FINRA´s Regulatory and Examination Priorities 2017

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FINRA´s Regulatory and Examination Priorities 2017
Foto: Mariya Chorna . Prioridades regulatorias y de supervisión de FINRA para 2017

Each year, FINRA publishes its Annual Regulatory and Examination Priorities Letter to highlight issues of importance to FINRA’s regulatory programs. In this year´s letter, Robert W. Cook, President and CEO, provides information about areas FINRA plans to review in its 2017 exams based on observations from its regulatory programs as well as input from various stakeholders, including member firms, other regulators and investor advocates.

Robert W. Cook, says: “As you will see, a common thread running throughout the Priorities Letter is a focus on core “blocking and tackling” issues of compliance, supervision and risk management. Most of the topics addressed in this year’s letter have been highlighted in prior years, but specific areas of emphasis have been updated or modified based on recent observations and experience. Attention to the core regulatory requirements identified in the letter—and how to address them in light of new business challenges and market developments—will serve investors and markets well.

“Your ongoing input on existing and emerging issues that put investors and market integrity at risk is very important. We share a common goal of promoting investor confidence, and I ask that you let us know of any areas on which you think FINRA should focus its regulatory resources to protect investors and bolster market integrity.

“Since joining FINRA in August, I have been engaged in an ongoing “listening tour,” meeting with member firms, regulators and investor groups, among others. I am grateful for the feedback and time many people have given me. In the coming months, I plan to provide more information about some concrete steps we are planning—based on the listening tour, as well as other input—to take a fresh look at certain aspects of FINRA’s programs and operations and to identify opportunities to do our work more effectively. In the meantime, I want to share with you two more modest steps we are already planning to take. 

“First, I have heard frequently from firms and other FINRA stakeholders that it would be useful to learn more about what FINRA is seeing through its examination programs. They have suggested that publishing common examination findings would help inform firms of deficiencies FINRA has observed, including in its areas of priority, and allow firms that have not yet been examined to fix any similar deficiencies. I agree, and starting this year, we will publish a summary report that outlines key findings from examinations in selected areas. This document will alert firms to what we are seeing from a national perspective and, therefore, serve as an additional tool firms can use to strengthen the control environment for their business. 

“Another suggestion that emerged from my meetings is that many small firms would like us to explore how FINRA can provide more, and perhaps different, compliance tools and resources to assist them in complying with applicable regulatory requirements. I have already asked our staff to develop several new resources along these lines, and in 2017 we will introduce a “compliance calendar” and a directory of compliance service providers. In addition, to gather more information in this area, we recently sent a brief survey to small firms to help us learn about the compliance tools and resources they would find valuable. We have received very helpful input from firms to date, but it is not too late to participate. If you are a small firm and have not already completed the survey, please do so to help us better assist you. 

“A related area of focus in the coming year will be recognizing the vital role that small firms—as well as larger firms—play in facilitating capital formation by small and emerging growth companies, which are vital engines of our economy and of job creation. We will be looking for opportunities to support these activities, including by providing guidance where appropriate to encourage innovative business models and new technologies in the Fintech space, consistent with maintaining important investor protections.

“Some have asked me when my listening tour will be finished. The short answer is: never. As noted above, in the coming months I will share with you some additional steps we will be undertaking that have been informed by the listening tour, and I am very excited about moving forward with these initiatives. But the listening will not end during my tenure. I hope you will always feel free to reach out directly to me or to anyone on our staff with your ideas and suggestions on how FINRA can better execute its mission of investor protection and market integrity.”

You may see the document that follow the letter here.

Credit Suisse: Conflicts of Generations Sets Tone for 2017

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Credit Suisse: los conflictos generacionales proporcionarán un contexto incierto en 2017
Pixabay CC0 Public DomainPhoto: bykst. Credit Suisse: Conflicts of Generations Sets Tone for 2017

In its recently published annual Investment Outlook, Credit Suisse’s investment experts suggest that financial markets are likely to remain challenging in 2017. The central economic forecast is for global GDP growth to accelerate slightly next year from 3.1% to 3.4%, albeit with pronounced regional differences. In combination with a slight rise in inflation and some monetary tightening, most asset classes are expected to generate low returns in 2017.

