EM’s Diverging Universe: Opportunities and Risks

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Aprovechar las divergencias en los mercados emergentes
Photo: Mark Fischer. EM’s Diverging Universe: Opportunities and Risks

2015 is definitely not the year to be making general statements about emerging markets (EM). The EM asset class is made up of a diverse mix of credits with varying risk and reward prospects, and the fortunes of the various economies within EM are currently increasingly diverging. There is a particular contrast between commodity exporting and commodity importing countries. Additionally in emerging Asia, there are different dynamics between commodity importers and manufacturers. The shifting dynamics make active management and fundamental research particularly important. For the selective strategy, EM credit currently offers a compelling investment case with certain countries attractive on valuation and fundamental grounds, others presenting tactical opportunities, while some markets are best avoided.

Expanding divergence

A high level look across the EM universe demonstrates the dynamics currently at work:

  • Asia is changing. Asian countries are increasingly becoming consumption-driven, shifting from their manufacturing-dominated economic status of the past; innovations in e-commerce are driving growth while demographics silently act as a further catalyst. The trends, while well-rehearsed, are ever important and are set to continue for a number of years. Meanwhile lower oil and commodity prices will work to the benefit of importing countries, such as India and China. The strong reform agenda pursued by India strengthens the country’s prospects while China is slowly becoming increasingly consumer-driven.
  • Latin American economies are on a different path; their pace of growth has now generally slowed and will likely continue at sub-par levels. Hurt by weakening commodity prices and the strength of the US dollar, their depreciating currencies present challenges. Additionally, the desire to raise interest rates to control inflation is a dilemma for many given the need to simultaneously stimulate growth.
  • Elsewhere, growth is weakening in Central and Eastern Europe, despite some signs of resilience in domestic demand. With Russia in recession and likely to remain there at least for the next two years, countries with currencies directly linked to the euro will continue to suffer but will have some insulation with the support of the European Central Bank’s quantitative easing programme.

Technical and fundamental support

While certain macro and geopolitical risks remain, there is currently strong support for a constructive stance on EM.

Technical factors are positive

With government bond yields close to all-time lows and in some cases in negative territory, there is strengthening demand for corporate bonds (credit) and higher yielding assets around the globe. Chart 1 shows there are now close to €1.2tn of negative yielding assets globally and the levels of assets within various other sectors, including EM sub sectors. This implies a lengthy, more protracted multi-year environment of searching for yield and diversification, with EM a likely beneficiary.

 

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For investors seeking additional compensation, chart 2 shows the balance of risk and reward of moving down the credit spectrum, which markets can offer higher yields and how liquid those markets are. Each bubble represents the total volume of outstanding issues within the particular sector.

Notably, the US dollar-denominated EM corporate bond market has grown significantly in recent years and the depth that this provides makes an allocation to this asset class within a portfolio potentially attractive. While the demand continues, there will, of course, be intermittent periods of volatility in this extended credit cycle as more investors are crowded into the same markets. We believe it will therefore be increasingly important to have a sharp ‘credit picking’ focus with the current environment of more credit rating downgrades than upgrades in EM set to continue.

 

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Supply and demand = supportive

The expected rise in demand for higher yielding assets corresponds with a time of reduced supplies in EM, with big issuing countries such as Russia and Brazil, finding it difficult to issue new debt. While investors shy away from Brazil on macroeconomic concerns, Russia faces a list of financial headaches. These include currency weakness and a looming recession as the country absorbs the double blow of Western sanctions over Ukraine and the sharp decline in the oil price since June 2014.

For euro investors there is, however, likely to be more euro-denominated issuance in EM credit, which should meet demand. On the flip-side, this would detract supply for dollar investors. A further supporting factor is the momentum gathering in the pace of inflows into EM external debt markets. This again is chasing a limited pool of securities relative to the scale of the demand and should therefore buoy prices.

Valuations favour EM

In many areas EM valuations are attractive relative to markets outside the sector. For example, on a 5-year historical basis, EM high yield credit is more attractively valued than US or European high yield.

Putting divergence to work

The current themes in our portfolio reflect the differentiation in EM and that we see this as a fundamentals-driven market. While headwinds remain at a macroeconomic level, fundamentals are improving for certain sectors and names. Careful selection between countries, sectors and stocks should therefore make a marked difference to overall returns.

