CC-BY-SA-2.0, FlickrPhoto: Lain. China: How Serious is the Debt Issue?
Emerging Markets (EMs) continue to drive global growth, with China still accounting for the lion’s share. However, China’s increasing debt remains a significant concern for global investors. Pioneer Investments’ Economist Qinwei Wang, takes a closer look at China’s debt situation.
After reviewing the recent developments around the debt issue, Pioneer has not changed their view that China can still avoid a systematic crisis in the near term, “as the issue remains largely a domestic problem and in the state sector.”
“Looking into the composition, China’s debt issues are largely within the country, unlike typical cases in EMs. Its external balance sheet still looks relatively resilient as China continues to run current account surpluses. China has also been building up net foreign assets over the last decade, and is one of the largest net lenders in the world and domestic savings remains high enough to fund investments.”
In addition, looking at domestic markets, Pioneer believes the situation still looks manageable. In fact, the borrowers have been largely in the state sector, directly or indirectly, through various government entities or SOEs. The lenders are also mainly state-linked, with banks (state dominant) making loans, holding bonds or channelling a big part of shadow activities.
The People’s Bank of China has prepared plenty of tools to avoid a liquidity squeeze, with capital controls still relatively effective, at least with respect to short-term flows. Ultimately, the government has enough resources to bail out the banking sector or major SOEs if necessary to prevent systemic risks.
The private sector does not appear to present big concerns, at least for now. In particular, on the property side, following the major correction since 2013, the health of the sector looks to be improving, although there is still a long way to go in smaller cities. Households have been leveraging up, but their debt levels are still relatively low with saving rates remaining high.
“We are not too concerned about existing troubled debt, as there are possible solutions to clean it up while avoiding a systemic crisis, and the implementation process has already started. The more challenging issue is how to prevent the generation of new bad debt.” Says Wang.
He believes that a first step in this direction is to improve the efficiency of resource allocation. Ongoing financial reforms, including the liberalization of interest rates, bond markets, IPOs, private banking, a more flexible FX regime as well as the opening of onshore interbank markets over the last couple of years are positive attempts in his view.
Continued efforts to shift towards a more market-driven monetary policy transmission mechanism is also helping. In addition, the anti-corruption campaign has also effectively added relatively better supervision of the state sector. That said, SOE reforms have been relatively slow, with mixed signals, although we see certain positive developments, such as individual defaults allowed and a pledge to remove their public functions.
Preventing new problematic debt levels from rising again in the future will also require strengthened financial regulations. We think a large part of the new forms of finance, or so-called shadow banking activities, are the result of financial liberalization. The current segmented regulation system is unlikely to keep pace with the rapid financial innovation across sectors and products. This will be an issue to monitor going forward.
“From an investment perspective we keep our preference for China’s “new economy” sectors, which could benefit from the move towards a more service-driven economy.” Wang concludes.
CC-BY-SA-2.0, FlickrFoto: Gideon Benari. Los precavidos inversores de renta fija europea podrían estar sacrificando el rendimiento
Tom Ross, Co-Manager of the Henderson Horizon Euro Corporate Bond Fund, and Vicky Browne, Fixed Income Analyst, look at the impact of the European Central Bank’s corporate sector purchase programme (CSPP).
What is the CSPP?
The corporate sector purchase programme (or CSPP as it is commonly known) was established by the European Central Bank (ECB) and began purchasing bonds on 8 June 2016. The CSPP is a form of monetary policy, which aims to help inflation rates return to levels below, but close to, 2% in the medium term and improve the financing conditions of economies within the Eurozone.
Purchases can be made in both the primary and secondary market. By the end of July 2016 – eight weeks into the programme – secondary market purchases formed 94% of purchases with only 6% being made in the primary market according to data from the ECB.
Which bonds are eligible for purchase?
Bonds purchasable under the scheme must be investment-grade euro-denominated bonds issued by non-bank corporations established (or incorporated) in the euro area. In assessing the eligibility of an issuer, the ECB will consider where the issuer is established rather than the ultimate parent. Thus an issuer incorporated in the Euro area, but whose ultimate parent company is not established in the Euro area, such as Unilever, is deemed eligible for purchase.
How have markets responded to CSPP so far?