Fundamental economic and social tensions – summarized using the term ‘Conflicts of Generations’ – provide an uncertain backdrop for investors. Michael Strobaek, Global Chief Investment Officer at Credit Suisse, predicts: “The investment environment remains difficult and political events are again likely to trigger some turbulence in 2017. However, market corrections are likely to offer selected opportunities that investors should seize”.

Global economic forecast

Global growth should improve somewhat in 2017, albeit with significant differences between countries and regions. On the whole, investors can expect a slight recovery in corporate investment coupled with still robust consumer demand, but overall growth is likely to remain well below pre-crisis levels. US fiscal easing would support the cyclical upswing, while uncertainty over global trade could act as a restraint.

Inflation is likely to pick up but should remain well below central bank targets in many developed economies except for the USA. While the US Federal Reserve will likely continue its gradual normalization of interest rates, other central banks will probably maintain a more accommodative stance, while shifting away from mechanical balance sheet expansion.

Oliver Adler, Head of Economic Research at Credit Suisse says: “Political uncertainty and risks look set to remain in the spotlight, as Brexit negotiations are initiated, elections are on the agenda in core European countries and the foreign, security and trade policies of the new US Administration take shape”.

Credit Suisse’s investment experts see European risk assets (credits and equities) as particularly exposed to an increase in political risks.

Global market outlook

Rising yields and steepening yield curves are beneficial for financial sector profitability. European political events are a source of potential volatility for European institutions, but US financials (including junior subordinated debt) are still favored as a source of return. The Trump administration is likely to favor less rather than more regulation in the financial sector. Emerging market (EM) hard currency bonds are attractive due to their yield and diversification potential. After the strong rally in EM bonds in 2016, country and sector selection will, however, be a key determinant of returns in the year ahead.

Among equities, investors should favor the healthcare and technology sectors in view of their sound fundamentals. Healthcare offers some of the strongest earnings trends. Technology, meanwhile, is still growing strongly in areas such as cybersecurity, robotics and virtual reality. Both sectors also have the most to gain from a likely US repatriation tax break.

Credit Suisse’s investment experts also favor selected infrastructure-oriented stocks, notably construction and construction-exposed industrials. In combination, the increased political will for fiscal expansion and a growing need to renew infrastructure will provide significant stimulus in several large economies in the coming years, including in the USA. The US dollar is expected to gain ground in view of rising US interest rates, fiscal expansion and a potential repatriation of deferred US corporate taxes. While the euro may suffer from a focus on political risks in 2017, the Japanese yen should recover from undervalued levels.

Nannette Hechler Fayd’herbe, Global Head of Investment Strategy at Credit Suisse, says: “The biggest challenge investors face in 2017 is to find yield at reasonable risk. We consider emerging market bonds to be the most attractive but selectivity as regards issuer risk remains key.”

Switzerland

For Switzerland, Credit Suisse’s investment experts expect continued moderate growth with an ongoing recovery in exports and subdued domestic demand. While inflation should remain below target, deflation risks have subsided.

The Swiss franc is, however, likely to weaken versus a generally stronger US dollar. Credit Suisse currency experts believe that any depreciation of the Swiss franc against the euro is likely to very limited, given that interest rates will remain low in the Eurozone and also due to lingering political risks in Europe.

Anja Hochberg, Chief Investment Officer Switzerland at Credit Suisse, says: “We recommend to add broadly diversified emerging market bonds to the portfolio and favor Swiss equities over Swiss bonds, with a preference for pharma and IT shares. For investors that can bear some illiquidity, private equity continues to be an interesting asset class.”

Europe & EMEA

Uncertainties over Brexit, political risks and intermittent worries over the health of European banks are likely to create bouts of volatility in European risk assets, making risk-adjusted returns on equities less attractive.

However, Credit Suisse’s economists believe that Brexit is unlikely to trigger exits by other EU members. Hence, peripheral sovereign and bank bonds should hold up well. Risks in Italy and Portugal need to be closely monitored, however.

The Eurozone should see modest growth. However, the divergence between a slightly tighter Fed and a still very accommodative European Central Bank mean the euro is unlikely to make gains against the US dollar. The British pound should stabilize after its drop below fair value in 2016.

