Frontier Markets: Kenya and Their Overcoming of the Infrastructure Deficit

  |   For  |  0 Comentarios

Mercados frontera: Kenia aborda el déficit de infraestructuras
CC-BY-SA-2.0, FlickrPhoto: Wajahat Mahmood. Frontier Markets: Kenya and Their Overcoming of the Infrastructure Deficit

Before the team lead by Stephen Bailey-Smith with Kenyan policy makers at the African Development Bank Annual meetings, Global Evolution was positioned long duration in the local bond curve, and overweight in the Eurobonds. However, after their meeting, they reinforced “our constructive sentiment towards the country’s longer-term prospects and happy with our investment positions.”

The key message from Kenya’s policy makers is that the high twin deficits are a necessary short-term evil in order to overcome the country’s infrastructure deficit. The strategy is being broadly practiced across the African continent. “But Kenya is one of the few countries where we believe it will proceed without jeopardizing macroeconomic stability.” Says Bailey-Smith.

“Our view is not uniformly held by the market and/or the rating agencies, who are concerned by the rate of debt accumulation, especially ahead of the elections in August 17.Certainly, the plan to spend KES45bn (USD450m) on elections discussed during our meetings does seem a tad excessive and reiterates for us one of the key negatives for the credit: the deeply ingrained ethnic fault lines in the political system, which raise governance costs and have arguably been exaggerated under the shift towards more local government.” He explains.

For the strategist, it is important to note that Cabinet Secretary Rotich will deliver the final budget to parliament In June and we suspect it will be more constrained than the April draft, which proposed a budget deficit of 9.3% of GDP. Moreover, the outcome for FY15/16 looks more like a deficit of 6.9% of GDP rather than the planned 7.9% of GDP reflecting the ongoing struggle to deliver on spending pledges. “We remain reasonably confident that the government will not allow their debt financing positon to become disorderly. Crucially, there appears to be a couple of prudent guidelines including recurrent spending being met by revenue and debt in NPV terms not exceeding 50.0% of GDP.”

Since the provisional budget was released there also appears to have been a change in the plans for deficit financing with more coming from concessional and less from commercial sources. Some 40.0% will come from domestic borrowing. Of the 60.0% external borrowing, some 46.0% will have a concessional element. “It is also important to take into account the huge investment spending going into the Single Gauge Railway which has a budget of around KES180bn or 2.6% of GDP. We remain reasonably constructive on the combination of the revamped rail and port facilities, plus the marked progress in energy generation and distribution to deliver significant productivity growth to the economy.”

Certainly this was the view of the relatively new CBK Governor Njoroge, who took up his position after nearly 20 years working at the IMF as a macroeconomist. Well known for his strict religious lifestyle and tough stance on corruption, “his appointment is positive not least because it demonstrates the President’s priorities” says Bailey-Smith.

Interestingly, the Governor feels the recent decline in the C/A deficit to 6.8% of GDP in 2015 from 9.8% of GDP in 2014 will continue despite the large fiscal deficit. He expects the C/A deficit to be around 5.5% in 2016 and 5.8% in 2017.

The improvement comes from a combination of lower imports (especially fuel), higher service and remittance inflows, albeit the improvement is partly due to better measurement. Interestingly, there have also been upward revisions to the FDI numbers suggesting the country now runs a much smaller basic balance deficit. He also suggested foreign holdings of local debt were a very minor 7.0% of total, suggesting limited currency vulnerability from global market risk.

“The reasonably contained BOP suggests continued currency stability, which should allow inflation to fall further and allow the CBK to continue easing monetary policy in coming months.” Bailey-Smith concludes.

Asia is Primed for Innovation

  |   For  |  0 Comentarios

Tendencias de mercado en Asia: Las empresas se vuelcan con la innovación y ganan cuota de mercado
CC-BY-SA-2.0, FlickrPhoto: Robert S. Donovan. Asia is Primed for Innovation

The massive buying power of Asian consumers has far-reaching significance, especially for aspiring entrepreneurs focused on ground-breaking new products. Innovators have existed in every market in Asia, most notably in South Korea, Japan and Taiwan. However, the overall value created has been constrained by their smaller market size since such homegrown inventions have been unique to their domestic markets. Today, this has completely changed, explained Michael J. Oh, CFA, portfolio manager at Matthews Asia. Key innovators in Asia now target their own regional market—and Asia’s middle class is quite homogeneous in many respects, meaning they may share similar cultural backgrounds, tastes and aspirations. Let’s look at South Korea’s cosmetics industry for example.

