Photo: Evan Bench. Who Do the Markets Really Want to Win 2015 UK General Election?
One of the few certainties in financial life is that political uncertainty will unsettle the currency markets – and the 2015 UK General Election is looking like the toughest to call for decades. Investec foreign exchange trader Demitri Theodosiou offers his take on the potential scenarios for Sterling in the run-up to May 7.
2015 election – more uncertainty, more Sterling volatility?
Now we face, on May 7, the country’s most wide-open election in more than 40 years. If the past is anything to go by, the pound will respond poorly for as long as the outcome remains in doubt. The only way to stabilise Sterling would be for one party to emerge as a clear favourite. But, who do the markets really want to win?, asked Theodosiou.
“The key thing, as we’ve seen is that markets hate uncertainty and tend to sit out political skirmishing with as little exposure as possible. The less clear the view of the future, the antsier traders get”, said Investec foreign exchange trader.
But while the markets don’t really play favourites politically, some outcomes would clearly be more favourably received than other:
Outcome 1: Strong lead for the Conservatives. Big thumbs up from the markets. A likely Tory victory would be certain to have a nice stabilising effect on the pound.
Outcome 2:Strong lead for the Labour Party. Maybe just one thumb up. Markets might well view a future Labour government as rather less pro-business than a Tory one, and perhaps more likely to tax the foreign owners of Sterling assets. Whatever you think of that idea, you could hardly blame overseas investors for reducing their holdings of such assets.
Outcome 3: Polls show potential for Conservative/UKIP coalition. No thumbs. The possibility of the Tories getting into bed with Nigel Farage & Co would be a negative point for investors, at least in the short term, because it could potentially bring forward a referendum on EU membership. Whatever you think of the pros and cons of EU membership, it’d be bound to generate loads of uncertainty – currency market kryptonite.
Back to the future: lessons from 1974
Perhaps the best way to get a feel for what actually might happen this year is to take a quick time-machine trip back to the last election that was as uncertain as this one is promising to be – February 28 1974.
Labour won more seats than the incumbent Conservatives, but no overall majority.The Tories had more votes, however, and spent the weekend of March 2-3 trying to cut a coalition deal with the old Liberal Party. No deal emerged, so Labour took office as a minority administration on Monday March 4.
“And what happened to Sterling, you ask?” From $2.32 at the start of 1974, the pound had dropped to $2.27 by close of trading on March 1. Once the new government was appointed on the Monday, it rallied to $2.28.
“Bear in mind that this minority government was committed to widespread nationalisation and a wealth tax too. All of which just goes to show that, in the currency markets, the key election battleground is never left versus right – but instability versus certainty“, concluded Theodosiou.
Carmignac has announced several promotions within the European Equities, Cross Asset and Fixed Income teams.
Huseyin Yasar has been appointed co-manager of the €420m Carmignac Portfolio Grande Europe fund, alongside Muhammed Yesilhark with whom he has worked since 2011. Yasar joined Carmignac in 2014 as an analyst.
In addition, Malte Heininger has been promoted to co-manager of the €565m Carmignac Euro-Patrimoine and Carmignac Portfolio Euro-Patrimoine funds, equally alongside Muhammed Yesilhark. Heininger has also recently been appointed as manager of the €440m Carmignac Euro-Entrepreneurs and Carmignac Portfolio Euro-Entrepreneurs funds.
Carmignac also confirmed the re-organization of its Cross Asset and Fixed Income teams, with Julien Chéron being appointed co-manager of the €1bn Carmignac Investissement Latitude and Carmignac Portfolio Investissement Latitude funds, which he will manage together with Frédéric Leroux.
For the fixed income team, which is headed by Rose Ouahba, Pierre Verlé has been appointed head of Credit, a position previously held by Keith Ney. Ney will now focus on the management of the €6.5bn Carmignac Sécurité fund which he managed since 2013.
