Photo: Gabriel Jorby. Chinese Stars Shine Bright Through Macro Clouds
Investors who obsess and fret about China’s slower headline gross domestic product (GDP) growth may be missing valuable individual equityinvestments. China is growing at a more measured pace than in the past and in 2015, China will continue to balance the competing needs of growth, reform and deleveraging. As such, official GDP growth targets may need to be revised down. However, a myopic vision that correlates GDP growth to investment returns overlooks the bright prospects for many companies, particularly those that are genuinely innovative, globally competitive, and those companies experiencing multi-year improvements in demand dynamics driven by demographics.
Bright stars
Many Chinese companies have a proven track record of delivering profit and cash-flow growth irrespective of the Chinese economy. The technology sector, particularly internet and software, is one of the few industries in China where research and development (R&D) is a priority. R&D has already led to growing profits, as companies develop products that increase user loyalty, generate incremental revenue and create valuable user bases that attract online advertising expenditure.
Tencent and Alibaba are arguably more innovative than Amazon, Facebook and Twitter as a result of their onnovative applications, huge user communities and early development of payment facilities. Tencent was founded in 1998 and now has more than 815 million monthly active instant messaging accounts. In 2013 it spent CNY 5.1bn on R&D (£0.5bn), which was 8.4 per cent of sales.
Recent IPO Alibaba was founded in 1999 and is now the world’s largest ecommerce company by revenues, in the financial year ending March 2014.
Companies in China’s technology sector are experiencing significant growth. The market capitalisations of internet firms Tencent and Alibaba now rank alongside some of the largest companies in China.
Another bright technology star is Lenovo, a Chinese PC company that through stable and strong management, international acquisitions, and the development of a global manufacturing footprint has become a recognisable global brand. It has been the world’s largest PC vendor for over a year, with a current market share of 19 per cent.
Demographic drivers
The Communist Party controls China but one thing it cannot control is demographic change, where past decisions can lead to future trends. China has had a one child policy since 1979 and consequently China’s population is rapidly ageing just as it is getting richer. This is triggering a multi-year boom in demand for healthcare drugs, therapies and services. China has probably underspent on healthcare, and with greater life expectancy and insurance provision we expect supportive industry tailwinds to benefit domestic healthcare companies such as CSPC Pharma and China Medical Systems.
So do not be frozen in the headlights of China’s macroeconomic slowdown, instead appreciate how far some Chinese companies have come and how the outlook varies dramatically on the ground.
Opinion column by Charlie Awdry, Chinese Equities Portfolio Manager at Henderson Global Investors.
. Funds Society celebra su fiesta de verano con la participación de 300 profesionales de la industria
A few days ago, Funds Society held a party in Miami to celebrate its second anniversary and the launch of its new print magazine, a quarterly publication for offshore industry professionals in the United States.
Funds Society celebrated in style the closure of an excellent year 2014, in which the website received 300,000 visits and over 500,000 page views, which translates into a growth of 56% and 81% respectively compared to 2013. The number of unique visitors is also worth noting, as these have more than doubled in the past year, a clear indication of Funds Society’s strong growth during the last two years since its founding.
At the anniversary party, held at Perfecto Gastrobar on Brickell Avenue in the financial heart of Miami, Funds Society was well supported by over 130 professionals from the wealth and asset management industry. To the delight of those present, the evening was enlivened with performances by a group of actors from Angelica Torres’ Broadway Musical Theatre Company.
Not only were the achievements to date celebrated, but also all of Funds Society’s projects for this year 2015, which is just beginning and for which it already has the support of twenty top-level international firms.
The Funds Society 2nd Golf Tournament, which will be sponsored this time by Henderson, MFS, M&G and Carmignac, will be held in March. On this occasion, the tournament will be held in Miami Beach on March 13th.
The Golf championship will be followed in May by Funds Society’s First Fund Selector Summit, an event which Funds Society will hold in Miami in association with the British company Open Door Media Partners, and to which 48 key fund selectors will be invited, who will get to know, firsthand, the most relevant strategies of some of the main asset managers in the industry.
