,000 charterholders who work in some of the industry’s most prominent firms. In 1959, the Financial Analysts Federation (FAF) formed the Institute of Chartered Financial Analysts (ICFA) to establish standards of ethics and competence for security analysts, develop the exam, and bestow the title of Chartered Financial Analyst® (CFA) on those who passed. The FAF and ICFA eventually merged to form what is now known as CFA Institute. On June 15, 1963, the inaugural exam was administered at 27 test centers in the United States, Canada, and London to 284 candidates, six of whom were women. Today, over 84,000 (37%) candidates are women.
Nick Timberlake, courtesy photo. "A Stronger Dollar Should Benefit the Emerging Markets Export Engine and Their Liquidity Should Be Less Vulnerable Than in the Past"
Despite the challenges in the form of monetary tightening in the United States or geopolitical factors, emerging market equities this year have everything to gain. The reason? Levers such as valuations, earnings growth expectations and the confidence of investors. This is what Nick Timberlake, responsible for Global Emerging Equities of HSBC Global Asset Management, states in this interview with Funds Society.
Is the global synchronized growth scenario in danger? If this is the case, how could this impact the emerging world?
Global growth remains strong, though there has been a slight loss in momentum recently. Emerging Markets continue to be the key driver of global growth, and we expect them to contribute about 70% to total GDP growth in 2018. Many Emerging Markets remain in a “Goldilocks” environment of strong growth and low inflation. Some countries have scope for monetary easing, while some countries are taking advantage of growth acceleration to implement long-term economic reforms. Different inflation levels across countries is leading to policy divergence. This can affect relative interest rates and currency strength, particularly resulting in higher US interest rates and a stronger USD.
What will be the impact in emerging markets of a higher inflation, a cycle of rate hikes in the developed world, and a potential greater strength of the dollar?
Inflation remains relatively low in most Emerging countries, despite cyclical inflation in the US. A stronger USD should benefit the Emerging Markets export engine. Emerging country liquidity should be less vulnerable to a stronger USD than in the past, given that governments have reduced the proportion of short-term USD debt and improved their current account deficits. This makes the country’s liquidity position less sensitive to foreign exchange movements. Many emerging countries have improved their fiscal positions, and increased macro credibility provides them a degree of monetary policy flexibility if needed. Certainly countries with a twin deficit are likely to be more sensitive than others.
Nonetheless, many experts are positive regarding emerging countries fundamentals, do you agree and why?
We are also positive on the fundamentals of Emerging countries. Fiscal budgets are better managed. For example, Russia has reduced the “oil breakeven” of its budget to reduce its sensitivity to fluctuations in oil prices. Monetary policy is more credible. A lower inflation environment in Brazil has allowed its Central Bank to implement aggressive monetary easing. Government reforms continue to strengthen the foundations for long-term economic growth. For example, Brazil is reducing its fiscal deficit through economic and anti-corruption reforms, while Mexico has a broad, long-term reform programme including energy, labour, and education. China is reducing capacity at state-owned enterprises and deleveraging.
Do the stock markets of emerging countries have potential to grow in 2018? At what pace or at what levels?
It is difficult to specify how the equity market will move, but, from my experience, this is the type of environment that should be positive for Emerging Markets equities and for active managers specifically.
Earnings drive equity markets. What is important for investors is that strong economic growth is translating into corporate earnings growth. Earnings growth expectations remain in double digits for 2018 and 2019, across most sectors and a majority of countries, though earnings revisions have moderated from a high level.
Valuations look attractive relative to profitability, though valuations are not as cheap as they were at the beginning of last year given the strong equity market returns. Emerging Markets equities offer a similar return on equity compared to Developed Markets equities while trading at a lower price-to-book valuation.
Investor sentiment has been positive. We have seen strong flows into the asset class over the past two years, yet global equity investors remain underweight Emerging Markets.
What is the biggest strength of emerging markets equities this year? The attractive valuations, corporate results outlook ….?
The biggest strength for Emerging Markets equities this year is that all the drivers we just discussed are present at the same time. We believe this combination of factors creates a positive and attractive environment for Emerging Markets equities.
What could be the impact of Fed’s rate hikes on the equities of the emerging world?
