Financial Anxiety Takes a Toll on Millennials

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Foto: Mozaico. Foto:

The Millennial generation gets a lot of flak, but is it actually warranted? Often pegged as lazy and entitled, Millennials actually highly value hard work and education, surveys have shown. Unfortunately, hard work and education aren’t getting them as far as it did previous generations; Millennials face greater financial burdens with rising education costs, crippling student loan debt and stagnant wages. As the costs continue to soar and Millennials take on more debt, it’s little wonder that many of them experience financial anxiety. One study found that 74 percent of Millennials surveyed feel daily stress related to their student loan debt.

American Financial Benefits Center (AFBC), a document preparation company, recognizes that Millennials face tough financial challenges in today’s economy and reminds student borrowers that there may be options to help. “We hear all the time that it’s gotten harder to make ends meet,” said Sarah Molina, manager at AFBC. “When you look at the statistics, it becomes clear that this isn’t an exaggeration.”

Higher education has become increasingly expensive; since 1980, tuition has risen nearly 260 percent. The rising costs and loan interest have made it more difficult for Millennial borrowers to pay off student debt than it was for previous generations. Baby Boomers, for example, would have had to work 306 hours at a minimum wage job, adjusted for inflation, to pay for four years at a public college; Millennials have to work an average of 4,459 hours in comparison. Millennials also have 300 percent more debt than their parents, the majority of which consists of student loans. Many Millennials with student debt have a net worth of -$1,900; they owe more than they own. In addition to shouldering monumental student loan debt, they face other financial challenges with increases in housing and medical costs, as well as lower wages.  

“It’s easy to take on student debt without realizing how much it will impact you later,” said Molina. “After graduation, the reality of having to pay off the debt sinks in and many young people feel overwhelmed trying to balance loan payments with other expenses.”   

According to a study conducted by Northwestern Mutual, approximately one-quarter of Millennials say that their financial anxiety affects their job and makes them feel physically ill, compared to 12 percent of Boomers or Gen Xers. A quarter of them also said that it affects their relationship with their significant other and causes them to miss social opportunities. Furthermore, 18 percent of Millennials said their financial anxiety caused them to feel depressed on a weekly basis. Adding to the stress, many Millennials don’t know the details of their loans or even how long it will take to pay off their debt. For Millennials with federal student loan debt, income-driven repayment plans (IDRs) may be a helpful option to reduce some of the financial stress. By taking into account a borrower’s family size and monthly discretionary income, loan payments can be recalculated to what should hopefully be a more manageable amount.      

“We feel young people should be able to have options for paying off their loans so their financial anxiety can be lessened,” stated Molina.

Are we Heading Towards a Political Crisis in the Eurozone with Italy?

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¿Caminamos hacia una crisis política en la eurozona con Italia?
Pixabay CC0 Public DomainWenPhotos. Are we Heading Towards a Political Crisis in the Eurozone with Italy?

The risk of a new sovereign crisis in the Eurozone seems to have come to a halt after the uncertainty caused by the Italian elections and the subsequent formation of a populist government. At the end of the second quarter, Italy became the center of attention and the fear of contagion resurfaced again. Will Italy – and the rest of the peripheral markets – endure the political noise? Noise such as that caused by the Italian Deputy Prime Minister and leader of the 5 Star Movement, Luigi Di Maio, when he affirmed that the government would not ratify the free-trade agreement between the EU and Canada (CETA). These types of statements generate uncertainty in the market and concern for international investors, as what happened with Greece during the economic crisis still remains fresh in their memory.

This is where asset management companies reassure and argue that we are not facing the same case. “As simple as the idea that we are facing a Greece II may be, there are several factors that override this perspective. On the one hand, the Italian economy is much larger: it represents approximately 15% of the economic activity registered in the Eurozone, compared to 1.6% for Greece, and traditionally, its economy and banking system are considered much more integrated with the rest of the Eurozone. Italy is also the third largest debtor in the world (130% of its GDP), after the United States and Japan. In addition, according to the figures handled by Deutsche Bank, only 40% of this debt has domestic creditors: foreign investors (around 35%) and the Euro system (approximately 18%) account for the majority,” Robeco sources explain.

Likewise, they consider that the contagion to other countries, especially the peripheral ones such as Spain or Portugal, is low. According to Oliver Marcoit and Guilhem Savry, Managers of Multiactive Strategies at Unigestion, contagion is very limited given the consolidation that exists in the Eurozone since the European debt crisis.

