CC-BY-SA-2.0, FlickrPhoto: AlfonsoBenayas, Flickr, Creative Commons and I will treat emerging markets as emerging (yet again), among them. UBS AM: Market Resolutions for 2016
The latest edition of UBS Asset Management’s Economist Insights, authored by Joshua McCallum and Gianluca Moretti, speaks about market resolutions for 2016. Joshua has been Senior Economist with UBS Asset Management’s Fixed Income area since 2005, and prior to this he was a macroeconomist at the UK Treasury. Gianluca joined the firm in 2010 from the central bank of Italy.
Based on the experiences of 2015, they once again suggest some New Year’s resolutions for the market. Among others:
I must behave like an adult if I want central banks to treat me like an adult;
I must acknowledge that lower potential growth mean searlier rate hikes;
I will start the year with more humble expectations of growth;
I will treat emerging markets as emerging (yet again);
I will think of Greece as a holiday destination, rather than as destroyer of the Euro;
I will recognize that the global economy is diverging.
You can download the full document in the following link.
CC-BY-SA-2.0, FlickrPhoto: Vicent_AF. Asia's Long-Term Growth Prospects Still Look Good
I think it is fair to say that sentiment toward China, and by extension, Asia, within the U.S. investment community, is quite polarized. Whereas some investors I have met recently see opportunity in the weakness of the second half of the year, doubts over the reality of recent growth rates and anxiety over a slower headline rate of growth has caused many others to be quite fearful of China as a deflationary force in the world economy. I think this caution is mirrored by investors around the world, albeit that the degree of discomfort with China and Asia is perhaps less acute in Europe. Whilst those in Asia appear to be much more optimistic about the region’s own long-term growth prospects (and less suspicious about the quality of China’s historic growth), most investors are still in a “wait-and-see” mode.
It is not hard to see why. Indeed, let us just list the headwinds that Asia faces in the near term: the prospect of further tightening by U.S. monetary policy—this time in the form of rising rates; slowing nominal growth; low margins and disappointing earnings growth; a strong dollar and weak local currencies; increasing credit spreads; and poor momentum in the equity markets. And all of this is happening at a time when valuations, whilst not expensive, cannot be regarded as cheap in absolute terms. It is understandable that people may be waiting for some event or some improvement in valuations before they turn more positive. And it is rational, and almost always your best first guess, to assume that current trends will persist when you are trying to forecast the near-term future.
Now, let me just suggest that we have some data that should allow us to be more confident over Asia’s ability to weather the world’s deflationary forces. First, current accounts in Asia are generally positive. That means Asia’s countries are saving more domestically than they invest domestically. And so, they are relatively less reliant on foreign capital. There are some exceptions—India and Indonesia. But even here, reliance on U.S.-dollar capital markets has reduced dramatically over recent years. Second, inflation rates are low across much of the region (again Indonesia and India are exceptions, even though they have been successful at moderate price rises). These low inflation rates mean that Asia’s policymakers have a lot of room to offset deflationary impulses by either monetary policy or even government spending or tax cuts. A return to a more inflationary environment would relieve some pressure on margins, earnings and valuations.
The question is: are we seeing any signs of such a response? I think we are. First, there are the natural responses of markets—prices adjust. Most obviously, in the face of deflationary U.S. pressures, Asia’s currencies have taken the strain. Acute declines have been limited to commodity-related currencies, such as the Malaysian ringgit and Indonesian rupiah. Elsewhere across the region, moderate currency declines (nowhere near as severe as what Latin America has suffered) have acted as a sort of pressure valve to protect domestic employment and maintain domestic demand. Although this is a drag on U.S. dollar returns and (to a lesser extent) Euro-based investors, the fact that currencies have been able to act as stabilizers of demand shows how far we have progressed in Asia since the late 1990s.