Investors should expect cyclical inflation at this point in the economic cycle. The current pace of Fed rate hikes has been well-flagged and has been priced in by the market. We are monitoring how high capacity utilisation, potential trade tariffs, and deficit spending could lead to higher prices and could cause the Fed to raise rates faster than expected. A much faster pace of rate hikes could lead to more volatility in equity markets in general, not specifically to Emerging Markets.
Currently, the volatility is stronger… Is this going to be the case in the stock markets of emerging countries. Which are the potential consequences?
Volatility in Emerging Market equities reached the lowest point in a decade in January 2018 and has been near pre-financial crisis levels, so a pick-up in volatility was expected and has not come as a surprise to us. There are any number of reasons why uncertainty increases or investors begin to have differing views of the future. Inflation, trade tariffs, and geopolitical tensions are the first examples that come to mind. As active managers, we need to monitor these issues and incorporate our perspective into our stock selection and portfolio construction. I should note that higher volatility can be advantageous, as it can create investment opportunities where we see our fundamental outlook has been mispriced by the market.
Which are the more attractive markets? (Africa, Latin America, Eastern Europe, Asia …)
Our region and country positioning is driven by our stock selection. This allows our portfolio positioning to be guided towards the areas of the market with greater opportunity. On a regional basis, we are overweight Eastern Europe and underweight Asia and Latin America.
On a country basis, we are most overweight Russia, given a stable macroeconomic backdrop, accelerating growth, and attractive valuations.
Regarding Latin America: with which markets are you more positive and why?
We are less positive on Latin America relative to other parts of Emerging Markets. On a country basis, we are somewhat neutral in Brazil, and we are underweight Mexico, Chile, and Peru. Mexico valuations are high relative to other Emerging Markets, and there is election uncertainty. Chile has fundamentally attractive companies but valuations are again high. Peru has a limited universe, and valuations are not attractive.
The situation in Argentina is complex following the support requested to the IMF … are you positive on that country?
Our Frontier Markets has exposure to Argentina. The country has been implementing structural reforms that we feel should support long-term growth. Any IMF support would help to reinforce that path. Our Global Emerging Markets fund currently does not have a position in Argentina.
Foto cedidaNicolás Gazitua. Ardian Opens an Office in Chile
Ardian, a private investment house with over 71 billion dollars in assets managed or advised, announced the opening of an office in Santiago, Chile. The new office, serving Ardian’s growing base of investors and investments in Latin America (LatAm), demonstrates Ardian’s long-term commitment to both Chile and the LatAm region. This will be Ardian’s 14th office in its global network.
Ardian will work closely with its LPs – pension funds, insurance companies and family offices — to share knowledge and strengthen relationships. Currently, Ardian’s LatAm investor base, mainly within Chile, Colombia and Peru, has leveraged a diversified range of strategies on Ardian’s platform including Private Equity Secondaries, European Direct Buyouts, Infrastructure Secondaries, European Real Estate and Global Co-Investments. Ardian sees continued investor demand in the region, as well as particular interest from LPs within Brazil and Mexico, which are looking to diversify their holdings outside of LatAm.
In addition, Ardian has become increasingly active since it first entered the region in 2010 after it began acquiring LatAm businesses as build-ups for European portfolio companies. Over the last eight years, Ardian has supported portfolio companies acquiring nine LatAm build-ups with specific exposure to Brazil, Mexico, Chile and Ecuador.
In 2016, Ardian Infrastructure made its first LatAm direct investment when it acquired an 81 percent stake in Solarpack, which manages solar PV plants in Chile and Peru. It will continue to target mid-market essential infrastructure assets in the energy and transport sectors to provide Ardian’s global investor base with increased opportunities to invest in high-quality LatAm infrastructure assets.
Nicolas Gazitua will lead the new Chilean office supported by a dedicated team based in Santiago in coordination with the NYC office co-headed by Mark Benedetti and Vladimir Colas. Ardian will continue to build out the Chilean team and provide additional resources over the coming years.
