Pixabay CC0 Public DomainMexico City's financial district. Old Mutual Latam Launches Their Wealth Management Segment in Mexico
Old Mutual has decided to enter into the Wealth Management segment in Mexico. This new division is being led by Rodrigo Iñiguez, a professional with over 11 years in the group.
Mexico is the second largest market in the Latin American region, after Brazil, so Old Mutual expects that in the next 5 years this line of business will generate a high percentage of its sales for Mexico and complement that of Latin America. According to McKinsey Global Wealth Management, Mexicans have over 800 billion dollars in different financial institutions.
Agustín Queirolo, who is in charge of the Wealth Management segment for Latin America, said: “We will face this new challenge by leveraging our experience and the great acceptance we already have in countries such as Chile, Peru, Switzerland and the United States…We are sure that this new and innovative Mexican solution will help us in advising our clients in an integral way with a local and international vision. Our solution allows Mexican clients and residents in Mexico the possibility of guarding their investments both locally and abroad.”
Julio Méndez, Group CEO in Mexico, said: “The company has achieved significant growth in its different segments in recent years. We maintain a leading position in the Institutional business through the administration of Private Pension Plans and have managed to expand our distribution through more than 3,000 investment advisors across the country. The DNA of our Group is constantly pushing the creation of new investment solutions with a constant innovation in the creation of products and today we visualize great opportunities to enter the Wealth segment.”
Thinking of complementing Private Banks, Family Offices and Wealth Managers that advise affluent and high net worth Mexican families, they will be using a life insurance solution, with an investment component, as an asset planning tool, as well as other innovative instruments that fit the segment and its clients.
Pixabay CC0 Public DomainMatteo Dante Perruccio, courtesy photo. Jupiter Asset Management Teams up with Unicorn to Target Latin America
Jupiter Asset Management (Jupiter AM) reached an agreement with global distribution platform Unicorn Strategic Partners, a global third-party distribution platform which services clients through offices in Santiago de Chile, Montevideo, Buenos Aires, Miami and New York, to service key Latin American markets as well as US offshore hubs of New York and Miami.
The agreement will allow Jupiter AM to continue its international growth strategy based on a selective business expansion in the regions where the Company has identified potential client demand and provides Jupiter AM with access to potential clients in the region. According to Matteo Dante Perruccio, Head of Global Key Clients: “Our alliance with Unicorn offers us the opportunity to enter the region partnering with an exceptionally talented and experienced team of distribution professionals with an in-depth knowledge of the unique characteristics and requirements of the Latin American market.”
According to the latest figures, private wealth in Latin America will reach an estimated $7.5.9 trillion by the end of 2021, making it a significant and rapidly growing market. Chile, Uruguay and Argentina are strategic markets in the region.
With this alliance, Jupiter AM consolidates its global presence, with representation in UK, Spain, Germany, Switzerland, Austria, France, Hong Kong, Italy, Luxembourg, Portugal, Sweden and Singapore.
Active management and high conviction investment:
Jupiter AM is a UK asset manager founded in 1985 that believes in high quality, high conviction active management and in the independence of its managers as a key requirement to be able to add value. As such, there is no in-house macro-economic view or investment committee that produces lists of recommended stocks. Managers instead have the freedom to make investment decisions, albeit always working within strict risk parameters.
Jupiter AM is an established UK-listed asset management business. In recent years the company has expanded its footprint across Europe and Asia. It currently has more than $ 61.1 billion under management globally (as at June 30, 2017).
Joel Peña, Photo Linkedin. Joel Peña Joins DoubleLine to Lead Expansion in Latin America, Caribbean
Joel Peña has joined DoubleLine Capital LP as head of the firm’s institutional and intermediary investor relations in Latin America and the Caribbean. Peña comes to DoubleLine from international asset manager Robeco where he served as managing director for Latin America and U.S. Offshore.
In addition to heading DoubleLine’s institutional and private client relations in Latin America and the Caribbean, Peña will manage relations with overseas clients, advisors and distributors engaging the firm via its U.S. offshore platforms.