Human resources, another key source of competitiveness for innovators in Asia, is something that tends not to be in short supply in Asia. Each year, a highly educated workforce of millions hails from North Asian countries and India. South Korea’s young population, for example, has a notably high proportion of college graduates and the country has one of the highest ratios of higher education degrees earned among OECD (Organization for Economic Cooperation and Development) countries and the highest in Asia for those aged 25-35, according to the OECD and UNESCO.

According to the expert, asian companies are also increasing spending on research and development. In fact, many policymakers in Asia have made innovation a national, strategic priority. The global share of research and development spending by Asian companies surpassed that of U.S. companies in 2011, and the gap continued to widen in 2015.  The effort has given rise to numerous research hubs equipped with good infrastructure and skilled workers. In this way, Asian companies are increasingly laying firm foundations for future innovation.

Moving from East to West

“An important trend we are seeing is innovation moving from East to West. This is most evident in the Internet services and consumer products space. For example, Amazon recently started a one to two-hour delivery service in some key cities in the U.S., and is investing in developing its own logistics as a key competitive advantage. This business strategy was started by leading Chinese entrepreneurs and companies early on. Initially, many investors had doubts over its potential for success, but the development of one’s own logistics has in fact become a global trend among many e-commerce companies. And most leading e-commerce companies in India and South Korea are making related investments in order to improve customer experience and satisfaction levels. It seems Amazon is also taking a page from this approach”, point out Matthews Asia portfolio manager.

In another area of prominence, China is leading the world in financial technology and, along with Indonesia, has among the highest levels of mobile banking penetration. In fact, Internet companies in China are penetrating deeper into the everyday lives of Chinese consumers in almost every respect. Internet companies have touched upon just about every major life purchase—from cars to homes to insurance products. Mobile Internet penetration in China is among the highest in the world, and China is often leading the innovation, creating new markets and services in the mobile Internet space.

“Asia can also claim to lead in some areas of traditional technology products, including next-generation display technology, known as organic light-emitting diodes (OLED), that will power future mobile devices and TVs, as well as lithium batteries—essential for many mobile devices and electronic vehicles. Almost all lithium batteries used in electronic vehicles today are made by companies based in Asia, and Asian companies are spearheading the development of next-generation batteries to power the global electronic vehicle industry”, explained Michael Oh.

Innovation is Key for Growth and Survival

Innovation can create value even during slower growth environments, which is important at this juncture since Asia in general is likely to transition more gradually, explained the strategist. For example, South Korea has long been a pioneer in the e-commerce industry and its market has become relatively mature with among the highest penetration rates in the world. It also has the highest e-commerce penetration rate in the Asia Pacific region with an online shopping reach of approximately 62%. But even in this relatively mature market, new companies with inventive marketing and distribution strategies have been able to grow exponentially—in one instance, one created a market value of approximately US$5 billion in just five years. This is particularly relevant to Asia today as many parts of the region adjust within a slower growth environment.

But for Oh, it is also important to note that innovation is not only limited to technology industries. Innovation can happen in any industry—old or new. Let’s look at transportation for example. Transportation is an old industry but a newcomer like the ride-sharing service Uber has completely changed the industry. Uber disrupted the century old industry with new ways of providing transportation services enabled by new mobile technology. Within the tourism industry, companies like Airbnb are doing the same, enabling people to capitalize on under-utilized assets by connecting the supply and demand of accommodation rentals via mobile technology. This is just the beginning for the ways in which technology is reshaping older industries.

Even in the automobile industry we are witnessing tremendous changes brought by electronic vehicles (EV). EV is likely to have far-reaching impacts beyond the automobile industries as it influences energy consumption patterns.