  • Chinese overweight: The biggest overweight in the portfolio is China. This weighting is a result of credit specific opportunities, particularly within state-owned enterprises, infrastructure and quasi-sovereigns such as the ICBC, where we hold the subordinated additional tier 1 (AT1) perpetual bonds issued in October 2014.
  • Brazil/Mexico – macro challenges but credit specific opportunities: In Brazil there are a number of companies that are attractive from a valuation perspective. We have overweight positions in oil and gas and infrastructure (Petrobras and Odebrecht), and the ‘protein sector’ (meat and poultry). The latter is one of the biggest export markets for Brazil. In Mexico, the chemicals sector is attractive, although selectivity is required given the impact of overcrowding and valuations becoming rather rich.
  • Russia – look beyond the headlines: Russia is still interesting from a technical point of view and also on valuation grounds. However, we are highly selective in our approach. Favoured names include Gazprom, Lukoil and VimpelCom; the latter is a strong cash generative business, which is also buying back its bonds.
  • Markets currently to avoid: At the opposite end, there are areas that we do not favour on fundamental grounds (Argentina and Venezuela), while valuations elsewhere make investments unattractive at current levels. In Latin America these include Chile and Peru; in Asia, Thailand, Malaysia and Korea and finally in Europe, the Central and Eastern European countries.

Steve Drew is portofolio manager for Emerging Market Corporate Bond Fund. These are fund manager views at the time of writing and may differ from those of other Henderson fund managers. The information should not be construed as investment advice. Before entering into an investment agreement please consult a professional investment adviser.

Don McLean’s Original Manuscript for “American Pie” to be sold, Tuesday

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El manuscrito original de la canción de Don McLean “American Pie” a subasta este martes
Foto cedidaFoto: Tim Stevenson, manager of the Henderson Horizon Pan European Equity. Debunking the ‘growth versus value’ myth

Tuesday at 10.00 am, Christie’s New York will auction the original manuscript and notes to Don McLean’s “American Pie” -sold by the singer-songwriter-, arguably the most iconic and recognizable American song of the Twentieth Century released in 1971.

This masterpiece of American arts and letters is estimated at $1 to $1.5 million. The investor will get the 16 pages of original working manuscript and typed drafts for the song, containing 237 lines of manuscript and 26 lines of typed text.

Since debuting on the airwaves in 1971, Don McLean’s “American Pie” has stood as one of the most important icons of twentieth-century American music. The singer-songwriter’s masterpiece became the anthem of McLean’s own “generation lost in space,” and continues to resonate in the present day. The author has remained decidedly enigmatic about the meaning and messages hidden in his masterpiece; like any great work of art, he says, the song remains open to interpretation, informed by the histories and experiences of all those who encounter it.

McLean’s song describes the turbulent upheavals of the latter half of the twentieth century and it is  an emblem that stands alongside the work of post-war figures such as Andy Warhol, J.D. Salinger, and Bob Dylan in its importance to the American cultural canon. The song was composed in Pennsylvania and Cold Spring, New York, recorded in May 1971 and released in October.

“I thought it would be interesting as I reach age 70 to release this work product on the song American Pie so that anyone who might be interested will learn that this song was not a parlor game. It was an indescribable photograph of America that I tried to capture in words and music,” he says. “I would say to young songwriters who are starting out to immerse yourself in beautiful music and beautiful lyrics and think about every word you say in a song,” added Don McLean.

Rock memorabilia collecting is popular among wealthy baby boomers, which are looking for alternative ways to invest, publishes bloomberg. The most sought-after manuscripts are from the Beatles and Bob Dylan, said Leila Dunbar, a former Sotheby’s executive who is a memorabilia appraiser and consultant in New York. Dylan’s “Like a Rolling Stone” sold for more than $2 million in 2012, and the Beatles’ “A Day in the Life”sold for $1.2 million in 2010. Both were sold at Sotheby’s.

The buyer is likely to end up being a private collector because museums cannot usually afford such an expensive memorabilia, and most items in the Rock and Roll Hall of Fame are donated, said Warwick Stone, a curator for the Hard Rock Hotel Las Vegas’s memorabilia collection. Chinese buyers have shown an interest in American pop culture memorabilia, particularly items from Michael Jackson and Marilyn Monroe, he said.

Are the Green Shoots of Recovery Finally Starting to Appear in the Eurozone Region?

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¿Brotes verdes en la eurozona?
Photo: Moyan Brenn. Are the Green Shoots of Recovery Finally Starting to Appear in the Eurozone Region?