“Thanks to economic growth, a broadening middle class and rising standards of living, countries in Central and South America have seen growth in assets entrusted to pension funds, insurers and other fiduciaries. These institutional investors are looking beyond their local markets for investment opportunities and expertise,” said Ron Redell, executive vice president of DoubleLine. “My colleagues and I are delighted to welcome Joel into the DoubleLine team to sharpen our focus on the needs and objectives of institutional and private investors in Latin American and the Caribbean.”
“Navigating markets in today’s complex environment is far from easy. Very few firms have been as successful at it as DoubleLine,” Peña said. “I look forward to leading the expansion in Latin America within this organization, a company which is fully committed to always putting its clients’ needs first.”
Peña has 16 years of experience in asset management. Prior to Robeco, he served nearly six years as head of institutional clients in Latin America for fixed income manager PIMCO. He began his career in asset management at BBVA Bancomer in Houston and Miami before joining Bank Hapoalim as senior private banker. He holds an undergraduate degree in economics from Instituto Tecnológico y de Estudios Superiores de Monterrey , Tecnológico de Monterrey, Mexico, and an MBA from the Stern School of Business, New York University. He is a CFA and CAIA charter-holder.
CC-BY-SA-2.0, FlickrPhoto: Marco Klapper. Surviving the Income Drought
Whether you are a private investor, a pension fund, an endowment or an insurer, you can be forgiven for sometimes feeling that the search for income is a lot like looking for a needle in a haystack. It doesn’t have to be that way, but it’s hard to deny the scale of the challenge or the impact of the drought.
As we entered 2017, more than $10 trillion of bonds offered only negative yields, according to the financial services company Tradeweb. The hangover from the financial crisis, approaching a full decade ago now, is clearly still lingering. Global growth remains sluggish, and central banks across the world have stepped in to help prop up economic activity, but the resulting financial repression has made income yield a scarce commodity.
A glance at developed market government finances makes for pretty ugly reading as well. Mounting pension and healthcare liabilities mean that the situation will only get worst. Aging Western populations will conspire to make the asset/liability equation much more challenging to solve. Consequently, governments will continue to need regular sources of funding or “income” to help meet their growing liabilities. At the other end of the spectrum, individuals’ thirst for yield will increase as they are forced to take ever increasing responsibility for securing and managing their own retirement incomes. Companies and institutions don’t escape either – none more so than an insurer who is faced with heightened regulatory capital requirements, at precisely the point where low yields would suggest they should be looking to alternative sources of income.
All this is intended to offer a frank assessment of where we are today and why income, such a key part of investor’s needs, is so elusive. But not all is doom and gloom. Indeed, today there are more sources of income than ever before. For example, the emerging markets bond universe has doubled since 2007, now standing at US$10.3 trillion. Until recently, other asset classes, such as litigation finance and catastrophe bonds, hardly existed at all, and were accessible to only the most sophisticated investors.
Diversify to survive1
By allocating across a broader mix of asset classes (alternatives), beyond traditional equities, fixed income and property, and combining them together in an intelligent way, investors can reduce risk and increase expected returns because the correlations between them and more traditional sources of yield are often low. Catastrophe bonds and other insurance-linked securities2 are good examples of these types of investments. The market for catastrophe bonds has grown from under $1 billion in value outstanding in 1997 to more than $25 billion today according to data provider Artemis. Typically for these instruments, the risk of non-payment is based on issues occurring in the natural world rather than in financial markets. They are certainly not “risk free” but clearly are exposed to a very different set of risks. Using some of these alternative asset classes should reduce the volatility of the overall portfolio. In fact, if the asset classes are fundamentally sound, the more types one uses, the lower the volatility – all other things being equal. Aircraft leasing, peer-to-peer lending and global loans are other compelling opportunities. Of course, as ever, due diligence in these areas is key.
To varying degrees, more traditional asset classes such as equities, fixed income and property still have an important role to play. A healthy and balanced portfolio can include steady and meaningful dividend payouts from equities, as well as the asset-backed, but more illiquid, returns from property and areas of the bond market that offer relatively attractive yields.