Oh highlights in a recent post in Matthews Asia blog that Japan and China, the region’s major auto powerhouses, have been ramping up the competition over the type of technology and power that may be adopted as the global standard for electric cars. China, which has famously been grappling with pollution issues, now has many locally funded EV start-ups that hope to usurp Tesla Motors. Beijing has been pushing for EV autos, offering buyer incentives, compelling global automakers to share their technology, and opening its market to tech firms. Japan, on the other hand, has invested heavily in fuel-cell technology and infrastructure as part of a national policy for the zero-emission fuel to power homes and vehicles.

Looking Ahead

The explosive growth of China’s emerging middle class brought sweeping economic changes to the global economy and these changes are still ongoing. Asia also has many emerging countries whose middle class has not yet entirely emerged. The ASEAN (Association of Southeast Asian Nations) region, which includes Indonesia, Malaysia, the Philippines, Thailand, Myanmar, Vietnam, is a compelling area of focus for future growth. With an overall population of about 625 million, this region holds exciting potential despite still being relatively poor with an overall middle class that is still relatively underdeveloped.

“We believe that Asia innovators can create value for Asian consumers and long-term shareholders on the back of a vast market that has been created in the Asian marketplace. Companies that can create unique products and services that are well-suited to meet the demand created by rising disposable incomes and improving lifestyles should be well rewarded by the market, and we believe this will continue to foster more innovation. This virtuous cycle will be one of the major trends in Asia going forward and be a sustainable value creator for long-term investors”, concluded.

 

 

How Lyxor’s Enhanced Architecture Program Can Boost European Pension Funds’ Performance

  |   For  |  0 Comentarios

Lyxor crea un programa de servicios único para los fondos de pensiones
CC-BY-SA-2.0, FlickrPhoto: Jennie O. How Lyxor’s Enhanced Architecture Program Can Boost European Pension Funds’ Performance

Europe’s pension funds face significant challenges as a result of low interest rates, volatile markets and regulatory constraints. Lyxor’s Enhanced Architecture Program (LEAP) helps institutional investors address these challenges.

The program offers its participants significant cost reduction, reporting, risk management, governance and return benefits. Amber Kizilbash, Global Head of Sales and Client Strategy at Lyxor Asset Management, explains how LEAP works and why operational effectiveness is such a hot topic.

“Pension funds face increasingly urgent demands to improve their overall performance. Lyxor’s Enhanced Architecture Program (LEAP) empowers them to achieve a step change in their infrastructure and investment effectiveness, via a collaborative, top- down approach. It is a modular, open architecture program from which investors can choose either a comprehensive  duciary management solution or individual modules”, explains Kizilbash.

Lyxor experts offer clients a range of specialist skills, such as the design of the legal and infrastructure framework, the negotiation of service provider agreements, risk management, fund selection and management.

A successful LEAP implementation can result in significant eficiency gains, offering better value for money for the pension funds’ ultimate clients saving for retirement.

LEAP benefits pension funds in two ways.

The first is by enhancing funds’ infrastructure, thereby increasing operational effectiveness. Many pension funds suffer from a duplication of roles amongst service providers, both across schemes and across countries. This duplication of efforts leads to a sub-optimal cost structure and a challenge in ensuring effective governance.

The second way in which LEAP helps investors is by providing access to state-of-the-art investment solutions. Many large pension funds have access to sophisticated in-house investment resources as a matter of course. LEAP puts these capabilities at the disposal of small and medium-sized pension funds, which may lack the scale to run such investment programs on their own. Via LEAP, Lyxor accompanies clients in implementing advanced tailored solutions along the full investment value chain, from liability-driven investment (LDI) and strategic asset allocation up to fund selection and management.

 

Investec Asset Management’s Top Performing Global Equity Income Strategy Launches in the UK

  |   For  |  0 Comentarios

Investec lanza su estrategia Global Quality Equity Income en Reino Unido
CC-BY-SA-2.0, FlickrPhoto: Hernán Piñera. Investec Asset Management’s Top Performing Global Equity Income Strategy Launches in the UK

Investec Asset Management launches the Investec Global Quality Equity Income Fund for UK based clients. A replica of the existing SICAV, which has outperformed the market and delivered top decile performance since inception, the Fund is the latest addition to the UK fund range managed by Investec’s Quality Investment Team.