To date the ECB has bought 478 bonds totalling approximately €11.85bn from 165 issuers (UniCredit as of 27 July 2016). The list of these bonds (but not the quantities purchased) is available on the websites of the national central banks performing the buying. Analysing these holdings would suggest that, on an industry sector basis, considerable CSPP purchasing has occurred in utilities and consumer non-cyclicals.
In June non-financial credit spreads initially responded positively to the CSPP purchases. However, excess credit returns over the month (returns over equivalent government bonds) detracted from total returns as market volatility increased as a result of the UK voting to leave the EU. Concerns surrounding the vote led to a temporary pull-back in demand for credit and this negative headwind overpowered the positive technical effect from CSPP.
July proved to be a stronger month for credit market performance. The European investment grade market – as measured by the BofA Merrill Lynch Euro Corporate Index – delivered a total return of +1.68% in July in euro terms and excess credit returns of +1.61% (source: Bloomberg at 31 July 2016). Undoubtedly, these positive movements have been partly driven by CSPP purchases as illustrated by the graph below. It reveals how spread performance – a declining spread indicates stronger returns – of the iBoxx Euro Corporate Index has been more pronounced in eligible bonds than non-eligible or senior bank assets.
However July’s returns are not just attributable to the technical support provided by the CSPP. An improvement in market sentiment driven by reduced fears about Brexit, together with a rise in flows into bond funds, has helped to increase demand for the asset class at a time when there is a lack of European investment grade supply.
How has the fund benefited from CSPP?
The Henderson Horizon Euro Corporate Bond Fund was positioned long credit and duration risk versus the index throughout June. Although the fund still trades with a long beta bias we have lowered risk levels over the past few weeks by reducing exposure to positions that have benefited from the recent rally in credit markets. Examples of these are euro-denominated bonds from utility companies Centrica and Redexis Gas, and US real estate investment trust WP Carey.
In July, the fund added to positions from CSPP-eligible issuers on a name-specific basis such as Aroundtown Property, Telenor and RELX Group. Exposure has not just been increased in CSPP-eligible issues but also in companies we favour that are not incorporated in the euro area, such as US names AT&T (in EUR) and Comcast and CVS Health (in USD). The CSPP technical has also been apparent in the primary market. The fund benefited in July from participating in a euro- denominated new issue from Deutsche Bahn, which has performed strongly post issuance. Positive fund performance has also come from a new issue from Teva Pharmaceuticals, which has seen solid demand since coming to the market.
While CSPP should help to provide technical support to European investment grade corporates, there exist several uncertainties in the market – such as the October referendum in Italy and instability in commodity prices – that could cause weakness to arise. We therefore continue to look to reduce risk into further strength while seeking to take advantage of any attractive opportunities presented by volatility or weakness.
CC-BY-SA-2.0, FlickrMichel Rittenberg . Michel Rittenberg, in Charge of Wunderlich Miami
Wunderlich, a leading full-service investment firm headquartered in Memphis, recently announced that Michel Rittenberg has joined its wealth management team as manager of the firm’s Miami branch. Rittenberg, a 36-year veteran of the financial services industry, was previously with Raymond James & Associates.
“Michel is a well-respected industry professional who will expand our presence in Miami and Coral Gables,” said Jim Parrish, president of Wunderlich’s Wealth Management division. “Having previously been colleagues at Morgan Keegan & Co. for many years, I know that his positive management style and ability to help elevate advisors’ careers will be a tremendous asset to Wunderlich. I’m thrilled to have him join our team.”
Prior to Raymond James, Rittenberg was a branch manager for Morgan Keegan & Co. in Miami from 2005 to 2012. Before that, he was New York City complex manager for H&R Block Financial Advisor and a managing director for Prudential Global Derivatives in New York. He began his career at Merrill Lynch. Rittenberg is a graduate of Beloit (Wisconsin) College and received his MBA from the Thunderbird School of Global Management at Arizona State University.
“Wunderlich is an impressive firm with a bright future, and I’ll be working with a group of true professionals in the Miami branch,” said Rittenberg, who will oversee the branch that was once part of Dominick & Dominick before being acquired by Wunderlich in 2015. “I am proud and happy to be here and look forward to growing our presence in the greater Miami area in the months ahead.”
CC-BY-SA-2.0, FlickrFoto: Dafne Cholet. Qué esperar del último trimestre del año en los mercados
The summer, while investors turned their attention to the Democratic National Convention in Philadelphia, the Republican National Convention in Cleveland, the Olympics in Brazil trading has been light.