Liquidity is great, but you do pay for it
Outside of diversifying, which is a fairly well understood notion these days (although the strategies and approach can be nuanced), there is another important factor to consider as part of how to solve the income challenge, and one that many overlook far too quickly: liquidity.
In a technology-led age of instant access it is easy to see why we obsess over the importance of liquidity. Having ready access to funds is a genuine priority, and one that many investors are hesitant to give up. However, there is a cost associated with it. Sources of return, whether income or growth, require investors to take on a degree of risk, traditionally measured by volatility. Rarely is liquidity risk given the same prominence or depth of thought.
Liquidity risk, tailored effectively, is something to be explored and will suit different investors at different times. Ultimately, though, by taking a long-term view as defined benefit pension funds do, your portfolio has more chance to meet your overall objectives. On a deeper level than that, it makes sense to better coordinate short-, medium- and long-term cash flows, identifying when it is possible to accept some illiquidity within the overall portfolio, and thus harness the benefits associated with locking your money away for longer periods of time. It is worth taking the time to do so, as interesting asset classes such as private loans to infrastructure projects and to corporates can suddenly become available.
The message is not just an institutional one; even retail investors should take heed and consider whether they are prizing liquidity above everything else, including the likelihood of a decent return once markets recover. The exodus from UK property funds after Brexit is a good example. Investors who were quick to rush out of the door after the UK referendum vote on June 23 missed the bounce in returns that occurred almost immediately after. The Towers Watson Illiquidity Risk Premium Index, which covers all asset classes, estimates that investors who are prepared to accept some liquidity are typically rewarded with between about 75 and 175 basis points.
We cannot pretend that the market environment is easy, and that yield assets are easy to come by. What we can do, however, is readjust our expectations and mind-sets around some long-held misconceptions. Liquidity can be our friend, and unfamiliar does not necessarily equal risky.
For more on how Aberdeen can help meet the income needs of investors, visit this link.
Column by Aberdeen AM written by Gregg McClymont
1Diversification does not ensure a profit or protect against a loss in a declining market. 2Insurance-linked securities (ILS) are financial assets, the values for which are driven by insurance loss events. Ref: 24533-010217-1
Pixabay CC0 Public DomainPhoto: StockSnap. A New Order in the Oil Industry?
At the end of July, the UK government announced plans to ban the sale of new gasoline and diesel vehicles from 2040, being the fifth country, with Holland, Norway, India and France, to end the sale of cars with traditional internal combustion engines. Noting the rapid changes taking place in the industry, many of the major car manufacturers have in turn announced their plans to focus on electric powertrain technologies in developing their product plans and launches. What’s more, in Volvo’s case, it has been announced that from 2019 the vehicles released into the market will be either electric or hybrid.
However, while much of the market narrative focuses on electric vehicles, the destruction of demand and the end of the oil era, the energy team at Investec Asset Management believes that global demand for crude oil continues to grow at a decent rate.
The International Energy Agency continues to alter historical data, distorting the picture, but the projected growth rate of demand is at 1% to 1.5% per year and shows no signs of slowing down. With this in mind, we expect the price of oil to remain at between 10% and 15% of current prices in the short and medium term. Even more important, for the energy companies that we have in our portfolios, we have behind us four consecutive quarters (from June 30th, 2016 to June 30th, 2017) in which the price of a barrel of Brent has averaged $50. This gives us a good understanding of the company’s profitability in the new oil order. In fact, we can find companies that are in the process of becoming more profitable at this price level than they were at the highest peak of the last cycle: given cost cuts, in asset classes, debt reduction and strategic focus on ‘value over volume’, which is perhaps not surprising. The main gas and oil companies have historically had no difficulties in generating liquidity; their errors have been committed from a poor allocation of capital and a search for growth.”
Fred Fromm, an analyst and Portfolio Manager at Franklin Natural Resources, a Franklin Equity Group fund, argues that while a small number of countries have announced plans to eliminate sales of internal combustion vehicles, given a time frame, which is often measured in decades, they do not see an impact in the oil markets. “These goals are long term and aspirational, with little foresight given the physical limits and practical implications of that shift. In the medium and short term, there simply is not enough infrastructure to facilitate a complete shift towards electric vehicles, while gasoline-powered vehicles have decades of infrastructure to withstand them, even with increased electric vehicle penetration, it will take years, if not decades, before the global base of vehicles, and therefore the demand for oil, is significantly affected,” says Fromm.
