CC-BY-SA-2.0, FlickrMatteo Renzi, after the referendum. Italy Starts a Period of Uncertainty After Matteo Renzi's Defeat
On Sunday, the populist wave spreading across Europe saw a defeat in Austria after the Green Party’s Alexander Van der Bellen won 53.3% of the votes versus Hofer’s 46.4%. However, in Italy, with around 60% of voters opting for a “no”, and nearly 70% turnout, Italians firmly rejected an important Constitutional reform that would have removed power from the Senate and left the Lower House as the key legislative Chamber in Italy. The reform was one of the flagship measures of PM Renzi, who has already confirmed he will tender his resignation.
Patrice Gautry – Chief economist, Union Bancaire Privée (UBP) believes that “a period of political uncertainty is coming back on Italy, with rising difficulties to form a government coalition or to find a clear majority. No time for the government to engage new economic reforms in front of political uncertainties.”
According to Nicola Mai, Head of European Sovereign Credit Research at PIMCO the result is negative at the margin for Italian and European risk assets, for a couple of reasons:
First, the reform’s failure means that Italy has lost an opportunity to make its political system leaner and more conducive to reforms.
Second, Renzi’s resignation is likely to lead to a period of higher political uncertainty which comes in the midst of ongoing recapitalization efforts in the Italian banking sector.
However, he believes that negative market sentiment on the vote is likely to be mitigated by the fact that the market has been expecting a “no” (based on polls) and that the ECB, which will meet next Thursday remains in play in European sovereign markets. Although originally they experienced losses, shares in Italian banks have rallied this morning. “Tail risk is sentiment deteriorating significantly on Italian banks and infecting other Italian and European risk markets.” Mai points out stating that the referendum outcome makes the recapitalization of Monte dei Paschi harder to achieve, with potential negative knock-on effects on the rest of the system and in particular on Unicredit’s equity raising plans, which today announced is in exclusive talks with Amundi for the sale of Pioneer Investments.
The Amundi team considers the Italian referendum is particularly important for portfolio construction for several reasons:
The markets doubt in Italy’s ability to make the reforms needed to revitalise its economy, which is a problem in a country where the debt-to-GDP ratio is well over 100%. The referendum is merely adding uncertainty to an already complex situation;
It comes at the end of a year of political surprises that caught out some investors;
It is being held just days before two much-awaited central bank meetings (ECB and Fed), which will only add to market jitters;
The markets’ capacity to absorb heavy trading flows at the end of the year is, at best, reduced, and this is stoking fears that volatility will rise. This is particularly true as the Italian market’s interest rate futures are also used to hedge positions on other premium-based markets (the credit market, for example) when liquidity is tight.
In terms of next steps, President Mattarella will seek to facilitate the formation of a transition government, headed by a political or technocratic figure, tasked with leading through ongoing bank recapitalizations and reforming the current electoral law (which is currently inconsistent between the two Chambers). This will take some time, and elections are unlikely to be called until this is done (until mid-2017 at the earliest). The new electoral system is likely to be proportional in nature, and facilitate the formation of grand coalition governments in future.
The people “have spoken in a clear and unequivocal way… we leave with no regrets,” said Italy’s Matteo Renzi, before tendering his resignation. According to Allianz GI, Italy’s rejection of reforms and Renzi’s resignation may lead to early elections or other scenarios that could spook investors already facing a tumultuous political year in Europe. Then again, markets may have already discounted future bad news, and the ECB stands ready to step in.
CC-BY-SA-2.0, Flickr. Pioneer Investments Could Become French
UniCredit and Amundi have entered into exclusive negotiations in relation to the possible sale of the Pioneer Investments business to Amundi. In a brief joint press release, they confirmed the negotiations are ongoing without disclosing price or further details.
The french asset management group confirmed its interest in acquiring Pioneer Investments last October saying the acquisition was consistent with the growth strategy, and that if it was to be closed it would have to offer a return on investment greater than 10% over a three-year horizon. However they denied a €4bn valuation for Pioneer Investments.
Other groups that were interested in acquiring Pioneer include British Aberdeen Asset Management which decided a €3.5bn valuation was too expensive, Australian Macquarie and Spanish Banco Santander which decided last July not to merge its Asset Management Business with Pioneer.
Pioneer had over 225 billion euros in Assets Under Management as of end of September.
UBS has combined most of its Wealth Management businesses in Europe into one legal entity, UBS Europe SE. The new European subsidiary is headquartered in Frankfurt, Germany and will operate in European markets through a network of branches.
According to a press release, the choice of a societas Europaea as the corporate structure for the entity provides UBS with strategic flexibility.