But what can be expected for the rest of the year? According to Edward J. Perkin, Chief Equity Investment Officer at Eaton Vance Management, “the second half of the year is chock full of likely market catalysts, including potential Brexit fallout, the upcoming presidential election, Fed meetings and more. Against this uncertain backdrop, we continue to believe that equity investors should remain focused and opportunistic.”
For the specialist these are the dates to keep in mind:
September
September is likely to be a busy month. Post-Labor Day is when many voters will begin to pay close attention to the presidential election. Having skipped August, the Fed will meet again on September 21 to make a decision on rates.
There are also a large number of industry conferences, where company management teams will give updates on their businesses. One of these, the “Back to School” conference, held each year in Boston, involves the largest consumer companies.
September is also important in that it is the third month of the quarter. Many companies have “blackout” periods in the final weeks of each quarter and into the early part of the next quarter, when they report earnings. During these blackout periods, companies suspend their share buyback programs in order to avoid accusations of trading on material, nonpublic information. Given how important corporate buybacks have become to the market, this temporary removal of demand for equities has coincided with several of the market’s pullbacks in the past two years.
October
Like July, October is a busy month for corporate earnings releases. With three quarters of the year complete, companies and investors will begin to think about 2017 and the trajectory of earnings into the approaching year. We will likely have a presidential debate in October, perhaps the only debate of this cycle. Television ratings may well set records.
November 8 – Election Day
At the November 2 Fed meeting, Janet Yellen and her colleagues are likely to take no action in order to avoid roiling markets six days prior to Election Day. We expect the market to be focused on the election throughout the summer and into autumn. If the likely result appears clear, Election Day may not produce much of a market reaction. Regardless of who wins the presidency, the equity market may prefer to see the same party capture the House of Representatives and the Senate. The reasoning would be that a new president will be more effective if he/she has the support of Congress.
Under either party, increased fiscal stimulus in 2017 seems likely. This could include corporate tax reform (lowering rates, reducing deductions and encouraging companies to repatriate overseas cash) and an infrastructure spending bill. If modest regulatory relief is also part of the agenda, then the economic outlook for 2017 may be stronger than many currently believe.
November 30 – OPEC meeting in Vienna
OPEC typically meets twice a year, with its next meeting to be held six days after Thanksgiving. At its November 2014 meeting, OPEC surprised global oil markets by maintaining an elevated level of production, which exacerbated the already-falling price of crude. “We expect supply and demand to continue to rebalance between now and the end of 2016. A production cut at the November meeting would be supportive of oil prices, but is unlikely, in our view.” He notes.
December 14 – Final Fed meeting of 2016
In December 2015, the Fed raised the federal funds rate by 0.25%, which led, in part, to market volatility in early 2016. The expectation at the beginning of 2016 was that the Fed had embarked on a path to normalize the level of interest rates. In the first half of the year, however, the Fed failed to follow through with further rate increases. The market has begun to doubt the Fed’s will: At around midyear, the implied probability of a rate increase on or before the December 14 meeting stood at less than 11%.
December is also the month when many investors choose to conduct tax loss harvesting, selling losers in their portfolios to take advantage of the tax benefit that comes from booking the loss before the end of the year. This activity sometimes puts further pressure on stocks that have performed poorly earlier in the year.
Stay focused and opportunistic
The second half of 2016 is full of potential catalysts – including not only the specter of further Brexit turmoil, but also Fed meetings, a presidential election, corporate earnings and incoming economic data. There will likely be a few surprises along the way. “In our equity portfolios at Eaton Vance, we are staying focused on the long-term prospects of our holdings and will look to take advantage of any opportunities thrown our way by the uncertainty of these events.” He concludes.
CC-BY-SA-2.0, FlickrPhoto: Jorge Elías
. Late Summer / Late Cycle
Here in Boston, cooler nights and unwelcome back-to-school advertisements tell us summer is beginning to draw to a close and autumn is approaching. Like seasons, business cycles often signal their coming demise.
One thing that recurs with greater regularity during the last phases of business cycles is a scramble by companies to purchase competitors. Corporate acquisitions have been rising and are now near peaks seen in other cycles. Late in the cycle, companies often see flagging internal rates of growth and seek to boost growth through mergers and acquisitions. Historically, companies often overpay for such acquisitions late in the cycle. We’re seeing that now with widespread takeovers and significantly higher premia in prices paid.