Aiming to generate sustainable dividend growth and attractive total returns over the long term, the Investec Global Quality Equity Income Fund is designed to provide UK investors with a dividend yield in excess of the MSCI All Country World Index. Since launching to global investors in March 2007, the existing fund has a top decile performance track-record and delivered 5.9 percent annually to global investors for the nine years since inception, versus 2.7 percent the index. Additionally, existing investors have benefited from 8.9 percent annual dividend growth since

The Investec Global Quality Equity Income strategy is managed by an experienced and global team, led by co- managers Blake Hutchins, Clyde Rossouw and Abrie Pretorius. A high conviction portfolio of 30-50 stocks, and cautiously positioned compared to the market, the co-managers take a differentiated approach by selecting world-leading Quality companies which are highly cash-generative, invest for future growth and have a proven track-record of paying growing dividends to investors, whilst avoiding more capital intensive sectors, often favoured by a number of competitor funds.

David Aird, Managing Director, UK Client Group, commented: “Given the challenges facing investors in the current climate of low rates and stagnant economic growth, coupled with the financial realities that face an aging population, investors are increasingly focused on sourcing attractive income streams from their assets whilst minimising risk to the underlying capital. We are excited to bring to the UK market the Investec Global Quality Equity Income Fund. A global fund with a proven nine year track record, it aims to deliver a smooth and steady investment journey over the long term, irrespective of market conditions.

“By investing in Quality companies with an ability to grow cash flows, whilst avoiding capital intensive sectors such as utilities and natural resources, which are often favoured by other equity income products, the Fund looks to provide lower volatility returns over the long term – something close to the hearts of our clients in today’s uncertain world.”

BMO Names Richard Wilson as New CEO-CIO

  |   For  |  0 Comentarios

BMO Global Asset Management nombra a Richard Wilson como nuevo CEO-CIO
CC-BY-SA-2.0, FlickrPhoto: Richard Wilson, new CEO-CIO at BMO Global Asset Management. BMO Names Richard Wilson as New CEO-CIO

Richard Wilson has been appointed Chief Executive Officer & Chief Investment Officer, BMO Global Asset Management, effective immediately.

Richard was previously CEO of BMO Global Asset Management (EMEA). He was appointed as CEO of F&C on January 1, 2013, prior to its acquisition by BMO Financial Group. Before becoming CEO, Richard held several senior positions at F&C including Head of Equities and Head of Investment & Institutional.

He began his asset management career in 1988 as a UK equity manager with HSBC Asset Management (formerly Midland Montagu). In 1993 he moved to Deutsche Asset Management (formerly Morgan Grenfell) where he was latterly Managing Director, Global Equities. From Deutsche, Richard joined Gartmore Investment Management in 2003 as head of international equity investments, prior to joining the Group in 2004. He holds a BA (Hons) in Economics and Statistics from the University of Exeter.

BMO Global Asset Management is a critical part of our overall Wealth Management business. It is well positioned to accelerate global growth. Over the past seven years, BMO Global Asset Management has transformed into a truly global asset manager with presence in 16 countries and AUM of more than £160-€200 billion (31 March 2016).

This change in our structure and leadership will help our business as we work toward achieving our global aspirations.We are confident we will deliver strong growth, outstanding client solutions, and market leading performance.

Gilles Ouellette, Group Head – Wealth Management, BMO Financial Group: “We’re pleased to appoint Richard Wilson as CEO & CIO of BMO Global Asset Management. His 30 years of experience in asset management and track record of developing innovative products, building high performance teams and delivering outstanding client service has been a tremendous asset for BMO.  BMO Global Asset Management continues to be a critical part of our overall Wealth Management business and by leveraging our strong investment capabilities and broad distributionnetwork, we’re confident in our growth strategy.”

Investors Expect to Double the Weight of Liquid Alternative Strategies in the Future

  |   For  |  0 Comentarios

Los inversores esperan duplicar el peso de las estrategias líquidas alternativas de cara al futuro
CC-BY-SA-2.0, Flickr. Investors Expect to Double the Weight of Liquid Alternative Strategies in the Future

During the week of May 9 to 13, Pioneer Investments organized an event in Boston that was attended by 85 of its best customers from the United States and various countries in Latin America. Delegates from Merrill Lynch, Wells Fargo Advisors, Citi, Vector Global and Monex, among other firms, learned firsthand about the most successful funds of the firm, but also had time to participate in a discussion of asset classes and risk involved in asset management in the current market context.