By merging its subsidiaries in Germany, Italy, Luxembourg (which already includes the branches in Austria, Denmark and Sweden), the Netherlands and Spain into one legal entity, UBS has taken an important step to simplify its governance structure and increase operational efficiency across its European operations. This move allows UBS to more effectively invest in its European wealth management business and enhance the offerings and services it provides to clients in these important markets.
UBS Europe SE will be led by a management board whose members are: Birgit Dietl-Benzin, Chief Risk Officer, Fabio Innocenzi, Market Representative (Wealth Management), René Mottas, Market Representative (Wealth Management), Andreas Przewloka, Chief Operating Officer, Thomas Rodermann, Market Representative (Wealth Management), Stefan Winter, Market Representative (Investment Bank). Thomas Rodermann, who has headed UBS’s German business for the past two years, will assume the role of spokesman of the UBS Europe SE Management Board. The UBS Europe SE Supervisory Board will be chaired by Roland Koch, who has been Chairman of UBS Deutschland AG since 2011. The Market Representatives will lead the branches in their respective country.
Pixabay CC0 Public DomainPhoto: Unsplash. Monaco Passes Law on Multi-Family Offices
The National Council of Monaco – the Monegasque Parliament – has passed a law on 29 November 2016, aiming to regulate the activity of multi-family offices in the Principality.
Amendments to the draft law put forward by the Monegasque government, allowing banks and asset managers to establish MFOs in the Principality and the ability given to MFOs to manage portfolios, were finally removed to avoid possible conflicts of interest.
Monegasque MFOs will be categorised in one of two ways: some will only focus on administration but will not be allowed to process financial transactions, while those in the second category will be able to transmit financial orders and provide financial advice to their clients.
The second type of MFOs will need both authorisation from Monegasque regulator the Commission de Contrôle des Activités Financières (CCAF) and the Monegasque government, as well as starting capital of €300,000.
Speaking to InvestmentEurope, Thierry Crovetto, the rapporteur of the law on MFOs and CEO/independent fund analyst at TC Stratégie Financière, says : “The law will spur foreign residents of Monaco to favour local MFOs rather than those of their countries of origin.
“It is estimated only 10% of the assets of Monaco’s foreign residents are currently deposited in banks established in the Principality. There is a huge potential to explore here. A few legal safeguards have been enshrined in the text. The remuneration will be that pertaining to clients only. In addition, banks and asset managers cannot be major shareholders of MFOs that will establish themselves in the Principality. We do not want to see asset managers selling their products through the setup of MFOs in Monaco,” Crovetto adds.
More to read about Monaco’s law on multi-family offices in the forthcoming December 2016/January 2017 issue of InvestmentEurope.
CC-BY-SA-2.0, FlickrPhoto: rachaelvoorhees
. AllianzGI to Acquire Sound Harbor Partners
Allianz Global Investors will acquire Sound Harbor Partners, a US private credit manager led by Michael Zupon and Dean Criares, for an undisclosed sum.
As a result of the acquisition, the Sound Harbor team will join AllianzGI. Sound Harbor is a New York-based private credit manager focused on alternative investments in corporate loans, direct lending, distressed debt and opportunistic credit. The firm manages these investments on behalf of its clients in private limited partnerships, collateralized loan obligations and separately managed accounts. Zupon is a former Partner at The Carlyle Group where he founded and led the leveraged finance business. Criares is a former Partner of The Blackstone Group where he founded and led the loan management business. The transaction is expected to close in the first quarter of 2017.
Andreas Utermann, CEO and Global CIO of AllianzGI, said: “Over the last five years, AllianzGI has invested steadily in the quality and breadth of its active investment offering. Within our fast-growing Alternatives segment, private debt stands out as a particularly exciting area, where we’ve clearly signalled our intent to expand our capabilities to address our clients’ evolving investment needs. The addition of the team from Sound Harbor is a significant step in that process, strengthening and complementing our existing capabilities in this important space.”
Deborah Zurkow, Head of Alternatives at AllianzGI, added: “We are very excited the Sound Harbor team are joining our expanding private debt platform. We continue to see strong demand from our clients for access to a diverse range of illiquid alternatives solutions. Sound Harbor’s expertise enhances AllianzGI’s existing global Alternatives capability, which includes infrastructure debt and a fast-growing corporate loans capability in Paris, underlining our desire to establish ourselves as one of the most prominent private debt managers globally.”