Another signal of changing cycle dynamics is the profit share of the economy. The share of gross domestic product going to the owners of capital in the form of net profits often dips in the final 12 months of a cycle. The United States is now experiencing the third quarter of such profit deterioration as the owners’ share of the expansion starts flowing to other parts of the economy, rather than to profit gathering.
Late in the cycle, companies often seek to add debt to their balance sheets in order to boost profit growth. Frequently, this results in a broad scale deterioration of credit quality, which is subsequently made worse by the onset of recession. US consumers also tend to add debt to their collective balance sheets in the late phases of a cycle. And indeed we see that the borrowing of both corporations and consumers, which has been comparatively subdued in this cycle, is now starting to rise.
Signs not totally aligned
Not all the usual signs of recession are present now in the US. Some typical late-cycle signs have yet to appear, and this should cheer investors. Typically the shape of the yield curve becomes distorted in the late months of a cycle as short-term rates rise above long-term rates, reflecting market expectations of subdued growth ahead. We’ve seen a flattening of the yield curve in this eighth year of the cycle, but not an inversion of yields, as short rates remain slightly lower than long rates.
Another late cycle characteristic is widespread fear of inflation taking hold and accelerating. The US Federal Reserve often acts to forestall inflation pressures by raising short-term rates, which can slow the economy’s momentum. So far, signs of gathering inflation pressures are scant, but worth watching. As our regular readers know, there are currently no signs that the Fed is about to act aggressively to prevent an inflation spiral.
As long-term investors, we know that fundamentals matter most. In this cycle we’ve seen profit margins hit near-record levels. Likewise, operating income compared to revenues and free cash flow compared to market capitalization have been consistently high for over six years. The return on equity of companies in the major US indices has been outstanding.
Fundamental shift
But in the past three quarters, margins and profits of US companies have been pressured, and not just by weak energy prices. Cost pressures in other sectors have appeared as rising general and administrative expenses and weak sales growth combine to trim profits. That environment makes it harder to grow profits than was the case in the first six years of the business cycle. Worryingly, this shift comes at a time when the S&P 500 price/earnings ratio has reached over 18 times expected 12 month forward earnings, a valuation measure which lies on the high side of history.
Despite the arrival of back-to-school ads in early August, and the return of neighborhood youth to US college campuses later in the month, we can choose to shrug off the passing of summer and instead relish the last warm sunny days. But the evening breezes now bring a chill to the air that we didn’t feel in June or July — a chill that should not be ignored. What we find most concerning is that late in the cycle, market behavior often seems to be propelled more by hope than fundamentals. Maybe that is happening today, as market averages for both large and small caps rise while revenues, margins and profits continue to diminish. It may be comforting to look the other way and pretend the days will remain warm and bright. But investors keen to hold on to their wealth should not let the hope of catching the final gains of the cycle keep them hanging on too long.
CC-BY-SA-2.0, FlickrPhoto: Bo Jayatilaka. India: Strength in Numbers
Asia is home to about 60% of humanity. With 1.3 billion people, China has demonstrated over the last three decades how an economic miracle can be created by productively employing such masses. It moved millions of people from a rural low productivity, agrarian economy to a more productive industrial and urban economy, thereby radically lifting its economic standards. In 1990, more than 60% of the Chinese population was below the poverty line but by 2015 that proportion was less than 4%. India and the ASEAN (Association of Southeast Asian Nations) economic bloc maintain a similar strength in numbers with populations of over 1.2 billion and 650 million, respectively.
India’s case is particularly unique. Estimates suggest India will add over 115 million people to the global labor force in the next 10 years, and then an additional 100 million over the following decade. By some estimates, this means that India will add more people to the global labor force than the rest of the world combined, excluding Africa. This has significant macroeconomic implications not only for the country, the region and the world, but it should also create opportunities for investors.
A paramount challenge for India is effectively employing these millions and generating strength from numbers rather than merely allowing resources to become constrained by rapid population growth. The need for sustainably high GDP growth to generate new jobs is not a debatable topic. The debates center around whether India is doing enough and whether it is on the right path. India went through liberalization in 1991. And since then, the country has seen significant benefits as GDP growth moved from low single digits (3.5% from 1950-1980) to high single digits. There remains much criticism, however, that government reforms around land, labor and taxation have not been completed. But over the last two years, there have been several government efforts that are worth highlighting.