“The move to electric vehicles will require an upgrade of the existing electricity grid, the creation of new public recharging stations, the refurbishment of homes to equip them with charging capacity, and an increase in the production of batteries and associated minerals. While we see the increase in electric vehicle usage as a long-term trend, we do not think it is so short-term as to threaten global demand for crude oil. In any case, the Franklin Natural Resources fund is a diversified portfolio, with significant exposure to the energy sector, but which also invests in diversified metals and mining companies, so that it can invest in companies positioned to benefit from growth in demand for electric vehicles. In addition, the fund’s energy investment is spread among several sub-sectors and among oil and natural gas producers, the latter is likely to benefit, as it is a cleaner fuel in generating the electricity needed to recharge electric vehicles. While part of this potential increase in demand for electricity can be met from renewable sources of energy, such as wind and solar energy, these alone will not be sufficient and will depend on battery technology and large capacity storage solutions,” he adds.
Likewise, Pieter Schop, Lead Manager of the NN (L) Energy fund, agrees that the impact of the electric vehicle on the demand for oil is exaggerated. “Demand for crude oil is expected to continue to grow at around 1.5 million barrels per day for the next few years, reaching peak demand within a decade or two. Demand for gas-powered passenger vehicles in the developed world will be affected, but growth in demand will come from China and other emerging countries. There are still 3 billion people without access to a car, and the first vehicle they are going to buy is probably not a Tesla. Secondly, the other half of the demand for transport comes from demand for aircraft, trucks and buses, where it is much more difficult to switch to electric motors. Industrial and residential demand is also expected to be more resilient.”
According to Eric McLaughling, senior investment specialist at BNP Paribas Asset Management Boston, while he is aware of the forecasts for the long-term demand for fossil fuels, short-term prospects for oil prices are positive. Lower investment by oil producers will weaken supply growth throughout the latter part of this decade. “Through the lens of our investment horizon, the gradual introduction of the electric vehicle does not alter our valuation thesis.”
When it rains, it pours
In an industry that has been affected by the volatility and uncertainty surrounding oil and energy prices, a negative sentiment persists despite the fact that Brent’s average price so far this year is US$ 52 per barrel, surpassing the US$ 45 per barrel average of 2016; the devastation caused by Hurricane Harvey in Texas and adjacent states is now the immediate focus of investors. “There are numerous repercussions in refineries, as well as in the upstream and midstream sectors, however, we believe that the impact will be transitory, given past experiences, and the operational strength and resilience of these sectors and businesses,” the team at Investec Asset Management comments.
In that regard, Schop, Manager at NN IP claims that the direct effects of the storm are limited. “The affected refineries will suffer cuts for a limited period of time and afterwards will continue production. We have seen some weakening in the price of WTI, but the Brent has not been impacted. This has resulted in an expansion of the spread between the WTI and Brent barrel. For most European oil companies, Brent is more important. The indirect effect of the storm is that it can result in lower GDP growth in the United States as damage costs are expected to exceed $ 10 billion. In turn, lower GDP results in lower demand for oil.”
Finally, from Franklin, they point out that in terms of impact on global markets, changes in production on the Texas and Louisiana Gulf Coast have resulted in a shift in trade flows, where Latin American markets have sought to import products from Europe and Asia to replace those typically received from the United States, and recent exports have also suggested that refineries in Asia are looking to secure US crude because of the discount at which it trades against Brent. “Although changes in production are the primary impetus that has led to the expansion of the differential, this was expected to occur at some point given the growth in US production, the limited ability of US refineries to expand their processing capacity in the short and medium term, and the need to encourage a decrease in net imports (through lower imports and higher exports).”