Mary Oliva in a screenshot of the documentary video. International Wealth Protection Shares Its Key to Success
In the last Transamerica’s annual Sales Summit meeting Mary Oliva was featured in a documentary style video shared with other life insurance professionals in attendance. The work was created by Transamerica to provide other life insurance sales individuals insights on how someone successful in working with ultra-high-net-worth approaches the opportunity.
In the video she describes: why and how she started International Wealth Protection, her team model approach, her personal experience in working with ultra-high-net-worth global citizens and how life insurance can be an effective solution to their wealth management risk needs, successes and challenges in this arena, as well as how she trains and mentors staff to also serve the needs of International Wealth Protection’s client base.
CC-BY-SA-2.0, FlickrPhoto: C.K.Tse
. One Cheer for India: Hip, Hip but no Hooray?
It seems that America, and American investors, are embracing India like never before. President Barack Obama was the chief guest at India’s recent republic day celebrations. The trip was the first such visit by a U.S. president, and an honor that India has typically bestowed on traditional allies. There was a sense of optimism over India’s place in the world, with Indian media headlines optimistic about the seemingly good chemistry between President Obama and Prime Minister Narendra Modi.
Obama’s visit to India capped several good months for India’s new government. The Modi government came to power on a platform of development economics, reflecting the desire of a poor nation to see rapid economic growth rather than a redistribution of wealth. Along the way there were some unanticipated good fortunes; weakening oil prices moderated inflation and provided some leeway to pursue reforms. And India’s stock market seems to have indicated its wholehearted approval.
Optimism regarding India is becoming the norm—look at the International Monetary Fund growth forecasts, for example. The IMF now expects India’s growth rates to begin to exceed those of China sometime between 2017 and 2018. And it is not as if India’s population is particularly old—on the contrary, 29% of its people are under 15 years of age, and a mere 5% is over 65. For China, the comparable percentages are 18% and 9%, respectively.
There is much that India can do to improve just by copying China’s growth, such as building infrastructure. And India can do so with a more entrenched sense of corporate governance and capital markets. China had to destroy a communist system and try to rebuild free markets. India’s task is presumably easier. So, one cheer for India!
But investors would do well just to cool their heels a bit here. Challenges remain. Structural reforms are difficult to push through given well-entrenched existing interests. These roadblocks get magnified in a democracy, particularly in such a large populous country. India’s parliamentary democracy has two bodies—Upper House and Lower House—any legislation needs to be passed by both these houses. In the Upper House, the ruling party is in a minority and hence has been unable to pass through any significant legislation.
And, moreover, it is not as if the market is trading at cheap valuations. The BSE 500 Index’s price-to-earnings ratio* (using the last 12 month’s earnings per share) is at 21x. While this might look only marginally higher than the long-term valuation of 17x, companies in sectors, such as property have underperformed. Several sectors are much more expensive than that reflected by the aggregate market valuation.
Using forecast earnings, the valuations appear much cheaper at 17x. But this is the point. At the moment, India is trading on expectations—expectations of accelerating earnings, expectations of better governance and expectations of faster economic growth. Given heightened expectations, even minor missteps can translate to pain in the stock market.
So, it is not that we don’t see the value of Modi’s proposed reforms or the promise of a young India, freed from the encumbrances of bureaucracy; it is just that these goals have yet to be achieved. One should invest in India only after a sober look at the long term. Beware of chasing price momentum.
Sudarshan Murthy, is research analyst at Matthews Asia.
The views and information discussed represent opinion and an assessment of market conditions at a specific point in time that are subject to change. It should not be relied upon as a recommendation to buy and sell particular securities or markets in general. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews International Capital Management, LLC does not accept any liability for losses either direct or consequential caused by the use of this information. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. In addition, single-country funds may be subject to a higher degree of market risk than diversified funds because of concentration in a specific geographic location. Investing in small- and mid-size companies is more risky than investing in large companies, as they may be more volatile and less liquid than large companies. This document has not been reviewed or approved by any regulatory body.