Bankruptcy Law: More Power to Banks
A structural factor to India’s banking woes has been the lack of a bankruptcy code, which distorts the system. “If a loan goes bad in India then the promoter (owner of the business) tells the bankers that he’ll see them in court and will keep seeing them in court for the next decade,” noted Indian central bank Governor Raghuram Rajan. This is aptly summarized given that politically well-connected promoters historically have not lost ownership of the asset even when loans have gone bad. Recovery takes much longer (more than four years versus less than two years in the U.S.) and recovery rates are dismal (25% versus 80% in the U.S.).
Recently passed insolvency and bankruptcy legislation, however, could critically revamp the current system by superseding existing laws, reversing the balance-of-power in favor of banks (i.e. promoters run the risk of losing their assets), and providing transparent and shorter time-bound resolution guidelines. The new law should remove willful defaulters from the system and prevent nonperforming loans (NPLs) from significantly jamming the banking system. Improving the efficiency of capital utilization is important in supporting entrepreneurs, and thereby helping job creation.
Inclusion for “Unplugged India”
When investors see India’s major urban areas, they see a lot of people but that does not describe the real story behind Indian demographics. Many in India still live in villages, rely on agriculture as their primary means of livelihood (about 65% of the population) and feel largely unconnected with the urban ecosystem. India cannot move forward without including this significant majority, or in other words, if included, the country should be able to produce tremendous national growth.
Much progress has been made over the last two decades in connecting “unplugged India” by improving and adding to its roadways and electricity grids. “All weather” roads have moved from fewer than 50,000 kilometers to over 450,000 kilometers; households with electricity have jumped from about 44% to more than 70%. These simple projects have provided a significant productivity boost to SMEs in India’s smaller towns.
In 2014, Prime Minister Narendra Modi launched a plan for comprehensive financial inclusion for all Indian households. This plan has added more than 175 million banking accounts to the existing 400 million over just two years. In India, consumer companies have been known to do well selling products in individual-sized “sachets” versus typical product sizes for such things as toothpaste or shampoo. In this way, this “sachetization” of the banking system over time will help broader access and increase participation in the financial system, leading to more efficient savings, credit availability for business, increase in investments, and hence, job creation.
Governance: a Prerequisite to Development
India ranks very poorly in terms of ease of doing business (130 out of 189 countries). Hence, the current ecosystem seems inadequate for the creation of enough new jobs to employ the millions expected to join the labor force. The numerous reasons for this poor ranking include layers of bureaucracy and corruption. In my view, improvements in governance are a precursor to improvements in physical infrastructure.
In May 2015, the government also passed the Black Money Act, which made ownership of illegal money a criminal offense. Some say it is an overly aggressive remedy, but necessary medication. The government also implemented a biometric check-in and check-out system for their officials, notorious for being missing-in-action while still being employed. Other improvements include the relaxation of certain rules for SMEs in order to promote a “start-up culture.”
Glass Half Full
Central bank Governor Raghuram Rajan’s announcement that he will not seek an extension to his term has created some anxiety. While some angst may be justified, I believe there is evidence that progress is in motion at various levels to improve the economic landscape. It should also be noted that the average length of tenure for the Reserve Bank of India (RBI) governor position has generally been shorter than that of Western countries. Already during Rajan’s term, he adopted an inflation-targeting framework, worked in conjunction with the Ministry of Finance to help resolve nonperforming assets in PBSs and set up a new Monetary Policy Committee as part of an institutional framework. These changes will become part of his legacy. The RBI has long been hailed as an institute of high repute in India, and should remain so even after his term.
Stepping back from the nuances of individual events, overall, I am impressed at the amount of activity and clear intentions by key officials in resolving the myriad of challenges at hand. Don’t get me wrong, there is still a long way for policy makers to go but some credit is due to them. India has a high cost of capital, hence, freeing up capital from dead physical assets, improving the allocation of that capital by an improved banking system and providing a higher governance environment for entrepreneurial talent in SMEs, will go a long way in delivering the strength of demographics. I hope that policy makers continue their good work and continue to take on the challenge of tough reforms to satisfy the need to create more jobs. Entrepreneurial businesses out of this fertile landscape would be good investment candidates for us.