Spain has its own problems, however, and the vote of no confidence that took place in June revived market tensions, since the markets are taking into account the risk that populist parties will gain access to executive functions. The combination of political risk in both Italy and Spain would weigh on European assets as a whole, with the spreads of the peripheral government and the Euro at the forefront,” warn Marcoit and Savry.

Italian Risks

That the risk of contagion is low, or that Italy’s context is totally different from what Greece was, does not exempt it from having a long list of tasks ahead to avoid weakening the European project. According to Philipp Vorndran, Market Strategist at Flossbach von Storch, Italy is at a moment of transition and exposes its public coffers to a new challenge, which will only be viable if interest rates are maintained at the current level.

In fact, the “Government for change” proposed by Italian Prime Minister Giuseppe Conte is a challenge for the public coffers and may lead to a greater imbalance than expected. According to a study by Flossbach von Storch’s Research Institute, the net negative fiscal impact of the proposed measures could reach 100 billion Euros per year. Amongst the proposed measures are the reduction of fuel taxes, the repeal of the recent pension reform, and the creation of an income for citizens living below the poverty line. Minister Conte’s plan, however, does not clarify how he plans to finance these and other measures. On the one hand, VAT remains unchanged. On the other hand, the reduction of expenses, such as the abolition of “golden pensions”, limitations on international missions, and the elimination of the life pension for members of parliament, does not release enough capital to finance the measures provided for in the coalition agreement. According to this study, the financial hole in public coffers could reach 120 billion Euros.

According to Vorndran, it also seems unlikely that these measures will significantly boost economic growth and improve the trade balance. “Half of the proposed measures would have a negative impact, going from the current 132% today to 141% of the GDP until the end of the mandate. As long as Italy’s economy maintains the growth rate of the last five years and the ECB extends its favorable monetary policy for the refinancing of costs,” he says.
 

Close to 20,000 Candidates Pass Level III CFA Program Exam

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CFA Institute, the global association of investment management professionals, announced that of 35,518 candidates who sat for the Level III CFA Program exam in June, 56 percent have passed, completing their final CFA Program exam. Successful Level III candidates will become CFA charterholders starting in early October, pending verification of professional experience and other membership requirements. They will join more than 154,000 charterholders around the globe who have earned the CFA designation and lead the investment industry by promoting the highest standards of professionalism to build a better world for investors.

Level I and II candidates received their results on August 14th. Of 79,507 candidates who sat for the Level I exam in June, 43 percent were successful and of 64,216 candidates who took the Level II exam, the pass rate was 45 percent. These candidates will continue on their journey to becoming CFA charterholders.

“Congratulations to all candidates who passed their June exam and those who will soon be awarded the CFA charter,” said Stephen M. Horan, CFA, CIPM, managing director of credentialing at CFA Institute. “Successfully completing all three levels of the CFA Program is an outstanding accomplishment, setting the foundation for a career-long journey of professional learning. As we strive to build a better world for investors, our incoming charterholders are joining a global community of highly motivated individuals committed to putting investors interests ahead of their own, and creating a profession that serves society’s need for a well-functioning investment management industry built on trust.”

The total number of candidates who sat for a CFA Program exam in June grew 18 percent globally year-over-year, with a 25 percent increase in Level I candidates for the same time period. Strong demand for the program continues in emerging and developing economy markets, where candidate numbers have doubled over the past five years. View historical pass rates and a series of infographics about the growth of the CFA Program.

Axel Christensen (BlackRock): “In the Short-Term, the New Mexican Government May Bring Good News in Terms of Increasing Consumption”

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Axel Christensen, Head Investment Strategist for the Latin America and Iberia region at BlackRock, and a member of BlackRock Investment Institute, has recently relocated from Santiago de Chile to Miami. On July 19th, he participated in the 2018 Mid-Year Outlook presented by the BlackRock Investment Institute at the Mandarin Oriental Hotel in Miami, sharing his views on Latin American markets and the concerns that BlackRock’s clients in the region -pension funds in Mexico, family offices in Brazil or insurance companies in Peru- are conveying.  

After being in negative territory or close to zero in 2015 and 2016, last year, the GDP growth forecast for the Latin America region started to pick up. For next year, market analysts are expecting a growth of about 3% a year. 

