The three main themes of the New Year are monetary policy, monetary policy and monetary policy. Far, far down the list is the question of the cyclical trend and – oh yes, there was one more thing, after the political uncertainties that are popping up everywhere.
First, monetary policy: the Bank of Japan is continuing its policy of monetary flooding. Although this policy has not brought about the desired results over more than 20 years, this is the only possible outcome of the re-election of Prime Minister Abe.
Second, monetary policy: over the Christmas holidays, another “Big Bertha” (“LTRO”)1 from the European Central Bank (ECB) ran out and repayments of the three-year tender of EUR 270 billion are due by February, which will shrink the central bank balance sheet and make the monetary guardian sweat, because the volume of the new conditional long-term tender fell short of expectations. The resulting balance sheet shrinkage is grist to the mill of proponents of extensive purchases of government bonds. This is all the truer as consumer prices are expected to go into reverse in future on the decline in the oil price. Things will not become interesting until 14 January, when the European Court of Justice, on the initiative of the German Federal Constitutional Court, announces its judgment on the OMT(Outright Monetary Transactions) purchases.
Third, monetary policy: the US Federal Reserve (Fed) is expected to introduce its first rate hike over the summer, but it is making every effort to protect the market as much as possible during this implementation.
For investors, this means: none of this does any good. Once the price of money is distorted, the result is misallocation of capital, and even macro- prudential measures only help under certain conditions. Some pay for this with negative real interest rates, others battle with valuations that increase with risk, with a tendency towards asset price bubbles. In addition, the focus is moving to the economy. We still do not expect deflation. The latest data from the US support that view. Furthermore the latest European consumer price indices need to be seen in the light of the oil price.
What remains is a set of geo-political uncertainties. The Russia-Ukraine conflict continues to smolder and shows that the laws of economics cannot be overridden, as indicated by the Ruble. Increased risk demands higher risk premiums. In Greece, new elections at end-January could put the entire reform process up for debate. One item that few have on the agenda: in May there will be elections in the United Kingdom and critics of Europe see an opportunity.
There remains just one thing: use volatility for active investment or make use of multi asset solutions.
Opinion Column by Hans-Jörg Naumer, Global Head of Capital Markets & Thematic Research, Allianz GI
CC-BY-SA-2.0, FlickrFoto: Eduardo Mar. A corto plazo las valoraciones en Brasil ya no resultan tan atractivas
Italy’s independent asset manager Azimut has signed a deal to acquire 50% of Brazil’s LFI Investimentos through AZ FuturaInvest, one of its Brazilian joint ventures, said italian media.
LFI is an independent wealth management company based in Sao Paulo, founded in 2009 with a proven track record on developing customized investment solutions for Brazilian HNWI.
The Brazilian company counts seven experienced professionals, with an average tenure of more than 25 years in the industry and approximately R$500m (US$190m) AUM.
AZ FuturaInvest is Azimut financial advisory arm for the Brazilian market providing professional advisory services on asset allocation, funds selection and financial education.
“With LFI, AZ FuturaInvest will be able to offer new and efficient wealth management solutions to families and HNWI clients leveraging on LFI experience to structure customized portfolios. The team of LFI will add up to the FuturaInvest advisory team which currently counts more than 40 professionals,” the company said.
The transaction, which is not subject to the approval by the competent authorities, involves a purchase price of around R$ 8.5m (around US$ 3.2m) to be paid to LFI founders in four tranches during the next five years depending on the attainment of specific targets.
Marcelo Vieira Elaiuy and Fabio Frugis Cruz, founders of LFI commented: “Joining Azimut project is a fundamental step to improve our business. We will be able to leverage on the entire Azimut structure maintaining our independent governance and focus on clients’ interests. We are confident that the quality of the new structure will result in huge benefits for our customers.”
Pietro Giuliani, Chairman and CEO of Azimut Holding, added: “Despite a tough 2014 for the Brazilian investment fund industry, our local operations registered an encouraging growth, confirming the value of our business model and the quality of our partners. The complementary nature of LFI and AZ FuturaInvest gives new strength to our project, which rests on providing asset allocation and financial advisory services to our clients. We continue to scout all the international markets in which Azimut operates in order to attract more talents, and the JV with LFI reinforces our focus on Brazil as one of the key markets for Azimut international expansion.”