Cyprus is lovely this time of year. With the green shoots of spring starting to emerge from the winter months it’s a time of new beginnings. Perhaps fitting then that Mario Draghi, President of the European Central Bank (ECB), should choose the island to unveil his upgraded growth forecasts for the eurozone region. Following years of near economic stagnation, GDP growth is estimated to rise by 1.5% for this year and 1.9% for 2016, up from 1.0% and 1.5% respectively. Draghi’s key hope is that the re-appearance of growth will deflect the deflationary scare that pre-occupies markets and investors alike.

There are solid grounds for thinking those growth forecasts might be on the conservative side. The sharp decline in the oil price, the euro’s devaluation against the US dollar – over 20% at the time of writing since its peak in May 2014 – and Draghi’s attempt to reflate the eurozone’s balance sheet mean that the region has undergone seismic shifts since the beginning of the year. Shares have already priced in some of the good news. In February alone the MSCI Europe index rose by a heady 6.9% in local currency terms, although that reduces to a little over 3% in sterling terms.

The rise in eurozone cyclicals since the start of the year shows the market is already aware of the most obvious sectors to benefit from the double tailwinds of a weaker euro and oil price. Airlines, automobiles, food producers and retailers are the most obvious candidates, as well as financials and engineers. But where’s the real evidence that the green shoots of economic recovery are appearing? While the full extent of a devalued currency is yet to be fully known, export data look encouraging. According to Eurostat, the European Commission’s statistics bureau, exports for the eurozone region are up by 0.8% quarter-on-quarter. Year-on-year statistics show an impressive 4.1% for the fourth quarter ending 2014.

Yet, good news has not yet properly fed through to the analyst community. While the scribblers have been keen to downgrade the obvious company ‘victims’ – those oil majors directly hurt by Brent crude’s decline –  the positives have yet to be fully reflected in earnings upgrades. This is largely due to the unquantifiable nature of by how much exactly a declining oil price and euro affect profitability. Yet, we do have some idea. According to estimates, a 10% drop in the euro (against other major currencies) could boost corporate earnings in the eurozone area by as much as 7%. That’s a very high correlation by any measure. Watch this space then, come April, when first quarter results, (especially for those companies where the cost base is in euros but sales are outside of the region) start to be unveiled.

What of the imminent headwinds for the region? Talk of a permanent deflationary spiral remains top of the list, with many investors still to be convinced that the eurozone will not follow Japan’s ‘lost decade’ period. Surplus capacity, particularly in Spain, and high levels of eurozone unemployment are still cause for concern, although Germany’s unemployment rate remains at a record low of 6.5%[2]. But signs of an improving consumer’s lot are already in evidence.  This is particularly evident in the growth in European car sales – up 8% for February alone. Furthermore, real wages are increasing.  IG Metall, Germany’s Industrial Union of Metalworkers, recently awarded their workers a pay rise of 3.4% – quite substantial given inflation in Germany is zero.

Of course, no one can permanently silence the bears on Europe – we’ve been used to their talk of anaemic growth and deflationary spirals for long enough. But if earnings revisions come through strongly in the spring and subsequent months, it should be sufficient to silence them for some time to come.

Kevin Lilley is portfolio manager of Old Mutual European Equity Fund, Old Mutual Global Investors

EM Growth to Bottom Out in Second Half, NN Investment Partners Says

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El crecimiento de los mercados emergentes tocará fondo en la segunda mitad del año, dice ING IM
Photo: Institution for Money, Technology and Financial inclusion. EM Growth to Bottom Out in Second Half, NN Investment Partners Says

After five years of growth adjustment, the risks within the emerging markets start to look more balanced, according to Maarten-Jan Bakkum, Senior Emerging Market Strategist at  NN Investment Partners (former ING IM)

Global headwinds and obstacles to growth remain, but are not getting worse. Without an accident in China, emerging market growth should bottom in Q3 or Q4. China demand slowdown is structural and continues to put pressure on the emerging markets in terms of trade, but a correction in the housing market is slowing and monetary easing has started. US monetary policy normalisation continues to put pressure on EM capital flows, but ECB QE has refuelled the global search for yield. In this context, EM central banks see room to cut interest rates.

Maarten-Jan Bakkum, Senior Emerging Market Strategist at NN IP, said: “Rapid leverage growth has created macro imbalances and system vulnerabilities, pushing policy makers into action in some countries, including: Indonesia, South Africa and Brazil. Policymakers in Indonesia in particular, stood out. Reducing macro imbalances within the country with the central bank remaining relatively prudent and president Joko Widodo’s government removing fuel subsidies and thereby creating fiscal room for infrastructure investments.”