“Probably due to the increase in uncertainty and risks, the final growth rate will be somewhere lower than a 3%. But I would like to say that the glass looks half full when looking at the region. The numbers in aggregate look good. We have seen a recovery in growth. Additionally, inflation, which has been a problem in the past, has been converging nicely into their target zone for most of the central banks in the region. The current account deficit, which is very important in rising rate environment because it tells you how exposed the region is to changes in flows, and the fiscal balance, meaning how much money is the government overspending in comparison to their income, are probably still two of the more challenging issues,” explained Christensen.

“If we look at the region as whole, I would say that the picture is a good reflection of a fairly looking awkward environment. A lot of the economies in the region are very synchronized with the US economy, something that we look forward that should continue. It we look at things at a more specific level, the region starts to become much more interesting, especially from the risk perspective. Perhaps, the risk that most investors are spending time on while looking into Latin America is political risk. There is a good reason for that. If we look at the past twelve to eighteen months, we had a very busy electoral cycle. We had Congressional elections in Argentina in October last year. We also had a General election in Chile. This year we had Presidential elections in Colombia and Mexico, and next October a major election will be held in Brazil. And, guess what? We do not know who is going to win”, he added.

In Latin America, BlackRock uses an index specifically built for the region, that they named the ‘Increase of Latin American populism’.

“We are concerned that changes in government will bring back policies in the economic space that not necessarily fit well with financial markets, being for instance a new President in Mexico that has come in with a very strong mandate to change things. We are concerned that change might mean removing some of the recent reforms that the current government has put in place, like opening the energy sector to private investment. And of course, in Brazil, we are concerned because whoever will lead the government, starting next year, will have to face very tough decisions from the first day in office: to solve a situation of high fiscal deficit on top of a lot of public debt being issued to finance that deficit. There is a lot of concern from investors on who is going to lead these countries and whether they are going to take right decisions that eventually will lead their economies to grow and therefore companies to prosper. The macroeconomic backdrop is pretty good, so is not that we are overly concerned in an overall sense, but we do identify there are specific challenges that may make the difference.”

Latin America is signaling green

The Latin American heatmap, the visual representation of economic indicators using red, yellow and green colors that BlackRock prepares to have a better grasp of what is going on in the region, is overall signaling green. The macro indicators of the two largest economies, Brazil and Mexico are also green, despite their higher exposure to political uncertainty. 

Mexico and Brazil

Investors in Mexico are in a “wait and see” mood. They want to see how the new government comes in. A lot has been said during the campaign, and investors want to check to which extend AMLO (Andres Manuel Lopez Obrador) is going to fulfill his electoral promises.

“This uncertainty is going to create interesting opportunities. As investors, we are seeing valuations on fixed income and equities that have not been at this levels for some time. A couple of Mexican companies, that we have visited there, see that in the short-term the new Mexican government may bring good news in terms of increasing consumption. As the new government wants to increase wages, people will have more disposable income to buy more goods and services. There is also an ambitious infrastructure investment agenda. However, they are concerned that the government may get too ambitious in terms of spending too much, and that the longer-term effect on Mexican economy may end up being negative. Not only in terms of fiscal situation deterioration, but also in terms of a delay on investments decisions, that may affect economic growth, and eventually although we may have a couple of very good initial years, the Mexican economy may end up paying higher financial costs because the risks of holding Mexican assets goes up,” he clarified. 

The case in Brazil is somewhat similar, BlackRock does see some green lights on the macro side. However, they are concerned with the high level of debt that the government carries and the uncertainty about the election. There are 13 candidates for the first round at the beginning of October, the frontrunner has slightly around 20% of voter support. Brazilian investors are holding to see who wins.

Argentina and Venezuela are signaling red

A couple of countries have, unfortunately, more red lights. Of course, there has been a very difficult economic situation in Venezuela, for some time now, in terms of geopolitical risks and hyperinflation. And then, Argentina, who used to share more green lights with the other countries, is now signaling more reds. As of recently the situation has become a lot more difficult, because the interest rates have come up responding to very high inflation level that has been reflected in the strong devaluation of the Argentinian peso against the dollar.

“The prospects of growth in Argentina are very concerning: To what extent can a country withstand such a high interests rates? It is very difficult for the Argentinian economy not to be affected in terms of growth. We are also concerned about the current account situation and their high level of debt. But if anything, we still think that the government is strongly committed to bring forward the necessary reforms at the Argentinian economy, and it needs to start resolving some of the more worrying aspects.”