Finally, also point out that the new Funds Society print magazine, whose first issue has come to light this January, debuted during the web’s second anniversary. The publication, which was launched with major backing from sponsors, was created with the aim of becoming a showcase for wealth and asset management companies on both sides of the Atlantic, and with the firm intention of becoming a reference amongst industry professionals.
Photo: Ahron de Leeuw. The Emerging Consumer: It’s all About the Rise of the Emerging Middle Class
The nineteenth century industrial revolution created a substantial Western European and American middle class. Today the same is happening in emerging markets. Over the next two decades, the global middle class is expected to expand by another three billion, from 1.8 billion to 4.9 billion, coming almost exclusively from the emerging world. In Asia alone, 575 million people can already count themselves among the middle class — more than the European Union’s total population, explain Jack Neele and Richard Speetjens, managers of the Robeco Global Consumer Trends Equities strategy.
This crossover from West to East in terms of size and spending of the middle class has large implications for expected consumption growth:
Adapt to shifting local demands
The aging population in China will need new financial services to help them save for retirement. In addition, the pressure from urbanization will lead to growing demand for green technologies. The transformation is most dramatic in China, but there will be shifts across many developing economies. What these households want may be very different from the consumer demands seen in previous periods of rapid economic development. Businesses will need to tailor the products they offer to shifting local demands.
More money to spend
Over the past decades, developed economies have dominated sales of durable consumer goods. Penetration is still relatively low in many rapid-growth economies. Once household incomes approach USD 10,000, however, demand for durable consumer goods picks up. As more households in these economies move into higher income bands, they will have more money to spend on discretionary items. Demand for services such as communications, culture and recreation will grow at almost twice the rate of food spending.
Strong local positions or strong Western brands
However, this higher growth in consumer spending in emerging markets has not been an easy win for consumer companies. Many local companies prioritized sales growth, but intense competition, value-focused consumers and rising costs are making it difficult to boost the bottom line. Amid rising volatility, companies must be more careful and strategic in how they approach these markets. This is the reason why within our emerging consumer trend we focus on companies with very strong local market positions or strong Western brands.
Photo: Sten Dueland. Oil: Pulled Apart or Pushed Ahead?
At the beginning of 2015, the worry machines of the world are working full time. We hear that China is a bubble, Japan cannot be fixed, Europe is a mess again and the United States is showing signs of slowing.
There may be some truth in all this, but there are other truths that we should also consider.
The drop in oil prices is basically good for 70% of the world’s economies
The biggest economic regions, mentioned above, are all net importers of energy, and now that the price of crude oil has been roughly cut in half, their costs of doing business will also fall. Further, a drop in commodity prices tends to spur overall spending. Historically, going back over 50 years, a 20% decline in oil prices has signaled a 0.5% – 1% rise in the rate of real global GDP growth during the subsequent 12 months. The current drop in oil is about twice that.
The world’s currencies have been going through a dramatic readjustment
Many local-country currencies that were once the darlings of international investors have fallen, while the value of the US dollar has risen. For US consumers, the world’s biggest block of final demand, a stronger US dollar boosts buying power and creates demand for cheaper imported goods, from cars to smartphones. Exporting countries — such as Germany, Japan, China and others in Asia and South America — can sell more manufactured goods in the world market.
The US expansion has not been purchased at the expense of future growth
Though this business cycle — now in its sixth year — has been characterized by low interest rates, no one is rushing to borrow. During the three previous business cycles, US consumers and businesses took on more debt as the US Federal Reserve lowered rates to kick-start economic activity. This time, however, the increase in US private borrowing has been more than offset by even bigger increases in the value of the underlying assets — as well as gains in the income and cash flows that support the repayment of that debt. In other words, the risk to this cycle of higher rates coming from the Fed or the market is not as dramatic as in previous cycles.
The theme of the world consumer may be revived
Admittedly, global growth has been sluggish, but the world population has continued to expand. Household formation, along with its related spending, was deferred during the slowdown. I think the demand for goods driven by growing populations — especially in developing countries — is likely to re-emerge. Thanks to currency moves and lower energy prices, many goods are now cheaper, while world wages are generally rising. The emergence of the global consumer, a popular investing theme a few years ago, has been given an added boost.
