CC-BY-SA-2.0, FlickrPhoto: Kath Cates. Columbia Threadneedle Investments Appoints Kath Cates as Non-Executive Director
Columbia Threadneedle Investments announces the appointment of Kath Cates to the Board of Threadneedle Asset Management Holdings Sarl (effective 10 May) and the Board of Threadneedle Investment Services Limited (effective 29 March), as a Non- Executive Director.
Ms Cates is also a Non-Executive Director of RSA Insurance Group Plc, where she Chairs the Board Risk Committee and is a member of the Group Audit Committee and the Remuneration Committee. In addition, she is a Non-Executive Director of Brewin Dolphin, where she chairs the Board Risk Committee and is a member of the Group Audit Committee.
Ms Cates’ most recent executive role was Global Chief Operating Officer for Standard Chartered Bank, a position based in Singapore which she held until 2013. In this role she led the Risk, IT, Operations, Legal and Compliance, Human Resources, Strategy, Corporate Affairs, Brand and Marketing functions across 60 countries. Prior to joining Standard Chartered Bank, Ms Cates spent over 20 years at UBS, most recently in the Zurich-based role of Global Head of Compliance. For the previous 10 years she was based in Hong Kong, as APAC General Counsel and then as Regional Operating Officer.
Ms Cates earned a First Class Honours degree in Jurisprudence from Oxford University and qualified as a Solicitor in England & Wales before specialising in financial services.
Tim Gillbanks, Interim Regional Head, EMEA at Columbia Threadneedle Investments said: “I’m pleased to welcome Kath to Columbia Threadneedle. She brings valuable financial services experience particularly in the areas of risk management, governance and regulation and operational excellence. We look forward to working with Kath and to the benefit of her contribution to our business.”
CC-BY-SA-2.0, FlickrPhoto: GIO IAB. Why Are Markets in Denial About Inflation?
As the US labor market continues to improve, investors are still waiting for signs that inflation will pick up. And with US consumer prices posting only a slight uptick in March, the Federal Reserve continues to assure markets that it will “proceed cautiously” in normalizing its policy rate.
Amit Agrawal, senior portfolio manager of developed markets investment grade credit at PineBridge Investments, discusses what’s going on with the Fed’s hawk-dove game and how investors can position portfolios for rising inflation.
Inflation has been benign for years in the US. Why are markets suddenly talking about it again?
Inflation has become a hot topic over the past two to three months because core inflation – which excludes the volatile food and energy components – has risen over 2% for the first time in four years. What many people haven’t noticed is that core inflation has been brewing for a while; 14 months ago it was at 1.6%. If you strip out goods, inflation has been trending over 3% over the past few months.
Why has the core trend flown under the radar?
Because low oil prices have dragged down the headline inflation rate, presenting a mixed picture.
The interesting thing is that despite these moves, the market is still sanguine about inflation. Investors are not convinced that it’s real, and neither is the Federal Reserve. In fact, the Fed is forecasting lower inflation for 2016 than we’re seeing right now. But if you look at past 50 years, US inflation has averaged around 4%; with core inflation at 2% currently, the risk of rising inflation is certainly there. For now, oil has stabilized, the Fed’s messaging is more dovish, and the dollar is trending sideways. These are all positive tailwinds for inflation in the near term.
Why are so many market participants unconvinced? And when do you think they’ll embrace the rising inflation trend?
The reason has to do with wages. The labor market has been improving for five or six years, while wages have been stuck around 2% over that time. Only over the past six months have we seen wages tick up around 2%-3% year over year. In past recoveries, wages have risen 3%-4%. Historically, when labor market slack disappears, inflation tends to show up in higher wages.
As far as when investors will come around, right now, we’re in what I call a “show-me” market. Inflation will have to run higher to convince people it has really arrived.
Several disinflationary trends have made people complacent about inflation: technological advances, demographics, the end of the commodity “supercycle,” and the China slowdown. These do seem like fair reasons for markets to expect inflation to remain low for a long time. (Although I’d argue that demographics may actually be inflationary as baby boomers enter retirement and require more in terms of health care and other services.) In fact, a recent survey by OppenheimerFunds found that, among the top 10 concerns among institutional investors for the next decade, inflation is nowhere to be found.
