Photo: KMR Photography. Equity Income: Why Big Is Not Necessarily Best When it Comes to Dividend Yield
The Henderson Horizon Euroland Fund utilises a proprietary analytical screening tool to identify stocks that are being incorrectly priced and offer value in the market. This is a model that fund manager Nick Sheridan has been developing since he first started running money in the late 1980s. The model is based around four key metrics: ‘Dividends; Earnings; Net Asset Value; and Value of Growth’, with the portfolio constructed from those stocks that offer the most overall value. This article looks at the ‘Earnings’ pillar in more detail.
“Higher corporate earnings has been the missing piece of the puzzle for European equities, but this seems to have finally started to come through, with most companies at least in line with estimates during the latest earnings season. Loose monetary policy and quantitative easing (QE) have helped, as has the currency advantage provided by a weaker euro” points out Sheridan.
Furthermore, while the negative effects of falling energy costs are well known, for many companies (and particularly those involved in travel, transportation and retail, plus energy-intensive industries) lower energy costs provide a significant boost to net earnings, freeing up money to spend on expansion and employment. Indirectly, with consumers benefiting from what is effectively a tax cut, companies can also profit from a consequent boost to consumer spending, explain the portfolio manager.
But Sheridan warns that any assessment of earnings should be viewed with an element of caution, and as just one metric to assess the investment potential of a stock. While a company may offer a sustained level of earnings, this may already be reflected in its price, with the risk being that an investor may be forced to pay a premium for the stock.
Companies in the portfolio are likely to be durable, well-established names with experience of trading through varied economic and business conditions. This should help to make the fund’s earnings profile more robust. RELX, Bayer and ASM International are a few examples from the current portfolio.
Brazil has been facing the perfect storm since the re-election of Dilma Rousseff in October 2014 and asset prices in Latin America’s largest country have collapsed. Credit default swaps on Brazil 5-year sovereign debt in US dollar and hard-currency corporate bond spreads widened to as much as 545 bps and 938 bps respectively, as at the end of September 2015, which is higher than during the 2008/09 global financial crisis and the highest since Brazil’s 2002 crisis. The adequate level of foreign exchange reserves – one of the few positives for the country – did not prevent S&P from downgrading Brazil’s sovereign rating to junk last month, which was inevitable given the weak macroeconomic and political environment.
Against this backdrop, many bond investors are looking at Brazilian assets in the same way they opportunistically eyed Russia at the beginning of this year. Russia, which was downgraded to junk by both S&P and Moody’s respectively in January and February of this year, has generated one of the best returns year to date in the emerging market debt universe. Russian hard-currency corporate bond spreads have tightened by more than 30% (or 273bps) year to date despite the ongoing economic sanctions from Western countries, low oil prices and weak Ruble and Russia 5YR CDS has rallied 32% (180bps) year-to-date to 370 bps as at 9th October 2015.
When looking at corporate bonds as per the above graph, Brazil’s recent widening in spreads with a peak after the September sovereign downgrade to junk shows some similarities to what Russia experienced earlier this year in January/February when a number of Russian corporate issuers became fallen angels to speculative grade. While they never recovered their investment grade ratings, Russian corporate bonds then outperformed the rest of emerging markets. Will Brazilian corporate bonds follow the same path in the short term? This is unlikely as Brazil is not Russia.
First, the macro picture is very different. Although both economies have plunged into recession this year, it was the result of external factors for Russia while Brazil is arguably facing more domestic headwinds than external threats. The Russian economy has been hard hit by the international sanctions and low oil prices. For Brazil, political issues (an out-of-favour President and the massive Petrobras corruption scandal) are arguably at least as detrimental to investor sentiment as low commodity prices are to its negative terms of trade.