On the whole, the mix of data does not suggest any kind of runaway boom in 2015, but at the same time, a global recession seems a long way off. Arguably, the world banking system has been largely repaired since the damage in 2009. For those investors scarred by the drops in global security markets six years ago who have been reluctant to return, it may be worthwhile to reconsider that the realignment of currencies and energy prices could be a long-term positive impulse to world growth.
So in 2015, let’s be grateful for organic, slow and steady growth, not leveraged boom-like growth. Let’s hear a cheer for lower, not higher, energy prices. And let’s bear in mind that when low interest rates rise someday, it will be a sign that normalcy is coming back, not that disaster is looming.
Opinion column by James Swanson, Chief Investment Strategist, MFS
Photo: Moni Sternbach, European Long Short team at Man Group.. Man GLG Appoints Moni Sternbach to European Long Short Team
Man Group has announced the appointment of Moni Sternbach to its European Long Short team.
Sternbach, who joins from hedge fund business Cheyne Capital, will manage a new strategy which GLGplans to launch in Q1 2015.
Sternbach, a mid-cap specialist, joins Man GLG after almost three years as lead manager of the Cheyne European Mid Cap Long/Short strategies.
Prior to Cheyne, Sternbach was head of European smaller companies at Gartmore Investment Management, where he worked from 2002 to 2011. He has also worked at Bank of America and Deloitte & Touche and graduated from Cambridge University with an MA in Economics. He is a CFA charterholder and a qualified accountant (ACA).
Sternbach will report to Man GLG’s co-CEOs Teun Johnston and Mark Jones.
Teun Johnston said: “Moni is an experienced European fund manager with an excellent track record and he will further enhance our capabilities in the European Long Short space. His mid-cap expertise will form the basis of a new strategy which we will announce in due course and it is with great pleasure we welcome him to Man GLG.”
Moni Sternbach said: “Man GLG has a clear advantage in delivering investment returns and creating value for clients. Its leading edge infrastructure, corporate access and distribution are differentiators in an increasingly complex environment and I am hugely excited to be joining its exceptionally strong team of analysts, portfolio managers, strategists and traders.”
Photo: Daniel Schwen . Afore Banamex Grants its Fourth Investment Mandate, in Asian Equities, to Four International Management Companies
Afore Banamex announced that it has awarded its fourth international investment mandate, worth between US$500 and US$600 mn, in separate accounts to four international fund managers: Wellington Management, BlackRock Pioneer Investments, and Nomura Asset Management.
Also noteworthy is the fact that this mandate is also the fourth in the history of the Mexican Retirement Pension System, as Afore Banamex is the only pension fund manager that has generated mandates under the precept approved by the Consar in 2013.
The aim of this operation is to diversify the investment strategy through this legal precept by which Afore Banamex hires the services of the mandataries so that its clients can access investments in Asian markets, particularly in Japan, Australia, South Korea, Singapore, China, India, and Hong Kong, with the most specialized and experienced teams in financial asset management worldwide.
Gustavo Lozano, CEO of Pioneer Investments, told Funds Society that this latest mandate, which is not the first which Pioneer Investments receives, shows that “we have been able to import and offer our knowledge and skills to the asset management industry in Mexico, offering diversification strategies and providing expertise in risk and asset management which will help to solidify the pension industry in Mexico. This will benefit the country’s pensioners and savers,” he pointed out.
It should be remembered that last October Consar authorized the funding of Afore Banamex’ investment mandate in European equities to Pioneer Investments, a US$400 mn separate account which was awarded in October 2013. The total amount of that mandate, which was also granted to BlackRock, BNP Paribas, Franklin Templeton and Schroders, was US$1bn.
The combined amount of the four mandates approved to date by the Mexican Pension Funds’ System regulator exceeds US$1.8bn , including the last US$600 mn dollars of this latest Afore Banamex mandate.
As was pointed out by company sources, “Afore Banamex is still the only Afore in Mexico to implement and fund these type of investment strategies, demonstrating its commitment to innovation and efficiency, once again enabling it to offer its clients the best returns through an internal process strictly adhered to the financial system’s official standards and best practices in risk control issues.”