Unemployment is at 4.9% right now. As slack reduces further, wages will pick up on a broad-based measure. Indeed, the Fed recently reported an increase in wages in nearly all regions of the country in the “beige book,” its survey of economic conditions.
How does the US dollar fit in?
Fed research has shown some impact of the dollar on core inflation, but not a significant one. It’s more about sentiment; inflation expectations can be self-fulfilling.
The impact of the dollar is stronger on headline inflation through oil prices and lower import prices from China. This is why the Fed has been more dovish in recent commentary; the Fed is undermining the dollar because it doesn’t want the dollar to strengthen. (This “ultra-gradualism” is one of the Fed’s unspoken objectives.) By doing that, the Fed will have more conviction in its inflation and growth outlook – growth because of healthy exports, and inflation because it will help keep oil prices from deteriorating further.
We expect core inflation to remain in the 2%-2.5% range over the next couple of years. I don’t expect to see a major pickup, but if wage inflation continues to rise, we expect core inflation could grow as high as 3% over that period.
The important thing is that the market is pricing in an average of 1% core inflation over the next five years. That’s a low bar, and it means inflation assets are very attractive; mispricing means opportunity.
Can you describe the opportunity set in inflation assets?
The opportunity set runs the gamut: Treasury Inflation-Protected Securities (TIPS), overseas markets, European inflation-linked bonds, commodity bonds, gold, real estate, and real estate investment trusts (REITs).
In the US, 30-year Treasury bond yields are about 2.5%, while 30-year TIPS are trading around 0.8%. TIPS are a much better investment than nominal Treasuries from a risk/reward perspective. The 30-year TIPS breakeven rate, which is the inflation component in the TIPS market, currently is below 1.8%. In the last 17 years, we have seen only four instances where TIPS traded below 1.8%.
The opportunity is even more robust in Europe, where the market is pricing in only 0.5% inflation over the next five years – much lower than in the US. Europe is in the midst of a huge push from the European Central Bank to create inflation through quantitative easing (QE). We think they will be successful in raising inflation much more than in the US. The market is way too pessimistic in Europe.
An indirect way to get exposure to the inflation opportunity is commodity bonds associated with energy and metals and mining companies. Many investors are shying away from these due to the broad slide in commodities prices. What they may not realize is that a lot of bonds from strong companies are trading at yields between 5% and 9%. These are companies we believe will survive the industry downturn. So while many investors have given up on commodities because of high volatility, we think select commodities bonds offer lower volatility with attractive upside.
Gold is a particularly interesting investment because it’s not only a commodity but a currency. With the Fed and the G3 undermining their currencies, many investors are turning to gold because it’s the only currency that governments don’t control. Gold was the best performing asset class in first quarter of this year; we expect prices from here will be range-bound, possibly moving up if we see a stronger rise in inflation or if central banks continue to undermine their currencies.
Real estate is another way to gain exposure to inflation. We think there is still some value left in REITs if you believe the US housing market will continue to recover. A big component of inflation in the US is shelter, which includes buying and renting. Home prices are growing at an annual rate of 3%-3.5%, and we expect this momentum to continue. The US has also seen a shift toward more renting, especially in metro areas, with an annual growth rate of 3%-5%.
Finally, investors can also buy direct exposure to real estate, though it’s important to realize that, unlike the other opportunities I’ve discussed, real estate is an illiquid investment.
How do you recommend investors position their portfolios for rising inflation?
If you expect inflation to rear its ugly head in the next couple years, and you own a high-quality portfolio with nominal Treasury bonds, you may want to consider selling those Treasuries in exchange for TIPS. Reallocating this way would allow you to gain exposure to inflation while maintaining the same credit quality.
We think gold is a good asset to own as part of a larger portfolio, not only for inflation down the road but as a safe haven as global central banks cut rates to negative. Equities and REITs are also good hedges against rising inflation.
Overall, you don’t need to make wholesale changes to your portfolios; we would recommend allocating about 10%-15% of a portfolio to instruments that are linked directly or indirectly to inflation.
This information is for educational purposes only and is not intended to serve as investment advice. This is not an offer to sell or solicitation of an offer to purchase any investment product or security. Any opinions provided should not be relied upon for investment decisions. Any opinions, projections, forecasts and forward-looking statements are speculative in nature; valid only as of the date hereof and are subject to change. PineBridge Investments is not soliciting or recommending any action based on this information.