Second, Russian issuers have shown incredibly resilient credit fundamentals in the current economic environment. The weak Ruble has been helping exporters (oil & gas, metals & mining, chemicals) to improve their competitiveness as their costs are in local currency and their revenues are in US dollars. Facing a virtually closed primary market over the past 12 months, Russian issuers have also shown strong discipline in keeping leverage down and maintaining adequate cash levels in order to meet debt maturities. Finally, the scarcity of bonds has been helpful from a market technicals point of view. In Brazil, this is quite the opposite. Many issuers have significant external debt on their balance sheet and the weakening Real has materially increased debt levels in US dollars and interest expenses for domestic players with no hedging in place. Leverage is on the rise as both debt levels increase and earnings reduce on the back of the recession in Brazil and weak commodity prices. In addition, the “Lava Jato” (Car Wash) corruption scandal is likely to remain an overhang on almost all corporate debt issuers in the country.
In this context, we expect default rates to increase in Brazil. Unlike Russia, which has been broadly a macro call in the first 9 months of this year, credit differentiation in Brazil will be critical and bond returns uneven. There is no doubt that some opportunities for decent returns have emerged among unduly punished bonds, but Brazilian corporate bonds as a whole are unlikely to generate such strong returns in the short term as those seen in Russian credit so far in 2015.
Photo: Michael Kooiman. Hedge Funds Bleeding Slowly versus Market Hemorrhage
The Lyxor Hedge Fund Index was down -1.4% in September. 3 out of 11 Lyxor Indices ended the month in positive territory. The Lyxor CTA Long Term Index (+4.0%), the Lyxor CTA ShortTerm Index (+2.3%), and the Lyxor L/S Equity Market Neutral Index (+0.4%) were the best performers.
In contrast with the sell-off by last fall, the current recovery process is proving more laborious. Continued soft macro releases, several micro turbulences (VW, GLEN, the US Healthcare) and signs that the Fed might be more concerned about global growth, drove markets to re-test the end-of-August lows. L/S Equity Long bias funds and Event Driven funds were yet again the main victims. Conversely, CTAs, Global Macro and L/S Equity funds with lower or variable bias, successfully navigated these challenging times.
“Quantitative easing combined with tighter regulation is growingly questioned. The former is boosting re-leveraging, the latter is trapping liquidity within banks. Both are increasing market risks. With few obvious growth gears in sight, we expect moderate and riskier asset returns.” says Jean-Baptiste Berthon, senior cross asset strategist at Lyxor AM.
Pressure remained on the L/S Equity Long bias funds. They continued to underperform, with broad markets bleeding back to the end-of-August lows. Their drawback accelerated by month-end on the healthcare sector’s debacle. They held their largest allocation in the non-cyclical consumers sectors (which includes healthcare stocks). The H. Clinton’s tweet, tackling drug prices hikes at one specialty-drug company, resulted in a sudden re-assessment of the whole sector’s revenues and M&A prospects. Indeed, these drug pricing anomalies reflect a broader transformation of the healthcare space since 2014. Since then, waves of Biotech and Generic companies’ acquisitions granted Pharma with much greater pricing power. The current correction might be bringing back M&A premiums and fundamental forecasts to a more sustainable profitability regime.
In contrast, Variable bias funds continued to successfully navigate a challenging space, in Europe especially. They finished the month only slightly down. They adequately not re-weighted yet their net exposure. Instead they actively traded around positions.
Market Neutral funds managed to weather the mid-month Fed sector repositioning. They also benefitted from wider quantitative factors differentiation, with Momentum outperforming Value. The short-term backdrop for the strategy remains riskier, less likely to profit from a potential rebound, and threatened by higher rotation risk, in the healthcare sector in particular.
Event Driven funds were again and by far, the main losers. Bargain hunting in the most beaten down securities allowed Event Driven to start the month on the right foot. However the valuation recovery didn’t last, caught up by the post-FOMC uncertainty. The losses accelerated in the last two weeks. In tandem with L/S Equity funds, they got hit by the healthcare meltdown. Strongly allocated through Merger arbitrage and special situation, the sector severely hit the whole Event Driven space. Valleant, Baxter, Allegan, Perrigo were amongst the largest return detractors.