Photo: DirkvdM. Panama's Leading Private Wealth Management Forum, in February
The Private Wealth Panama Forum is a country focused asset protection meeting for private banks, wealth managers, trust companies, legal professionals and other intermediaries. The Forum brings together 200+ industry leaders from Panama and around the world to discuss private banking, tax, trust, bearer shares, foundations, corporate structures, estate planning and wealth growth in one of the world’s banking and legal centers.
The forum provides direct and unique access to Panama’s growing private wealth management community. More than 100+ wealth protection strategists and gatekeepers from around the world.
Among the speakers, Guillermo Mendez, Chief Executive Officer at BHD International; Juan Manuel Martans, Superintendent at Superintendence of Securities Market; Sergi Lucas, Chief Executive Officer at Banca Privada d’Andorra (Panama); Rainer Hensel, General Manager at Credit Suisse Asesoria (Panama); and Marcelo Suarez Castillo, CFA, Director, Wealth Management at Scotia Private Client.
The mee. Authorities and Academics Reflect about the Challenges of The Emerging World Order at the II CAF-LSE Conference
With the purpose of promoting the analysis regarding the current dynamics of emerging countries and their impact on the configuration of a new world order, on January 16th, 2015, CAF, Development of Latin America, and the London School of Economics and Political Science (LSE) will hold the II CAF-LSE Conference “Geopolitics and the Global South: Challenges of the emerging world order”.
This year’s program will address in detail the analysis of the current reconfigurations of the world order from the perspective of the emergence of the Global South, and particularly its effects on multilateralism, safety, development, and South-South cooperation. The inaugural session will be in charge of Enrique Garcia, CAF’s Executive President, Stuart Corbridge, LSE’s Deputy Director, and Chris Alden, Director of the LSE’s Global South Unit.
Speakers will include Ricardo Lagos, former President of Chile, and Jose Maria Aznar, former President of the Government of Spain.
The meeting will be held at the headquarters of the London School of Economics and Political Science, and will be transmitted live through livestreaming. It may also by followed in the social networks with the hashtag #CAFLSE.
The II CAF-LSE Conference, organized by CAF, Development Bank of Latin America, and the London School of Economics and Political Science (LSE), is carried out in the framework of the strategic alliance established between the two institutions in 2013 to examine the changing role of emerging countries of the South, especially Latin American countries, in the configuration of the dynamic international scenario.
Photo: Nestor Galina. 7 Prices for 7 Commodities by Loomis, Sayles & Company
The commodity complex has seen a rapid fall since the middle of the 2014 due to global growth concerns, the US dollar rally and continuing overall growth in supply. “I believe prices may be close to bottoming and we could see a cyclical upturn in the first half of 2015”, says Saurabh Lele, Commodities Analyst for the macro strategies group at Loomis, Sayles & Company.
Crude oil
Lele expects crude oil prices to correct in 2015, bringing the Brent Crude Index to $85-95/barrel and the West Texas Intermediate (WTI) to $75-85/barrel by year end. “My opinion is that the current move in crude oil prices is unwarranted. I believe the market is mispricing geopolitical risk, a US supply response and the upcoming global refinery turnaround schedule (periods of refinery closure for maintenance and renewal services)”.
The situation in Libya is still volatile and recent disruptions to oil production are yet to have any impact on prices. Refinery demand in the second half of 2014 was the weakest in five years, not only due to global growth but also due to temporary factors such as closures and maintenance related shutdowns, explains. “The first half of 2015 will see very little maintenance related shutdowns as well as several new refineries initiating operations. Finally, US domestic production will adjust lower as energy and petroleum companies will have less cash to spend in 2015”.
Natural gas
In this case, the analyst expects prices to continue to trade in the $3.75 to $4.25 per mmbtu range (this is the price required for electric consumption to balance the market)
Natural gas seems to have found a comfortable trading range between $3.75 and $4.25 per mmbtu as electric utilities switch between natural gas and coal. Inventories, which were down significantly after the severe winter in early 2014, have built up steadily over the course of a cooler-than-usual summer. “In 2015 we are likely to see higher demand for natural gas due to higher industrial consumption, exports to Mexico and the start of LNG exports from the new Sabine Pass terminal in Texas”, argues.