Photo: Motori Italia. FIA Formula E “Miami ePrix” Silently Takes Over the City
On Saturday, March 14, motor racing returns to the streets of downtown Miami. But unlike before, when the buildings vibrated to the sound on Internal Combustion Engines, this time it’s the quiet revolution of motor racing that’s drawing in the fans.
The FIA Formula E Championship is the world’s first all-electric single-seater series. Conceived by the FIA – the governing body of world motorsport – the series aims to showcase the potential for electric cars in their most relevant environment – city centers.
The World Health Organization reckons that seven million people a year die as a result of air pollution, and with gas-powered cars estimated to contribute 75 per cent of that air pollution, the potential for electric cars to benefit the environment – and people’s quality of life – is enormous.
Formula E intends to play a key role in this by showing that electric cars can be exciting and cool as well as environmentally beneficial. Indeed, it is predicted that as a result of the promotion of electric cars through initiative such as Formula E, an additional 77 million EVs will be on the road by 2038.
Formula E will also accelerate the rate of development in electric car technology. There’s an old saying that ‘racing improves the breed’. The relentless pace of technical development and prototyping that is needed to compete at the forefront in motorsport means that it has the potential to drive technological development at a far greater pace that conventional R&D programs.
At present, in order to complete the hour-long Formula E races, drivers have to change cars midway through. However, from season three onwards, Formula E will allow manufacturers to develop their own battery technology. The aim of this competition is to ensure that by season five the cars are able to complete the whole race on a single charge.
So in effect, Formula E wants to stimulate a 100 per cent increase in battery range in just two years. This will have enormous benefits for the usability and drivability for electric cars for everyday use.
Formula E also aims to minimize its carbon footprint to the lowest possible level paying special attention on waste, water and energy management on site. To this end, the cars for the Miami ePrix will be charged using electricity generated by solar power supplied by the Florida Power and Light Company.
The calendar is also designed to be as low-carbon as possible, with the races taking place across the global in geographical clusters. The series started in South-east Asia before moving to South America and onto North America before finally concluding in Europe.
Photo: John James, Managing Director-Vanguard Australia. Vanguard Names New Managing Director for UK and Europe
John James, Managing Director-Vanguard Australia, and Colin Kelton, principal of Vanguard’s Retail Marketing & Communications group in the United States, have been named to new roles on the leadership team of Vanguard’s International group, reporting directly to James M. Norris, Managing Director, Vanguard International.
James will transition from his current position as Managing Director-Vanguard Australia, assuming responsibility for management, distribution, and operations of Vanguard’s UK and European businesses.
He replaces Thomas M. Rampulla, who after seven years of leading Vanguard’s operations in the United Kingdom and Europe, will return to the US to head Vanguard’s $1trn (€930m) Financial Advisor Services division by mid-year. Rampulla will join Vanguard’s senior executive team and report directly to Vanguard CEO Bill McNabb.
Mr. James joined Vanguard at its US headquarters in 2008 as head of Broker-Dealer Sales and Distribution, and then moved to the International division and was the global business lead for the group’s strategic review of The Vanguard Group’s non US business and distribution efforts. In 2010, Mr. James returned to Australia to lead Vanguard’s Australian operation.
Prior to joining Vanguard, James was the CEO of Australian Football League team Port Adelaide for four years. In addition, he brings more than 15 years of executive leadership experience with prominent Australian financial services companies.
In Australia, Colin Kelton will assume the position of Managing Director-Vanguard Australia, with responsibility for all aspects of management, distribution, and operations of Vanguard’s Australian business.
Kelton started with Vanguard in 1990 as a service associate and has held various positions of increasing responsibility in Vanguard’s Retirement Resource Center, Retail Operations, and Retail Services.
James Norris, Managing Director, Vanguard International, comments: “We are very pleased to retain John on Vanguard’s international leadership team. He is a tenured professional in the investment management industry who will bring his experiences from the US and Australia to benefit our European business and our clients.”