Fortunately, most of the other economies in the region are doing quite well. Some of them are signaling green. Definitively Chile, Colombia and Peru are going through a more favorable part of the cycle. “We see growth in the Andean Region. Thanks to the comeback of commodities prices that are very important for the economy of this region -being copper, because of Chile and Peru, being oil, because of Colombia- the situation looks pretty good. At the same time, if we look at markets and their valuations, a lot of that good situation is already in the price,” he concluded. 

Fintech and Machine Learning Among New Topics for the CFA Program Curriculum in 2019

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Fintech y aprendizaje automatizado, entre los nuevos temas incluidos en el programa de CFA de cara a 2019
Pixabay CC0 Public Domain . Fintech and Machine Learning Among New Topics for the CFA Program Curriculum in 2019

CFA Institute, the global association of investment management professionals, has introduced its 2019 CFA® Program curriculum for June and December 2019 exam candidates. Guided by a robust practice analysis process that tracks how the investment management profession changes over time, CFA Institute regularly updates its curricula to arm candidates with the skills and knowledge needed for success in the rapidly evolving industry.

“The integration of next-generation knowledge into our curricula on emerging topics like fintech and machine learning ensures our candidates are fully prepared to not only have a place in the industry, but to lead it,” said Stephen M. Horan, CFA, CIPM, managing director of credentialing at CFA Institute. “It is challenging to keep a nearly 9,000-page curriculum up to date, and we take that task very seriously to prepare the next generation of investment managers for the demands of the global capital markets.”

The CFA designation is one of the most respected and recognized investment management designations in the world, and its reputation and that of CFA Institute depend upon maintaining a comprehensive “gold standard” curriculum. To ensure its integrity and relevance, the organization gathers input from practicing investment management professionals, university faculty, and regulators around the globe, who help identify and prioritize the CFA curriculum areas to be added, deleted, or revised. 

The 2019 CFA curriculum update includes a total of 10 new readings and major revisions and improvements to 18 existing readings. Among the highlights:

  • Fintech enters the CFA Program curriculum at Level I and II, surveying the range of technologies and financial applications in investment management, new content on Machine Learning, and ethics cases within a fintech work setting.
  • New content for Level III in Equity Portfolio Management reflecting the latest practices in the areas of both passive and active equity investing.
  • New Level III content on Professionalism in Investment Management explaining the characteristics of investment management professions and CFA Institute as a professional body.
  • 20 sets of practice problems supporting new curriculum content.

Candidates study approximately 1,000 hours on average to master nearly 9,000 pages of curriculum. Its depth and breadth provides a strong foundation of advanced investment analysis and practical portfolio management skills, which gives investment professionals a career advantage. To earn the charter, candidates must pass all three levels of the exam, considered to be the most rigorous in the investment profession; meet the work experience requirements of four years in the investment industry; sign a commitment to abide by the CFA Institute Code of Ethics and Standards of Professional Conduct; and become a member of CFA Institute. Less than one in five candidates who begin the program actually become CFA charterholders, a testament to the determination and mastery of professional competencies demonstrated by successful candidates.

Jupiter Makes Two New Senior Appointments to its Team

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Jupiter AM refuerza su equipo de distribución internacional con dos nuevos fichajes
Pixabay CC0 Public Domain. Jupiter Makes Two New Senior Appointments to its Team

After Jupiter’s appointment of William Lopez, who is leading the firm’s distribution efforts in Latin America and US Offshore, the firm continues to strengthen its distribution capabilities to support its growth in international markets with two key hires. Nick Anderson joins as a Senior Adviser for the Middle East and Africa and Paul van Olst joins as Head of Netherlands.

Nick will be looking at opportunities to further develop Jupiter’s footprint across all sales channels in Middle East and Africa where Jupiter already has relationships with selected third party distribution partners. Nick has over thirty years’ experience in the industry, with a strong reputation in the Middle East and Africa. He was most recently Country Manager and Head of Institutional Client Business for the Middle East & Africa at Blackrock.

Paul, who will be based at the newly-established Jupiter office in Eindhoven, will be responsible for the set up and build out of Jupiter’s business in the Netherlands. Paul joins from Fidelity International where he worked for 15 years in various sales management roles in the Netherlands and Benelux, most recently as Head of Distribution, Netherlands. Prior to this, Paul worked for over ten years at Zurich Financial Services in the Netherlands.