Copper
Loomis, Sayles & Company expects copper to stay in a slight surplus after which supply growth is expected to slow and fall behind demand.
Inventories at the exchange and bonded warehouses are low and a slight pickup in demand could result in prices moving higher. “Over the next two quarters, we could see demand improve from higher grid spending in China, which has lagged its budgeted number year-to-date”, says Lele.
Iron ore
“Prices could correct and move up to the $80-90 per metric tonne range by the second half of 2015. Longer-term I believe iron ore prices to remain in $80-$90 range”, affirms Lele.
“The fall in prices exceeds what fundamentals would dictate – I believe the decline is being driven by de-stocking/restocking cycles. Demand should improve after the APEC (Asia-Pacific Economic Cooperation) summit in November as steel makers restart mills near Beijing”. Ore inventories at ports have fallen between 7-10% since their June highs, indicating low but stable demand. Iron ore inventories at steel mills are also close to their 2012 lows.
Thermal coal
He expects global thermal coal prices to stay in the $70-75 per metric tonne range over the next year due to weak demand is likely to persist with the only bright spot being medium-term Indian coal. “I see strong supply growth from Indonesia and Australia in the near-term; the impact of the thermal coal import tax is expected to be minimal as Indonesia and Australia are exempt due to their respective free-trade agreements with China”.
Gold
The firm expects gold prices to fall to $1,000/oz over the next two years. “Resilient mine supply and lower demand from China and India should push prices lower. I expect the Indian gold export tax to continue until the end of 2015 as well as Chinese demand for jewelry to remain subdued as anti-corruption sentiment reduces the demand for luxury goods. ETF selling is expected to continue as real rates move higher and inflation/deflation present no major concerns at this time”, enunciates.
Photo: Official White House (Pete Souza). Shades of APEC Blue
Just about the time of the Asia-Pacific Economic Cooperation (APEC) summit late last year, my social media feed began filling up with stunningly beautiful images of autumn in Beijing. This made me feel like all my bad memories of the city’s haze and smog were merely delusions. The chatter that week was all about what was nicknamed “APEC Blue,” the clear blue skies that replaced the normally smog-choked atmosphere ahead of the economic summit—a result of intentional government closings of factories and roads. This was done expressly to clear the air before the world leaders arrived.
The APEC meeting was touted as the second-most important event in Beijing after the Olympics, and it was a great feat to clean the air even though results were just temporary. Beijingers have added “APEC Blue” to their urban slang and joke that it stands for “Air Pollution Eventually Controlled” Blue. While some companies may have taken a hit after shuttering their factories, the temporary blue skies also demonstrates that air pollution is controllable and it is not “pollution with China characteristics,” an overused term to explain differences unique to the country. It is just a matter of how much effort and priority one places upon this.
Producing APEC blue is a complicated and expensive task. In addition to shutting factories and closing roads, the government offered additional paid time off to local state workers, closing many businesses and postponing winter heating supplies to reduce coal burning.
In my view, air pollution is symbolic of growing pains. If you consider the history of London, Los Angeles, Tokyo and Chicago, almost all major metropolitans have gone through similar pains as they developed and industrialized. Beijing is not an outlier, even though environment protection was well-discussed in my 8th grade textbooks.
Thanks to President Barack Obama’s trip to China, Chinese President Xi Jinping proceeded to outline a climate change agreement with the U.S. during the APEC summit. The world’s two biggest greenhouse gas emitters have been at opposite ends of the negotiating table during almost two decades of attempts to strike a meaningful global pact to lower emissions. This is the first time China has agreed to cap its emissions, after arguing for many years that it needed to grow richer before worrying about climate change. Progressively, we hope to see more Chinese initiatives, not only aggressive and temporary ones that have led to such literal breaths of fresh air as APEC blue, but those more akin to such efforts as the Clean Water and Clean Air acts that have had more lasting benefits.
At Matthews Asia, we aim to seek firms well-positioned to ride on this wave and benefit from China’s environmental improvements as well as its shift toward a more service- and consumption-oriented economy.
Column by Raymond Z. Deng, 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.