CC-BY-SA-2.0, FlickrIgnacio Fuenzalida, courtesy photo. Chile’s Pension Reform and Savings in Peru and Colombia: An Interview with AllianceBerstein's Ignacio Fuenzalida
Ignacio Fuenzalida has just been appointed as AllianceBerstein’s Regional Director for Chile, Peru, and Colombia. His incorporation coincides with the opening of an office in Chile, which reinforces the firm’s presence in Latin America. Fuenzalida spoke with Funds Society about the region’s situation and AB’s projects.
What challenge does heading the Andean zone (Chile, Peru and Colombia) for AllianceBerstein pose for you? “I’ve been entrusted with the task of making AB grow in this region. I believe we have a range of products which is capable of satisfying different types of clients in this region. And I think I have the tools to overcome that challenge. We have both institutional and retail clients and I believe that the diversification of the market is quite relevant. The number of players is very relevant. “
Chile is in the process of reforming its pension system, with some changes already known and others that are underway. What impact will these innovations have and how are they appraised? The reform bill is still being discussed, but I think the reform takes care of emerging needs. We believe it’s important to increase future pensioners’ contributions and savings. And we hope that in the future we can satisfy those savings with adequate investments that allow pensioners’ returns to grow.”
Do you see it as a restriction or as an opportunity? “We see that we are in line with other developed countries, which seek an increase in savings, and we believe that this increase will always mean a greater opportunity for us, as we have good products and focus on satisfying the client”.
The reform proposed by the Chilean government includes the creation of a state entity to manage part of the contributions: Will there be room in this sector for players like you? “That remains to be seen, but at AllianceBerstein we are investment tool suppliers, and I am sure that, with our returns and variety, some of them will adjust to the needs of how these pensions are managed in future “.
The operations of two countries that are doing well economically, Peru and Colombia, are centralized in Chile: What are AB’s perspectives for these countries? “We think they are countries that have good economic data, which have a fairly stable and sustained growth over time. We believe that this will continue and that the economies of Colombia and Peru (and also of Chile), will increase their rates of savings over time. And as these savings rates increase, the amount available for investing will grow. That is why we believe that we are going to be a very relevant player in the region, both for pensions and for the voluntary savings of non-pensioners. All the countries of the Andean region share similarities, the pension systems are quite uniform and their somewhat conservative investment practices are similar. That’s what poses a significant challenge.”
It is often pointed out that there is little tendency to save in Latin America, but you describe a future with an increase in savings in homes and institutions. “This has to do with what we have seen that has happened in other countries. At present, the savings to income ratio is quite low, and is almost nil in some segments of the population. Fortunately, in these countries we have pensions as mandatory savings, and we believe we are heading towards an increase in the mandatory rate. But also, as countries grow and per capita incomes increase, we believe that the most basic needs are being met, and then we can move on to savings. Savings will be one of the things that are going to happen, because in these countries there are also idiosyncrasies of a certain order and both mandatory and voluntary savings will increase gradually.
Could you tell us about AB’s funds’ range? “Perhaps AllianceBerstein was initially known for fixed income products, and there were quite traditional products such as High Yield and American Income (with a more conservative and a more aggressive part), which together have worked very well during the fund’s 22 year history. But its share of equity is presently very strong; we currently have about 30 funds which are ranked very well, with the highest rating and also four stars. Presently, I feel that I have several funds, more than ten, that I can offer clients because they adjust to their needs. “
AllianceBerstein, based in New York, is currently present in 21 countries, including Brazil, Argentina and Mexico. Globally, the firm has about $ 517 billion in assets under management.
Photo: Bolton. Ruben Lerner and Manuel Uranga Join Bolton's New York Team
Independent broker-dealer Bolton Global Capital has ramped up its expansion in New York City with the addition of Morgan Stanley international advisors Ruben Lerner and Manuel Uranga.
After nine years as managing directors at Morgan Stanley, where they advised on an international client book of $550 million, Lerner and Uranga have launched A Plus Capital, which will be headquartered in Manhattan at 515 Madison Avenue, Bolton has announced.
Junior partner Ariel Materin, client associate Jennifer Ramos and office manager Olga Lopez also join from Morgan Stanley. Materin will manage client acquisition and investment strategy for the team while Ramos will be based in A Plus Capital’s Miami location and Lopez will manage the New York office.