At Matthews Asia, our investments are not based on macroeconomic projections or policy changes. That said, we still do try to understand the implications of the actions of key policymakers for our economies and businesses in the region. For us, macroeconomic understanding is not about predicting GDP, interest rates, and/or currency changes, but more about socioeconomic developments related to the social fabric of Asian societies. I look at these broader developments through that lens while seeking quality businesses and management teams.
Column by Mathews Asia written by Rahul Gupta, Senior Research Analyst and Portfolio Manager at Matthews Asia
CC-BY-SA-2.0, FlickrPhoto: Studio Incendo. No Headwind Strong Enough To Derail Emerging Market Performance
Emerging markets are better positioned now to deal with headwinds, which only a few quarters ago caused serious financial market turmoil.
Emerging market (EM) equities and bonds continue to perform well, benefiting from the global search for yield and the tentative improvements in EM fundamentals. With regard to fundamentals, it is important to note that the better overall EM capital flow picture and the pick-up in EM growth momentum are largely linked to the benign global liquidity environment of the past quarters. But regardless of the exact explanation, the general state of the emerging world is much better now than it was in the last few years and the beginning of this year.
Emerging markets have to deal with several headwinds
Currently, there is no situation of critical capital outflows that can easily make policy makers panic, EM growth has been picking up somewhat since June and EM exchange rates have adjusted to a more realistic level. This partly explains why EM assets have not been affected by a number of issues that not so long ago could easily have caused investors to take their money elsewhere. First, there is the sharp decline in the oil price since June. Second, the market started to re-price Fed rate hike expectations following the strong US labour market report of July. And third, most recent Chinese economic data were far from convincing. In other words, emerging markets are better positioned now to deal with headwinds, which only a few quarters ago caused serious financial market turmoil.
Of course, recent moves by the Bank of England and expectations about the Bank of Japan and the European Central Bank have kept investors confident that easy monetary policy in developed markets will continue for longer. In this environment, some adverse data and news flow are considered manageable. At any case, investors are not intending to throw in the towel on the EM yield theme yet.
Lower oil price not seen as evidence of EM demand problem
What is particularly remarkable is that the sharp decline in the oil price of the last two months has not affected emerging bond and equity markets. Oil-sensitive markets such as Russia and Colombia have underperformed, but emerging markets as a whole have not suffered. This is in sharp contrast with the second half of last year, when the falling oil price created a lot of additional nervousness about the overall EM growth picture and the external and fiscal vulnerabilities of the commodity-exporting economies.
The main explanation of the different market interpretation of the lower oil price lies in the better EM growth picture. Growth momentum is clearly improving throughout the emerging world. This makes it easier to believe that, this time, oil is declining primarily because of oversupply concerns and not because of a worsening EM demand outlook.
No significant impact from repricing of Fed expectations
In our base-case scenario, the Federal Reserve will hike interest rates in December. A December hike was completely priced out a month ago. Now, the probability is almost 50% again. The re-pricing of a Fed rate hike this year has not affected emerging asset markets and we feel that a further re-pricing of a December hike should not be a big problem either. The main reasons are the better EM growth backdrop and reduced external financing requirements in most emerging economies. A crucially important condition for a limited market impact of the re-pricing of Fed tightening is that the market continues to believe that the normalization of US interest rates will remain a very slow process.
Current pace of China slowdown appears manageable
At this stage, we are more concerned about the recent deterioration of Chinese economic data. We still think that the Chinese economy is generating reasonable numbers, but doubts about the growth stabilisation have emerged again. Real estate sales growth seems to have peaked, while private investment growth continues to struggle. The capital flow picture remains a big positive change compared with last year and the beginning of this year. The authorities have been successful in stabilizing flows, which suggests that policy makers are in control again.
We are keeping our view that Chinese growth is in a multi-year slowdown. A sharp deceleration with increasing system pressures was what we feared last year. Recent data still give enough comfort that the current pace of slowdown is manageable. But at the same time, we continue to think that a deterioration in Chinese growth is the single-most important risk to all EM assets. So if we talk about the recent resilience of emerging market assets, we feel that the most remarkable has been that investors have shrugged off the disappointing Chinese data.