Then, we have the active response of policymakers. In India, we have seen the central bank successfully squeeze down core inflation rates without too severe an impact on industrial profits (perhaps helped by lower commodity prices). Now, India’s central bank seems ready to ease. In China, we are seeing authorities raise the growth rate of narrow money, continue to press with financial system reforms, and support the property market. Japan is continuing its policy of reflation and structural reform initiatives. So, in the face of a deflationary U.S. policy, the three Asia giants seem to be leaning in the other direction. The degree of offset is perhaps still small. But talking to clients and investors around the region leaves me to believe that there is no great liquidity crisis. Indeed, if the acutely bearish reaction to the Chinese currency re-pegging in the middle of 2015 taught us anything it is that, in the wake of a fall in equity prices, value was quick to emerge and buyers were quick to enter the markets.
Global Middle Class Spending
In this context, Asia’s long-term growth prospects still look good. High savings rates, large manufacturing bases, reformist governments pursuing financial, legal, and corporate reforms mean that Asia should continue to invest and potentially grow at higher rates than the rest of the world. Over time, this investment will continue to raise real wages across the region. This trend should not only support currencies and growth but also may lead to big changes in Asia’s households. We have noted before that on current trends, Asia stands to account for two-thirds of global middle class spending by 2050. We believe this is just the beginning of a sustained growth in the kinds of businesses that will help generate profits from facilitating this revolutionary change in lifestyles: consumer brands, restaurants, leisure, media, insurance, property, consumer banking and wealth management. In industry, automation equipment and IT software will help companies offset higher wages. Increased government and private spending on health care, the environment, and general welfare will open up new opportunities for companies to create competitive advantages and raise profits and shareholder returns.
In light of these trends, we should remember the monetary environment that dominates our discourse and the media headlines: By how much the Fed will raise rates? This environment, whilst important in the short-term, is to an extent just a veil that distracts our attention from the real economic changes that are evolving almost undetected before our eyes. With that said, nevertheless, we have to admit that 2016 is likely to be a landmark year in U.S. monetary policy—the first rise in rates in a decade.
Within Asia, our focus remains on the companies that will support the real economic growth trends, across all countries. However, it is true that some countries currently appear to be more fertile grounds for corporate research than others. On valuation grounds, India looks moderately expensive, with disappointing earnings growth and a lot of expectations over the still-unfulfilled reforms by the prime minister. In China, valuations are much more reasonable—parts of the Hong Kong market look cheap. And after a difficult time in 2015, the Association of Southeast Asian Nations once again looks to offer new opportunities, even as stock prices in some parts of the North Asian markets, particularly in Korea, seem to be quite advanced. Japan, at least, offers some value and some hope of better corporate returns, though one should be wary of hyping Abe’s third arrow too much.
Overall, I look forward to 2016. Although the headwinds are currently considerable, Asia’s businesses seem to be weathering the storm, and so long as we keep our eye on the long term, the investment environment should offer up some good opportunities.
Robert J. Horrocks is CIO and portfolio manager at Matthews Asia.
CC-BY-SA-2.0, FlickrFoto: nathanmac87
. Beechwood Acquires Old Mutual Bermuda
Beechwood Bermudaannounced the completion of its acquisition of Old Mutual (Bermuda), a Bermuda based provider of insurance and investment products with over $1 billion in assets, which closed for new business in 2009. Beechwood, one of the largest providers of international investment plans, now has over $2 billion in total assets and is featured on the platforms of over 100 banks and brokerage firms around the world.
The transaction, which closed on December 31, 2015, provides for the continuation of service support by Old Mutual for the OMB products over the next three years, supplemented by additional support from Beechwood’s growing wealth management business. As part of the arrangement, Old Mutual will reinsure certain policy guarantees until they mature in 2017 and 2018. Given the continuity of resources, no disruption to client service is anticipated.
“This transaction offers a unique opportunity to strengthen our position as a global leader and demonstrates our dedication to providing innovative financial solutions for international investors,” said Mark Feuer, Chief Executive Officer of Beechwood. “Our scale and resources will allow us to continue to meet and further develop client demand for our products for years to come.”