Nick Ring, Global Head of Distribution, commented: “We are very pleased to have attracted three experienced and highly-respected individuals to spearhead our business drive in their respective regions. Our strategic priority has been to expand our international business in a considered way and where we find the right people to communicate Jupiter’s investment expertise to potential investors. The appointments of Nick, William and Paul are a natural next step to broaden and deepen our global growth story.”

The Problem With Turkey

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¿Cuál es el problema de Turquía?
Foto: Kremlin.ru. The Problem With Turkey

Since the start of July, EMD assets have bounced with local and dollar debt markets up. According to Investec Asset Management, the positive returns reflect the still solid fundamentals across most of EM and the extent of the sell-off in Q2 reinvigorating value into the asset class. However, Turkey has been the noticeable exception – it is the only country to have a material negative return.

Grant Webster, Portfolio Manager, Emerging Market Fixed Income at Investec believes that “the drivers of recent weakness have been the same drivers that have weighed on the country’s markets over the medium term; namely a lack of credibility at the central bank, an unwillingness or inability to address external vulnerabilities and, related to both these points, a troubling political backdrop of heterodox macro policy and increasing authoritarianism.”

For Webster, both domestic and foreign politics are headwinds for investors. Relations with the US have also worsened, which speaks to the ongoing deterioration in relations with the West, and “since Erdogan’s election victory in June, there have been several moves that have rattled investors including, changing the rules to make the central bank governor a political appointee. Moreover, the appointment of his son-in-law (and potential successor), Berat to head up the finance and treasury ministry.”

He also mentions how the July meeting of the central bank disappointed markets after, and despite both core and headline inflation surprising more than a full percentage point higher, rates were kept on hold and the forward-looking guidance was left unchanged – “the optics couldn’t have been much worse given the fresh concerns about the politicization of the central bank,” he states.
Webster also notes that the current account deficit remains above 5% and that net foreign-exchange reserves keep on dropping, while the currency’s weakness is exerting major pressure on corporate balance sheets.

According to Webster, Turkey is now in very challenging waters but there are some measures it can take to navigate the risk. “The major supporting factor for Turkey is that the government has relatively low levels of debt. Even under our severe scenario analysis debt levels remain manageable. However, if the government is going to take advantage of this supportive starting point, then at the very least we think they need to”:

  • Hike rates by around 500-700bps to take rates to 23-25%
  • Tighten fiscal policy including by increasing fuel and energy prices
  • Act to prevent more damaging US sanctions by re-engaging with the West at the highest level
  • Put in place plans to establish a “bad bank” which could take on non-performing loans from the banking sector in return for capital injections

“Taken together this would stem local demand for dollars, curb inflation expectations, reaffirm fiscal prudence and bolster investor confidence. However, what Turkey needs, and what the government does, are separate questions. If the government delays and the situation continues to deteriorate, we believe the government may need to source around $50bn to finance a bank bailout, as well as increase FX reserves”. As they see it there are perhaps three possible scenarios for how they may try to achieve this.

  1. Seek IMF and Western support- The best outcome is also the least likely: a return to orthodoxy.
  2. Seek support elsewhere: China, Russia and Qatar are potential sources of funding- Given his seeming antipathy towards the West, Erdogan might turn eastwards:
  3. Local ‘solution’- A materially worse outcome than either would be something more akin to autarky

“Turkey is between a rock and hard place. The authorities have some tough decisions to make, but seem unwilling to recognise the scope of the fragilities or take sufficient steps to address them. Ultimately, the market will impose a reckoning. At some point the value that has opened up might start to look like an attractive entry point, but much will depend on the choices made by the authorities. For now, we remain relatively conservatively positioned across portfolios, preferring opportunities elsewhere in our universe where we see better fundamentals and more constructive policy-making.” Webster concludes.

Terry Simpson (BlackRock): “We See Macro Uncertainty Rising, Both To The Upside and Downside”

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Against a backdrop of rising trade tensions, BlackRock Investment Institute’s 2018 Midyear Investment Outlook remains pro-risk, but it has partially tempered that stance given the uneasy equilibrium that BlackRock perceives between rising macro uncertainty and strong earnings. On July 19th, at the Mandarin Oriental Hotel in Miami, Terry Simpson, Multi-Asset Investment Strategist of BlackRock’s Global Investment Strategy Team, discussed the macroeconomic environment and how investors should position their portfolios with investment professionals from the Latin American and US offshore business.