Benoît Verbrugghe, Member of the Executive Committee, Head of Ardian US said: “The Latin American region is very important to Ardian and this office will allow us to focus on building closer relationships with our LPs and other institutional investors in the region. Our growing international footprint highlights our commitment to a truly global, multi-local approach. We prioritize the deep knowledge and relationships that can only come from an on-the-ground perspective, allowing us to understand the needs of our investors and portfolio companies on a granular level.”
“Furthermore, the Chilean office is an important step forward in our continued efforts to provide our global investor base with opportunities in high quality LatAm investments and superior returns. We will also use the office to source secondary deals from potential LatAm sellers” concluded Verbrugghe.
Wikimedia CommonsJenny Johnson, presidenta y COO de Franklin Templeton Investments . Franklin Templeton Prepares to Position its ETF Platform in all Distribution Channels in Mexico
During her last visit to Mexico, Jennifer M. Johnson, President and COO of Franklin Templeton Investments, pointed out that country’s importance for her company, stating that, regardless of the outcome of the elections, “We are very optimistic about the possibilities of the local market.”
Its most recent bet, the entry into the ETFs’ market, presents an unparalleled opportunity in Mexico: “Mexico is very interesting since ETFs are bigger than mutual funds, I think it is the only market where that happens”, commented Johnson, who, through Franklin Templeton has a line of ETFs that includes passive and Smart Beta strategies. “Mexico is a great opportunity for the Franklin ETFs platform. They are great for all markets, pension funds, institutional funds, retail clients, and we are going to look to position them in all distribution channels,” she added. Meanwhile, Hugo Petricioli, the company’s Regional Director for Mexico and Central America, mentioned that he has seen a strong appetite for ETFs from all of his clients.
Regarding the recent change in regulation, which will allow Afores to invest in international mutual funds, Johnson commented: “We believe that open architecture is the best thing for the client” adding that it is a natural progression to first invest in the local market and then turn around to see what’s on offer abroad, “also, when there is greater uncertainty within a country [such as the one generated before the presidential elections and the NAFTA renegotiations], investors like to hedge themselves by venturing into other geographies.” She also mentioned that at Franklin Templeton they have “great portfolio managers both locally and abroad, and so we see this opening as an interesting opportunity”.
About the renegotiation of the North American Free Trade Agreement, Johnson commented that it may take a little longer to reach its culmination but that in general, President Trump likes to use social networks to provoke, but he is practical when it comes to executing, “so we believe that in the end it will be something sensible which will not be very disruptive.”
Despite the above, and according to Luis Gonzali CFA, Portfolio Manager, the team at Franklin Templeton is cautious in its positioning, seeking to hedge against a global rise in inflation. In addition, and according to Ramsé Gutiérrez CFA,Vice-president of the Fixed Income team in Mexico, the company is also looking, as long as the mandate allows, to reduce the duration of debt portfolios, “since the premium’s time value is currently almost nil.”
Aitor Jauregui, courtesy photo. Aitor Jauregui (BlackRock): "Growing Demand in Europe and Sustainable Investment will Make the ETF Market Grow Over the Next Few Years"
The ETF business continues to increase after three years of record growth figures. For Aitor Jauregui, Head of Business Development for BlackRock in Iberia, the outlook is much better in the long term: “With an average annual growth of 19% over the past few years, at BlackRock, we expect that in 2023 the ETF industry will reach 12 trillion dollars and 25 trillion dollars by 2030.”
These positive forecasts are also positive for the ETFs market in Europe which, according to Jauregui, will be “one of the main drivers of the investment fund business during the coming years”. According to this executive, and as shown by the Greenwich Associates European ETF Study commissioned by BlackRock, European institutional investors will have a prominent role in this growth, as the average of their allocation to exchange-traded funds increased by 10.3% of its total assets in 2017, from 7.7% in 2016.
“European institutional investors are adjusting their portfolios to a more volatile environment, given the return of volatility to the market and the end of stimuli from central banks. In this context, European institutional investors have found in the ETFs an investment vehicle that adapts to their needs,” says Jauregui before delving into this survey’s data, which was compiled from the responses of 125 investors, mainly pension funds, asset management companies, and insurance companies.
The survey shows the trends that make the ETF business set a positive trend in Europe. First of all, there has been an increase in the use of smart beta ETFs, which, at present 50% of respondents admit to using. Secondly, there is a greater demand for ETFs by multi-asset funds: In fact, 79% of asset managers admit to using them, as well as their intention to increase their use during the next year.