L/S Credit Arbitrage funds’ returns were in line with the global index. The perception of risk remained elevated, factored in widening HY spreads, in the US especially. Lyxor L/S Credit funds remained reasonably conservative. There was volatility in cross credit Fixed-income arbitrage ahead of the Fed FOMC: this sub-strategy slightly underperformed.
CTAs, stars of the month. After being initially hit on their short energy exposures, CTAs then hoarded gains from their long bond exposures. With limited or negative exposures to equities, they dodged most of the market turmoil. They recorded small losses in FX and agricultural.
The sell-off since the end of August combined fundamental and technical drivers. CTAs’ involvement in the debacle was recently debated. Lyxor observes that Long term models cut their equity allocation to a conservative net exposure of 25% before the sell-off. During the sell-off, they further cut their equity exposure to around 5-10%: not a key factor in the selling pressure. During the sell-off, most Short term models further cut their about-zero net exposure down to -25%. The ST models move was more aggressive. But they manage a tiny portion of total CTAs’ AuM (less than 15% of the around $300bn CTAs’ total assets). The firm therefore see little evidence that CTAs were a substantial culprit for the equity sell-off.
By focusing on FX and rates, Global Macro dodged most of the September equity volatility. With limited exposure to commodities and shrinking allocation to equities (from 15 to less than 10% in net exposure), Global Macro dodged most of the September volatility. The bulk of their directional exposure was in the FX space. Their long in USD vs. EUR, GBP and CAD, produced marginally positive returns. Their market timing on rates added gains. They rapidly rotated their bond exposures back to the US, as it became probable that the Fed’s normalization process would be postponed.
To say it has been a difficult quarter for investors would be an understatement, with markets and investor confidence experiencing the most significant weakness for many years. We have all read and heard about the challenges facing China, and the implications for the global economy, but the issues are broader than just how China and the developed world copes with the former’s inevitable slowdown. As I write, the MSCI World index (total return) is down 8.3% in Q3 in US dollar terms, although given the sharp falls in some sectors, it sometimes feels worse than that.
Depending on one’s starting point, we are now some seven or eight years on from the start of the Global Financial Crisis (GFC). For what it’s worth, my reference point is the HSBC profit warning in February 2007 when it cut its profit forecasts due to the escalating bad loan experience in the then recently acquired US subprime lending division. Even if the crisis didn’t really start with a vengeance until 2008, history would suggest we are closer to the start of the next downturn than we are to the end of the last one.
The problem is that even with ultra-loose monetary policy with zero per cent interest rates and abundant liquidity from (effectively) global quantitative easing (QE), developed world economic growth is modest at best. On our forecasts, global growth is going to be only 3.5% in 2016, and will be much weaker than that in much of the developed world. In the US, the strongest developed market, growth forecasts continue to come under pressure, acting as a restriction on the authorities’ ability to start normalising interest rates. In Europe, growth could pick up but only to 1.5% next year, despite massive monetary stimulus, a much weaker euro, and a big fall in energy prices. Even in Japan, where QE is now running at over 14% of GDP per annum, growth and inflation are very hard to come by, with growth set to be no better than 1.5% next year.
This is why China matters so much; it has been such a significant driver of marginal growth. With credit-fuelled investment spending inevitably slowing down, or even potentially coming to a halt, the effects this has on the global economy and financial system are significant. For commodity prices, we have already seen the collapse in the oil price and in industrial metals more broadly as consumption has been curtailed. With new areas of supply for oil, and unwillingness by OPEC to cut production, the oil price has fallen to levels previously difficult to imagine. Although this is effectively a much-needed tax cut for Western consumers, so far they appear to be saving rather than spending their gains.