Capital Strategies Partners, a third party mutual fund distribution firm, holds the distribution of AZ Fund Management products in Latin America
Photo: Dennis Jarvis. “Make in India”: A Push for Manufacturing
India’s challenges in the manufacturing sector illustrate the complexities of implementation in real (versus theoretical) political and economic systems. Ownership barriers, rigid labor laws, complex land acquisition rules and weak infrastructure have conspired to stunt manufacturing growth. But whenever these barriers have been lifted, explains Sharat Shroff, portfolio manager at Matthews Asia, the response from the entrepreneurial community has been encouraging. The automobile industry, liberalized in 1991, was among the first segments of manufacturing to open up to private sector participation. Since then, output has grown 15-fold and, India is increasingly considered a destination for manufacturing and an export base for auto parts and automotive vehicles.
India’s newly elected Prime Minister Narendra Modi has made manufacturing a key agenda point, thinks Shroff. Specifically, his administration plans on building a globally competitive industrial sector that can steadily increase market share in exports. To support this, authorities have progressively lowered ownership barriers to foreign firms within manufacturing. Most recently, in the defense and railways sectors, it has increased the level of ownership permitted by foreigners to 49% and 100%, respectively.
Labor laws in India are more vexing because they are legislated concurrently by both the central and state governments. The Northwestern state of Rajasthan has taken the lead in labor deregulation by reducing government-approval restrictions on hiring/firing workers. Other proposed measures aim to provide greater flexibility in running factories, and in complying with existing labor laws. If the efforts in Rajasthan lead to greater job creation, it will be difficult for other states not to follow suit.
Formal job creation is surely a goal of Mr. Modi’s and the kinds of changes sought by the state of Rajasthan are certain to challenge some vested interests. But the recent elections have given a broad mandate of growth and governance over welfare entitlements to the incoming government, concludes the Matthews Asia expert.
Ethenea Independent Investors S.A. expands its Portfolio Management Team by a new colleague. Peter Steffen strengthens the team around Luca Pesarini, Arnoldo Valsangiacomo, Guido Barthels and Daniel Stefanetti as of January 2015. “We are happy to have experienced Portfolio Manager Peter Steffen aboard. The equities expert completes our team and will support us in the investment decisions of our funds”, says Chairman of the Board of Directors and Portfolio Manager Luca Pesarini.
Peter Steffen holds a Master’s Degree in Finance and Asset Management and is CFA Charterholder. He worked for different banks and gained relevant experience in the areas of Credit Research, Equity Research, Corporate Banking and Alternative Asset Management. In 2007 he joined Deutsche Asset & Wealth Management Investment GmbH in Frankfurt and New York. For three years he worked as analyst for US bank and insurance stocks. Since 2010, he occupied the position of Portfolio Manager and successfully managed the funds DWS Global Value and DWS Top Dividende.
Capital Strategies is Ethenea distributor in Spain and Portugal.
Photo: Eneas de Troya. Assessing the U.S. Economy in the New Era of Innovation
There are driving changes in the U.S. economy, affecting employment, productivity and profitability dynamics: the automation of knowledge work, advanced robotics and the energy revolution. These trends are just the tip of the iceberg, says Pioneer Investments. “Over the coming decade, radical changes in healthcare, education, communication, transportation and alternative energy – to name just a few – will transform the economy and the investment landscape. We believe that new modes of research and analysis will be necessary in order to interpret the impact of these changes on both the macro and micro levels of the economy”.
Selection in the Era of Innovation
In this era of accelerating innovation, Pioneer´s analysts believe that a fundamentally different analytical perspective on long-term factors shaping the economic landscape is required. “This framework, together with the more traditional sector/business financial analysis, will potentially enable us to identify unique return opportunities and uncover hidden risks in each market”. Key factors for the firm are:
New technologies’ impacts on sector trends
New business emergence
Rapidly evolving disruptive competitors
Business model flexibility; the ability to leverage a platform, respond to competitive threats, reshape product and service offerings
Demonstrable innovation track record (ability to enter new markets/launch new products)
The ability to attract/retain innovation talent, shed costs, rapidly increase productivity
Accelerating Innovation: Far-reaching, Positive Consequences on the Economy
The U.S. economy is in transition, moving rapidly towards a knowledge-based economy that will rely increasingly less on human labor to manufacture goods and provide many services. “We believe the trends we have discussed will rapidly reshape the economic landscape. With any dramatic change comes uncertainty and some fear. Many pundits have highlighted the possible downside of these changes. While we are sympathetic to these concerns, we believe that accelerating innovation will ultimately create more jobs than it destroys, produce dramatic wealth and have far-reaching positive consequences to areas of the economy that have historically been less productive (education and healthcare are good examples)”, explains Michael Temple, director of Credit Research at Pioneer Investments and portfolio manager for Pioneer Dynamic Credit Fund.