Commenting on behalf of Sound Harbor, Michael Zupon said: “Dean and I, along with the entire team, are looking forward to joining a leading and respected investment manager that shares Sound Harbor’s commitment to outstanding investment performance and dedication to its clients’ needs. Joining AllianzGI will enhance our ability to capitalize on trends favoring growth in alternative investment managers with scale, brand recognition and long-term capital.”
On December 4th, a constitutional referendum is to be held in Italy to vote on amending the Italian constitution. The referendum poses the question:
Do you approve the constitutional bill concerning the dispositions to overcome the perfect bicameralism, the reduction of the number of members of the Parliament, the restraint of the institutions’ operating costs, the abolition of CNEL and the revision of Titolo V of the 2nd part of the Constitution, which was approved by the Parliament and published on the Gazzetta Ufficiale n. 88, on April 15, 2016?
According to Columbia Threadneedle’s Philip Dicken and Andrea Carzana, over the longer term, reform in Italy is critical for increased economic growth and the ultimate well-being of the Italian people, but it is also important to the economy of Europe and the political stability of the EU.
Columbia Threadneedle believes investors should be very aware of the political risks as, in many parts of Europe they see dissatisfaction with globalisation, the rise of populism (and in some cases nationalism) and a frustration with incumbent politicians. Political risk is on the rise and investors need to get used to it they state. “Italy has many fine attributes but has struggled with low growth and political instability. Indeed, Renzi is the third Prime Minister in four years and his government is the 63rd in the past 70 years. If the referendum succeeds the hope is that Italy will have more stability in its political structure, opening the way to economic reforms which could allow the government to tackle several serious structural issues hindering economic growth.”
There are three areas of the economy which they believe need to be addressed:
Labour and demographics – an ageing population with high unemployment amongst the young.
Productivity – persistently low growth and productivity.
Debt and leverage – high public sector debt and a poorly capitalised banking system, but a wealthy population.
They believe the consequences are:
YES VOTE
We believe that this will be received positively by markets, at least in the short term. Renzi would have a mandate for his reforms and would probably seek to amend the Italicum law to head off a possible Five Star win in the expected 2018 general election.
However, if Renzi is not able the change the Italicum law and Five Star continue to gain in popularity from their around 30% in the polls today, then there is an increased risk of a populist, anti-EU, anti-euro government in 2018.
NO VOTE
This would be negatively received in the short term, in our view, but the longer-term impact would be less clear.
Renzi could resign and a technocratic government be formed by the President, Sergio Mattarella. The new PM could again be Renzi who would continue to argue for reform, not least because the Italicum law would be neutered by the unreformed Senate retaining its power.
A technocratic government could be led by others or a general election could be called, both leading to periods of uncertainty.
Or, Renzi may not resign as threatened and simply continue as PM, albeit with reduced political capital.
Wikimedia CommonsFoto: Zimbres. Shenzhen—China's Silicon Valley
Despite all the negatives we hear about the hollowing out of Shenzhen as a manufacturing base—either overseas or to inland urban areas, the city continues to move up the value chain into design, branding, marketing and more says Jeremy Sutch, Senior Research Analyst at Matthews Asia. Who points as an example, the development of drones, a newer and now-booming industry.
Back in the late 1990s, Shenzhen still had a reputation for making fake DVDs, cheap clothes and copycat toys. Eventually, it morphed into the tech hardware capital of the world. And in the past decade or so, Shenzhen has earned its status as the birthplace for certain popularly emerging consumer products. It churns out more than 90% of the world’s e-cigarettes and over 70% of the world’s consumer drones.
So what is it that has enabled Shenzhen—a sleepy fishing village just 30 years ago—to become the “Silicon Valley of China,” now with a population of roughly 12 million? About seven years ago, Shenzhen officials began designating sectors like information technology, the internet, biotechnology and renewables as “strategic industries.” These industries received financial support of up to about US$77 million (RMB500 million), and contributed 40% of the city’s GDP in 2015. (GDP growth in 2015 was a strong 8.9%).
Once a place for transients trying to turn a quick profit, Shenzhen has grown more welcoming. According to Matthews Asia, it is now easier to get work and residential permits, and Shenzhen is often said to be a more meritocratic society where political relationships are less critical—unlike cities where state-owned industries dominate.
Sutch believes China’s drone makers have credited supportive local government policies. In March of this year, the city earmarked billions to attract world-class talent, including national and foreign scientists and academics, to drive innovation. Some of the incentives include housing subsidies for job seekers who hold higher educational degrees. In 2015, R&D accounted for 4.05% of Shenzhen’s economy. This compares with an estimated 1.98% for the whole of China; 2.76% for the U.S. and 4.04% for South Korea, respectively, according a 2016 study by the Industrial Research Institute.