Also, South Africa has shown better growth momentum, strong earnings growth, improving terms of trade, and the government has shown more fiscal discipline.

Bakkum continues: “Other areas that are currently showing promise, include Mexico. Mexico is one of the few markets with a positive growth momentum. Its large exposure to the US and low sensitivity to China are key positive factors making this an overweight for us.”

ING IM believes that strong earnings momentum and solid capital inflows are the main reasons to like the Philippines at the moment. Reforms and more policy discipline continue to have a positive impact on growth prospects of India, where the lower oil price helps too. Also, better economic governance and lower political risk have helped Egypt’s growth to recover to pre-2011 levels.

Easier financial conditions can compensate temporarily for the lack of structural change but EM currencies remain vulnerable. More depreciation is likely to be needed to enforce the reforms that reduce macro imbalances and create engines of future growth.

Aberdeen AM: “It is Becoming Important to Reconsider the Fact of Not Having any Exposure to Japanese Equities”

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Aberdeen AM: “Empieza a ser importante replantearse el no tener nada de exposición a Japón”
Over 30 professional investors attended Aberdeen Asset Management’s presentation on Asian Equities in Miami. Aberdeen AM: "It is Becoming Important to Reconsider the Fact of Not Having any Exposure to Japanese Equities"

Over 30 professional investors attended Aberdeen Asset Management’s presentation on Asian Equities in Miami last month. Adrian Lim, CFA and senior investment manager for the management company, shared his views on the effect of US rates and the evolution of the US dollar over Asian equity assets, as well as the impact of falling oil prices and the effectiveness of reforms. During the event, the management company submitted its equity strategies for the Asia Pacific region and Japan. Following the presentation, attendees enjoyed a cocktail on the terrace of one of the most emblematic buildings in Downtown Miami, the heart of its financial center.

China vs Hong Kong

Aberdeen AM is known as a stock picking management company. Therefore, Lim maintains that “quality is the first thing we look for when selecting an asset.” One example that epitomizes this philosophy is that Aberdeen’s Asia Pacific strategy portfolio has a debt to equity ratio that is half of that recorded by its benchmark. As well as focusing on asset quality, Aberdeen looks for companies with attractive valuations to create concentrated portfolios (the Asia Pacific strategy portfolio currently has about 55 assets), in which stability is the main priority. “Of the Top 10 holdings on our portfolio, six have been in the portfolio for over 10 years,” Lim points out.

In this strategy, which does not include Japan, Aberdeen now has an overall weight in China and Hong Kong similar to its benchmark. Separately, however, exposure to Hong Kong is higher than the index, while exposure to continental China is lower. Lim again stressed the importance of quality when selecting stocks: “Chinese companies are generally of lower quality, Chinese rule of law is less strict, and there has been cheap access to capital in China for many years, and therefore companies have not had to focus too much on getting a good return on their business; they have become very large, but really not too profitable.”

Citing a Korean cellular phone manufacturer as an example, with very strong exposure in the cell phone market in China, Lim also adds that “it is not necessary to invest in shares listed in China to access Chinese domestic consumption.”

A Look at the Japanese Market

When talking about Japan, Lim says that “talking to an investor who has spent 20 years investing in Japan, and who, fed up with not profiting from their investment, most likely left the market at the beginning of this last rally, is not the same as talking to someone who has been investing in Japan only during the last three years, and who, therefore, has had a much better experience.”

Can we believe that it will be different this time? According to Lim, Shinzo Abe has been in power longer than most recent governments. “His commitment to introduce inflation in the economy is tremendous, and even if its not very popular with the Japanese population, he has managed to get reelected and to push a number of reforms, although he still has a long way to go.” In any case, as pointed out by the Senior Investment Manager, “it is becoming important to reconsider the fact of not having any exposure to Japanese equities.”

Even though the environment in Japan is currently more positive, we mustn’t forget that we are talking about an economy whose growth remains weak, and so “we choose exporter stocks such large tobacco or automotive manufacturers, whose behavior does not depend on domestic consumption, or companies selling components and materials to Japanese companies whose final market is an exporter, so that ultimately the demand comes from outside,” says Lim.

In terms of valuation, Lim points out that we have to take into consideration that we are talking about a developed market with high multiples, although not as high as those in Europe or the US.