The discussions focused on the multidimensional aspects of risk and risk management, opportunities available and how to build a robust portfolio given the current economic environment. Attendees were very interested in learning about the strategies that that allow Pioneer to minimize downshifts. For the firm, the answer to this can be summarized in one idea: we must change our mentality for the market to work out.

While it is true that thinking about investments as a way to beat a specific market index has served in the past, that does not mean it will be an appropriate approach for the future. For Pioneer Investments’ portfolios managers, there is a need to go beyond traditional ideas and start testing other strategies in order to get better returns.

Most investors are aware of the dangers facing the market nowadays, although risk appears to be among the main concerns of all of them. At a conference Pioneer Investments held in April, over 100 professionals of the mutual fund industry were asked to define what risk means to them. 34%, the highest percentage in the results, said risk meant losses, a drawdown. Second, with 26% of the responses, it was said that risk was to not be likely to achieve profitability goals.
 

Similarly, when asked what major gaps they faced in their investment strategy, 39% of the conference attendees said it was managing drawdown effectively while for 34% it was generating sufficient returns.

‘Risk is not one dimensional,’ summarised Hugh Prendergast, Head of Strategic Product and Marketing at Pioneer. It certainly goes beyond its traditional definition in the investment world: volatility. For him,volatility is not risk; it is simply movement. True risk management for investors should factor in volatility, drawdown, and shortfall against targets.

One option Pioneer identifies to help in all these regards are liquid-alternative strategies, given “how effective they have been in mitigating risk since the financial crisis”. This performance record has not passed unnoticed by investors. The survey of the conference participants revealed that a majority of them, 54%, currently allocated 10% of their portfolios to liquid-alternative funds. Asked how they expected that to change over the next two years, the largest single category, 42%, responded that they expected to move to apportioning 20% of their portfolios to liquid-alternative funds.

Pioneer Investments believes that incorporating liquid-alternative solutions into portfolios will be essential in helping investors meet the functional challenges of the future.
 

AllianzGI Completes Acquisition of Rogge Global Partners

  |   For  |  0 Comentarios

¿Y Reino Unido?: Después de usted, Sra. Yellen
CC-BY-SA-2.0, FlickrFoto: Danny Nicholson . ¿Y Reino Unido?: Después de usted, Sra. Yellen

Allianz Global Investors announced yesterday that it has completed its acquisition of Rogge Global Partners (RGP), the London- based global fixed income specialist.

The combination further strengthens AllianzGI’s fixed income capability and provides greater global distribution potential for RGP’s strategies.

Consistent with AllianzGI’s previous integrations, the distinct dynamics and processes of RGP’s 30 year- old investment philosophy will be maintained within AllianzGI’s global investment platform. Consequently, Malie Conway will continue to lead the RGP team and in the role of CIO Global Fixed Income report to Franck Dixmier. At the same time, RGP’s Emerging Market expertise will be combined with that of AllianzGI’s Emerging Markets Debt team, led by Greg Saichin. The portfolio managers in the newly combined EM Debt team will continue to report to Greg Saichin, as part of the RGP setup.

AllianzGI has acquired 100 per cent of the issued share capital in RGP from Old Mutual and RGP management for an undisclosed sum.

Andreas Utermann, CEO and Global CIO of AllianzGI, said: “The successful completion of this transaction marks a significant milestone in the evolution of AllianzGI, giving our clients access to a suite of proven and distinct global fixed income strategies. As well as augmenting our expertise in global fundamental fixed income – an asset class where we continue to see very strong client demand – the acquisition of RGP substantially increases our footprint in the UK, a strategically important market for AllianzGI.

George McKay, Co-Head, Global head of Distribution and Global COO of AllianzGI, said: “We are delighted to welcome our new RGP colleagues to the AllianzGI family. With our joint commitment to active management, similar investment culture and values, we are sure they will find AllianzGI a natural home.”

Franck Dixmier, AllianzGI’s Global Head of Fixed Income and a member of its Global Executive Committee, said: “Adding RGP’s fundamental global fixed income expertise to our investment platform fills an important gap in our product range for clients. It strengthens our fixed income knowledge base and client book beyond our traditional European centres and will, over time, present us with exciting new opportunities to create further additional products.”