For the oil producers, the effects are potentially catastrophic, putting their budgets under enormous pressure and placing a spotlight on expensive (and now unaffordable) social welfare programmes. This in turn has placed downside pressure on many of the emerging market currencies, and many economies are being forced to implement pro-cyclical interest rate policies to protect their currencies from collapse. All of this is negative for global growth, and places the financial system under some pressure. How this will unfold is difficult to predict, but what we do know is that global economic growth forecasts will continue to be downgraded.
Why developed market growth is so weak, despite the numerous monetary stimuli, is difficult to explain. Maybe it is the invisible force of deleveraging as we grapple with the debt overhang built up during the ‘noughties’. Maybe it is unfavourable demographics or a lack of productivity improvements. Whatever the reason, a weaker China is bad news, because at the margin, its growth has been so important. One has to worry that, if global growth comes under real pressure, there is not much left that the authorities can do to stimulate the economy; interest rates are already at zero, QE has had a limited impact, and budget deficits restrict the ability of governments to spend their way out of trouble. Our central case is that China will slow to perhaps 5% GDP growth per year. This would mean we wouldn’t need to wait to find out what China does next on the policy front, as further major stimulus would probably not be required. Whatever the outcome, it seems clear that rates are going to stay lower for longer, and the end point for interest rates once they do start to rise will be much lower than in past cycles.
Before one gets too depressed, there is some good news resulting from this. After years of losing market share to passive providers, active managers are fighting back. This year in Europe and the UK, the average active manager is some 3-5% ahead of the index, and our own funds have mostly done better than that. Reflecting our cautious stance and investment style, we have been very underweight the large energy and resource stocks, and have observed as bystanders as the share prices of many once-mighty companies have collapsed under the weight of downgrade after downgrade. For those that are also badly financed, it could get worse from here, and one should expect some bankruptcies to follow. This has already been reflected in credit spreads, where high yield spreads have risen to nearly 600bps over gilts from a low of 300bps in 2014. In our opinion, robust stock selection, risk management and portfolio construction are going to be critical as the backdrop continues to deteriorate.
Thankfully, these are all areas where we believe we excel. Although we are now arguably in the most challenging macro and market backdrop since the onset of the GFC, we believe strongly that we are well placed to continue to deliver for our clients. We have been pleased with our performance versus our peers, and areas of weakness are few and far between. It is however a time for focus and vigilance, and we will be keeping that in mind at all times when managing portfolios.
Mark Burgess is CIO EMEA and Global Head of Equities at Columbia Threadneedle Investments.
CC-BY-SA-2.0, FlickrAdam Mac Nulty, Client Portfolio Manager for Multi-Asset Solutions at Pioneer Investments. Pioneer Investments: “We Must Open up The Range of Opportunities and Ideas in order to Generate Alpha”
Volatility has returned to the markets and investors are realizing that, in this environment of uncertainty, there is a possibility of losing money in assets traditionally regarded as safe, such as fixed income. In fact, some debt and equity markets seem to be overvalued and doubts about their behavior are becoming more pressing. “Investors want more stable returns but do not want to experience losses or take risk, and in this regard, absolute return solutions are a good choice. These strategies really do have a place in portfolios,” says Adam Mac Nulty, Client Portfolio Manager for Multi-Asset Solutions at Pioneer Investments, during an interview with Funds Society.
The expert, who recently participated in the Pioneer Forum in Miami, reveals the virtues of a range of the management company’s multi-asset solutions, encompassing multi-asset products with direct investment, even in income mode, funds of funds, tailored solutions, and absolute return multi-asset strategies. The latter, which they have been managing since 2004, have aroused great appetite amongst investors, especially during the last 18 months, due to market conditions.
But not just any absolute return strategy will do. Mac Nulty explains that diversification is the key: being aware of what is in the portfolio; giving beta an increasingly less important role; and placing greater emphasis on alpha generation. “We should not depend on beta because perceptions often do not correspond to reality,” he says.