Over the next several weeks, Beechwood will be contacting OMB’s distribution partners to discuss the transition and introduce Beechwood’s Accumulator Plus and Escalator Plus investment plans, which offer attractive rates and unique investment features such as principal protection guarantees. David Lessing, Executive Vice President of Products and Services at Beechwood, noted, “The growing client demand for the Beechwood products reinforces our decision to make a significant commitment to this business in support of our distribution partners and their financial advisors.”
Financial terms of the transaction were not disclosed. Certain regulatory approvals for the transfer of future policy administration arrangements are expected by the end of Q1 2016.
CC-BY-SA-2.0, FlickrPhoto: Chuck Coker
. House Prices Continue a Slow Recovery, IMF Says
Globally, house prices continue a slow recovery, according to The Global House Price Index, released by IMF in December. The Index, an equally weighted average of real house prices in nearly 60 countries, inched up slowly during the past two years but has not yet returned to pre-crisis levels.
If prices went up in The United States, Colombia and Spain, in Brazil, Chile, Mexico, and Peru they decreased. The areas with the biggest growth were Qatar, Ireland and Hong Kong while the biggest decreases took place in Ucraine, Russia and Latvia.
As noted in previous quarterly reports, the overall index conceals divergent patterns: over the past year, house prices rose in two-thirds of the countries included in the index and fell in the other one-third.
Credit growth has been strong in many countries. As noted in July’s quarterly report, house prices and credit growth have gone hand-in-hand over the past five years. However, credit growth is not the only predictor for the extent of house price growth; several other factors appear to be at play. While in Brazil credit and prices went down, and in Colombia and The United States both grew, in Spain prices grew while credit decreased, and in Mexico priced did not while credit did.
For OECD countries, house prices have grown faster than incomes and rents in almost half of the countries.House price-to income and house price-to-rent ratios are highly correlated, as documented in the previous quarterly report.
Belgian companies Petercam Institutional Asset Management and Degroof Fund Management Company have merged on 4 January to form one entity called Degroof Petercam Asset Management (Degroof Petercam AM).
The merger comes in the aftermath of these between Belgian groups Bank Degroof and Petercam that has taken place in October 2015.
Degroof Petercam AM has €25bn of assets under management and tallies 140 employees.
Its management board is composed of president Hugo Lasat, Tomás Murillo, Thomas Palmblad, Guy Lerminiaux, Philippe Denef, Peter De Coensel and Vincent Planche.
Photo: Sarath Kuchi
. Houston and Washington DC: The Best Cities in the US to Get Rich
Not in every city you can build a fortune. Even if the biggest cities in the US are the most attractive for those willing to do it, you should analyze a series of criteria in order to choose the right one. Houston, Washington DC, Cleveland, Detroit, and New York are the best 5 cities in the country to build a fortune, according to Bankrate. Dallas-Fort Worth, Baltimore, Miami, Minneapolis-St. Paul and Chicago, complete the Top 10.
In order to rank the 18 largest metro areas in the country, Bankrate analyzed after-tax savable income, the job market, human capital (indicating available educational opportunities for career advancement), access to financial services, participation in retirement savings plans, and the local housing market in each city.
CC-BY-SA-2.0, FlickrPhoto: Scott Beale. Henderson: “Companies That Are Reliant Solely on A Cyclical Upturn to Grow Their Revenues Present an Elevated Level of Risk”
Ian Warmerdam and Ronan Kelleher, Managers of the Henderson Global Growth Strategy, believe that concentrating on secular growth in 2016, particularly within innovative themes, while maintaining a strict valuation discipline, is a prudent approach to generating attractive long-term returns.
What lessons have you learned from 2015?
2015 has again felt like a year of mediocre global economic growth, broadly speaking, and we believe that companies that are reliant solely on a cyclical upturn to grow their revenues present an elevated level of risk. This year has reinforced our belief that concentrating on truly secular growth, while maintaining a strict valuation discipline, is a prudent approach to generating attractive long-term returns.
Are you more or less positive than you were this time last year, and why?
We claim no ability to predict the short-term direction of the markets so our strategy remains unchanged. We continue to operate with our five-year investment horizon at a stock level and have confidence that our philosophy and process will continue to deliver strong absolute and relative returns over this longer-term timeframe.