Malie Conway, commented: “Increased interaction between colleagues from AllianzGI and Rogge since the announcement of this transaction has enhanced our confidence that this combination marks an exciting new chapter in RGP’s development, with our clients able to rely on a continuity of investment team and an unchanged investment process and philosophy. We look forward to working together closely with our new AllianzGI colleagues in the best interests of our clients.”

NewAlpha Announces a Strategic Partnership with New York Based Naqvi-Van Ness Asset Management

  |   For  |  0 Comentarios

NewAlpha anuncia un acuerdo estratégico con la gestora con sede en Nueva York Aqvi-Van Ness Asset Management
Photo: DanNguyen, Flickr, Creative Commons. NewAlpha Announces a Strategic Partnership with New York Based Naqvi-Van Ness Asset Management

NewAlpha Asset Management, the Paris-based global fund incubation and acceleration specialist, has announced a strategic investment with Naqvi-Van Ness Asset Management. As Europe’s leading incubator, NewAlpha is continuously seeking talented investment managers that are in their early stage of development or are looking for strategic partnerships to accelerate their growth… and now is Naqvi-Van Ness AM.

Naqvi-Van Ness’ investment approach combines a core quantitative driven long-short strategy on US equities with uncorrelated opportunistic directional strategies that seek to detect and exploit potential changes in market behavior.

The investment objective is to generate alpha and deliver absolute returns in all market environments. The strategy has been ranked by Bloomberg in the top 6% amongst their peer group over the past 5 years, and in the top 10% YTD (30/05/2016)*. Naqvi-Van Ness’ flagship strategy has $90 million dollars in AUM.

Commenting on the strategic deal, Ali Naqvi co-Founder of Naqvi-Van Ness said, “I am glad that our R&D efforts to apply our investment expertise in a highly liquid format succeeded in the successful development of our approach. This strategy is an innovative addition to the existing offering of classical hedge fund strategies and we view having on board an experienced investor like NewAlpha as an independent seal of approval regarding the thoroughness of our investment process and operations.”

Albert Van Ness, co-Founder of Naqvi-Van Ness, added “Furthermore, the NewAlpha investment will accelerate the growth and increase the attractiveness of the strategy. Having a strategic investment gives us an institutional level of credibility. Along with our differentiating strategy to Long/Short equity, this should be a positive combination for clients that have us on their radar.”

Antoine Rolland, CEO of NewAlpha, stated: “We are very enthusiastic to enter this strategic partnership with Naqvi-Van Ness. During their career, Ali, Albert and Charles have consistently shown dedication and drive to deliver the highest quality in terms of investment research, market insights and portfolio management. Their investment strategy offers many benefits, including diversification and performance, even more so given recent market volatility.   In addition, Naqvi-Van Ness and NewAlpha share common values and both organizations have an entrepreneurial corporate culture..”

In 2001, Ali Naqvi and Albert Van Ness founded Naqvi–Van Ness Asset Management (NVAM) with founders’ capital to develop a systematic investment approach. This effort resulted in a research-intensive firm with proprietary models that utilize factors and insights underpinned by investor behavior and persistent biases. Prior to founding NVAM, Ali Naqvi gained extensive investment experience during 18 years at Citibank Global Asset Management, during which he was responsible for managing portfolios for large institutional clients. The portfolios under his supervision totaled nearly US $8 billion.

Co-founder of the Firm, Albert Van Ness was also a portfolio manager at Citibank Investment Management from 1994 to 2000. In 1994, he joined Ali Naqvi, managing portfolios for high net worth clients, pension plan sponsors, and sovereign investors totaling over $1.2 billion in AUMs.

In 2010, Charles DuBois joined NVAM as Director of Investment Strategies and Research. He is now responsible for developing models and strategies and researching new investment ideas.  Previously, Mr. DuBois was a Global Partner and Head of U.S. Asset Allocation Strategies for the Global Structured Products Group of Invesco.