Alpha generation can be arrived at, for example, by investing in long-short, or relative value strategies: “In traditional strategies alpha is usually only generated on the long side, but it’s different with portfolios that are less restrictive. It’s important to increase the range of investment opportunities and ideas; adopt relative value positions; invest in multiple uncorrelated strategies thus ensuring robust diversification,” he says. All with the intention of reducing the volatility of fixed income and equity markets.
And he admits that the fact of having an absolute return perspective is easier with a multi-asset portfolio than with a single asset: “The fact of not being limited to an asset offers more opportunities.”
In their strategies, they invest in liquid assets, including fixed income, equities, real estate, convertible bonds, derivative strategies, commodities…
Since they started managing absolute return portfolios in 2004, the markets have changed greatly. “Many extreme events have happened, such as the 2008 crisis and periods of volatility, from which we have learned and which have helped us to improve the management of our portfolios,” explains Mac Nulty.
For example, in recent years they have introduced more diversification in portfolios (previously they had around 45 strategies, and now there’s around one hundred); more relative value strategies; they are constantly seeking to combine multiple, low correlated strategies into the portfolio; and they have introduced several layers of risk management to help protect the portfolio from the permanent impairment of capital including hedges against possible extreme events in the form of put options, or positions in Gold as a hedge to their macro base case. “We learned a lot from past experiences. It’s also very important to stress test the portfolios regularly to discover how they would behave under different scenarios. Because the next crisis will be different, and we want to be prepared,” he says.
Proof of this is the behavior of the portfolio during last August. After the rally in the first quarter of the year, the managers decided to adopt a more cautious stance. “We believed that the market was too complacent and that valuations were not attractive.” Therefore, they reduced risk, by cutting their equity and FX exposures, and reducing duration from 4 years to 2 years. Their positioning paid off during the summer−especially in the slumps in August− as the team benefited from the low risk of their portfolio.
“We’re not market timers but we’re very good at managing risk. In summer we had very little market exposure, and moderate levels of duration when the sell-off occurred; we were well positioned and the portfolio lost only a small bit of ground,” he explains. After the falls, they assumed a bit more risk in portfolios, although they are still at low levels, and believe that, as yet, there are still no good market entry points. “We believe that volatility is making its way back, which will increase the correlation between asset classes,” advises the expert. “But we are always on the lookout for interesting opportunities and would look to add risk exposure should we experience any further sell offs”.
Among the company’s multi-asset absolute return strategies, the most noteworthy are two funds which are both managed flexibly and domiciled in Luxembourg: the first, “Multi-Strategy”, is a multi-strategy, absolute return fund launched in 2008, flexible and of long-biased duration, it targets a return above liquidity of between 3.5% and 4.5%; and the second, “Multi-Strategy Growth”, is a somewhat more aggressive version which aims to beat the cash at between 5% and 6%. “We intend to provide stable returns by focusing on risk, without relying on the beta, and with relative value strategies playing a key role,” he explains.
In general, Pioneer’s multi-asset strategies (both funds of funds and direct investment or absolute return focused multi-assets) are based on four pillars of management. The first is the macro, in which managers obtain a main scenario which leads them to favor some assets over others and some regions over others (for example, it can lead them to be positive with Europe or the US dollar but avoid investing in emerging markets, except for in some of them, such as India). The second pillar is macro hedging: a group of hedging specialists, critical of the risk taken in macro strategy, is dedicated to analyzing those risks, their probability, and their potential impact on the portfolios. For example, now they consider that there are risks of a hard landing in China, a bubble in their markets, the possibility that the rate hikes in the US occur too quickly, or too slowly, that there is deflation in Europe … and they analyze the impact on the portfolios. “If they believe that the odds are high, they use hedges,” explains the expert, and such hedgingcan be easily implemented, with gold, for example, or more complex, with derivatives and swaps.