Lerner, originally from Venezuela, and Uranga, from Spain, service clients across Europe, Latin America and the US.
The duo joined Morgan Stanley from Smith Barney, which was then still part of Citi, in 2008 with sales assistants Dolores Alcaide-Mendez and Jennifer Ramos. Alcaide-Mendez remains with Morgan Stanley.
Custody of client assets will be held through BNY Mellon Pershing. Bolton will be providing compliance, back office, and marketing support as well as the wealth management and trading technologies for the A Plus Capital team.
Morgan Stanley confirmed the team’s exit, but declined to comment further.
Bolton’s big plans
The Bolton, Massachusetts-based business is looking to continue to acquire more than $850 million in client assets in New York City market before the end of 2017. It entered the region in May when former HSBC private banker Ethan Assouline joined the broker-dealer.
Over the last two years Bolton had been targeting advisors in Miami, adding international teams that had left wirehouses and private banks due to internal policy changes during that period. It now has over $4 billion in assets under management from non-US resident clients.
Foto: Fernando Pérez-Hickman (izda.) y Jefferson G. Parker (dcha) . Fernando Pérez-Hickman and Jefferson G. Parker Take on New Roles at Iberiabank Corporation
Iberiabank, has announced today a change in leadership. After John R. Davis‘ resignation from his position as Director of Financial Strategy, Investor Relations, and Mergers and Acquisitions, effective today, August 31, 2017. Jefferson G. Parker, who will continue to be responsible for the capital markets business, will take on Investor Relations, and Fernando Perez-Hickman will serve as Director of Corporate Strategy and be responsible for Mergers and Acquisitions.
Daryl G. Byrd, President and Chief Executive Officer of Iberiabank Corporation, commented, “For 18 years, John has made immeasurable contributions to the success of our Company. He has been instrumental in transforming our Company from a small Louisiana-based community bank holding company to the nearly $30 billion regional, multi-faceted financial holding company it is today. We thank him for his dedication and extraordinary hard work and wish him all the best.”
John R. Davis said, “I have thoroughly enjoyed working with Daryl, my teammates, and the investment community in building a dynamic company through unprecedented economic and regulatory changes. The Iberiabank brand of quality is truly defined by its people. I am confident that Jeff and Fernando will do a great job and expect this to be a very smooth transition.”
Byrd continued, “Jeff’s background, his 16 years of service both as an outside Director of our Company and as head of our capital markets and brokerage businesses, position him well to handle investor relations. Through the recent acquisition of Sabadell United Bank, Fernando joined our Company and will serve as Director of Corporate Strategy and lead our mergers and acquisitions efforts. I am confident that Jeff and Fernando will continue to leverage the strong relationships John has developed to continue to grow our Company successfully.”
CC-BY-SA-2.0, Flickr. The Uruguayan Bond Becomes One of Latin America’s Fixed Income Stars
The Uruguayan government is preparing a new bond issue, this time it will tender 775 million in Indexed Units (pesos indexed in inflation) with maturity in 2025. And as always, demand is expected to greatly exceed the supply: The Uruguayan bond is one of the shining stars of Latin American fixed income.
Last July, JP Morgan included the bond in Uruguayan pesos in its GBI-EM index, the index that consolidates emerging countries’ international issues in local currency. For the first time, the country’s population of 3.3 million people joined a club reserved for 18 countries.
Something exceptional had happened weeks before: for the first time in its history, Uruguay placed a global bond in pesos to five years. And demand was almost five times higher than supply. Financial advisors have not yet become accustomed to the new reality of a strong peso and a decoupled economy in the region, which has had almost twelve years of uninterrupted growth.
Juan José Varela, Gletir’s Commercial Manager, recalls the years that followed the financial crisis of 2002 and assures that “not even those who are the most optimistic could imagine an exchange rate at 28 pesos per dollar. JP Morgan’s GBI-EM index is “cheap rate assurance for Uruguay“.