EM central banks will continue to ease monetary policy
As long as the global liquidity environment remains benign and inflation in the emerging world continues to decline, central banks in emerging countries will continue to loosen their monetary policy. Our monetary policy stance indicator has been in positive territory since March and has sharply risen since May. It tells us that more monetary easing has been taking place recently. For emerging debt markets this is hugely important. Not only because declining yields push the value of the bonds higher, but also because more easing of financial conditions should help the EM growth recovery to broaden out and strengthen.
Jacco de Winter is Senior Financial Editor at NN Investment Partners.
CC-BY-SA-2.0, FlickrPhoto: Jose Gutierrez. AUM in the Global Investment Funds Market Grew US$1.1 Trillion in July
According to the Global Fund Market Statistics Report, written by Otto Christian Kober, Global Head of Methodology at Thomson Reuters Lipper, assets under management in the global collective investment funds market grew US$1.1 trillion (+3.0%) for July and stood at US$37.1 trillion at the end of the month.
Estimated net inflows accounted for US$107.7 billion, while US$967.3 billion was added because of the positively performing markets. On a year-to-date basis assets increased US$2.1 trillion (+6.1%). Included in the overall year-to-date asset change figure were US$123.9 billion of estimated net inflows. Compared to a year ago, assets increased US$1.1 trillion (+2.9%). Included in the overall one-year asset change figure were US$478.9 billion of estimated net inflows. The average overall return in U.S.-dollar terms was a positive 3.0% at the end of the reporting month, outperforming the 12-month moving average return by 3.0 percentage points and outperforming the 36-month moving average return by 2.9 percentage points.
Most of the net new money for July was attracted by bond funds, accounting for US$77.6 billion, followed by money market funds and commodity funds, with US$47.7 billion and US$3.3 billion of net inflows, respectively. Equity funds, with a negative US$19.4 billion, were at the bottom of the table for July, bettered by “other” funds and real estate funds, with US$4.5 billion of net outflows and US$0.3 billion of net inflows, respectively. The best performing funds for the month were equity funds at 4.6%, followed by “other” funds and mixed-asset funds, with 4.3% and 2.5% returns on average. Commodity funds at negative 1.3% bottom-performed, bettered by real estate funds and money market funds, with a positive 0.2% and a positive 0.3%, respectively.
In a year-to-date perspective most of the net new money was attracted by bond funds, accounting for US$279.3 billion, followed by commodity funds and alternatives funds, with US$26.0 billion and US$9.1 billion of net inflows, respectively. Equity funds were at the bottom of the table with a negative US$110.9 billion, bettered by mixed-asset funds and money market funds, with US$51.4 billion and US$38.2 billion of net outflows. The best performing funds year-to-date were commodity funds at 12.1%, followed by mixed-asset funds and bond funds, both with 7.2% returns on average. Alternatives funds, with a positive 1.3% was the bottom-performing, bettered by money market funds and “other” funds, with a positive 1.9% and a positive 5.1%, respectively.
CC-BY-SA-2.0, FlickrDavid Knutson, Eric Skelton and Chris Eger . Schroders US Strengthens Credit Team with Three Key Hires
Schroders has announced three senior appointments in the US to underpin the strong growth of its US fixed income business.
David Knutson has joined the US Credit team as Head of Credit Research – Americas. He will be based in New York and report into Wes Sparks, Head of US Credit. David will be covering large US banks. David brings almost 25 years of research experience to Schroders; he joins from Legal and General Investment Management America, where he had been a Senior Analyst in Fixed Income Research for ten years. Prior to this, David spent three years as Director of Fixed Income Research at Mason Street Advisors and seven years working in Credit Research and Debt Capital Markets at UBS. David replaces Jack Davis who transitions internally into a Senior Analyst role.
Eric Skelton joined the Global Fixed Income and FX trading team as US Credit trader for US investment grade credit, based in New York. He will report into Gregg Moore, Head of Trading, Americas and will work closely with US Credit Portfolio Managers, Rick Rezek and Ryan Mostafa and the rest of the US Fixed Income trading desk. Eric Skelton joins Schroders from Achievement Asset Management (formerly Peak6 Advisors), where he was a Credit Trader. Prior to joining Achievement Asset Management in 2014, Eric spent three years at Nuveen Investments.