India, an Emerging Market in its Purest Form

When talking about India, Lim explains that it is the purest example of an emerging market in the region. “It’s a challenging market, but at the same time, very subjective, with much ‘noise’ for the investor,” he says. According to Lim, the Modi government has been the best for the country in recent years, but you cannot ignore the fact that the Indian economy is slowing down, “and Modi cannot do much to prevent it; we cannot expect Modi to work an economic miracle for the whole of India such as the one he orchestrated in the state of Gujarat, of which he was governor before being elected as Prime Minister.” In such a market, it is particularly important to be a good stock picker: “If in Japan we are more inclined towards exporting assets, stock selection in India is purely directed towards the domestic consumer market,” says Lim.

Global ETP Flows of $36.1bn in March Ensured that 2015 Began With the Best Opening Quarter on Record

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Los flujos globales de ETP sumaron 36.100 millones de dólares en marzo, consolidando el mejor trimestre de la historia
Photo: Bert Kaufmann. Global ETP Flows of $36.1bn in March Ensured that 2015 Began With the Best Opening Quarter on Record

Global ETFs gathered $36.1bn in March to lift Q1 flows to $97.2bn, nearly triple the total from Q1 2014. The figures came largely from investor demand for non- U.S. equities, whereas the all-time high of $138.0bn from Q4 2014 was concentrated in U.S. equities. This demonstrates the ability of the ETP industry to respond quickly to changing market conditions while maintaining strong growth. Only one other quarter outside of the past two has ever topped asset gathering of $100bn, showed BlackRock ETP Research.

March was driven by accelerating non-U.S. developed markets equity flows of $32.6bn, nearly as much as the prior two months combined. Year-to-date flows of $71.0bn have almost reached the full-year total from 2014, spurred on by attractive valuations in Europe and Japan relative to the U.S. The divergence of increasingly accommodative ECB and Bank of Japan monetary policy with that of the Fed has also been a key factor.

Flows for Europe and Japan, as well as broad developed markets (EAFE), have benefitted significantly from currency-hedged equity funds, which had a record month gathering $13.4bn. This trend is expected to persist. The consensus is the U.S. dollar is in the midst of a strengthening cycle and these cycles have historically lasted for six to seven years.
 

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Europe equity established a new monthly high of $14.8bn. While pan-European equities led with $13.4bn, German equities added $1.4bn and have already captured $4.8bn year-to-date.

“Investors recognized attractive valuations in European equities following the announcement of the European Central Bank’s ambitious quantitative easing program, adding $36.5bn into pan-European ETFs in Q1. European-listed ETFs are close to reaching $500bn in assets, as investors from Europe, Asia and Latin America added $34.2bn of new flows in Q1, the best quarter ever for the European ETF industry”, said Amy Belew, global head of ETP research at BlackRock.

Japan equity brought in $8.3bn, the second highest monthly total ever. Flows were diversified across Japan-, U.S.- and Europe-listed funds. Japanese stocks retain upside even as the Nikkei 225 index approaches its highest level in 15 years. Corporate governance reforms have shown progress and pensions have announced further reallocation of assets to equities.
 

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U.S. equity flows improved by $6.2bn in March, helped by the Fed indicating after its March meeting that though rates may soon rise, the pace could be slower than previously expected. It was the second consecutive month of inflows, but year-to-date redemptions are still ($8.4bn) due to the impact of large cap weakness during January.

Emerging markets equity outflows resumed, hitting ($7.3bn) after stabilizing briefly in February. Broad EM equity and China equity redemptions overwhelmed a thirteenth consecutive month of India equity inflows.

Fixed income flows stayed ahead of record pace for the year, but slowed to $4.3bn in March. Appetite for European fixed income remained healthy as the ECB began the bond buying program announced in January. Flows totaled $3.6bn across sovereign as well as high yield and investment grade corporate bonds.

U.S. fixed income, however, had modest outflows of ($0.2bn). Investment grade corporate and broad U.S. funds each gathered $1.1bn, but high yield corporate momentum from recent months stalled and U.S. Treasuries experienced outflows of ($3.2bn).

Worldwide Investment Fund Assets Reach All-Time High at EUR 28 Trillion in Q4

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Los activos de los fondos de inversión a nivel mundial se situaron en un nuevo máximo histórico a finales de 2014
Photo: Jeff Belmonte. Worldwide Investment Fund Assets Reach All-Time High at EUR 28 Trillion in Q4

The European Fund and Asset Management Association (EFAMA), has released its latest international statistical release containing the worldwide investment fund industry results for the fourth quarter of 2014 and the whole year 2014. 