CC-BY-SA-2.0, FlickrPhoto: Christian Theulot . Christian Theulot, New Chief Retail and Digital Officer at Lyxor AM
Lyxor AM announces the appointment of Christian Theulot as Chief Retail and Digital Officer. The appointment took effect on 15 March 2016.
In this newly created position, Christian Theulot will be responsible for accelerating Lyxor’s digital transformation, supporting its commercial development and fostering excellence in its business processes. He is also tasked with strengthening Lyxor’s presence in distribution, where it is already well established, especially among private banks.
Lionel Paquin, Lyxor AM CEO, said: “The digital transformation presents many opportunities for asset management, whether for enhancing investor experience or for developing digital tools to optimise management processes. Christian Theulot’s appointment will allow us to fully seize them, while enhancing our ties to distribution and delivering Lyxor’s proven expertise and innovation capabilities to this segment.”
Based in Paris, Christian Theulot will report to Guilhem Tosi, Head of Products, Solutions and Legal and a member of Lyxor’s executive board.
Before joining Lyxor, Christian Theulot was Head of Marketing and Development for the Retail Partners & Investment Solutions business line at the Amundi Group for four years. Christian began his career at the Paribas Group, where he spent some ten years in various Marketing/Partnerships managerial roles (Cardif, Cortal-Consors, Compagnie Bancaire). At the beginning of the 2000s, Christian joined AXA’s holding as Senior Vice-President e-business. In 2004 Christian was recruited by the Société Générale group, where he spent seven years as Head of Savings Products for the French network.
Christian Theulot is a graduate of Kedge Business School and holds an MBA in Marketing from HEC.
CC-BY-SA-2.0, FlickrPhoto: Carlos ZGZ. Surviving Chinese Volatility
Despite strong concerns at the start of the year, at Pioneer Investments, they believe that overall economic conditions are stabilizing, backed by a more aggressive policy stance, better fiscal supports, recovery of the real estate sector and credit growth, while consumers and the private sector have remained relatively resilient. Tail risks of a hard-landing in the near term are easing meaningfully.
Policy stance: 6.5% GDP Growth is the Floor
Following China’s annual National People’s Congress meeting (NPC) in March, policymakers sent relatively strong messages regarding their stance this year, which is likely biased towards the easing side.
The GDP growth target for the year was announced as the 6.5-7.0% range. According to Monica Defend, Head of Global Asset Allocation Research with Pioneer, the floor of 6.5% is probably a harder target than others. In other words, if growth risked breaching the 6.5% floor, policy support would turn stronger than planned, while support could ease if growth reached 7.0%.
Better Fiscal Support
“China’s overall fiscal and quasi-fiscal position is complicated, including the budget deficit, out-of-budget funds to local governments, net revenues from land sales, and changes of fiscal deposits in PBOC accounts,” says Defend.
The latest information allows us to have a more complete picture of the underlying fiscal & quasi-fiscal position, and suggests that fiscal policy is becoming more supportive and perhaps more effective.
The overall fiscal stance, including all budgetary and quasi-fiscal measures, became less supportive or even tightened beginning in late 2014 and through most of 2015, largely due to strengthening of regulations on local government out-of-budget financing and weak land sales. Defend believes that the increase of central government spending was not sufficient to offset such weakness. But this seems to have changed since late 2015. And so she estimates that the overall fiscal and quasi-fiscal deficit will rise by around 1.5% of GDP in 2016 vs 2015. This is mainly due to:
The fiscal deficit has increased since late 2015 and the plan is for it to continue to rise.
Land sales are likely to at least stop acting as a drag in 2016, with further positive signs in real estate markets.
The creation of Special Construction Funds (SCFs) in late 2015, which policy banks use to inject capital into specific projects, mainly infrastructure-related. This new quasi-fiscal channel appears, relative to traditional out-of-budget local government borrowing, easier to regulate and manage, and thus more flexible and efficient.
Easing of policy over the past year or so appears to have stabilized the real estate sector, with a visible rebound early this year. Relatively strong sales have been pushing acceleration of existing projects and new starts have finally picked up.
Although property activity is still fairly weak for the country as a whole and price increases have been subdued, momentum in some large cities has been relatively strong. This has triggered a recent tightening of property purchase policy in a few large cities. But this is largely designed to prevent potential price bubbles in individual regions, rather than reflecting a reversal of a generally supportive policy stance.