The third pillar is based on relative value satellite strategies, favoring an asset, country, sector, or currency over others … For example, in emerging markets they favor countries that have made reforms, such as India, over those which are debt ridden, and are committed to long positions in this Asian country as opposed to short positions in currencies of countries like Hungary or Brazil. The idea is that these strategies are not correlated with each other or with the macro vision. And the fourth pillar is that of selection, which tries not to replicate the macro vision, and which is a key aspect in funds of funds strategies, but not as much for those of absolute return. In fact, these pillars have different weights depending on whether the multi-asset portfolios are funds of funds, direct investments, or absolute return.
Currently, the management company has 2 billion Euros in multi-asset absolute return strategies, but feels very comfortable, however, and believes they can grow further. “We could manage 20 billion,” says the expert.
Photo: Frédéric Janbon, new Head of BNP Paribas IP. Frédéric Janbon Appointed Head of the Asset Management Business of BNP Paribas
BNP Paribas announced the appointment of Frédéric Janbon as Head of BNP Paribas Investment Partners (IP), the Group’s asset management specialist. He succeeds Philippe Marchessaux, who will support and advise him during a transition period before taking on, at his request, another project within the BNP Paribas Group.
After successfully steering the integration of various asset management teams from ABN Amro AM, Fortis IM and BNP Paribas Investment Partners to build a global-scale asset management business, Philippe Marchessaux worked further to simplify its structure, consolidate its client base and prepare the business for tomorrow’s challenges.
Frédéric Janbon is to take up his new responsibilities on 20 October 2015. His main task will be to further accelerate the development of BNP Paribas Investment Partners as a benchmark player in institutional asset management and client service. Having started his career in 1988, Frédéric has over 25 years’ experience in financial markets. With the BNP Paribas Group he served in various management positions in the interest rate, derivatives and options markets, before being appointed global head of Fixed Income in 2005, an activity which he successfully steered until the end of 2014. Frédéric Janbon will therefore bring to BNP Paribas Investment Partners his long experience in managing relationships with international institutional investors and in the development of client solutions.
BNP Paribas CEO Jean-Laurent Bonnafé said: “BNP Paribas Investment Partners is a key business for the BNP Paribas Group, both in terms of serving our institutional clientele and providing savings & investment solutions to individual retail customers. This business is very much a part of our growth strategy, which focuses on developing businesses where we are able to achieve high performance in order to offer our clients the best products and services.”
Jacques d’Estais, BNP Paribas Group Deputy Chief Operating Officer and Head of International Financial Services, said: “I would like to express my sincere thanks to Philippe for his contribution to the growth of BNP Paribas Investment Partners over these past six years, particularly the international institutional business line. I have every confidence in Frédéric’s ability to reinforce our range of investment solutions for institutional clients, distributors and individual customers in what is a highly strategic business for the BNP Paribas Group.”
Satya Patel and Teresa Kong, portfolio managers of the Credit Opportunities Fund. Matthews Asia Launches Credit Opportunities Fund, Adding to its Offshore Line-Up
Matthews Asia has launched the Credit Opportunities Fund, the newest fund to its offshore line-up, which invests in all countries and markets in Asia, including developed, emerging, and frontier countries and markets in the Asian region.
The Matthews Asia Credit Opportunities Fund intends to distribute its dividends quarterly for the Distribution share classes. Teresa Kong, portfolio manager at Matthews Asia leads the team with Satya Patel. Most bonds in the portfolio will be sub-investment grade, or so-called ‘high yield’ bonds.
The aim of the Matthews Asia Credit Opportunities Fund is to provide investors with a compelling fixed income investment solution that offers yield enhancement and diversification. Asia high yield credit has historically generated attractive returns compared to assets of similar risk: about 10% annualized returns with 10% annualized volatility. By identifying compelling opportunities in the growing Asia credit universe, the asset manager hopes to generate an attractive risk-adjusted return profile over the long run.