The two (interconnected) factors of funding and talent pool alone do not explain Shenzhen’s success says the specialist adding that “the balance of elements that create its unique ecosystem are its supply chain, manufacturing capability and transport infrastructure.” The city boasts easy and cheap access to every conceivable component—circuit boards, chips, LEDs, lithium batteries, sensors, screws—enabling significantly faster times for production and testing of prototypes, to mass production (and delivery). The latter is abetted by a large number of specialized factories. Shenzhen, being in close proximity to Dongguan where labor is both abundant and skilled, also benefits from efficient air and sea transport links.
However he points out that, like in any environment where the focus is on innovation and speed-to-market, hiccups do happen. And Shenzhen has not been immune. One need look no further than last year’s arrival on the global consumer scene of the “hover board.” These self-balancing scooters—a large proportion of which were churned out of factories in and around Shenzhen—quickly got attention for the wrong reason; namely explosions. “Whilst a setback for the city’s name, innovation and future successes will continue to flow from the city. We may well, for instance, be on the cusp of drones—aided by rising brand strength, and constantly improving product functionality and ease-of-use—moving from the niche hobbyist market to mainstream consumer (not to mention commercial) market. Christmas shoppers beware!” Sutch concludes.
According to Rick Rieder, BlackRock’s Chief Investment Officer of Global Fixed Income, investing in flexible fixed income strategies has never made more sense than it does in the present environment. In a world in which developed market interest rates are extraordinarily low or even negative, and where monetary policy regimes diverge across the globe, Rieder believes that maintaining investment flexibility is vital to successfully navigating markets. In an interview with Funds Society, he talks about the lack of utility of the extraordinarily low interest rate levels for stimulating real economic growth, and the anticipation of a rate hike as the Fed to continue its path of slow interest rate normalization. Hereunder, his answers:
What does the most recent payroll growth slowdown mean for the timing of an interest rate hike?
Without question, payrolls growth in recent months has slowed from its extraordinary pace of recent years, but in our view, that has more to do with the economy’s approach toward full employment and the diminished ranks of qualified applicants searching for positions. Interestingly, this has also resulted in the improvement of wage levels, which are now running at an impressive 2.8% year-over-year, which is a clear representation of growing tightness in the labor markets. Overall, payrolls are fairly strong for this stage in the economic cycle, so with firming wages, and the modest increase in inflation that should follow, we think the Fed should be able to continue on its path of slow interest rate normalization.
Do you think a December rate hike is imminent and what would that mean for the broader economic outlook?
Understandably, the Fed held off from raising policy rates at its recent meeting, coming nearly a week before a highly contested general election in the U.S., but we do anticipate the Committee will make a quarter-point move in December. Still, we believe bond markets have largely priced in such a move, and the gradual rise in interest rates should have only a modest impact on the overall economic outlook. Indeed, as we have argued many times in the past, the utility of extraordinarily low interest rate levels has long since passed in stimulating real economic growth and for some time now has solely been influencing the financial economy as a price-supporting mechanism.
Does a flexible fixed income strategy still make sense in today’s environment?
In our view, flexible fixed income strategies have never made more sense than they do in the present environment. Indeed, we live in a world in which developed market interest rates are extraordinarily low (and in some cases, are negative), monetary policy regimes are continuing to diverge across the globe, a monetary-to-fiscal policy transition is potentially in the cards, and the inflation outlook is evolving globally. And that is to say nothing of the political and event risks that abound in the world today, or the fact that the sources of global growth are rapidly shifting by region. In this environment, we believe that maintaining investment flexibility is vital to successfully navigating markets, and within that framework, the critical importance of “globalizing” ones’ view of fixed income cannot be overstated.
What elements differentiate the BGF Fixed Income Global Opportunities Fund’s strategy from its peers?
For this strategy, we focus on generating consistent, attractive risk-adjusted returns through various market cycles while maintaining the risk profile of traditional fixed income investments. To do this, we invest in a diversified portfolio of beta and alpha sources, and aims to lower absolute risk while achieving attractive risk-adjusted returns. The fund employs BlackRock’s best ideas to identify attractive opportunities across global fixed income markets and is supported by the firm’s vast risk management platform and resources.
Fabio Balboni, European Economist at HSBC and his team expect the ECB to announce another six-month extension of QE at EUR80bn per month at its 8 December meeting. He believes that due to the recent rise in bond yields, this may only require increasing to 50% (from 33%) the limit for bonds without Collective Action Clauses (CACs). Nothing is certain, however, and there is a risk the ECB opts to wait a few months before extending, announces a shorter extension, or opts for another form of monetary stimulus altogether, although they think this is unlikely.