Investment fund assets worldwide stood at a new all-time high of EUR 28.29 trillion at end 2014, reflecting growth of 3.9 percent during the fourth quarter and 18.9 percent since end 2013. In U.S. dollar terms, worldwide investment fund assets totalled US$ 34.35 trillion at end 2014

Worldwide net cash inflows increased in the fourth quarter to EUR 335 billion, up from EUR 290 billion in the third quarter, thanks to strong net inflows to worldwide money market funds.

Long-term funds (all funds excluding money market funds) recorded net inflows of EUR 220 billion during the fourth quarter, slightly down from the EUR 223 billion registered in the previous quarter.

  • Equity funds attracted net inflows of EUR 44 billion, up from EUR 24 billion in the third quarter.
  • Bond funds posted reduced net inflows of EUR 63 billion, down from EUR 79 billion in the previous quarter.
  • Balanced funds also registered reduced net sales of EUR 52 billion, down from EUR 72 billion in the third quarter.
  • Coincidently, long-term funds registered net inflows of EUR 68 billion in both the United States and Europe during the fourth quarter.
     
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Money market funds registered net inflows of EUR 115 billion during the fourth quarter, compared to EUR 67 billion in the third quarter of 2014. This result is largely attributable to positive net sales recorded in the United States of EUR 98 billion, whereas Europe registered net outflows during the quarter of EUR 10 billion.

Overall in 2014, worldwide investment funds attracted net sales of EUR 1,169 billion, up from EUR 848 billion in 2013. Worldwide long-term funds registered net inflows of EUR 1,015 billion in 2014, as all categories of funds registered net inflows during the year. The United States recorded net inflows into long-term funds of EUR 302 billion, with Europe registering net inflows of EUR 471 billion.

At the end of 2014, assets of equity funds represented 40 percent and bond funds represented 22 percent of all investment fund assets worldwide. Of the remaining assets money market funds represented 13 percent and the asset share of balanced/mixed funds was 12 percent.

The market share of the ten largest countries/regions in the world market were the United States (51.2%), Europe (28.2%), Australia (4.7%), Brazil (4.4%), Canada (3.7%), Japan (3.1%), China (2.1%), Rep. of Korea (1.0%), South Africa (0.5%) and India (0.4%).

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RobecoSAM Launches Impact Investing Platform

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RobecoSAM pone en marcha su plataforma de inversiones sostenibles
Photo: Woodley Wonder Works. RobecoSAM Launches Impact Investing Platform

RobecoSAM, the investment specialist focused exclusively on Sustainability Investing (SI), announced the launch of its impact investing offering. RobecoSAM’s Environmental Impact Monitoring tool is the first of a broad suite of impact investing solutions to be released by the Company. The platform will leverage RobecoSAM’s expertise in SI including its proprietary corporate sustainability database, and will cater to institutional investors seeking both societal and financial returns on their investments.

Environmental Impact Monitoring: Quantifying Portfolio Impacts

RobecoSAM’s Environmental Impact Monitoring tool enables investors to quantify, communicate and optimize the environmental impacts of their listed equity and corporate bond portfolios. It measures the impact of investors’ portfolios on a series of tangible environmental indicators and indicates the magnitude of their portfolios’ environmental impact per invested dollar. The key quantitative indicators screened for are: greenhouse gas (GHG) emissions, energy consumption, water use and waste generation. The data can subsequently be used to enable investors to make better informed decisions on how to optimize their portfolios in order to maximize the positive or limit the negative environmental impacts of their investments.

Michael Baldinger, CEO, RobecoSAM: “The launch of our impact investing platform reflects RobecoSAM’s commitment to SI and is a response to investors’ increasing interest in investing with social and environmental improvement in mind. With 20 years’ experience in sustainability investing, no one is better positioned to bring a comprehensive impact investing platform to the market than RobecoSAM.”

Daniel Wild, Head of SI Research & Development, RobecoSAM: “Our Environmental Impact Monitoring tool draws on RobecoSAM’s deep sustainability investing expertise and unique corporate sustainability database to measure the environmental impact per invested dollar of investors’ portfolios. We use this information to optimize investors’ listed equity and corporate bond portfolios and achieve positive environmental impact without compromising financial returns.”

Environmental Impact Monitoring Leverages RobecoSAM’s SI Expertise

The Environmental Impact Monitoring tool uses the data collected from RobecoSAM’s Corporate Sustainability Assessment (CSA) and long-standing experience in analyzing financially relevant environmental data. Based on its CSA, an annual ESG analysis of more than 2,900 listed companies, RobecoSAM has compiled one of the world’s most comprehensive sustainability databases. RobecoSAM’s proprietary research and sustainability insight, gained through its direct contact with companies, serve as the foundation for measuring and monitoring the impacts of listed equity and corporate bond portfolios.