The firm points out that Asia has a large and liquid corporate bond market and, as a relatively under-researched asset class, it provides opportunities to potentially benefit not only from attractive levels of yield, but also capital appreciation. The fund intends to leverage Matthews Asia’s 24 years of experience in Asia equity and fixed income security selection to effectively manage this strategy.
Asia’s contribution to global growth continues to grow and the region generally has high levels of foreign currency reserves, high personal savings rates, and low levels of inflation, particularly when compared to Latin America, Russia, and Central and Eastern Europe. Currency regimes across the region have become more flexible over the past 15 years, which generally facilitates more flexible monetary policy by countries in the region. Currencies in the region can be volatile, which is one reason why the Matthews Asia Credit Opportunities Fund focuses primarily on U.S. dollar-denominated investments.
Photo: Prefeitura de Olinda
. Brazil: The End of the Carnival?
For months positive headlines about the Brazilian economy have been scarce. Real gross domestic product (GDP) is contracting, inflation has soared, and the Real has now lost over 50% of its value since 2014. The country is also facing one of the most pervasive political scandals in recent memory. At present, Brazil is a far cry from being the paragon of Latin American growth.
The economic malaise facing the country is the culmination of long-term structural issues accentuated by short-term cyclical and political factors. A series of policy mistakes has resulted in an imbalanced economy, formerly disguised by the positive effects of booming commodity prices. Brazil’s aggressive taxation regime has discouraged business investment and quelled productivity, while a sprawling social security system has redirected funds away from infrastructure.
The end of the commodity super-cycle has exposed Brazil’s deteriorating fiscal position and dependence on cheap borrowing. It has also undermined confidence in a political system still digesting the fallout from the Petrobras scandal. In a recent poll, President Rousseff’s approval rating had fallen to just 8%.
A tough nut to crack
From a monetary perspective, the central bank is unable to loosen policy for fear of stoking inflation that is already running at over 9%. Fiscal measures are also unlikely as the government embarks on a period of reform to repair past excesses. The current political dislocation, atop an already fragile coalition government, is proving an impediment to substantive economic policy action. In short: a solution remains elusive.
From a market perspective, some commentators argue that the rapidly depreciating exchange rate will provide economic stimulus via exports. We don’t think this sufficient to significantly increase growth. Brazil’s export markets are relatively price inelastic and are largely dependent on a revival in commodity demand. We feel that only a recovery in China can really help the Brazilian economy right now. China is Brazil’s largest trading partner and its thirst for raw materials has been a key driver of Brazilian growth in the past.
Feeling hot, hot, hot
Such stresses are already evident in bond markets. The yield on Brazil’s 10-year local currency debt is over 16% and corporate bond spreads have widened. This pressurises financing requirements for the government, companies and households alike. Households are particularly vulnerable given the recent rise in private sector debt. Equity markets are also struggling as falling company revenues and rising interest rates erode net profit margins.
The speed of the deterioration may catch market participants off guard; Brazilian government yields have already increased by a third over the past two months (see chart) and the potential spillovers may not be fully reflected in markets. One area we are monitoring is the Spanish banking sector, which has a significant exposure to Latin America.
Brazil has fallen a long way since its ‘momento magico’. It must now embark on the long path to fiscal and political reform if it wishes to restore investor confidence and the belief of ordinary Brazilians in the political system. We remain cautious on Latin America and emerging markets in general, particularly of the potential for a systematic event. We await an improvement in cyclical headwinds and political stability in the short-term, as well as a commitment to structural reform over a longer horizon.
Conference "Embrace New Sources of Return" hosted by Pioneer Investments in Miami. Pioneer Investments’ Miami Forum “Embrace New Sources of Return” Gathers Attendance of 50 Investors from Across Latin America and the U.S.
Last week, Pioneer Investments had the pleasure to host an event in Miami under the theme “Embrace New Sources of Return”. Over 50 attendees from Latin America and the U.S. Offshore wealth management industry had the opportunity to listen to Pioneer Investment’s top portfolio managers talking about several topics of interest.