Every economic transition generates dislocations. Society ultimately adapts but the transition will be difficult to navigate for those unable to keep up. This has significant ramifications for the investment landscape, opines Temple. “Investors that use traditional frameworks to analyze the market, picking winners and losers based on outdated valuation relationships or assessing macro-economic policy based on irrelevant historical paradigms, run the risk of focusing on the wrong things”.
Photo: Florian K. Alain Ucari Succeeds Bruno Dumitrescu in The Leadership of Julius Baer’s Entities in Monaco
Effective from 6 January 2015, the leadership of Julius Baer’s entities in Monaco changes: Bruno Dumitrescu, who has led both Bank Julius Baer (Monaco) S.A.M. and Julius Baer Wealth Management (Monaco) S.A.M. since 2010, has decided to step down from his present management responsibilities to fully focus on acquiring and servicing key clients in the future. He is succeeded by Alain Ucari who joins Julius Baer from Credit Suisse Monaco where he has been CEO.
Bruno Dumitrescu joined Julius Baer during the acquisition of ING Bank (Switzerland) Ltd and its subsidiaries in 2010, after leading their wealth management in Monaco as CEO for eight years. Previously, he was Commercial Director at ABN-AMRO Bank N.V. in Monaco for seven years. His leadership in the past years enabled the Bank and Wealth Management companies of Julius Baer in Monaco to successfully and strongly grow. Going forward, Bruno Dumitrescu will fully focus on acquiring and servicing key clients in his new roles as Senior Relationship Manager within the Bank and Vice-Chairman of the Wealth Management Unit in Monaco. He will continue to report directly to Rémy Bersier, Region Head Southern Europe, Middle East and Africa and member of the Executive Board.
Alain Ucari takes over from Bruno Dumitrescu as CEO of Julius Baer’s two entities in Monaco, reporting to Rémy Bersier. Prior to joining Julius Baer, he was CEO of Credit Suisse Monaco during more than twelve years. In this position, he continuously expanded the bank’s share of the local market, broadening the client base and increasing the profitability. Previously, Alain Ucari worked in senior management functions for Credit Suisse in Lebanon, the United Arab Emirates and in Switzerland. He maintains an extensive professional network, both in Monaco and on an international level.
“I would like to thank Bruno for his outstanding commitment, his personal contribution as well as for his achievement in successfully positioning Julius Baer in Monaco and developing our local business in the past years. I am pleased that we can continue to build on his broad expertise in his new roles. At the same time, I am also very happy that Alain agreed to take over such an important management responsibility. With his solid experience, excellent reputation and vast network he is the best possible choice to further build on Julius Baer’s positioning in Monaco. Bruno and Alain will closely collaborate to ensure a smooth transition and to set the path for further growth in this key market,” said Rémy Bersier.
Photo: Alastair Mundy, Head of Value at Investec. Investec: “Finally Things Are Changing With Large Companies in UK”
Alastair Mundy, Head of Value at Investec Asset Management, discusses in this interview where he sees the best investment potential in 2015.
What has surprised you most in 2014?
What has really surprised me this year was quite how poor the performance of Tesco’s share price was. We knew trading was tough in the food retail sector and we knew their accounting was pretty aggressive, but even we were surprised when the accounting irregularities hit the screens.
However, we are keeping faith with Tesco, we still think they can turn the business around, and we think they can compete against discount retailers. There is now new management at Tesco, Dave Lewis has come in from Unilever, and we expect him to shake things up very quickly; perhaps sell the Asian or European divisions and/or some non-corporate businesses, and perhaps be more competitive against the discount retailers.
Where do you see good value in the UK equity market in 2015?
The best value we see in the UK equity market going into 2015 is in the larger stocks in the market. Companies like HSBC, Glaxo, BP and Shell have performed poorly against the mid-cap companies over the last decade and we think finally things are changing with these very large companies. Rather than looking for acquisitions they are making disposals, reducing their non-core assets, cutting costs and we believe focusing on what is right for the shareholder.
Why do you believe there is value in mega caps?
We think if mega-cap companies can shrink back to where they really have the strong competitive advantage, shareholders will be surprised at the amount of earnings growth these companies can deliver. They are on quite low valuations already compared to some other smaller companies in the market, so we think that is what is going to drive performance.