Photo: Damian Gadal. Drilling Into the Oil Price Impact
Over the last six months the oil price has fallen sharply. This has been attributed variously to fracking in the US causing a rise in the supply of hydrocarbon energy, concerns about a slowdown in the Chinese economy leading to weaker demand, high oil prices prompting a structural shift in energy efficiency and resistance by Saudi Arabia within OPEC to cut production to support prices. Whatever the underlying cause, the low oil price has implications for the high yield market, especially in the US where around 18% of high yield issuance in 2014 originated from the energy sector.
Energy positioning within the strategy
In late 2014, we reviewed our positioning in high yield Energy and stress tested our holdings based on a long-term WTI Oil price of $60/bbl. As a result, we exited four energy positions – Sandridge Energy, Energy XXI, Tervita and California Resources Corp (Calres). For the first three we projected potential default scenarios at the end of 2015/early 2016 and, therefore, further downside risk. We decided to exit Calres despite its low cost structure and liquidity because the company is unhedged and results are likely to be volatile in the medium term.
However, it is important not to write off the energy sector entirely. There will be plenty of companies that are able to tolerate the volatility in oil and gas prices and the risk premium that is reflected in their yields can offer an attractive opportunity. That is why we reviewed several higher quality names that were better positioned to withstand a low oil price environment due to a low cost profile, solid balance sheet, significant liquidity and an equity cushion. As a result we have added Chesapeake Energy and Hilcorp Energy as names that have sold off, but also offer downside protection. At 20 February 2015, the yield to worst on these two bonds was respectively 5.0% and 5.8%, with the yields declining (prices rising) since we made the purchases. The table below shows the HY energy weight in the fund.
The plight of oil services
Having lots of debt may stop some capacity exiting as producers operate to earn every dollar of cash they can, hoping for an upturn, but in the process they will try to force down costs. Just as supermarkets squeeze their suppliers, we anticipate oil margins at oil services companies being squeezed by oil explorers and producers that are seeking to cut costs. Daily prices for rigs are already tumbling and many producers are announcing big cuts to capex budgets as they seek to preserve free cash. In anticipation of a difficult near term for this sub-sector, we now hold no oil field equipment and services debt.
Similarities with 1986
Lower oil prices are contributing to lower inflation, which in turn is contributing to lower yields. Some commentators are interpreting this as a signal that the global economy is weak. It is not uncommon for a sharp drop in the oil price to occur without presaging a recession, however, as happened in 1986. This view is shared by Morgan Stanley, the investment bank, which has pointed out that 1986 offers many similarities to today: US credit spreads initially widened, Treasury bond yields fell and the yield curve flattened – the following years would see the economy do reasonably well. The chart below shows the direction of the oil price in 1986 overlaid with today’s oil price movement. If the oil price follows a similar pattern, then it may level out at current levels. Equity markets rose for several more years following 1986 and a strong equity market is usually helpful for the high yield bond market in general in terms of investor sentiment, capacity for M&A activity and IPO activity.
The oil price decline is good news for global growth as it should act as a tax cut for consumers, leading to a shift in wealth from oil-exporting countries to countries with a high propensity to consume. The US and Europe, in particular, should be net beneficiaries. Oil is an important primary input for many products, which together with tumbling transport and energy costs means the positive ripple-through effects on the broader economy are substantial. Spreads on high yield, however, have been dragged wider in response to worries about the energy sector and we believe this has created better value within the high yield market.
Improving flow picture
Higher spreads on high yield bonds come at a time when yields on core government bonds appear to be anchoring at lower levels, a consequence of lower inflation levels together with deliberate policy action by the European Central Bank (ECB) to purchase sovereign bonds. Unlike investment grade markets, the high yield market may not benefit as directly from the “crowding out” effect of the ECB’s quantitative easing program, but the second order effect could be just as large. The first beneficiary will be BB-rated (which is easier for institutions to move down into) but ultimately this will have a knock-on impact on B/CCC pricing. With fund flows starting to pick up, the yield and spread enhancement offered by high yield looks increasingly attractive in a world of negative or low government bond yields. Already, in recent weeks, there has been a shift towards positive flows within both the European and US high yield sectors.