According to Simpson, a year ago, the global economy was facing a very different scenario: a very favorable environment brightened by synchronous global growth with still relatively high levels of monetary accommodation, in which everything was going well and there was an abnormally low volatility. But, these conditions have shifted, and the BlackRock Investment Institute is debating whether there is a new market regime change. 

BlackRock’s base scenario sees strong US growth extending positive spillover effects to the rest of the world, sustaining the global economic expansion. The corporate tax reform has fueled US earnings surprises. However, the range of possibilities for the economic outlook has substantially widened due to US-China trade war tensions and tighter financial conditions via rising US rates and stronger dollar. This greater uncertainty argues for building greater resilience into portfolios. 

Fiscal stimulus spurs US growth

With fiscal stimulus, US companies are rewarded for accelerating their expending on capex, something that could lift potential growth. According to the data provided by the Duke-Fuqua CFO Survey, the Deloitte CFO Signals survey and an average of regional Fed surveys, there is a notable pick-up in expected capex relative to two years ago. Over the next 12 months, capital spending is expected to grow about five times as much, as compared to first quarter 2016 projections.

The S&P 500 first-quarter earnings results confirmed US companies were investing at multi-year highs. “One of the struggles of this economic recovery is that it has yielded a subpar amount of capital expenditures or investment. Now, the government is willing to help finance business capex intentions, and firms are eager to invest. This could potentially extend the current business cycle as some supply side stimulus that may be very beneficial for changes on the potential GDP growth of the US economy”, explained Simpson.

“Developed market capex cycles are very beneficial for emerging markets. Specifically, it could be very beneficial for the Asian region, due to their dependency on global trade”, he added.

The range of possibilities for the economic outlook is widening

This year, the most significant development in the macro environment has been a rising dispersion in consensus forecast for US GDP growth. Economists see a wider range of potential outcomes for future economic growth, as the tails (outliers) of the distribution of the expected GDP growth have widened. On the upside, there is a chance for U.S. stimulus-fueled surprises. On the downside, that same stimulus could spark economic overheating. Resulting inflationary pressures could prompt a quicker pace of Fed tightening and bring forward the end of the current business cycle. Any further escalation in the US-China trade war also could have a knock-on effect on business confidence, hitting growth.

“Last year, forecasters were optimistic due to tax reform and fiscal stimulus. Now in 2018, forecasts have been reduced, something which could have a negative effect on sentiment, both business and households” he stated.

With higher U.S. short rates has come dollar strength

The rising cost of US dollar financing has hurt Emerging Markets (EM), especially those dependent on external funding. “We all know the relationship between the dollar and emerging market assets, there is high sensitivity. The latest episode is proof that when the dollar rises, EM assets are tested. EM local debt and equities have gone down in aggregate. But there have also been idiosyncratic stories in places like Argentina and Turkey. But these are countries that have significant current account deficits. They are going to be challenged whenever the external cost of financing goes up. Regional and country selection is needed and can enhance investing outcomes that have relied on making an aggregate beta call on EM”, said Simpson.

According to the expert, some of this tightening on financial conditions has created new opportunities. Higher US rates have led to a renewed competition for capital and there is less need to search for yield as US dollar-based investors can get above inflation returns in short-term debt -as of midyear, the two-year Treasury was around 2,5%. The result is a higher risk premium all around. This repricing of risk free rates has made selected hard-currency EM debt look attractive again, both relative to EM local debt and to other alternatives, such as developed market credit.

“Emerging market dollar debt has widened out much more meaningfully, whereas local currency has widened out but not as much as the dollar-based debt. The historical yield advantage of local over hard currency EM debt has vanished”.

According to BlackRock, there is a case for favoring hard-currency EM debt over US credit, yet the firm remains neutral across both. The spreads have tightened in the latter asset class, paced by the outperformance of the riskiest portions of the market. Wider spreads in EM debt make valuations more attractive. They also see floating-rate bank loans having an edge over high yield bonds, given their lower duration and that they can benefit from rising income as short rates reset higher.

“We believe the Fed will raise rates four times total this year. The Fed has expressed their concern about trade tensions, but at the same time they are aware that the US economy is operating above potential. The U.S. economy is creating 200,000 jobs per month on average for the last 36 months, that is something very interesting in this given the duration of this economic cycle”.