Finally, the survey shows two further trends: The use of fixed-income ETFs is a source of growth in the ETFs universe, and socially responsible investment (SRI) has a leverage effect on this business. Regarding the latter, it is worth noting that 50% of the respondents admit having invested part of their assets following sustainable investment criteria.
The attractiveness of ETFs
For Jauregui, these four trends are, “sources of forward ETFs market growth.” And they will be a driver because European institutional investors appreciate the value that this vehicle brings to their portfolio. For example, according to the aforementioned survey, ETFs are used to substitute direct investments, such as bonds, shares or derivatives. The survey shows that 50% of respondents say they use ETFs to substitute derivatives, compared to the 30% who acknowledged doing so last year.
In this regard, Jauregui points out that, regardless of the economic environment, investors value the characteristics they offer positively. “In Europe, in particular, I believe that the implementation of MiFID II makes institutional investors appreciate transparency, cost, and operational simplicity more. This is also going to be an argument that will sustain its growth in the coming years,” he says.
Speaking in terms of strategies, the ETFs that arouse most interest among European institutional investors are those of minimum volatility, dividends, factors and, finally, multifactor strategies.
Finally, should we carry out this same analytic exercise by asset allocation, the survey would show that fixed income is the type of asset where ETFs are most likely to grow. “In the case of equity ETFs, 86% of respondents admit to using them and 43% expect to increase their use throughout 2018. In fixed income, 65% expect to invest in this type of ETF as compared to the 48%registered last survey. Once again, the main criteria of European institutional investors when deciding on their use are: their liquidity, their cost, their performance and, finally, the choice and composition of the index they follow.
Debates within the Sector
In the midst of the strong development that this market is experiencing, the sector faces two debates: Possible overheating in the ETFs market and the argument between active management and passive management. In both cases, Jauregui has a solid position that he defends coherently. “It‘s clear that the weight of the ETFs in the market as a whole, and the assets that are there, is too small a part for their behavior to affect the progress of the underlying markets,” he said in relation to the first debate.
Regarding the second debate, Jauregui argues that the approach of two different types of confronting management does not make any sense. “I think that every investment decision is an active decision, even when a manager chooses to use an indexed vehicle in his portfolio. At BlackRock we believe that we have to think about indexed management as one more element when managing our clients’ capital and offering investment solutions,” he points out.
And while the sector continues debating this, BlackRock has advanced over all its competitors and has become the leading provider of the European market in terms of ETFs. According to the survey, 91% indicates iShares as its main provider.
In this regard, the asset manager believes they are on the right track. “We will continue working on new launches, while always being very selective about the solutions we provide in the market and betting on the indexes without leverage and without using derivatives. Likewise, we will focus on smart beta and factors ETFs. There is a general interest on the investors‘part, but we believe that managers of multi-active strategies are very interesting potential investors. In the long term, we will also focus on the trends we see, such as fixed-income ETFs and socially responsible investment,” concludes Jauregui
Pixabay CC0 Public DomainSean Taylor, courtesy photo. Latin America Has Higher Earnings Expectations than Other EM, but Significant More Political Risk
Funds Society had the occasion to, from Santiago de Chile, interview Sean Taylor, Chief Investment Officer for Asia Pacific at DWS, and discuss with him his market view on the Asia Pacific region for 2018. Taylor, who joined DWS in 2013 with 21 years’ experience in the Industry, manages two flagship DWS products: DWS Investor Emerging market fund and DWS Top Asian fund. He is also responsible for the EM equity platform.
Positive view on global economy but need to be selective in sector and stocks
DWS outlook is positive on the global economy but recently they have observed an increase in uncertainty due to the US trade policy, Italy’s new government’s anti-EU rhetoric and select Emerging Market currency weaknesses. Taylor states that: “All three aspects require close monitoring. While an outcome is difficult to predict, our base case assumes no escalation of these issues and an eventual positive resolution triggering a sentiment relieve.”
Taylor also thinks that assets prices have already rallied and DWS is recommending their clients to be more selective in sectors and stocks: “Even under these positive scenarios, investors have to be more selective on duration and seek diversification.”