European Equities: Politics Versus Progress

  |   For  |  0 Comentarios

Renta variable europea: política frente a progreso
CC-BY-SA-2.0, FlickrPhoto: Woodley Wonder Works. European Equities: Politics Versus Progress

European equity markets have had a torrid 12 months. It was all meant to be so different. Quantitative Easing (QE), launched in March 2015, would accelerate the recovery – I used the expression “QE on steroids” a few times last year – given the strong starting point for growth at that point. Growth would be better across the world, and earnings would start to pick up.

The reality has been rather different. The US dollar has been weakening when it should have been strengthening, given the assumption that the US Federal Reserve (Fed) would be tightening rates, while the euro was meant to have remained at low and highly competitive levels for exporters. Politics was also not expected to feature until 2017, but not even the prospect of Trump leading the Republican charge in the US has diverted attention away from Europe’s political uncertainties. Of more immediate political concern, the referendum in the UK over membership of the EU is likely to be much closer than many had ever thought.

Given these uncertainties, it is little wonder that the equity market has found it difficult to trade at what some felt was a high rating. After five years of little or no earnings growth at an aggregate level, 2016 estimates have steadily been revised down (yet again) from a starting point of around 8% to a more recent level of nearer 1%.

Progress behind the bluster

All that may be a reason to look at the glass as half empty. So here are a few reasons to consider that it is still actually half full: gross domestic product (GDP) growth in Europe this year is expected to be somewhere in the region of 1.5%. Inflation is expected to start to pick up albeit slowly, which is perhaps why German 10 year government bond yields have risen from 0.09% at their recent low on 7 April to 0.15% on 13 May – admittedly the tiny numbers helping to exaggerate the scale of the move. Unemployment is declining, consumer demand is improving and government finances are no longer deteriorating. This may not sound all that exciting, but equally it is not actually the disaster area that anyone listening to the claptrap from (now) ex-London mayor Boris Johnson might like to believe.

In the “real” world of company results, the first quarter has been generally in line with expectations. One or two firms have pointed out that the tailwind of a weaker euro has ended, but this is simply a translational impact in most cases. Many companies have reminded anyone who might have been sound asleep for the last six months that growth globally is quite subdued and pricing pressure remains intense. Those quality companies which we expected to grow in the portfolio, such as ARM, Fresenius Medical Care, Essilor, Infineon Technologies and Valeo, have indeed done so. But, so far in 2016, so-called “fast money” has been playing a rotational game – buy the laggards, sell the winners. As the chart here shows, the weakest sectors from 2015 – energy and materials – have rebounded strongly, at the cost of previously strong areas, such as IT and healthcare:

I can understand much of this – the fears about China were certainly exaggerated – but so is the hope that China is now recovering rapidly and returning to high growth. The probable reality is that we are in a slow growth world, where achieving anywhere between 5% and 10% earnings growth sustainably is a good achievement. That is not a bad environment for equities – but it might be a bit dull for some.

“Brexit” – unlikely but unsettling

At the time of writing, the UK referendum is only a few weeks away. Current betting patterns imply that the UK will stay part of Europe, but the general polls remain very close. It may sound extraordinary to some, from the US President to the Head of the IMF, but there is a large body of UK residents – particularly older voters – that believe the UK would be better off out of Europe. While I do not doubt that the UK will survive given either outcome, if the vote was to leave the EU, it would force us to reassess our reasonably optimistic view for European equities. Among the potential shorter-term risks, I would anticipate a sharp fall in sterling, a decline in GDP (leading to a potential recession), losses on the FTSE and a major increase in uncertainty across Europe. While we still believe that a vote for ‘Brexit’ remains unlikely, politics may overshadow Europe’s otherwise solid fundamentals for a few more weeks.

Tim Stevenson is Director of European Equities as Henderson.

The Case for Small Caps in a World of Deflation and Disruption

  |   For  |  0 Comentarios

¿Por qué las ‘small caps’ representan mejores oportunidades de inversión en este contexto de mercado?
CC-BY-SA-2.0, FlickrPhoto: Susanne Nilsson. The Case for Small Caps in a World of Deflation and Disruption

Over the last 30 years, the case for investing in small caps has been debated extensively. The long-term statistics certainly suggest that smaller companies do indeed outperform larger ones. There is less agreement on the reasons. According to Schroders, the explanations range from the contention that small caps offer a risk premium in return for lower liquidity, that limited research means any new information has a bigger impact on the shares, and/or that small companies in aggregate tend to grow faster than larger ones.