More volatility

Global financial conditions are tightening as US rates rise. Monetary policy is shifting, with the Fed pushing on with normalization and the European Central Bank (ECB) set to wind down its asset purchases by year-end. Additionally, US-China trade tensions have added new worries to the market. However, BlackRock still has a very positive risk stand stance, valuations have corrected enough in global equities and with 2018 earnings across the global coming in positively, there is still room to maintain equity exposure with a preference of equities over bonds.

“Most global investors are still positive on equities over bonds, even with all the risks the market is facing this year. According to EPFR funds flows, investors are putting more money in the equity funds than in bond funds. In 2018, we are seeing negative Sharpe ratio on a traditional 60/40 global portfolio, with higher volatility and negative returns. Going forward we are going to maintain risk on in our portfolios, but there is a need to adjust client expectations; it is unlikely we obtain the same returns that we gathered over the last few years of this bull market. Meaning, we now have to think where we want to take the risk in our portfolios”, he said.

Commodities

Oil prices are still at good levels, though they have already decreased a 10% from their recent peaks. Most of the worry was whether the OPEC was going to deliver a tremendous amount of supply back into the market, but BlackRock maintains their base scenario of global oil inventories remaining in a deficit into year-end; from a fundamental supply-demand view they do not think there is enough oil production to add back. In the next six months. If this view proves correct, oil prices should remain supported at these levels.

The metals picture looks a bit different. Copper prices, considered a barometer of global growth along with other industrial metals, have weakened on slowing global growth momentum and global trade tensions that are likely to persist for a while.

Allocation

BlackRock sees factors like momentum in equities outperforming, giving preference to quality exposure. They prefer US equities over other regions, as US stocks have outpaced other global markets on strong earnings growth, but they are also positive on Emerging Markets Equities, particularly on Asian equities including China. They are also neutral on Japan and underweighting Europe. 

In fixed income, they are favoring short-term bonds in the US and taking a bias towards quality in credit. They are favoring Emerging market debt denominated in dollar versus local currency and selected private credit and real assets for diversification.

Turkey’s Crisis: Policy Response Disappointing So Far

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La respuesta política a la crisis en Turquía decepciona a los mercados
Pixabay CC0 Public DomainPhoto: xxoktayxx. Turkey’s Crisis: Policy Response Disappointing So Far

Turkey is in the midst of an economic crisis. On August 10th their assets suffered greatly and their currency has fallen to historical lows after President Trump said last week he was doubling the amount of steel and aluminum tariffs on the country. On Wednesday, Tayyip Erdogan doubled import tariffs on some US imports (cars, alcohol, tobacco, cosmetics) and a Turkish court rejected an appeal for the release of a jailed American pastor at the center of the spat between Ankara and Washington.

The Turkish economy remains vulnerable as its current account deficit is the widest among emerging markets (The United States had a trade surplus with Turkey in 2017 of nearly 330 million dollars) and inflation levels are nearly three times the central bank’s target. Aneeka Gupta, analyst at WisdomTree mentions: “The perception from the investment community is that monetary policy in Turkey is not independent as President Erdogan is opposed to higher interest rates, so the central banks would need to defy the president and raise rates to defend the currency and avoid a default scenario.”

According to Delphine Arrighi, fund manager, Old Mutual Emerging Market Debt Fund, Old Mutual Global Investors, the worsening of political tensions between the US and Turkey has been the final blow to an already dire economic situation, with the collapse of the lira now rapidly fuelling concern of a full-blown currency and debt crisis given the amount of USD-denominated debt in the private sector. More over, the meetings between the banking regulator and the central bank over the weekend haven’t yielded the results the market was expecting. “Although the recent measures announced by the Central Bank of the Republic of Turkey (CBRT) will aim to ease onshore liquidity, they will fall short of restoring investors’ confidence. At this stage, the lack of credible policy response is pushing Turkish asset prices into a tailspin” Arrighi mentions adding that “given the reluctance of the CBRT to hike rates at its previous meeting and President Erdogan’s recent comments blaming an international conspiracy rather than acknowledging the real economic crisis resulting from an overheating economy faced with tighter global financial conditions, there is little hope for a return to orthodox policies at this stage”.