Michael O’Sullivan, Chief Investment Officer International Wealth Management at Credit Suisse, explains: “What is certain even at this stage is that Brexit will visit economic and political uncertainty not just upon the UK itself but also upon its European neighbors.”

Asia Pacific

Asia can look forward to stable growth in 2017, underpinned by a structural transition from manufactured exports to services-based consumption.

China remains on course for a soft landing, as the government successfully manages a bifurcated economy in which the industrial trade sector continues to decelerate while domestic services expand steadily. In this context, the real estate sector must be prevented from overheating in tier 1 cities.

A supportive combination of firming economic growth, reasonable valuations and improving profitability suggests that emerging Asian equities should perform well in 2017, possibly outperforming their global emerging markets counterparts.

John Woods, Chief Investment Officer Asia Pacific at Credit Suisse, notes: “Our more favorable view on Asia reflects our improving view on China, where we believe the domestic economy – particularly the services sector – should surprise to the upside.”

And Now for Something Completely Different?

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HSBC Global Research asks if the ECB QE set to become an ‘ex policy’. In its last European Economics Quarterly the firm explains that there’s more than a whiff of Monty Python’s famous parrot sketch in the ECB’s current position. “Like Michael Palin trying to persuade John Cleese that his dead parrot might be just “resting” or “pining for the fjords”, so the ECB for the past few years has been keen to convince markets that it has the will and the means to return inflation to target, despite mounting evidence to the contrary”.

It is two years since the ECB announced QE, albeit belatedly and cautiously. Yet inflation still seems stuck in a rut. “So is ECB QE, like Monty Python’s parrot, dead? Is it an ex-policy? Is it time for something completely different?”, asks HSBC Global Research.

Markets have become more optimistic on inflation and the reflation trade is on

Since Donald Trump was elected as the next US president, equities and bond yields have risen and the US dollar has appreciated. This positive sentiment has affected Europe. During Q4, ten-year bund yields rose from around -10bps to +25bps, and at 1.4% gilt yields are up around 90bps from their post-Brexit lows. European equities have shrugged off various political shocks to end 2016 at highs for the year.

To HSBC, the market reaction jars with the economic realities. The two key tailwinds to eurozone growth over the past two years – energy price deflation and fiscal headroom from falling government borrowing costs – have ended. They expect the eurozone to grow by just 1.2% in 2017. This is 0.2% higher than their previous forecast thanks to strong momentum going into the year, but it still marks a slowdown from 2016. Unemployment and economic slack are still elevated in three of the eurozone’s big four economies and are likely to remain so.

There may be structural global factors, such as price-sensitive, digitally-savvy consumers restraining inflation. And the impact of monetary policy is still limited by a low ‘natural’ real interest rate. It will require more than a dose of US fiscal expansion to reverse the trend in the factors that have driven ‘natural rates’ down, such as slowing productivity growth, high debt burdens and unfavourable demographics. In short, they think we are a long way from seeing ‘the whites of the eyes’ of sustained eurozone inflation.

Core inflation in the eurozone is unlikely to rise much above 1% over the coming years, even if headline inflation is set to rise reasonably sharply. The 18% rise in the EUR oil price through Q4 2016 alongside EUR depreciation means they now see eurozone inflation peaking briefly at 1.8% and averaging 1.6% in 2017 (up from 1.0% previously). But they see core inflation reaching just 1.2% in 2018. Indeed, even after the latest extension of QE to December 2017, the ECB itself is only forecasting inflation rising to 1.7% by 2019.

The eurozone is unlikely to follow the US down the path of fiscal expansion. Markets shouldn’t rely on the fiscal expansion to drive up growth and inflation, even if there is a strong case for Europe to follow the US. In aggregate, the eurozone’s deficit, current account and public debt burden provide a more favourable base to launch a fiscal loosening. Also, there is an urgent need for investment, with the level of investment around EUR200bn below where it should be given the level of GDP. Even the European Commission has acknowledged this and requested (for the first time) an aggregate fiscal expansion of 0.5% of GDP. Unsurprisingly, it wants this to come from the surplus countries although it has no powers to enforce this.

So is it time for something completely different?