Whatever the case, even though US small caps have underperformed large by over 10% in the last two years, their outperformance over a longer period is dramatic. So what of the future?

In truth, the outlook for all investors is murky. Everything from disruptive technology to persistent low growth is making it easier to pick losers than winners. The challenges span the waterfront, from environmental concerns that put a question mark over the future of the carbon-based economy, to advances in artificial intelligence that could undermine the position of over 230 million knowledge workers around the world.

In these circumstances, and contrary to received wisdom, Schroders thinks that more winners may be found amongst the mass of lesser-known and under-researched smaller companies than amongst their larger brethren. With innovation and technological advances moving at an unprecedented pace, companies that are nimble and less burdened
by layers of management may be better equipped to keep up with these changes. In this environment, having a strong brand, a large installed base and a wide distribution network are not necessarily assets anymore. “Instead we are seeing a new generation of winners that are “capital light” and have a strong online presence. As industries evolve in this direction, barriers to entry are reduced and innovations progress faster, creating increasing opportunities for small companies.” They state.

However, periods of disruptive innovation inevitably create losers as well as winners. One classic period was the dot com bubble. During most of this time, the US small
cap index underperformed the large cap index. “However, a very different story emerges when the small cap universe is broken down into sectors. Smaller pharmaceutical, biotechnology and software companies outperformed the US S&P 500 Index of larger companies, whereas traditional industries, such as banking and retailing, lagged behind. This shows how vital it is to be able to actively pick winners when disruption occurs.”

For Schroders, what often handicaps traditional companies when it comes to developing or adopting a disruptive innovation is the fear of cannibalising their existing revenues. In contrast, smaller and newer companies not tied to an established product have more incentive to direct resources to the next disruptive innovation. Medical technology is a good example of this. Historically, incumbent providers of medical equipment, such as video scopes for internal examinations, focused on reusable technology that is high margin, but also expensive. Clearly, these incumbents had little incentive to produce a lower- cost alternative as such a course would have eaten into demand for their existing products. This allowed Ambu, a small cap technology company with fewer existing sales to defend, to launch a single-use alternative which was both cheaper and came with a lower risk of infection. Not surprisingly, this has allowed Ambu to disrupt the existing market and gain market share.

There are, of course, a number of examples of large technology suppliers operating in markets where the “winner takes all”. Here the so-called FANG companies with dominant technology (Facebook, Amazon, Netflix and Google) often use their substantial cash reserves to buy up smaller competitors. For investors in the shares of these publicly-traded small companies, this is clearly good news, even if it may limit their opportunities for making even larger gains.

“Of course, not all small technology companies are publicly quoted. With return prospects low, venture capital financing is popular and often more readily available than other sources of finance (Figure 3). In this environment, innovative companies may remain private long after the development stage, denying investors the chance to piggy-back on rapid growth.” For example, the electric car manufacturer Tesla floated when it was valued at over $2 billion, while the app-based taxi group Uber remains private and is already worth over $60 billion. “However, we would argue that the publicly listed universe of companies still provides ample opportunity to find disrupters. For example, at the end of February, the technology sector accounted for 3.8% of the FTSE SmallCap Index, more than twice the figure for either the FTSE All-Share or the FTSE 100 indices. In the tech-heavy NASDAQ index in the US, about 65% of the constituents by number are valued at $500 million or less.

Beyond these general characteristics, they identify a number of specific areas where smaller companies enjoy advantages not necessarily shared by their larger rivals:

  • Unfilled niches
  • Pricing power
  • Better balance sheets
  • Investment impact
  • Lower profile

“Given the outlook for low economic growth and increasing technological disruption, we believe investors should pay particular attention to small caps. This environment will make life hard for large companies, whereas smaller companies have the opportunity to gain market share and grow faster than the market. At a time of unprecedented technological, social and regulatory change, small companies may be able to operate “below the radar” and dominate niches which are likely to grow in light of these changes. For investors, each investment will need to be evaluated on a company by company basis. They should not rely on the assumption that the small cap premium will operate universally. Being able to sort the wheat from the chaff will be vital to the success of a small cap portfolio.” They conclude.