The peso is a strong currency because of the amount of investments the country is receiving, the soybean revolution during the last fifteen years (thanks to Argentine technology), Argentina’s very closed markets, and furthermore, the installation of pulp mills, which are investments that impact the country’s GDP. If tourism, which is a very good element for Uruguay, is added to this, it generates very important currency strength. Many dollars come in and those dollars have to be sold to be applied to the national economy. “
Jerónimo Nin, Head Trader at Nobilis, coincided in Boston with authorities from Uruguay’s Ministry of Finance’s Debt Unit on the same day of that issue in pesos. Those officials had spent a week visiting funds around the world. “Investors were already looking for returns, at which point, the fears of Donald Trump’s policy toward emerging markets were dissipating. Then, the dollar began to weaken and the search for a bit more risk / return began,” explains Nin. At that time, Uruguay, an investment-grade country, was one of the few countries in the world to offer double-digit returns. The Central Bank’s anti-inflation policies began to bear fruit, and the government corrected the fiscal side, all of which brought confidence to the markets.
Jerónimo Nin points out that “it has gone very well for those who have bought, because the bonus came out at 10% yield, and currently is already operating at 8.25% or 8.30%.After fulfilling the authorities’ idea to enter the JP Morgan index and that drew in even more because it is a call for passive investors, those who follow strategies to replicate the index. Then those investors go out to buy in Uruguay.”
At Gaston Bengochea & Cia CB S.A, stockbrokers, they consider that the issue in pesos was a milestone, a maneuver attributed to the entry of young people to the Ministry of Finance. Diego Rodríguez, Director at Gastón Bengochea, affirmed that external factors played a fundamental role: “this issue is not only explained by Uruguay’s economic strength (which has been uninterrupted for 12 years) but also by the existence of a weak dollar since 2008. It’s clear, therefore, that, in the world, there is an appetite for currencies other than the dollar, and that has allowed many economies to issue in local currency. Brazil has issued in Reals, as have Mexico and Chile, amongst others.”
Photo: Terry Simpson, a multi-asset investment strategist at BlackRock / Courtesy. Terry Simpson: “We Continue to be Overweight in Equities Relative to Bonds, Even Eight and a Half Years into the Cycle”
In an environment where volatility levels are at a minimum, partly because of the widespread measures of QE by central banks and the low volatility of macroeconomic variables such as GDP, and the employment and inflation rates, the Black Rock Investment Institute is committed to maintaining current risk exposure, and even to increasing it. From here, the question that makes sense is: Given the present conditions, where do you take that risk within the capital markets? Terry Simpson, a multi-asset investment strategist, met in Miami in mid-July to resolve this issue and to share the firm’s expectations about the different markets.
Over the next five years, they expect US large-cap equities, as well as small- and medium-cap equities, to deliver an average return of 4 %. Also, for the same time horizon, they expect developed global equities, excluding US, to achieve an average yield of 6.2% and emerging market equities to reach 7%.
“These differences in returns are due to the high valuation levels in the US equity market, which are vulnerable to mean reversion. But we also believe there is an opportunity in the growth of global volatility within this economic cycle and we want to tilt our portfolios to where growth will emanate from. We know that the US economic cycle is much more mature than that of the Eurozone, emerging markets, or Japan, so these economies have scope for catch up,” said Terry Simpson.
“Thinking about valuations and rethinking asset allocations, we often get the question about the high valuations in financial markets, which is true whether you look across equities or you look across bonds. Bonds valuations are at historically high valuations. While equities also are at high historical valuations, they are not as expensive when compared to bonds. Thus, the key is relative value,” he added.
A Clear Commitment to Equities
The issue here is betting on relative value: If we invest in equities, how much premium are we offered in relation to investment in bonds? For the firm, these questions make more sense than to think about equities in absolute terms, as the vast majority of clients have positions in multi-asset portfolios. In addition, we are already eight and a half years into the cycle, so valuation levels are high: “If you compare the earnings yield of the S&P 500 index with the premium provided by equities- it can be calculated as the earnings yield of US Equities minus the real bond yield in the US markets- it can be seen that stock market valuations are high, but if the same yield is compared to bonds, one will see equities are still relatively cheap, and that is why we continue to maintain an overweight in equities in relation to bonds, even eight and a half years into the cycle.”