Perhaps the ECB’s best option to meet its inflation mandate is to accept lower inflation for a few years, ramp down its bond buying programme gradually and put the pressure back on governments to make structural reforms. To avoid a repeat of 2012, where reforms arguably contributed to a recession and the rise of populist parties, there would also need to be an investment-led fiscal stimulus that raises both near-term and, via higher future productivity, longer-term growth. This would require further steps toward centralised fiscal policy, after the raft of 2017 elections.

The ECB should reduce its purchases further at the end of 2017. In reality, the ECB is unlikely to administer a sharp shock. Mario Draghi has been clear that there will be no sudden stop to QE. However, they do think the ECB will reduce the QE purchase rate further when the current programme finishes in December 2017. Of course, the ECB may give different reasons for piling pressure on governments (eg higher headline inflation projections) but they think it is likely to announce another six-month extension, buying at EUR40bn per month, probably at its October 2017 meeting.  And there is always the possibility of it adjusting its policy mix away from government bond buying to other forms of easing.

Bellevue Asset Management Launches The BB Adamant Healthcare Index Fund

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April 2017 marks the ten-year anniversary of the Adamant Global Healthcare Index. With that date on the horizon, it is more than fitting that Bellevue Asset Management has launched a corresponding investment fund governed by Luxembourg law. The BB Adamant Healthcare Index (Lux) Fund was registered for public distribution in Germany, Austria, Switzerland and Luxembourg end of 2016.

The Adamant Global Healthcare Index was created in April 2007 to capture the attractive prospects that the global healthcare market offers to investors. The index is composed of the forty most attractive healthcare stocks in the global universe. It is reviewed every six months in April and October and adjusted if necessary. The success of the Adamant Healthcare Index led to the 2011 launch of a Swiss investment fund for institutional investors that replicates the index. This Swiss fund is now being followed by a Luxembourg-based fund that has been approved for sale to retail investors in Germany, Switzerland, Austria and Luxembourg.

All growth segments in one fund

With new drug approvals holding steady at high levels and a flurry of innovation coming from the medtech and services sub-sectors, the healthcare sector’s long-term growth potential is secure and investors can participate in that potential through this fund. For Dr. Cyrill Zimmermann, Head of Healthcare Funds & Mandates, this new fund represents another major step in the development of the firm´s range of healthcare investment products: “A growing number of investors had asked us to offer an index product outside Switzerland too. Those requests have now been met with the launch of the BB Adamant Healthcare Index (Lux) Fund. This is an important addition to our diverse range of sound investment solutions. The fund effectively covers all of the high growth segments within the promising healthcare industry on a global scale.”

The team continuously screens about 600 of the 3,000 listed companies in the healthcare sector based on 8 criteria. Four quantitative and four qualitative parameters are applied. The qualitative parameters measure the quality and track record of a company’s management team, product pipeline and operating risks as well as country-related risks while the quantitative parameters provide information on stock valuations. There are four regions, Western Europe, North America, Japan/Australia and Emerging Markets, and the index is composed of the ten best stocks from each region.

The region with the highest overall score, usually North America, can have a maximum index weighting of 35% when the index is rebalanced, so this index puts more emphasis on emerging markets. Companies with high valuations and low growth rates are rarely in the index. Historical index data shows that mid-cap stocks have typically represented 60% to 80% of the index and the Asia region has accounted for about one-third of the index. Furthermore, conventional pharma stocks are clearly underweighted compared to their weighting on the MSCI World Health Care Index, the standard sector benchmark.

The BRIDGE Platform Hits EUR 1bn Under Management

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Project Bonds, la palanca que transformará el mundo
Foto: Unsplash, Flickr, Creative Commons. Project Bonds, la palanca que transformará el mundo

5 new investors, for a combined EUR 147m, have joined the BRIDGE platform -a platform with funds that invest in debt related with infraestructures owned by Edmond the Rothschild AM- through BRIDGE II, a Luxembourg-regulated fund launched at the end of March 2016. Less than 2 years after its first closing, the BRIDGE platform has raised close to EUR 1bn through 3 funds, of which EUR 400m in 2016.

Persistently strong institutional demand

The first closing of BRIDGE II at the beginning of December involved new investors based in Italy, Germany and France and should enable an interim closing at the beginning of 2017 as investors are currently at an advanced due diligence stage. BRIDGE II is expected to complete its fundraising in the course of Q2 2017 and for a similar amount as FCT BRIDGE I (BRIDGE I).