What are the key themes likely to shape your asset class going forward and how are you likely to position your portfolios as a result?
Our strategy remains to avoid making major macroeconomic calls, and to instead focus on using our bottom-up approach to find companies that are benefitting from underappreciated secular growth and high barriers to entry, at attractive valuations. As we look into 2016, we continue to see compelling investment opportunities within our five existing themes: Healthcare Innovation, Internet Transformation, Emerging Markets Growth, Paperless Payment and Energy Efficiency.
Within Healthcare Innovation, for example, we are attracted by the demographic changes at play as an ageing global population struggles to contain ever rising healthcare costs. Increases in life expectancy mean that the global 60+ age group is expected to double by 2050 to two billion people. CVS Health, the US pharmacy chain, provides an integrated healthcare service for its customers and looks set to benefit from these demographic shifts.
Rightmove is a leading online UK property listings company that sits within our Internet Transformation theme and should continue to benefit from the structural shift in advertising spend from offline to online. Within Energy Efficiency investments include companies that increase vehicle efficiency such as Continental, a Germany-based automotive supplier, Valeo, a multi-national automotive supplier based in France, along with Delphi, a US auto component manufacturer.
Photo: AndyCastro, Flickr, Creative Commons. Monaco and China Pressure the US to Apply FATCA
On December 15 and 16, Monaco and China signed the multilateral OECD MAP agreement on automatic exchange of information, therefore, raising the number of jurisdictions that will automatically exchange information to 77.
Both countries will exchange information in 2018 about data of 2017.
According to the law firm Broseta, “the signing of the Multilateral MAP by a country such as China will probably increase the pressure on the US to bilaterally apply FATCA and, therefore, to exchange automatic information with countries with which the US has FATCA agreements”.
CC-BY-SA-2.0, FlickrPhoto: BCE Offcial. Markets’ Addiction to Central Bank Support Leaves Investors Stunned
Markets have become increasingly volatile this year and seem to be much more driven by investor sentiment rather than economic fundamentals. In the past years, markets have developed an addiction to central bank support and their reaction to changes in monetary policy stances has become unpredictable and often dramatic.
This year we saw a couple of good examples. On August 24, or “Black Monday”, Chinese equity markets dropped nearly 9% in one day followed by the news that China’s central bank was not quickly planning to bail out markets again after already pledging hundreds of billions of dollars for this purpose earlier. Naturally this sent ripples throughout global markets, including Europe and the US. On Black Monday, the Dow Jones dropped 1,000 points at opening, the largest drop ever.
The latest example is from December 3, the day that ECB President Mario Draghi announced additional stimulus measures in order to boost the Eurozone economy and inflation. However, markets had created the image of “Super Mario”, the central banker who has proven to be able to overachieve the market’s already high expectations. In September and October, Draghi had hinted at “QE2”, an extension of the ECB’s bond buying program, partly as an answer to China’s woes potentially threatening the Eurozone economy. Markets had therefore been anticipating a substantial additional stimulus package at the central bank’s December meeting, Draghi’s status in mind. Super Mario however managed to underachieve this time and delivered less than the market consensus had expected. The market reaction therefore was one of declining stock markets, a spike in the euro exchange rate and, most notably, a sharp rise in government bond yields. The yield on the German 10-year Bund rose by as much as 20 basis points in a matter of hours, a rise of almost 50%!
It may be obvious that such a highly volatile environment presents major challenges for investors. We have seen quite some examples now of central banks having difficulties communicating their intentions to the markets. And it is clearly not unlikely that more examples will follow. From a portfolio risk management perspective, these kind of occasions emphasize the importance of a well-informed, unbiased and active asset allocation. Given the substantial volatility spikes as mentioned above, more and more investors choose to delegate their allocation decisions to specialised multi-asset teams.
As we saw ECB easing expectations being priced into the government bond market, we decided to underweight German Bunds in our multi-asset portfolios already in the first part of November. In the weeks that followed, we also took some risk off the table by neutralising our equity and fixed income spread positions. Divergence between ECB and Fed policy is – although well telegraphed to the markets – coming to the surface more clearly now. The announcements from both central banks hitting the markets in December, combined with lower-than-usual market liquidity, was for us reason enough to opt for a relatively light asset allocation stance as we move towards year-end.