“The latest data suggest that sales in Tier 1 cities have cooled somewhat, while overall sales have been relatively stable. While we expect only stabilization or a moderate recovery for the whole year, this scenario should be relatively sustainable.”
Conclusions
“Despite strong concerns about China’s economy at the start of the year, there is increasing evidence suggesting that the underlying situation has been stabilizing, with tail risks easing. This is buying more time for China to push structural reforms. We are conscious that the process is still long and not straightforward. A failure in reform implementation would add to medium-term risks. So far, we believe that the reforms are progressing nicely and that the transition of China toward a more balanced economic model is underway. For this reason, we are moderately positive on China, that is one of our favorite countries among emerging market universe,” she concludes.
To read Defend’s complete macroeconomic update, follow this link.
CC-BY-SA-2.0, FlickrPhoto: Glyn Lowe. Columbia Threadneedle Investments to Acquire Emerging Global Advisors
Columbia Threadneedle Investments announced on Wednesday an agreement for Columbia Management Investment Advisers, LLC to acquire Emerging Global Advisors, LLC (EGA), a New York-based registered investment adviser and a leading provider of smart beta portfolios focused on emerging markets. The acquisition will significantly expand the smart beta capabilities of Columbia Threadneedle Investments. Terms of the EGA acquisition were not disclosed. The transaction is expected to close later this year.
With $892 million in assets, EGA has an established presence in the smart beta marketplace. It is the investment adviser to the EGShares suite of nine emerging markets equity exchange-traded funds (ETFs) that track custom-designed indices:
Beyond BRICs (BBRC)
EM Core ex-China (XCEM)
EM Quality Dividend (HILO)
EM Strategic Opportunities (EMSO)
Emerging Markets Consumer (ECON)
Emerging Markets Core (EMCR)
India Consumer (INCO)
India Infrastructure (INXX)
India Small Cap (SCIN)
“The experience and knowledge of the EGA team and strong emerging markets ETF products will complement our existing actively managed product lineup,” said Ted Truscott, chief executive officer of Columbia Threadneedle Investments. “The EGA acquisition will allow us to reach even more investors and accelerates our efforts as we build our smart beta capabilities.”
Since launching its first ETF in 2009, EGA has had a dedicated focus on providing rules-based, smart beta strategies designed to provide investors with diversification and growth opportunities in emerging markets.
“The team is excited about joining Columbia Threadneedle Investments and building on our complementary strengths to deliver smart beta strategies across asset classes to investors,” said Marten Hoekstra, Chief Executive Officer of EGA. “Now our clients gain access to Columbia Threadneedle’s rich investment expertise, while continuing to benefit from EGA’s experience converting investment insights into rules-based, smart beta strategies.”
“Columbia Threadneedle Investment’s expansive footprint across global markets provides an opportunity to accelerate the growth of our smart beta platform,” said Robert Holderith, President and Founder of EGA.
As part of their efforts to enter the smart beta marketplace, in the first quarter of 2016 Columbia Threadneedle Investments filed with the SEC a preliminary registration statement relating to multiple equity smart beta ETFs, including Columbia Sustainable Global Equity Income ETF, Columbia Sustainable International Equity Income ETF and Columbia Sustainable U.S. Equity Income ETF (referred to as the Columbia Beta AdvantageSM ETFs).
CC-BY-SA-2.0, Flickr. Credit Markets: Confidence Returns, but is it Sustainable?
Stephen Thariyan, Global Head of Credit at Henderson, reviews the credit markets in Q1 highlighting the ‘two-thirds—one-third’ nature of the markets. Financials came under particular pressure over the quarter exemplified by Deutsche Bank’s ordeal. While investors are happy to be back in the markets for now, as central banks have acted effectively to bring confidence back, challenges lie ahead in 2016. Thus, Stephen believes investors should be prepared for volatility to resurface.
Can you give a brief summary of corporate bond markets in Q1 2016?
It was a tough start to the year. It seems that in the first two months, particularly in February, the markets were discounting all the possible bumps in the road for 2016: concerns about central bank policy, illiquidity, Brexit, the oil price, China and growth in general. This led to quite a major sell-off across all capital markets, both debt and equity.