Petrobras event risk
Petrobras, the Brazilian oil and gas giant, has been the subject of an ongoingcorruption investigation, which together with the collapse in the oil price, has led to negative sentiment towards the company and concern about its accounting practices. The company was downgraded to just one notch above investment grade by Moody’s and Fitch, the credit rating agencies, in early February 2015. A company’s credit rating for index purposes reflects the majority view of the big three ratings agencies. With around $50bn of outstanding debt a downgrade to sub-investment grade status could lead to a flood of high yield energy paper onto the market as investors who are restricted from owning non-investment grade bonds are forced to sell. This is all the more reason for our preference for higher quality high yield within the energy sector.
Kevin Loome is Head of US Credit and portfolio manager of the Henderson Horizon Global High Yield Bond Fund.
Old Mutual Global Investors won two major accolades at the 2015 European Funds Trophy Awards in Paris last week.
The company scooped the award for Best Long Term Management of a range of funds, in the 41-70 rated funds category and Best International Large Cap Fund for the Old Mutual Global Equity fund for the second year running.
Now in its ninth year, the European Funds Trophy rewards the best European asset management companies and funds for the global quality of their European fund range. The shortlisted managers are assessed for quality by a panel of five professional jurors from the finance industry.
The awards are organised by FUNDCLASS in cooperation with media from across Europe including La Stampa, Le Jeudi, Tageblagt, El Pais, L’Opinion and LCI.
This is the third year Old Mutual Global Investors have been awarded a top accolade at the European Funds Trophy Awards. They won Best European Asset Management Company in the 8 -15 rated funds category in 2014 and Best United Kingdom Asset Manager in 2013.
Allan Macleod, Head of International Distribution at Old Mutual Global Investors, comments:
“We are delighted to have been acknowledged again at these prestigious awards. Europe continues to be a key market for Old Mutual Global Investors and being awarded for the long term management of our funds clearly demonstrates that we are highly regarded within the European market place.
“With over 84% of our funds ranked above the median of their investment sectors and 74% in the first quartile over three years, we see this award as independent recognition that we are a top class asset management company, which is important to us as we look to further enhance our distribution in Europe in 2015.”
Photo: bachman01. Latin America in Focus for Axa IM Growth Plans in 2015
AXA IM has announced its assets under management at the end of December 2014 hit a record €623bn, up 14% per cent from €547bn in 2013.
Net new inflows accounted for €19bn, dominated by third party clients, and €58bn came from market and foreign exchange rate impact.
Andrea Rossi, CEO of AXA IM, said: “Our priority as a business is to grow our third party assets, while continuing to serve and support the AXA Group around the world. I am therefore delighted to see that the majority of our €19bn in net new money inflows in 2014 came from non-AXA clients across both the institutional and wholesale markets. Positive growth in net new money, AuM, revenues and underlying earnings provide a solid base from which to accelerate our growth in 2015.”
Expansion plans for AXA IM in 2015 are targeting several areas. AXA IM wants to make its third party business growing in both the US and Canada. In 2014, in the US, the company strengthened its teams into boosting the RFP team and hiring a new head of Client Group, Stephen Sexeny. A participating affiliate agreement was established, that means the firm will be able to sell in the US market products managed in the UK.
After the hire of a team dedicated to the service of its Nordic clients in February, the firm plans to strengthen its presence in Latin America focusing on Mexico, Colombia and Peru and also targets to develop business in Chile, “where the company has been active with local pension fund clients for over 10 years.”
For the Asia Pacific area, AXA IM is also seeking a growth of its profile, client base and product offering. The company underlined its joint ventures in this area were performing well in 2014 and made “a strong contribution” to net new money inflows.