Emerging Market Currencies Face Renewed Pressure

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Las divisas emergentes se enfrentan a nuevas presiones
Photo: Ged Carroll. Emerging Market Currencies Face Renewed Pressure

The outlook for emerging market debt (EMD) is two-sided, said INM IM in its las market analysis. On the one hand, the global liquidity environment remains benign, thanks to low developed-market bond yields and a limited risk of rising yields, particularly in Europe and Japan. On the other hand, EM endogenous factors remain weak, as growth continues to struggle and reforms are still unconvincing.

Global liquidity still very supportive

The liquidity environment for EMD has remained supportive in the past few months. Even in the past weeks, when US bond yields rose by around 40 basis points, the search for yield remained strong. Hard-currency debt (EMD HC) benefited, as did high yield credits in developed markets. “As US bond yields rose and market expectations for the first Fed rate hike moved from autumn to summer, hard-currency debt clearly outperformed local-currency debt. A lot of this outperformance can be explained by the rebound of the oil price since the last week of January, as EMD HC had suffered relatively strongly from the sharp drop in oil prices. But the deteriorating prospects for EM currencies have also played a role”, explained Jacco de Winter, senior financial editor at the Dutch firm.

EM growth momentum has deteriorated

Two things have changed in the past few weeks, said de Winter. Firstly, EM growth momentum has deteriorated sharply. “Our own EM growth momentum indicator has declined sharply in the past weeks, after being stable at the neutral mark for several months. Of the 18 markets in the index, only Thailand, Chile and Mexico have a positive growth momentum now. The other 15 are negative or neutral. The worst momentum can be found in China, Indonesia and Russia”.

Secondly, monetary easing in the emerging world has become more pronounced, with recent interest rate cuts by Indonesia and Turkey. Twelve of the main 16 emerging economies are now on an easing path. This is the result of weak growth and falling inflation, and because policy makers want weaker exchange rates to compensate for lower raw material prices and/or lost competitiveness. Lower raw material prices continue to put pressure on many emerging economies, particularly the fundamentally weak ones. “This explains why in the past weeks Nigeria stopped defending its currency and Azerbaijan decided to devalue its currency (by 33%!) for the first time since 1999”, stated ING IM expert.

Volatility in EM currencies has increased

“The combination of weaker growth and overconfident central banks is a bad one for EM currencies, which have become more and more volatile recently. The fear that we have had for years now – that EM exchange rates eventually will have to depreciate much more to fully reflect deteriorated EM fundamentals – is becoming more relevant”, argued de Winter.

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Central banks should be more cautious

“In our view, EM central banks are counting too much on carry- trade-related hot money inflows. With the first Fed rate hike now only half a year away – this is what the Fed fund futures have priced in – countries like Turkey and Indonesia, with their high current account deficits and fragile domestic banking systems, should be more cautious. Especially since recent capital flows to the emerging world have already been weak”, afirmed ING in its analysis.

“Policy makers see no end to the growth slowdown. At the same time, inflation is declining. This probably makes them think that more currency depreciation is desirable, instead of a risk”, concluded.

Variations on the Scarcity Theme

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Crecimiento, reformas, rentabilidad: 2015 será un año de escasez
CC-BY-SA-2.0, FlickrPhoto: Chris Potter. Variations on the Scarcity Theme

The first part of 2015 has confirmed the maxim we described in our January: global economic growth remains weak and vulnerable to deflationary pressures, but investors are suddenly regaining their appetite with stronger monetary intervention imminent, this time on the part of the European Central Bank.

It would be wrong for an asset manager to deprive his customers of a particularly enterprising central bank’s generosity. Our portfolios are taking full advantage of the Draghi effect, especially through our positioning in European bonds and the dollar, as well as increased exposure to European equities.

However, our analysis of long-term global economic trends leaves us convinced that market performance will remain linked to the rarity of growth, yields, reforms, political leadership and inflation, a scarcity counterbalanced by the abundance of debt and central banks’ liquidity injections. In addition to the tactical management of equity, fixed income and currency exposure levels, this diagnosis encourages us to hold a majority our investments in the few assets that offer predictable growth and a safe medium-term return.

Scarcity of growth

It is worth remembering the circular origin of the persistent growth deficit affecting most of the world’s leading economies: over- indebtedness is thwarting the recovery of private investment as well as any strong public stimulus measures, and the weak growth that results is preventing over- indebtedness from falling. The addition of often unfavourable demographic trends means that the long-term outlook for global growth remains mediocre.