Chris Eger joins the US Credit team in a newly created role as Portfolio Manager, reporting to Wes Sparks. Chris is based in the New York office. He joins Schroders with 14 years of experience in Investment Grade – in both Trading and Portfolio Management capacities. He joins from J.P. Morgan Chase, where he held the role of Executive Director – Credit Trader, Investment Grade Domestic and Yankee Banks. Prior to joining J.P. Morgan in 2007, Chris spent five years at AIG Global Investment Group where he held two Vice President positions, firstly as a Credit Trader and then as a Total Return Portfolio Manager.
Karl Dasher, CEO North America & Co-Head of Fixed Income at Schroders, said: “Investors globally are increasingly attracted to US credit markets in the search for yield and we have been beneficiaries of that trend. To support continued client demand and process evolution, we have made three strategic hires. These additions will further strengthen our in-house research and execution capabilities in the USD credit domain.”
CC-BY-SA-2.0, Flickr. US Engine of Dividend Growth Slows Markedly, While Europe Picks up the Pace
Global dividend growth slowed in the second quarter, according to the latest Henderson Global Dividend Index. Underlying dividend growth, which strips out exchange rate movements and other lesser factors, was 1.2%. This is slower than the 3.1% underlying growth seen in the first quarter, partly reflecting Q2 seasonal patterns that give greater weight to slower growing parts of the world, and partly owing to a more muted performance from the US.
US payouts rose 3.1% on a headline basis to $101.7bn, equivalent to an underlying increase of 4.6%. This was the slowest rate of growth since 2013, reflecting subdued profit growth in the US, partly due to the impact of a strong dollar. The slowdown in the US began late last year but should be considered a normalisation to more sustainable levels of dividend growth after several quarters of double digit increases.
Income investors turn their attention to Europe in the second quarter. Two-thirds of the region’s dividends are paid in Q2, making it comfortably the largest contributor to the global total. European dividends (excluding the UK) rose 1.1% year on year in headline terms*, but on an underlying basis were an encouraging 4.1% higher. European dividends of $140.2bn made up two-fifths of the global second-quarter total. They were 1.1% higher than Q2 2015 on a headline basis. Underlying growth was an impressive 4.1%, once lower special dividends, particularly in France and Denmark, as well as other lesser factors were taken into account.
The Netherlands and France enjoyed the second and third fastest growth rate in the world, while German growth was hit by big cuts from Volkswagen and Deutsche Bank; Austria, Spain and Belgium also lagged behind.
In Japan, headline growth was 28.8%, with payouts totalling $30.8bn. Two thirds of this increase was down to the currency, with positive index changes accounting for the rest. In underlying terms, therefore, dividends were 0.8% lower, as company earnings were depressed by the strong yen, and as economic confidence in Japan weakened.
It was a challenging quarter for emerging markets. Dividends fell over a quarter on a headline basis to $22.9bn, as weaker currencies and index changes took their toll. Adjusting for these factors, payouts fell 18.8% in underlying terms, with a large number of countries, including the big four BRICs, seeing underlying declines.
The second half of the year is likely to be weaker than the first, partly because seasonal patterns means the emphasis shifts slightly towards those parts of the world where dividends are growing more slowly, like emerging markets, Australia, and the UK. Owing to the changes in the latest quarter, the Henderson’s team has reduced their forecast for the full year to $1.16 trillion, down from $1.18 trillion. This is equivalent to a headline expansion of 1.1%, or 1.4% on an underlying basis.
“We can see how more muted profit expansion, partly owing to stronger currencies, has slowed dividend growth in Japan and the US. In emerging markets, payout cuts have been greater than we expected so far this year as well. Europe remains broadly positive, in line with our expectations. The weak spots we have seen have been company-driven, or owing to specific sector trends like the impact of lower commodity prices, rather than related to wider economic difficulties. The slowdown in the US began late last year but should be considered a normalisation to more sustainable levels of dividend growth after several quarters of double digit increases.” Said Alex Crooke, Head of Global Equity Income.
Since the UK’s decision to leave the EU at the end of June, the pound has fallen further on the foreign exchange markets, extending a descent that began in the months running up to the referendum. However, a number of large international UK companies pay their dividends in dollars, so, according to Crooke, the impact will be less severe than the pound’s devaluation might suggest. In addition, the UK only accounts for around only 10% of global dividends so the effect on the global total is likely to be relatively small.