How are you positioning your portfolios in terms of strategy and style?
Our UK Special Situations portfolio is positioned increasingly towards the FTSE 100 companies, where we have a very large weighting. We have been reducing our weighting towards FTSE 250 companies over the last couple of years and this has continued in 2014. We also hold quite a lot of cash; not so that we can spend it if there is a small market fall, but to wait for some really fantastic opportunities or for individual stocks if they have profit warnings or fall significantly out of favour.
How are you positioned in your complementary assets on your Cautious Managed portfolio?
We think it is very important to focus our Cautious Managed portfolio on capital preservation at the moment, as we see a number of concerns around the world. These concerns range from geopolitical worries to fairly disappointing earnings growth for companies worldwide, and, of course, the end of quantitative easing in the US. All of these factors suggest that equity valuations should not be as high as they are. So, what do we need if we think equity valuations are going to fall? We need some complementary assets such as gold, gold equities, Norwegian krone, cash and index-linked bonds, both US and UK. We cannot be absolutely positive that these complementary assets will rise if equity markets fall significantly, but we are hoping that they will dampen volatility if equity markets become more volatile. The strategy of investing in out-of-favour companies and combining this with a focus on complementary assets that work well with equities in different times in the cycle has been a strategy that has been successful for us over the past 21 years on our Cautious Managed portfolio.
Photo: John Bennett, Head of European Equities at Henderson. Henderson: "Europe Remains the Global Whipping Boy"
Europe remains the global whipping boy, says John Bennett, Head of European Equities at Henderson. But among european countries, the Henderson team prefers Germany, “where balance sheets are improving and political headwinds are easing”.
What lessons have you learned from 2014?
I have long believed that we live in a world of momentum investing. Investors fail to anticipate inflection points; they like to chase it once the inflection has already happened. This is reflected in the amount of time that people waste from quarter to quarter, focusing on earnings per share (EPS) guidance as an indicator of a company’s prospects. This is a horrible trend that originated in the US. The way to get a competitive advantage, in my view, is to ignore it and focus on what really matters – cash flow. I always look at the cash flow, because cash will always out, as will value.
2014 also provided a reminder of why (with the exception of some of the Nordics), I prefer to ‘rent’ or trade European banks, holding stocks in the sector on a short-term basis. The industry has been a disappointing investment since the mid-1990s and it remains in a structural bear market, subject to short, sharp rallies.
Where do you see the most attractive opportunities within your asset class in 2015?
I think that large caps offer the best prospects in Europe, with investors willing to pay a higher price for quality businesses where they perceive a greater source of safe income. At a sector level, our established and often contrarian commitment to the pharmaceutical sector remains intact, while “smart cars” has been a consistent investment theme for two years now.
Recent months has seen us call off a major bear in telecommunications and utilities, two areas of potential opportunity in 2015. Merger and acquisition (M&A) speculation has fuelled a rally in the European telecommunications sector and we expect further consolidation going forward. The case for utilities is driven by delta – the rate of change we see in the industry. We are focused primarily on Germany, where balance sheets are improving and political headwinds are easing.
What are the biggest risks?
Europe remains the global whipping boy: the economy is in a mess, politicians are dysfunctional (a global problem) and there are fault lines in financial markets. I prefer to focus on the micro, identifying attractive sector and stock-specific opportunities, rather than geopolitical events we cannot influence and which may, or may not, be a factor.
Are you more positive or negative now than you were 12 months ago on the economic and investment outlook, and why?
The bull market is starting to look stretched in Europe and without a step-up in revenue growth leading to earnings growth any rise in equity markets can only come from an expansion of price/earnings (P/E) multiples. M&A activity is likely to remain in focus and may well accelerate. In the near term, investor uncertainty has risen and the market remains schizophrenic, while deflation remains a real and present danger. The European Central Bank is clearly seeking to underpin the eurozone and we saw in 2012 that this can be very supportive. But equities were cheaper back then and the cycle younger.
I think 2015 could see a significant pick-up in volatility, so investors should brace themselves for difficult markets. That is why I think stock picking is so important. By understanding a company’s strengths and weaknesses we can seek to be better positioned than the general market both in good times and bad.
Photo: Peter Eerdmans Co-Head of Emerging Markets Fixed Income . Investec's Peter Eerdmans Sees More Room for Positive EMD Returns this Year
As he reflects on events in 2014 and looks forward to the coming months, Peter Eerdmans, Co-Head of Emerging Market Fixed Income at Investec AM, sees more room for positive EMD returns this year.