“For institutions looking for yield in today’s low interest rates environment and amid ongoing banking disintermediation, high asset quality along with low volatility and stable cash flows over long maturities represent very solid fundamentals”.

As with BRIDGE I, this second generation fund, which is managed by the same London-based team of 11 experts, seeks to broaden the platform’s range and capture new opportunities among the vast universe of available infrastructure assets. 

At the end of 2016, The BRIDGE platform comprises three funds representing an aggregate amount of close to EUR 1bn under management.

Strong momentum in commitments

The commitments from BRIDGE II’s initial investors also mark the beginning of the fund’s investment period. Three investments have already been structured and closed just before the Christmas break.

These first crystallised opportunities see the BRIDGE platform reinforce its position in the social and telecoms infrastructure, the latter via a first investment in a fibre optic PPP (Public Private Partnership) in France. A new opportunity in the renewable energy sector is being structured and should close soon, confirming BRIDGE’s focus on this sector.

In a very active year for the platform, these newly closed opportunities take the number of investments in 2016 to 10. BRIDGE I, 94% invested, is also finalising its investment period -one year ahead of schedule-. 

The investment team’s strong relations with sponsors give it access to a wealth of diversified opportunities and enable it to act as lead arranger in major infrastructure projects financings.As the team investsonlyon behalf of its clients, this allows it to select high-quality assets with attractive credit margins and maximise investor protection in line with investment mandates.

Both fund vintages can act in concert through co-investments to access opportunities requiring significant investment capacity.

Jimmy Ly Will Join Robeco in Miami as Head of Sales US Offshore & Latin America

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Jimmy Ly se unirá al equipo de Robeco en Miami como responsable de Ventas para US Offshore y Latinoamérica
Photo: LinkedIn. Jimmy Ly Will Join Robeco in Miami as Head of Sales US Offshore & Latin America

Jimmy Ly, part of Pioneer Investment’s sales team in Miami, will join Robeco on January 17th. Funds Society has learned that Ly will join Robeco’s Miami office as Executive Director heading the Americas Sales Team (US Offshore and Latin America). Ly will succeed Joel Peña, who recently left the company.

According to Robeco, Jimmy Ly will be join Robeco as new head of Sales US Offshore & Latin America reporting to Javier García de Vinuesa. He will be responsible for maintaining, developing and expanding existing relationships with Robeco’s current client base and the main players in the America’s offshore region, and for acquiring and developing relationships with new clients which lead to new business opportunities.

Jimmy will continue working at Pioneer Investments until January 13th to help with the transition process to the rest of the team.

Joel Peña exited Robeco recently after two and a half years at the asset manager firm. In June 2014 Robeco released his appointment as part of the Latin America and US Offshore team to position Robeco’s business development in the Latin American and US Offshore market.

Following 15 years in Pioneer Investments

Jimmy started his career in 1998 as Mutual Funds Relationship & Product Manager at Merril Lynch in New York. He relocated to Singapore to manage and accelerate Merril Lynch´s mutual fund sales and marketing business in Asia.

In 2002 he joined Pioneer Investments as Regional Sales Manager in Los Angeles and Miami. During his last two years at Pioneer Investments he was Senior Sales Manager.

Jimmy holds and MBA International Marketing from Loyola Marymount Univesity Los Angeles and a Bachelor of Arts from the California State University in Northridge.

More Outsourcing by Institutions in Asia Will Be a Bright Spot for Fund Managers, Despite of More Turbulence Expected in 2017

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The asset management industry in Asia is set for a turbulent year in 2017, with the impending Donald Trump presidency in the U.S. and its impact on the global economy. For asset managers, the institutional space is becoming more interesting, with a growing trend of outsourcing by institutions.

After a very challenging 2016 in Asia’s asset management industry, what does 2017 hold? That is the question that underpins this quarter’s The Cerulli Edge – Asia-Pacific Edition which highlights key developments in 2016 in eight of the Asian markets they cover, namely, China, Hong Kong, India, Indonesia, Korea, Singapore, Taiwan, and Thailand. They also make some predictions on potential trends in each of those markets for 2017.