The overall trend, which to varying degrees applies to Europe, Japan, the United States and emerging markets, does not rule out mini-cycles in the meantime. For example, the eurozone will go through a growth spurt in 2015 thanks to its weaker currency, lower energy costs, cheaper bank loans and slower fiscal tightening.

Economic growth forecasts for the eurozone this year could be corrected slightly upwards, while revisions had consistently been in downward direction in the last year. However, it is still very hard to imagine growth of much more than 1.5% this year, which would be insufficient to reduce the overall level of debt or improve the potential growth rate.

It is worth mentioning also that the euro’s weakness will first and foremost benefit the area’s biggest exporter, Germany, widening economic divergence within the eurozone. In the United States, the Fed’s discomfort is palpable as it prepares to tighten its monetary policy while the rest of the world is easing theirs. Should a Fed funds rate hike need to be quickly reversed because the US economy shows new signs of weakness, this would cast doubt on the credibility of Janet Yellen’s monetary guidance.

Meanwhile, China’s growth is at best stabilising at levels half as high as those seen five years ago, while Japan’s will be no more than 1% at most, compared with 0 last year. It is important to bear in mind that in a globalised economy, eurozone growth depends on worldwide growth, and attempts at stimulus through currency depreciation are ultimately a zero sum game. A sharp drop in the value of the euro due to the ECB’s quantitative easing would export deflationary pressures from the eurozone at the expense of nominal global growth.

Scarcity of reforms

For many countries, increasing potential economic growth means undertaking serious reforms. Progress is slow, especially in Europe. A few examples:

  • In France, although opinion polls showed that the public supported the Macron bill, neither the left nor the right wing of parliament had the political courage to vote for it.
  • Italy’s Jobs Act was passed, but the institutional reforms needed to stabilise the government are moving very slowly and will still have to make it through the Senate in March.
  • The requirement that Greece’s creditors have made of the new government to commit to reforms whose abandonment had been at the heart of the party’s winning manifesto raises the suspicion of blatant populism and pseudo reformism in equal measure.
  • China’s emphasis on fighting corruption in 2014 delayed the reform programme. But at least we can reasonably hope that reforms concerning public enterprises, real estate, the environment and Hukou status will gather pace in 2015.
  • The same applies in India where land purchase, mining and insurance deregulation reforms are due to be debated in parliament this year.

Scarcity of yield

Apart from the temporary drop in oil prices, global deflationary pressures result from persistently high debt, which increases the propensity to save. Added to this are more structural factors such as demographics, technological progress, globalisation, the distribution of wealth between labour and capital (Thomas Piketty would surely agree). Even in the United States, where job creation has picked up, the famous Phillips curve, which postulates that inflation automatically rises when unemployment falls, is no longer borne out by the facts. Bringing down interest rates, central banks’ massive bond buying adds to this general backdrop of disinflation.

With the ECB coming on board and the Bank of Japan continuing its intervention, these purchases will be even greater in 2015 than in 2014, despite the end of the Fed’s quantitative easing. This windfall for bond investors was unexpected and yields – already very low – will probably drop even further in 2015 with the ECB committed to buying EUR 60 billion of assets each month for at least two years, whatever the cost (an expression that comes into its own here). In this context, Nestlé and the German government have already managed to issue bonds with negative yields, guaranteeing investors a capital loss if the issues are held to maturity!

These market distortions make Mario Draghi the best friend of short-term investors in the eurozone, as he reduces the perception of risk while increasing the value of financial assets. As for us, we are being very careful to keep positions in all asset classes that balance portfolio risks, while reaping the short term benefits of this situation for our funds’ performance. Valuation levels made possible by extremely low discount rates and squeezed risk premiums are a big source of support for financial markets.

But they must not lure us into a false sense of security, as they can only last as long as confidence in central banks’ market impact remains intact. They therefore leave open the question of the exit from quantitative easing. A negative scenario, namely the admission of manifest failure of attempts at lasting improvement in nominal growth, would obviously have negative effects on credit and equity markets. Whereas a positive outcome, marked by widespread economic recovery, would see fixed income markets undergo a correction (this scenario has prompted several Fed members to call for an early hike in US Fed funds rates before the markets step in).

Although the ideal path between these two pitfalls is a narrow one, it might seem too early to worry about it while central banks remain on the move. But it seem wise to us to keep our eyes wide-open on the risks that accompany the markets’ enthusiasm at the beginning of this year. Lucidity is always too scarce.