Arrighi suggests to include capital controls, “which seem more likely than an appeal to the IMF, but that would certainly not be the least painful and would most likely precipitate a recession while postponing the return of portfolio inflows. Hence a sizable rate hike followed by drastic measures of fiscal consolidation still appear as the most viable option to re-anchor the lira and pull the Turkish economy from the brink. This is very much like what Argentina had to deliver. We doubt the political will is there in Turkey and so more pain might be needed to force policy action. Some resolution of the political spat with the US could lead to some near-term relief in the currency, but this is unlikely to be sustainable if not accompanied by credible economic actions.”

Ranko Berich from Monex Europe mentions that “Normally when a currency falls 10% in a day, political and monetary authorities scramble to promise fiscal discipline and central bank independence. Instead of doing this, Erdogan has reached for the crazy stick and given the lira another whack in a rambling speech that focussed more on combative rhetoric than addressing market concerns… The lira’s issue now isn’t if the central bank is willing to raise rates high enough to combat the coming inflationary shock, but one of credibility. Erdogan’s son in law and economy chief, Berat Albayrak, also gave a speech in which he spoke in favour of central bank independence, so this may represent a sliver of hope for the lira. But the pressure is now on the TCMB to announce a drastic tightening of monetary policy in the order of a 5-10% increase in rates to demonstrate that it has the political mandate to fight inflation and stem the lira’s losses.”

Dave Lafferty, Chief Market strategist at Natixis Investment Managers, adds that: “This risk to EM contagion is sentiment, not fundamental. Turkey has limited trade and economic ties to other EMs. However, market reaction can throw the baby out with the bathwater as we see with other fragile EMs like Argentina and Hungary, who both saw steep currency losses in sympathy with the lira. Argentine CDS also spiked although Hungary CDS held reasonably steady.”

Dick Weil, Named Sole CEO of Janus Henderson Group

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Dick Weil, Named Sole CEO of Janus Henderson Group
Dick Weil, foto cedida. Dick Weil, nombrado único CEO de Janus Henderson Group

Dick Weil is now the solo Chief Executive Officer (CEO) of Janus Henderson Group. In this role, he is responsible for the strategic direction and overall day-to-day management of the firm. He also leads the firm’s Executive Committee. Prior to this, Weil was Chief Executive Officer of Janus, a position he had held since joining the firm in 2010. Weil spent 15 years with PIMCO. He has 23 years of financial industry experience.

According to the company, while not an easy decision, due to having two highly qualified candidates, the CEO decision was based on a very rigorous process over several months, supported by expert advice from external consultants. “This decision was made with the full support of the Board, and the Board believes Dick is most appropriate to take Janus Henderson to the next level,” they mentioned in their earnings release.

“Now that our integration plans are significantly progressed, our Board has determined that the co-CEO structure has achieved its goals, and now is the appropriate time for Janus Henderson to be led once again by a sole CEO. Dick brings a breadth of skills and experience from prior roles in his career where he successfully led organisations through challenge and change”, said Richard Gillingwater, Chairman of the Janus Henderson Group plc Board.

The Board wishes to thank Andrew Formica for his tremendous leadership over the past 10 years, and especially for the dedication and collaboration he has demonstrated since announcement of our merger. While Andrew will resign his co-CEO role and Board seat effective immediately, he has agreed to continue on as an advisor to assist with final integration efforts through the end of the year”.

Commenting on his appointment as sole CEO, Dick Weil said: “I am honored and excited to have the opportunity to lead Janus Henderson. We have established a strong platform from which Janus Henderson can continue to drive deeper client relationships”.

Andrew Formica added: “It has been a pleasure to work with Dick in the creation and formation of Janus Henderson this past year. I am also proud of what we achieved at Henderson over the 10 years I was CEO. Janus Henderson is an outstanding business with a fantastic and talented workforce. I wish Dick and the team the very best going forward”. In connection with the Board’s decision, the firm will take a severance charge of approximately US$12 million, including the acceleration of long-term incentive compensation, that will be reflected in the third quarter results.

Phil Wagstaff, Global Head of Distribution, has decided that now is the right time to take a career break, given that the integration work is significantly progressed and the distribution team is well in place. Phil will work closely with Dick Weil over the next 6 months to ensure a full and smooth transition. Commenting on Phil Wagstaff’s departure, Richard Gillingwater said: “Phil has been instrumental in the development of our global distribution team, first at Henderson following the acquisition of Gartmore and then with the merger of Janus and Henderson, where he has played a key role in welding the two distribution teams together, creating a world-class distribution organisation. We are grateful for all Phil’s efforts”.