The impending Trump presidency and the geopolitical turbulence tipped to come with it will drive global macroeconomic factors in 2017. Although the repercussions remain to be seen after his inauguration in January, one thing that the Asian asset management industry will be closely watching is how his pledge to bring manufacturing jobs back to the United States pans out. This issue will be particularly important to Asian countries as many of them count the United States as one of their top-five trading partners. If the trade faucet to the United States begins to shut, this will inevitably lead to some restructuring as these economies seek and find new exports markets or new export products.

From an asset management perspective, a widespread restructuring will have an impact on asset allocations in Asian markets. However, this will be a long-term process. Any short to medium-term pain felt by Asian retail and institutional investors in the face of such changes would be the price they have to pay for longer-term gains.

Cerulli has observed that retail investors in the region have notoriously shorter-term investment horizons than their Western counterparts. Asset retention is a constant struggle, but likely more apparent in North Asian markets including China. Another commonality is that investor sentiment for financial products, including mutual funds, tends to be driven by stock market sentiment. Consequently, we tend to see outflows from equity funds when stock markets are falling.

In the recent past in Asia ex-Japan, this has led to some funds being diverted to bond funds or balanced funds. However, with growing expectations that interest rates may head higher in 2017, led by rate hikes by the Federal Reserve, bond funds and balanced funds may not be viewed as safe havens for a while. In such market conditions, “we may see retail investors go back to their default positions, namely bank deposits. This would put the asset management industry back to square one in the region, after a lot of effort has been expended in recent years to mobilise people’s savings toward riskier financial products”.

Having said that, across Asia, regulators all stand firm on investor protection -that is ostensibly one of their highest priorities. Their basic stance is that riskier products should only be sold to accredited or wholesale or high-net-worth investors. Plain-vanilla mutual funds and exchange-traded funds are seen as more desirable for ordinary investors. Further, most Asian regulators share a keenness to develop their local mutual fund industries, and offer incentives to asset managers who show commitment to the domestic market. A prominent example is Taiwan’s scorecard that incentivizes foreign asset managers to set up shop on the island.

Cerulli has also noticed asset managers’ burgeoning interest in targeting institutional assets in the region. Institutional investors are increasingly searching for yield outside their comfort zones, and will typically outsource to asset managers with strategies that they do not have internal capabilities in, including foreign investment and alternative asset investment strategies. Cerulli predicts that outsourced assets will maintain an uptrend through to at least 2020, which will be good news for asset managers in the region.

Deutsche Asset Management names David Bianco as Chief Investment Strategist for the Americas and Head of Equities in the US

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Deutsche Asset Management names David Bianco as Chief Investment Strategist for the Americas and Head of Equities in the US
Foto: Ildefonso Rodríguez Morales . Deutsche Asset Management nombra a David Bianco director de estrategia de inversión para las Américas y director de renta variable estadounidense

Following the appointment of Petra Pflaum as Chief Investment Officer for Responsible Investments, Deutsche Asset Management (Deutsche AM) has announced that David Bianco has been named Chief Investment Strategist for the Americas and Head of Equities in the US. Based in New York, he will report globally to Stefan Kreuzkamp, Chief Investment Officer and Head of Active Asset Management, and regionally to Bob Kendall, Head of Deutsche Asset Management, Americas.

In his dual roles, Bianco will play an integral part in assisting clients with portfolio construction across Deutsche AM’s full range of investment vehicles and asset classes, and will also lead a team of experienced investors responsible for the management of the active equity assets in the Americas.

“We are extremely pleased to welcome David to our organization,” said Bob Kendall, Head of Deutsche Asset Management in the Americas. “David is a well-respected and familiar face within our industry and will be a key public figure for us in presenting to our clients Deutsche Asset Management’s global views on markets, economies and policies.”

Bianco has more than 20 years of investment research experience and a decade of experience as an equity strategist. He has been the bank’s US Equity Strategist since 2012. Prior to joining Deutsche Bank, Bianco held the position of Head US Equity Strategist for Bank of America Merrill Lynch Investment Research and Global Wealth Management. Before BofA, he spent seven years at UBS and five years at Financial Account Standards Board’s Financial Accounting Standards Advisory Council.