The end of February and March then saw a strong recovery, essentially based on the oil price, rallying from a low of US$26 upwards. That resulted in good returns, especially in high yield and emerging markets; total returns being positive across most currencies, across most credit markets, and excess returns again being broadly flat across most credit markets. So, a quarter of two thirds/one third: a very poor start and a strong recovery that continued into Q2.
Can you explain why the financial sector underperformed, particularly Deutsche Bank and subordinated banks/insurers more broadly?
The financial sector came under particular pressure in the first quarter. This was based on a combination of issues. Deutsche Bank in a way personified this with a situation that led to a significant sell-off in its bond prices, CDS and equity price. In a negative interest rate world, the core way the banks make money is challenged (ie, use short-term borrowing to lend for longer periods). This means significantly reduced returns from investment banking, especially in trading, fixed income, commodity and currency.
Banks, such as Deutsche, reported their first major loss in around eight years and there is a huge degree of outstanding litigation surrounding these banks, totalling billions. The last point was, especially with respect to Deutsche, concerns about the AT1 securities, contingent capital notes, which are complex subordinated financial securities, in existence to increase the capital buffer. There was a rumour that Deutsche would not pay its coupon, and even though these securities are designed to protect the public, the potential triggering spooked investors. Deutsche did recover the situation, but for the first time it felt a bit like 2008.
So financials generally took an awkward situation largely on the chin, given that central banks, especially in Europe, are trying to make banks lend money. Banks, however, are deleveraging, carrying lots of liquidity and struggling to find borrowers to borrow that money.
What is the outlook for credit markets and what themes are likely to drive the markets?
We are at an interesting point. We have suffered from a difficult first few months in 2016. The central banks have come in and almost acted in unison, with the European Central Bank subtly talking about a movement in monetary policy, but more importantly, the purchase of corporate bonds in the next few months. They haven’t given any details but the sheer fact that they are prepared to do it has given the markets confidence that there is a bidder for bonds.
It is debatable how effective that would be but the markets have rallied as a result. That combined with the Fed being a little more dovish a week later gave the capital markets, debt and equity, a huge fillip. Equity markets strengthened, bond markets strengthened, new issuance has started and the oil price steadied. A combination of all those events and generally benign data means that the investor seems happy to be back in the market again.
There is a degree of suspicion about how long this will last, but I think as we have said ever since the back end of last year, given all the different events that could occur in 2016, we are in for a volatile time. Certainly central banks have acted effectively so far in giving investors the confidence that they should be back in the markets buying both debt and equity.
CC-BY-SA-2.0, FlickrPhoto: Heribert pohl. Misperceptions of Thailand
On a recent research trip to Thailand, I had the chance to evaluate some commonly held misperceptions about the long-term outlook for the country’s economy.
One common misperception about Thailand, for example, is that its rapidly greying population makes its markets and companies relatively unattractive for investments compared to neighboring countries like the Philippines, Vietnam, Myanmar and Indonesia. We believe that this generalization discounts the dynamism of several Thai companies. The opportunity set for many companies extends beyond the country’s population of about 68 million. Thai companies have made progress, branching out to nearby countries to participate in their growth and to take advantage of more youthful populations. Similarities in culture and business practices have made it easier for companies to expand profitably in the surrounding region.
Another misperception is that Thailand, with its GDP per capita at approximately US$6,000, is stuck in a middle-income trap. The fear is that Thailand might not be able to graduate from an economy based on manufacturing and agriculture to one more specialized in services. The Thai economy does indeed need to restructure its workforce since roughly 42% of the population works in the agriculture sector, contributing less than 11% to GDP.
However, we believe that policy frameworks to enable the country to graduate to a knowledge-based economy are in place. For example, the government’s continued investment in education, which accounted for over 21% of the national budget in 2012, has resulted in a tertiary education enrollment rate amongst the highest in ASEAN.
A common mistake amongst foreign investors in recent years is to divide Thailand regionally along “Bangkok” and “Upcountry.” The inference is that the “Upcountry” is significantly under-developed and heavily dependent on agriculture. But based on our research, we believe that this division is, perhaps, too simplistic. For instance, our analysis of shopping mall operators has uncovered “rural” malls that are, in fact, in large towns thriving due to tourism and cross-border trade.