Another reason why the BlackRock Investment Institute favors equities is because earnings growth is now becoming a sustained part of this market: “We have long understood that this is a multiple expansion bull market, lacking an earnings growth recovery, yet we are at point of solid earnings growth. Q1 in 2017 was the first quarter since 2010, when all the major global regions recorded double digit positive EPS growth. So, it’s confusing that clients are taking money out of markets now that we are getting earnings growth. It is likely that growth in the first quarter of this year will not be recorded again because in some regions currencies have risen which may act as a headwind for earnings, but we still think that in Europe and Japan double digits earnings growth is feasible for Q2, while in the US we expect it to remain at the top end of single digits. In any case, this is a marked improvement from years past.”
Furthermore, one could consider Wall Street’s expectations, since there is a trend that began around 2010-2011. Since then, analysts broadcasted very high expectations in terms of earnings per share at the beginning of each year, yet as the year progressed, those expectations were adjusted downwards becoming more and more pessimistic. However, 2017 is the first year in which the expectations broadcasted at the beginning of the year remained practically flat, something that according to Terry Simpson should be interpreted as an encouraging fact, since it breaks with the previous pattern and in addition is being supported by an improvement in profit recovery.
Opportunities are Outside the US
At BlackRock, they began to think that there would be investment opportunities in the international markets at the tail end of last year, a position that at that time was identified as contrarian to market consensus. The rest of the market is now just getting on board, so their contrarian call is no longer contrarian. Will they adjust their position? Not quite yet.
“When we analyze the fundamentals of certain regions, our takeaway remains positive. For example, in Europe, the percentage of countries that have PMIs above their historical average is at its highest level since 2011”.
“Prior to 2009, EPS in European equity markets, excluding the UK, was virtually in line with that of the United States, as was earnings growth, obviously as a result of increased globalization. After the Great Financial Crisis, US earnings continued to increase somewhat, but in Europe they basically remained flat or declined. We think that the gap has potential to close as the global economy picks up. This is a fundamental story, there is an opportunity that Europe is going to catch up to the US”, he explained.
Regarding the need to protect and hedge the portfolio against currency risk, Simpson argued that it depends on risk tolerance and the client’s time horizon. “If you are looking for exposure to the European or Japanese equity market and the local currency is at a positive moment, you would be adding alpha to the portfolio with a direct exposure to currency risk, as is currently the case with the Euro and the Yen. Conversely, if the local currency is in a weak moment, as was the case during the past two years, it is convenient to opt for currency hedging strategies. With a high-risk tolerance and with a short time horizon, you can invest without currency hedging and take currency risk, but if the client does not want so much volatility in their portfolio, it is better to hedge the position. The same happens with the time horizon, over the course of 20-25 years, the effect of the local currency is washed out, there is basically no difference in terms of total return, but if you only want to invest for one or two years, it is better to hedge the risk”.
Finally, Simpson reviews the fundamentals that support investment in emerging markets. The differential between the growth of emerging and developed markets began to narrow in 2010. The growth of emerging markets started to converge with that of developed markets. It happened with China, which went from registering an annual growth of 10% to one of 6%, but this was also the case in Brazil and Russia. “In the last two quarters, we are seeing a rebound in the differential; emerging markets are restarting their growth. If this trend firms, we believe that EPS will grow and we will see better performance by emerging markets in relation to developed markets.”
From a technical perspective, Simpson recalled what happened in 2013, in the episode known as the “Taper Tantrum.” Ben Bernanke was Fed Chairman at a time when yields in developed economies were depressed; a massive flow of funds had invested in emerging market equities seeking higher yields. “At that moment Bernanke told global investors that they had reached the peak in the influence of QE measures, and that it may be optimal to withdraw the stimulus. A miscommunication that saw investors respond with a strong exit from emerging markets. Money has returned to this asset class, but there is still a lot of money waiting on the sidelines to reenter emerging markets, another positive point for this asset class,” he concluded.