Three Main Concerns for EM in 2017: Potential Protectionist Trade Policies, Rising Rates and a Strengthening US Dollar

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Tres vientos en contra para los mercados emergentes: el potencial proteccionismo, el aumento de tipos de interés y la fortaleza del dólar
CC-BY-SA-2.0, FlickrPhoto: Henry Jager. Three Main Concerns for EM in 2017: Potential Protectionist Trade Policies, Rising Rates and a Strengthening US Dollar

According to Goldman Sachs Asset Management, Donald J. Trump’s victory in the US election has fuelled three main concerns for Emerging Markets (EM): potential protectionist trade policies, rising rates and a strengthening US dollar. The surprising result created uncertainty for EM, which is reflected in equity market performance and flows since the election: the MSCI EM Index is down 5%, underperforming developed market equities by almost 7% and suffering the worst week of underperformance since the financial crisis. EM equity flows have also sharply reversed; outflows hit $7bn in the week following the election – equating to one third of YTD inflows.

The firm believes the initial market reaction is underappreciating the diversity of the EM opportunity set and the wide- ranging impacts of trade policy, rising US interest rates and a strengthening dollar on each of the 23 economies in EM. They also think investors may be overestimating the potential for campaign promises to become actual policy.

In their view, the long-term case for owning EM equities – portfolio diversification and alpha potential – remains intact.

The Possibility of Protectionism

EM has been the low-cost manufacturer to the world since the early 1990s. If the US introduces protectionist policies, most likely in the form of tariffs on imported goods, many EM economies could be negatively impacted. Crucially, the US may also experience sizeable repercussions. In fact, the introduction of tariffs – and resulting retaliatory measures from countries like China – could cause up to a -0.7% hit to US real GDP growth.

The firm is not convinced that tariffs would bring trading partners “to the negotiating table” – as is often cited using the example of Ronald Reagan’s 45% tariff on Japanese motorcycles in the 1980s – they would more likely result in trade wars and counter-protectionist acts. The Chinese government has already suggested that it is open to letting the country’s US dollar peg relax and is threatening to stop the import of key US products – actions that could further undermine growth in the US.

The firm could see aggressive government concessions for firms willing to keep manufacturing in the US and tariffs in specific industries where US manufacturing has suffered most. If the Trump administration is slightly more pragmatic than the market has assumed then investors may feel more assured that the EM growth model is still intact. They believe there could be a difference between campaign rhetoric around protectionism and actual implementation as policy makers may be constrained by economic realities such as negative consequences to US economic growth. The introduction of unilateral tariffs could have lasting negative consequences for the US and could undermine what has been widely considered part of President-elect Trump’s mandate: to improve the economic position of the US working class.

The Risk of Rising Rates

Since the election, inflation expectations and US government bond yields have increased. Rising US interest rates will mean higher funding costs for EM debt and increased pressure on EM economies. In addition, higher US rates and a waning search for yield could reduce foreign investment into EM, which has lowered funding costs and supported increased consumption and lending in EM economies. These are clearly headwinds for EM growth.

An end to the ‘low rates, low growth’ environment may not be as negative for EM as markets may be suggesting. If rising rates are the result of an improving growth backdrop in the US, it should be supportive for EM economies. Since 1980, EM equities have outperformed developed markets on average by 11% during Fed rate hike cycles, including three of the past four cycles. This scenario played out during the last Fed hike cycle between 2004 and 2006 – the Fed raised rates by 425 bps in less than two years, but it coincided with a strengthening US and global economy that supported a sustained rally in EM equities.

The debt profile of EM countries has also changed meaningfully in recent years. In 2000, the vast majority of debt issued by EM countries was in US dollars. Today, over two-thirds of all EM sovereign debt is in local currency. This typically reduces any potential instability and should make EM more resilient to rising rates. There will be greater headwinds for those countries and companies that have only been able to drive growth in recent years because of cheap, easy money in developed markets. In our view, companies with more sustainable long-term growth models can differentiate themselves in this environment.

Rising rates will highlight fragilities in EM and put pressure on companies with weaker governance practices who have attempted to take advantage of the lower rate environment in the US. However, if the cyclical recovery in earnings and return on equity that has materialized in 2016 can be supported by a better global growth backdrop, then there is reason to be constructive on EM equities going forward.