Same happens in the EM context, where Taylor recommends that: “it is not just buying EM, is being more selective particularly on the credit side and the sovereign side” and adds: “Current account deficit EM countries and those with high US debt levels are being impacted through their domestic currencies and/or foreign reserves, although rising US rates have been well flagged.” According to Taylor, if easing financial conditions tighten more sharply than expected, EM debt could become under pressure. DWS expects 2 further 25bps hikes by the Fed by the end of the year with the US 10yr yields of 3.25% by March 2019.
Regarding credit, they are expecting positive returns although not as high as in the recent years. They recommend a multicredit strategy to blend in some of that risk in.
On equities they are positive, US equities are expensive but still have upside: “it is really going to be based in earnings and earnings this year will be quite positive.” The rest of the international markets are looking cheaper, as they are not reflecting this economic growth.
Emerging markets: Expecting rewards after years of growth negative policies
When questioned about their preferences in terms of markets from a macro perspective, Taylor stated that beginning 2017 DWS was overweight in EM and continue to do so structurally: “There have been changes happening in those markets that we consider very positive. From a Macro perspective we see high potential in GDP growth versus previous years because we will start to see the positive impact of the new policies of new leaders in Asia. The new leaders in Asia came all about at the same time with a new mandate: to widen the economy. To achieve this they had to change the model: China had to stop corruption, India had to reduce burocracy and so did the Philippines and Indonesia. These changes implied being growth negative for the first 5 years but now they are able to collect the positive effect.
Also from a monetary point of view, Asia had a tight monetary policy and was dampening growth when the rest of the world had QE. Now as QE comes out we think Asia continues to be driven by its owns dynamic in economic terms. “
Taylor also thinks that EM and Asia are in a better position to adjust to changes in US and Chinese policy and adds, “Investing in EM has therefore been selective, avoiding those most vulnerable economies with deteriorating current account deficits and uncertain politics (Indonesia, Argentina, Philippines, Turkey, Malaysia) and under pressure to raise rates (Indonesia, Philippines) as well as those under potential trade/sanctions (Mexico, Russia) – however we have taken advantage of the rise in commodities, energy and oil prices where we have been sectorally overweight.”
Latam higher earnings growth than EM area but significant political risk
Turning into the Latin American region, although it has been underweight in DWS portfolios for several years, they have started to increase their exposure recently. Even if political risk is on top of the table, DWS has a forecast of 25% estimated growth earnings versus 18% for the EM market area as a whole.
Going into more detail on the political risk, Taylor mentioned that the difficulty about the Brazilian election is the wide variety of candidates and possible scenarios. Therefore, there is a lot of event risk going forward. But to his view, Brazil is already factoring the worst case scenario:” From a fundamental point of view, Brazil went through 4 years of deep recession and although last year President Temer was beginning to put some reforms in there were also down because of the political situation. The Brazilian team is not factoring any positive news until the election. Brazil has the highest tax to GDP ratio of any large EM but has the lowest investment rate/GDP of 14% and the growth model relays on current account deficit. They need a strong president to implement the necessary reforms and leads Brazil to a cycle of economic growth. On the bottom up side they are expecting good earnings coming through.”
Commodities and Growing demand in China
DWS is expecting to see steady commodity prices going forward supported by growing demand in China. China’s growth for the following 5 years will be driven by : “the “One Belt one Road project” and growth in Chinese domestic economy. China is going to change from investment led growth to domestic lead growth so it will evolve into better consumption. In addition, the increase of the quality of life of the average Chinese will lead to the next phase of urbanization that will imply taking the next 100 million people from Central China to Western China into more urban areas. All these factors will enhance the demand for commodities”
Hong Kong versus Chinese domestic stocks
Taylor is an expert in Chinese and Hong Kong markets and as such he highlights the need to differentiate between forces driving Hong Kong markets and Chinese stocks. Taylor explains that; “the HK index, the Hang Seng, has relatively little to do with China as it is really based in domestic HK. Its sectors are: HK property, HK or international banks with HSBC and utilities and all those are quite interest rate sensitive so that puts as off. Utilities, we are underweight because the prices are capped by the government and if the funding costs increase their margins are going to be reduced and it is relatively expensive. The only area where we see some upside is consumer as consumption is picking up.”