Valentijn van Nieuwenhuijzen is Head of Multi-Asset at NN Investment Partners.
CC-BY-SA-2.0, FlickrPhoto: jo.sau
. All-Consuming Asia: A Retail Revolution Story
Did you know that Chinese online shoppers spent some $5.7 billion on a single day in November last year; that more and more well-heeled Indian consumers prefer to buy their tea from a pharmacy; or that urban Thais visit a hypermarket at least once a week and spend around half their monthly bills on groceries?
For most of us this is the sort of random information usually reserved for a pub quiz, but for fund managers these are valuable insights into consumer behaviour that reflect some of the changes that have occurred in Asia over recent years.
China’s meteoric rise has changed the world from the price we pay for consumer goods, to the global demand for natural resources, and even the flow of international capital. Much has been written about how policymakers there are promoting domestic consumption as a future driver of growth, but in fact the nation’s consumers have been flexing their muscles for some time.
E-commerce crazy China also happens to be the world’s biggest smartphone market with some 98.8 million shipped in the first three months of this year alone. The country is the world’s biggest car market and, with India, vies for the title of the world’s biggest market for gold.
However, it’s easy to get overly fixated on China. India is another country where reform is on the agenda and where a growing urban middle class is changing the way people spend their money. This is important because people who live in cities tend to earn and spend more.
While only three-in-10 Indians are classified as ‘urban’ in census statistics, urban consumers account for more than 70 per cent of the market for so-called fast moving consumer goods (FMCGs). These consumers are developing new patterns of retail behaviour.
For example, pharmacies have emerged as the fastest growing ‘old economy’ sales channel for FMCGs. Chemists attract a more upmarket customer who seems to prefer buying packaged teas, fruit juices and healthy foods from a man in a white lab coat.
Elsewhere, the 10-nation Association of Southeast Asian Nations, better known as Asean, has developed into something resembling a single market of some 625 million consumers. This has helped the region to emerge quietly from China’s giant shadow.
There has been a shift away from raw materials extraction towards economic activities further up the value chain. Where China talks of rebalancing, Asean has mainly found a happy medium of exporting and recycling wealth at home in the form of growing consumer demand.
Populations are young
Incomes have grown from a low base and there is a huge pent-up demand for housing, consumer durables, transport and banking services. Populations, as is common throughout the emerging markets, are young.
Domestic consumption accounts for around 70 per cent of economic growth in the Philippines, and has done so for some time, according to Jaime de Ayala, chief executive and chairman of Ayala Corp, the country’s oldest conglomerate. Remittances from overseas Filipinos have been a strong driver of middle income consumer markets such as telecoms, real estate and other services.
Meanwhile, the investment case for Indonesia, Asean’s biggest member, is closely tied to its population of some 254 million people. Over half of all Indonesians live in cities and this number increases by some 300,000 every year.
What makes all this even more attractive to us is that consumer businesses aren’t subject to stifling government controls, as tends to be the case with more ‘strategic’ sectors such as defence, utilities or aviation. This means competition exists and innovation can follow.
Clearly not everything is perfect. For one, Chinese growth is decelerating. This may be a good thing in the long run because double-digit growth rates were, in hindsight, unsustainable. But in the short term the whole world suffers.
Asia is struggling to regain momentum in part because of its reliance on Chinese demand. While growth rates are still higher than in other parts of the world, corporate earnings are falling, which may affect jobs and wages.
In particular, Asian economies that are more reliant on foreign investment are being penalized by indiscriminate capital outflows from the region. However, there are lots of people in Asia who are getting richer. Many have a disposal income for the first time in their lives and want to spend this money. The most successful companies have already figured out a way to tap into these fundamental changes.
While Asia must overcome many immediate challenges, an investor would do well to remember the longer term trends that are changing the lives of billions of people across the region every day. That’s because these changes will end up making someone some decent money.