The 1980s Dollar Revival?

A further concern post-election has been the idea that we are once again in a bull market for the US dollar.

Many commentators have compared the prospects for the dollar to what was seen in the Reagan years of the 1980s, namely a multi-year, close to 100% rally. Goldman Sachs AM believes the US dollar has scope to further strengthen, but the magnitude may not mirror the 1980s because the starting points are very different. When Reagan came to power in 1981, the US was trying to pull itself out of recession, inflation had reached almost 15% and the dollar had fallen by roughly a third over the prior decade. More recently, the backdrop has been years of consistent dollar strength. In fact, following almost nine years of depreciation, EM currencies are trading at a discount of ~15% relative to fair value.

Furthermore, the primary driver of EM equity returns historically has been corporate fundamentals, not currency. In fact, over the past fifteen years, EM FX has been a slight detractor from total returns, but this has been comfortably offset by earnings growth. We see encouraging signs that EM earnings and returns on equity are picking up from cyclical lows and continue to believe that this can be the major driver of the asset class going forward, offsetting any potential currency headwinds.

Outlook and Opportunity: Stay the Course

EM has taken the brunt of the post-election fallout in light of Trump’s rhetoric around implementing protectionist measures, the impact of rising rates on funding costs for EM debt and a strengthening US dollar. The firm´s view is that these risks will not be as prevalent as initially feared.

Despite increased uncertainty, the key reasons for investing in EM, namely the diversification and alpha potential, are both still intact. In fact, they believe these benefits are potentially enhanced given that the market appears to be discounting the diverse, heterogeneous nature of the asset class.

Fundamentals are recovering

Fundamentals in EM are also far stronger than at the time of the 2013 Taper Tantrum when the asset class sold off following the Fed’s tapering of quantitative easing, although the market reaction has been similar.

The growth premium relative to developed markets has begun to reappear, external imbalances have been reduced, inflation remains benign and EM FX is more attractively valued than it was in 2013. Finally, we have seen the earnings and returns cycle turn positive in the past six months and earnings expectations continue to support a mid-teens earnings outlook for 2017. Historically this has been the key driver of EM outperformance.

Valuations are attractive

On a forward price-to-earnings basis EM still trades at a 25% discount relative to developed markets. In absolute terms, EM appears to be returning to its long-term average, though we believe this is largely the result of significant earnings declines over the past few years, which have inflated the multiple. This is most apparent when observing a cyclically-adjusted price-to-earnings ratio, which shows EM is comfortably in the bottom quartile relative to its long-term history.

As such, while it is reasonable to argue that EM is not extremely cheap, the firm believes that long-term investors are able to access the market today at an attractive level for what could be cyclically suppressed earnings.

Selectivity is critical

EM has taken the brunt of the post-election fallout in light of Trump’s rhetoric around implementing protectionist measures, the impact of rising rates on funding costs for EM debt and a strengthening US dollar.

Their view is that these risks will not be as prevalent as initially feared. EM equity returns have historically been driven by corporate fundamentals rather than currency, suggesting the uptick that we have seen in earnings and ROEs suggests that there is significant growth potential for the asset class. In their view, an actively managed investment approach, focused on mitigating the structurally-impaired parts of the EM universe, is a potentially effective way to access this growth potential over the long-term.

Tikehau IM Names Gen Oba as Marketing and International Development Director

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Tikehau IM Names Gen Oba as Marketing and International Development Director
Foto: Moyan Brenn, Flickr, Creative Commons. Tikehau IM nombra a Gen Oba director de Desarrollo Internacional y Marketing

Tikehau IM has appointed Gen Oba as director of marketing and international development.

Oba will support the executive management team of Tikehau IM to further expand the firm in France and abroad. He will be responsible for the development of Tikehau IM’s marketing strategy and the development of the firm’s relationship with large international clients.

The executive joins Tikehau Capital after 18 years at Bank of America Merrill Lynch where he managed and developed relationships with key international clients, executed major strategic and capital market transactions, and last served as managing director of Investment Banking.

Oba started his career  in 1996 at Rothschild in Paris and then at BNP Paribas in New York. He is a graduate from H.E.C.