Economic Restructuring
We have also discovered that locals, especially bureaucrats, still believe Thailand to be quite resilient to various internal and external shocks. They call it “Teflon Thailand,” to suggest nothing can stick to it. But they may be overestimating that level of resiliency. Thailand still has not recovered from the 2014 national coup d’état. The replacement of the democratically elected government and appointment of a junta-led government has led to a period of both uncertainty and policy inaction. A consequence of this has been the loss of foreign direct investment market share to countries such as Vietnam, the Philippines and Indonesia.
We believe a restructuring of the economy is necessitated by Thailand’s aging population, slower global growth and competition from neighbouring countries. The government seems to understand the urgency of the situation and has unveiled a series of policies to improve the country’s basic infrastructure. Over the short to medium term, this should help. Over the longer term, we would like to see an environment that accommodates a more sustainable governance system that inspires confidence from local and foreign investors to commit long-term capital to the country.
Tarik Jaleel is research analyst at Matthews Asia.
CC-BY-SA-2.0, FlickrPhoto: Glenn Waters. Abenomics is Alive and Well
Despite the disappointment that the Bank of Japan (BOJ) did not act this week, one should not listen to those proclaiming the death of Abenomics. Indeed, it is alive and well.
Many people somehow suggest that Abenomics has so far been a failure, but this is only partially true if you were expecting miracles. The truth is:
Even after its recent rise, the current level of the Yen compares favorably with the 78:USD level before Abenomics;
TPP (the Trans Pacific Partnership) was successfully negotiated, which requires substantial economic reforms, especially in the heretofore heavily protected agricultural sector.
The 2% CPI target was ambitious, but CPI ex food and energy is now near 1% compared to flat or negative prior to Abenomics
Japan now believes in shareholder value, share buybacks and improved pretax profit margins, which have soared to record high, especially in the non-Yen sensitive service sectors
Corporate taxes were lowered by a massive amount, so recurring net profit margins are improving even faster than pre-tax margins
When looking at the overall economic picture, not the macro-economic statistics, which likely do not accurately reflect the new economy and often get revised, one sees full employment, stable or rising property values (after decades of wealth-sapping declines), and solid international competitiveness in advanced industries
Political stability reigns whereas previously the prime minister was an annually revolving door; and lastly (although there are many more examples)
Women are increasing their share of the labor force and over 200,000 kindergarten slots have been created in the last two years.
As for the BOJ, the likely reason why it decided to wait this week was to make certain that its next step was perfectly organized logistically, compared to its negative-rate decision in January. Certainly, the logistics for an ECB-style TLTRO (Targeted Longer Term Refinancing Operations)-like program is much more complicated than simply increasing QE purchases, and requires much more planning and transparency. But delay does not mean surrender, and if anyone thinks that Governor Kuroda is not fully dedicated to achieving positive inflation expectations, they are gravely mistaken and will likely be unhappily surprised when the BOJ takes its next large action, likely in June.
TLTROs, which provide negative-rate funding to banks if they can prove that it is going towards increased lending, are necessary, as in January, negative rates on excessive reserves led analysts to cut banks’ earnings estimates, which led to a broader equity sell off. Since price (including asset prices like real estate and equities, in order create the “wealth effect”) inflation is a key part of Abenomics, banks must not be penalized too much, or else lending and equity prices will not rise steadily.
Besides TLTROs, the next BOJ move will also likely increase the amount of bank reserves that are not subject to negative interest rates. We also expect an increase in ETF purchases to a level that will start to have monetary policy implications instead of just being symbolic of the BOJ’s desire to increase risk appetite by the Japanese people.
As for the fiscal “arrow,” “Helicopter money” is a vague and controversial term. If it means a hazard and extraordinary surge in fiscal spending financed by monetary injection, then such is not likely. However, Japan is soon going to increase fiscal spending substantially, especially due to the earthquake, and the BOJ will indirectly finance much of this.
Thus, the monetary and fiscal “arrows” will accelerate soon, while the economy is likely to continue growing at a moderate rate. It would be helpful if the US would pass TPP, but even if it does not, Japan will likely implement most of the reforms anyway, as such are obviously necessary, especially in the demographically challenged agricultural sectors. Other reforms, including in the labor markets, will also help prove that Abenomics is alive and well. It is critically important, however, that Japanese corporations are pro-active in this effort. They need to invest more locally, rather than abroad, and to be more creative, along with entrepreneurs, in creating new ventures, especially in green technologies. Abenomics is not just about the Prime Minister and his team, it is about Japan’s future as a whole.