Rossi commented: “We are becoming more and more global. Today, we employ over 2,300 people, including 250 portfolio managers, in 28 cities across 21 countries. We now employ more than 150 people in the US and over 100 in Asia, not including our JVs. We will continue to expand our global footprint, but in a targeted fashion.”
He added: “We want to accelerate our growth in key mature markets where we don’t yet have a significant market share, such as the US, Japan and the Nordics. In high growth markets, such as Asia and Latin America, we will continue to develop our distribution coverage. We will also strengthen our historically robust positions in Europe by reinforcing our presence in the retail and unit-linked markets.”
Photo: Jacob Ehnmark. Why China's A-Shares Matter Now?
Although we often receive questions on mainland China’s A-share equities, which trade on the Shanghai and Shenzhen Stock Exchanges, we currently invest in Chinese equities primarily via Hong Kong-listed companies and also by way of U.S.-listed Chinese firms. China’s domestic A-share market remains largely closed to foreign institutional investors. The only way for foreigners to participate in this market is to enroll in China’s Qualified Foreign Institutional Investor (QFII) program or invest via a manager who has a quota in this program. Even still, relatively few QFII licenses have been granted.
China’s A-share market performance has been lackluster over the long term. Ten years ago, the Shanghai Composite Index traded at approximately 1,800 and had a stellar run to 6,000 in late 2007. But the index has since erased most of its gains and is now trading back around 2,000. This may leave you to wonder: do the A-share markets reward long term investors?
There are a couple of unique characteristics of China’s A-share markets that have, either directly or indirectly, contributed to the country’s stock market performance. First, a key issue has been China’s “non-tradable shares,” which were awarded to the management teams and employees of listed state-owned companies. As their name implies, these shares have been disallowed from trading in the open market. But after a long reform process of the non-tradable shares in from 2005 to 2007, individuals could gradually sell their shares. Over the next few years, batches of non-tradable shares continued to become available for trading and created a situation of excess liquidity, weighing down stock market performance.
Unlike in most markets, another characteristic unique to the A-share market is its trading volatility. This results from the dominance of the A-share market by retail investors, who make up 80% of the market and tend to be short-term market-timers.
All of that said, many of these comments are backward-looking. The non-tradable shares issue peaked around 2009 and provokes less discussion today. High volatility continues to be challenging, but steps have been taken to introduce more institutional and QFII participants to the market, encouraging a longer term investment mentality.
As these markets evolve, they may present more attractive opportunities for investors. For starters, valuations are currently enticing, trading at price-to-earnings (P/E) multiples currently estimated by Bloomberg at 8x for 2014 and 7x for 2015. These valuations are approaching 10-year historical lows. The A-share markets also broaden the pool of stocks from which investors may choose. For example, in certain fast-growing Chinese sectors as health care, consumer and technology, there are many more selections on the A-share market, compared to the relatively few numbers of firms listed in Hong Kong or the U.S. We may also be able to research the A-share competitors of businesses we currently study.
Matthews Asia currently holds no exposure to A-share equity markets, and we are not commenting on the domestic markets as a whole. Careful stock picking is particularly important here since this market does have its fair share of poorer quality companies, including a large representation of state-owned businesses. However, such a large opportunity set does have the potential for investors to choose from a larger menu of quality companies.
Winnie Chwang, portfolio manager at Matthews Asia, is set to present her views on Chinese companies when she takes part in the Fund Selector Summit Miami 2015, at the Ritz-Carlton Key Biscayne on 7-8 May.
The views and information discussed represent opinion and an assessment of market conditions at a specific point in time that are subject to change. It should not be relied upon as a recommendation to buy and sell particular securities or markets in general. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews International Capital Management, LLC does not accept any liability for losses either direct or consequential caused by the use of this information. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. In addition, single-country funds may be subject to a higher degree of market risk than diversified funds because of concentration in a specific geographic location. Investing in small- and mid-size companies is more risky than investing in large companies, as they may be more volatile and less liquid than large companies. This document has not been reviewed or approved by any regulatory body.