He further states that on the other side, the China indexes traded in HK, the H Share index, which is effectively Chinese SOE (state owned enterprisers) listed in HK many years ago to improve Chinese corporate governance is 30% cheaper than the A share (Shanghai) index: “We have now a 25/28% arbitrage between H share and A share. The H share 3 years ago was 60% cheaper than the A share in China is now 30% cheaper”. This fact together with “Asian are buying Asian” and are demanding better balance sheet management, support his view that “ the earnings profile of what I call, MSCI China H Share, which does not include Hang Seng- domestics HK stocks- is much greater that the earnings of HK companies.”
In addition, as per recent announcements that could also boost Chinese equities, Taylor mentioned the Chinese Depository receipts. Although details are yet to come, the Chinese depository receipts will allow companies like the tech and the internet companies in the US to trade onshore in the Chinese market.
Chinese Bond Connect
Following on with his positive view on China, Taylor also comments on the Chinese Bond Connect project. It will allow foreign investors to be able to access the second largest bond market in the world:“ given our view in sovereign, where we are not seeing much yield globally, Chinese sovereign and corporate offer some good yields. That will mean that China will go into some of the big bond indexes and that will naturally put a one-of flow of bonds in there, but what it really means is that international investors can´t ignore China”
View on the generally accepted Chinese risks
The two biggest risk of China according to the majority of investors is that China´s got too much debt and too much leverage. To Taylor the two are different. The government debt to GDP, which is increasing every day, will be eased by foreign investors being able to access the Chinese bond market (Chinese Bond connect) as the government will be able to issue more, diversify and lower the risk premium of the Chinese economy . “Our view is that the debt problem is a balance sheet problem not a solvency problem and China owns effectively both sides of the balance sheet, so the only problem that can really put China into trouble is China itself.”
In his opinion, the biggest short term risk China is exposed to is the leverage in the financial system and particularly wealth management products. A lot of the smaller banks don’t have enough deposits, so they go to the overnight market and that causes spikes. Nonetheless, to Taylor the decision taken by the Chinese central bank has been very sensible: “what has happened in the last year is that PBOC has been very clever, it has kept policy rates very low, only raising 5 bps when the fed rose, but its kept 7 days rate quite tight, so it’s been squeezing liquidity out of the market, it´s been making the system safer. And that is also why we can assign a higher PE to China.”
EM Currencies outlook
For Taylor recent months have been complicated for emerging market currencies due to a stronger US dolar. That being said, most of the currencies are behaving as expected with current account surplus economies and better politics outperforming those with more difficult current accounts and uncertain politics. They consider Turkey and Argentina isolated incidents.
“In Asia, India has not done too well given the rise of commodities and oil prices, whilst Malaysia’s new government has caused some political uncertainty which is seen in the ringgit – however higher oil for Malaysia will help bolster their current account. For China the renminbi has strengthened since the beginning of the year while the Korean won has mostly been stable during the latest geopolitical tensions. Russia however has seen a depreciation in its currency post sanctions,” explains Taylor.
Strategies applied to the DWS Emerging and Asian funds
DWS Investor Emerging market and DWS Top Asian fund are both managed similarly combing country selection with stock selection. Their philosophy is one of a global perspective with local knowledge. They have localized teams all across the regions that provide a very good perspective of what is going on the ground: “3 years ago their strategy was defensive, which meant buying growth companies, buying quality. Now the strategy is more balanced. Last year they were really overweight in the technology areas, in South Korea and Taiwan while this year they are underweight because prices have already reflected the upside value. For 2018 they are focused more into consumer, financial, and cyclicals sectors. We have a very good risk adjusted return and very fundamentally driven, very disciplined process.”
2019 Outlook
As a final conclusion, Taylor states that their 2018 outlook for Asia and the emerging markets is positive: “We don’t see it being the same return as last year but we are confident for another 10% upside from here.” When asked about their expectations for 2019, he stated that next year earnings will be lower than 2018 but still positive at 14%. ”In 2019 we would expect to get full return as we would have gone through the rate cycle, would be a bit clearer on trade, hopefully more clear on sanctions and people would truly realize that our top down story of that growth continuing, plus the bottom up story of earning picking up structurally as well as cyclically, plus Asia buying Asia will give good support for the market.”