CC-BY-SA-2.0, FlickrFoto: e_mole
. Jemstep, SigFig and Vanare Added to Pershing's Platform
Invesco recently announced that it will collaborate with Pershing to offer Jemstep Advisor Pro, the firm’s digital advisor-focused digital solution, to Pershing’s clients. Jemstep Advisor Pro will enable RIAs and broker-dealers on the Pershing platform to seamlessly onboard prospects and effectively service investors. It is expected to be available on Pershing’s NetX360 platform in the third quarter of 2016.
“Pershing serves a wide range of investment firms including RIAs and broker-dealers, and the Jemstep Advisor Pro platform offers the capabilities to satisfy the needs across our spectrum of clients,” said Jim Crowley, chief relationship officer at Pershing. “Jemstep Advisor Pro is distinct in that it combines Invesco’s leading world-class investment capabilities with best-in-class digital technology to enhance the financial experience for advisors and end investors.”
Jemstep Advisor Pro is open architecture which allows investors to access a variety of professionally selected investment options across mutual funds and ETFs. Unlike peer tools that focus on market-cap-weighted indexing, Jemstep Advisor Pro also gives home offices new and differentiated insights to help track advisor progress, view client data in aggregate, enhance portfolio management offerings and services, manage risk, and an opportunity to broaden their client reach to address intergenerational needs.
CC-BY-SA-2.0, FlickrPhoto: Neal Fowler. Time To Take A Step Back?
As a disappointing first quarter earnings season rolls on, I am beginning to feel more cautious about the markets in the months ahead. We’re in the midst of a third consecutive quarter of poor profits and cash flows, and what’s most troubling is the weakness that’s spreading beyond energy and exporters to a broader swath of companies in the index. To me, this is a signal to reduce risk in many portfolios.
Why the increasing level of concern? The three previous earnings recessions of the last 50 years that were caused by a combination of tumbling oil prices and a strong dollar tended to last two quarters. But this pronounced downturn in earnings has now stretched into a third quarter. By now, I would have expected sales and profits to have rebounded, with consumers responding to the “energy dividend” that has accompanied the tumble in oil prices. And the pass-through from lower input costs should have driven an increase in overall economic activity, fueled by higher real consumer incomes. That has not yet happened. I find it both discouraging and an ominous sign for risk assets.
Reevaluate your asset mix
With new money, investors may want to contemplate standing aside for now. An appropriate response for existing diversified portfolios could be to reevaluate their quality mix, and to consider favoring a tilt toward shares in companies with sustainable dividend yields and toward high-quality bonds, perhaps US corporate credits.
Although I don’t believe the present backdrop signals the beginning of a US recession, it does mean that we are now experiencing a protracted earnings recession. To resume favoring risk, I’d need to see the following:
A recovery in capital expenditures
An improved revenue line for US-based multinationals
A sustained improvement in emerging markets
Improved pricing power on the back of an increase in global inflation
Additional concerns
Aside from the concerns expressed above, there are a number of other issues that the market needs to confront. In particular, because of the growing weakness in earnings, the current price-earnings ratio for the S&P 500 is too high, at 16.3x.
Seasonal trends are not particularly favorable in the months ahead. The May–October period is historically characterized by sideways market movements, delivering indifferent returns to investors when viewed over many decades. As the popular saying goes, “Sell in May and go away.” This year, in particular, investors can afford to wait for more clarity from the data flow.
Generally, market participants tend to be cautious in the months leading up to major elections. And with this year’s US election likely to be contentious, that caution may be justified. Further risks that may warrant caution are the Brexit referendum on 23 June and a Spanish general election days after, as well as concerns about Greece’s ability to meet its financial obligations over the coming months.
The macroeconomic environment has proven less dynamic than expected in recent months. US government income tax receipts have slowed despite still-robust employment data. New single family home sales, though solid, have not met my expectations. Auto sales are losing momentum after a very strong 2015. And most importantly, the profit share of gross domestic product, one of the most important forward indicators I follow, has started to slide.
While the current US business cycle remains strong by many measures, like job and wage growth and corporate profit margins, the equity markets are laboring to produce the earnings and margins that we’ve come to expect in recent years.
Our job will be to follow the shifts in the markets and the economy, and it’s our hope that our current concerns will be temporary.
But for now, it might make sense to take a step back.
James Swanson is Chief Investment Strategist at MFS Investment Management.