How did EMD perform in 2014?
2014 was an eventful year for emerging markets, characterised by geopolitical risk and volatility. 2014 was, however, better than 2013, when there was a lot of negativity about emerging markets. Since then people have started to re-engage with emerging markets. They rallied through the spring and summer, but when the dollar started strengthening the markets ran into resistance again. Nevertheless, emerging market bonds have continued to post positive returns on the year, as many emerging markets have reached a level of economic maturity that allows them to benefit from low global inflation. EM currencies have been more mixed, as some economies require further adjustment to cope with tightening US monetary policy. Also, geopolitics has had a major impact on specific countries, notably the Russia/Ukraine conflict, the Argentinian default, and Iraq/ISIS. These themes have impacted local markets but not global emerging markets as a whole, allowing currency selection between countries to offer some protection to investors.
Should we be concerned about rising interest rates and a stronger dollar in the emerging economies in 2015?
The markets will have to work with rising interest rates from here and with that probably a slightly stronger dollar. We will have to navigate the portfolios through those times. But we do not think that there will be either excessive interest rate rises in the US or excessive dollar strength. The US also has its issues. Trend growth is lower, which means we are unlikely to see a strong US dollar bull market, as in the 1980s and the late 1990s.
The asset class has re-priced: we think emerging markets are a lot cheaper and a lot more is priced in. Emerging markets have implemented reforms and now have flexible exchange rates, their current accounts look better, external debt is lower, and FX reserves are healthier. To re-cap, many key factors in emerging markets are stronger today than in previous crises, so we think emerging markets will perform better in future crises. Of course, there will be times when we have to adjust the portfolio more tactically to protect it, but there will be other times when emerging markets will perform well.
What are the biggest risks to these views?
One of the key risks is monetary policy withdrawal, i.e. less easing and more tightening over the next year or so. But as outlined above, we think that emerging markets are well placed for that. We also think that they will react with more positive reforms. Emerging markets have had an easy decade. Quantitative easing made it very easy, as a lot of money flowed into emerging markets.
Another risk is China. A key question is: Will we see a hard landing that will impact Asian markets and commodity prices further? We think that the Chinese have all the levers to navigate their growth gently slower as they rebalance their economy. Notwithstanding this, we believe there is going to be a moderate slowdown in China, which we think emerging markets will be able to withstand. There will be winners and losers from slower growth in China — countries such as Turkey and India which compete with China for commodity imports will benefit as the price of those commodities fall.
How are you positioning your different strategies?
We run a lot of different strategies. Broadly speaking, we prefer markets that are weighted towards manufacturing. Asia is a region that we like, especially as regards to currencies. We are more cautious about rates. Latin America will be slightly more challenging, in terms of growth, because of the predominance of commodities in that region. Overall, we like bonds better than currencies because our inflation outlook sees moderating inflation and lower inflation should help bonds. We are more neutral on currencies, as although they offer value they are faced with a dollar headwind. We focus on relative plays, on picking the right countries to be overweight and picking the right countries to avoid.
Photo: Valentijn van Nieuwenhuijzen, head of Strategy Multi-Asset at ING IM . Investors Expect Deflation in Europe and QE by the ECB in 2015, ING IM Survey Reveals
According to the latest Risk Rotation survey released by ING Investment Management (ING IM), 64% of institutional investors expect the ECB to introduce quantitative easing (QE) measures this year, almost one third (27%) sees first measures to take place in the third quarter of 2015.
The research, which is based on a survey among 152 institutional investors, also revealed that half of all respondents consider a deflationary Japan-style scenario in the eurozone to be ‘moderately likely’, while 13% see it as very likely. Only 23% of investors believe that the eurozone will not enter deflation.
Valentijn van Nieuwenhuijzen, head of Strategy Multi-Asset at ING IM says: It is clear that there are very real concerns of a prolonged period of deflation which could – if investors are correct – twist Draghi’s arm when it comes to implementing a Sovereign QE programme in early 2015.
Other than a potential Eurozone crisis, investors cited interest rate rises (50%), Chinese hard landing (47%) and a fiscal shock (37%) as the most significant risks posed to investment portfolios.
With regard to asset allocation, 40% of institutional investors surveyed say they have maintained their positions in terms of risk over the past six months. European investors appear to be the most bullish when it comes to risk, with 32% having increased their appetite in recent months, compared to 29% for all investors.