CC-BY-SA-2.0, FlickrPhoto: Gnuckx. It Takes 1.4 Million Dollars To Be Considered Truly Wealthy in the USA
According to the Modern Wealth Index, developed in partnership with Koski Research and the Schwab Center for Financial Research, nearly half of Americans (49%) believe saving and investing is the way to achieve wealth over time.
The survey, conducted among 1,000 Americans aged 21 to 75, shows respondents believe it takes $1.4 million to be considered financially comfortable. To be considered truly “wealthy,” that number increases to $2.4 million.
In the short-term, respondents say that other things make them feel wealthy in their day-to-day live, such as:
Spending time with family (62 percent)
Having time to myself (55 percent)
Owning a home (49 percent)
Eating out or having meals delivered (41 percent)
Subscription services like movie/TV and music streaming (33 percent)
Other things that make people feel wealthy in their daily lives include owning the latest tech gadgets (27 percent), having a gym membership or personal trainer (17 percent), and using a home cleaning service (12 percent).
According to the Modern Wealth Index, millennials are in many cases more focused on saving, investing and financial planning than older generations, and are almost as likely as Boomers to work with a financial advisor (22% and 25%, respectively) while Gen X lags (16%)
“The idea that financial planning and wealth management are just for millionaires is one of the biggest misconceptions among Americans, and one of the most damaging,” said Joe Vietri, senior vice president and head of Schwab’s retail branch network.
“Whether people think they don’t have enough money, believe it would be too expensive, or just find the whole concept too complicated, the longer they wait the harder it is to achieve long-term success. We must make planning and advice more accessible to more people. Simply put, we believe every American deserves a financial plan, regardless of how much money they have today,” Vietri concludes.
Pixabay CC0 Public Domain. 2017 Brought More Clients and AUM to the Biggest 25 Global Wealth Management Operators
Assets Under Management (AUM) at the top 25 global wealth management operators grew 17.0% on average this year, finds Scorpio Partnership’s 2018 Global Private Banking Benchmark. This means the top 25 operators now collectively manage 16.2 trillion dollars.
Just as a rising tide raises all boats, wealth managers were able to capitalize on favourable market conditions in 2017 as a core driver of growth. The FTSE All-World Index advanced nearly 22% during the year and global economic growth was estimated to have reached 3%, an uptick from 2.4% in 2016.
However, there were also positive indicators that firms achieved greater success in drawing additional assets from new and existing clients in 2017. On average, the contribution of Net New Money to AUM, which was flat in 2016, rose to 4.3% in 2017 for those firms who declared this data.
China Merchants Bank gained two positions, taking over Northern Trust and Pictec. BNP Paribas, Safra Sarasin Group, Banco Santander and Credit Agricole are the few non-American firms.
Asian firms grew the most, with a median increase in AUM of 15.2%, versus the 7.5% European ones got and the 13.8% from the Americans.
“Conditions have been exceptionally positive for global wealth management in the last 12 months, but wealth firms must also be given credit for starting to find new revenue” says Caroline Burkart, Director at Scorpio Partnership. “Our client engagement assessments throughout 2017 have indicated that client sentiment is on the up which is inevitable when markets are good.
Wealth firms should put processes in place now to measure and respond to customer feedback, so that when the next market downturn occurs, they have the insight they need to continue delivering a compelling client experience. A handful of wealth firms are starting to publish their client satisfaction data, highlighting that this is creeping up the agenda as a complementary measure to financial performance.”
Asia’s wealth managers achieved the most significant gains this year, with average AUM growth of 15.2% (in base reporting currency), compared to 7.5% among European operators and 13.8% among firms based in the Americas. Many wealth managers present in Asia continued to increase their focus in this region in 2017. In several emerging markets, strategic acquisitions contributed to inorganic growth in AUM.
Most notably, Bank of China – a new entrant to the top 25 table last year – stood out by reporting double-digit growth for a second consecutive year. The firm attributed its success to effective marketing, customer developed client profiles and proposition enhancements.