Jimmy Ly, SVP, U.S. Offshore Senior Sales Manager welcomed the delegates and conducted the agenda for the day. During the morning, Piergaetano Iaccarino, Head of Thematic and Disciplined Equity shared Pioneer Investments’ Macroeconomic view for the following months. He was followed by Andrew Feltus, Director of High Yield Bank Loans, who shared his ideas about ‘How to Navigate the Fixed Income Markets, Now and Into the Future.’
Thomas Swaney, Head of Alternative Fixed Income U.S., talked about the role of alternative solutions within credit investing. The morning session ended with a presentation about opportunities in Emerging Markets by Giles Bedford, Client Portfolio Manager of Pioneer Funds – Emerging Markets Corporate High Yield Bond.
After a networking lunch, the program continued with a session about opportunities in U.S. Equities, conducted by Alec Murray, Client Portfolio Manager of Pioneer Funds – U.S. Fundamental Growth. Then came the turn for Income Solutions in today’s economic environment; a topic discussed through a panel in which Piergaetano Iaccarino was joined by Adam MacNulty, Client Portfolio Manager of Pioneer Funds – Global Multi-Asset Target Income. He also shared his thoughts about portfolio construction using non-traditional solutions, such as the Absolute Return Multi-Strategy portfolios.
To wrap up the program, Florian Schneider, Head of Product Research and Development, shared his thoughts about Industry Trends in product and asset management.
Pioneer Investments’Jose Castellano, MD, Head of U.S. Offshore, Latin America, and Iberia, along with Florencia Bunge, SVP, Director of Pioneer Investments’ office in Argentina, joined Jimmy Ly as additional hosts for the event.
You may follow the photos of the event through this link.
CC-BY-SA-2.0, FlickrPhoto: Aaron Goodman. The Evolution of China’s Capital Markets
There is little doubt China is going to play a major role in determining the trajectory of global markets. So with the world’s second-largest economy going through a period of profound change, says Investec, it is crucial for investors to gain an understanding of the challenges and opportunities inherent in this transformation.
For the past five years or more China has been rebalancing to make consumption a bigger part of the domestic economy than investment, and services a more important driver of growth than manufacturing. The People’s Republic is also seeking to become better integrated into the global financial system by allowing greater foreign participation in its domestic capital markets and encouraging its companies to invest abroad.
“The recent turmoil in China’s onshore markets was further evidence that this rebalancing process was not going as smoothly as planned, while the global reaction highlighted the fact that many investors have not understood it or the challenges it represents”, points out the firm.
But Investec believe such gyrations should be expected as structural adjustments play out. “As the rebalancing process continues, we anticipate a wealth of opportunities may be uncovered for investors who are prepared to take a disciplined, bottom-up approach with a long-term time horizon”.
According to the Investec´s experts, while many investors may not yet be ready to invest in China’s onshore markets today, there is growing recognition of the importance of developing a more nuanced understanding of the changes taking place in China and the country’s role in the evolution of the global financial system. “We believe that the sharp global reactions to China’s stock market volatility and devaluation of the renminbi over the summer of 2015 make clear that we are embarking on a new era in global markets, one that has China’s increasing integration into the global financial system at its core”.
“This process is only just beginning and the road is likely to be bumpy. Beijing’s policy response to steering the country through its major economic and financial transitions, is not going to be familiar. China is taking an alternative path to financial regulation than that traced by the West by choosing to experiment to find an appropriate position. Beijing will likely make small, regular adjustments to various policy levers to find out what works”, state Investec.
Since the firm established our Hong Kong office in 1997, Investec Asset Management has invested in both onshore and offshore Chinese securities. “Over the past two decades we have learned to navigate the country’s complex and evolving regulatory processes, and understand its unusual market dynamics. We hope to share this insight with our clients and use our knowledge and expertise to help them understand the impact of events in Beijing on their portfolios, wherever they are invested”, conclude.