In their view, the underlying inflation situation warrants further easing. Despite a waning drag from energy prices, core and services inflation remain muted and they see few signs of emerging pressures in the key drivers of inflation (wages, pricing behaviour of firms). “We think financial markets got carried away about the European re-inflationary consequences of the US election result, as reflected by the rise in 5yr-5yr forward eurozone inflation swap rates.” He notes.
He believes though, that the ECB will be reluctant to withdraw the monetary stimulus before it sees signs of domestic inflation emerging in the eurozone and will be wary of repeating its 2011 mistake, when it tightened prematurely. Recent speeches, including by ECB head Mario Draghi, have hinted at possibly changing the policy mix, to achieve the most effective stimulus. “But we think the ECB currently has little alternative to QE. Deeper negative rates have potential negative implications for banks’ profitability. Bolder measures, like purchasing equities or NPLs (to spur bank lending) are unlikely at this stage.”
Although the marginal benefits of QE on financial conditions might be waning, it still plays a crucial role supporting fiscal policy via lower government bond yields. And calls for more outright fiscal expansion from the ECB and the European Commission have fallen on deaf ears, particularly in Germany where fiscal headroom exists.
The ECB will publish new forecasts in December. Not much has changed on the economic front since the last meeting, so they don’t expect any major revision to its growth and inflation forecasts. The ECB will, however, present for the first time its forecast for 2019, which Balboni suspects will be very close to 2% for inflation.
“The ECB might also address the question of tapering, using its new 2019 forecast as a hook to say how it intends to unwind QE. However, it’s unlikely they will want to tie their hands on a set date for tapering and the eventual exit should be well flagged.” He concludes.
CC-BY-SA-2.0, FlickrFoto: M M . China: cautela en el futuro a corto plazo
Taiwanese and Korean insurance companies are currently the most active in overseas investments among insurers in Asia ex-Japan, but it is Chinese insurers that outsource the most assets. Cerulli Associates, a global research and consulting firm, estimates that Chinese insurers outsourced US$228.1 billion in life insurance assets in 2015, up by 38.6% over 2014 and nearly double the amount in 2011.
This is one of the key findings in Cerulli’s newly released Asian Insurance Industry 2016 report. Though most of these outsourced assets are invested domestically, more assets are expected to flow overseas as Chinese insurers see a growing need for better returns outside their domestic market to help meet their liabilities. China’s life insurers have seen their liabilities rise as they tried to compete with providers of popular wealth management products by offering policies with attractive return rates, such as universal life. Total insurance liabilities in the country stood at US$1.7 trillion in 2015, up by 44.5% from 2013.
Chinese insurers also face a growing concern over the potential impact of lower interest rates, with the People’s Bank of China‘s base rate for one-year loans now at 4.35% and its benchmark rate at 1.5%. With more than 21% of total insurance assets invested in deposits alone at end-2015, insurers derive an important portion of their investment income from the interest earnings of these investments. A fall in interest rates will inevitably have an impact on their investment income and will push insurers to deploy assets more efficiently by diversifying their sources of returns, including overseas.
This is something Cerulli has already seen happening. Looking at the Chinese insurance industry’s total investment portfolio, the proportion of assets in bank deposits declined from 27.1% in 2014 to 18.8% in June 2016. On the other hand, investments in the “others” category–which includes listed and unlisted long-term equity investments, bank wealth management products, trusts, private equity, venture capital, loans, and real estate–rose from 23.7% in 2014 to 34.2% in June 2016.
With the general lack of overseas investment experience and expertise among Chinese insurers, Cerulli expects many of them to work with foreign managers on offshore allocation. “There will particularly be opportunity among small and mid-sized players as they follow the lead of large insurers and rely on third parties. Unlike their larger counterparts, most of these players don’t have asset management subsidiaries in China or Hong Kong to help them with their investments,” says Manuelita Contreras, associate director at Cerulli, who led the report.
Supporting this outlook is the increasing number of insurers with regulatory approval to invest overseas. “Nine life and non-life companies received the green light to invest overseas in 2015 through the external manager route, up from only four in 2014. As of July 2016, 15 insurers have the approval to invest overseas through this route,” says Rui Ming Tay, analyst at Cerulli, who co-led the report.
“Through the Qualified Domestic Institutional Investor (QDII) scheme, some of the private insurers are expected to use their overseas investment quotas to outsource assets, potentially for global fixed-income and multi-asset strategies,” says Kangting Ye, analyst at Cerulli, who covers the Chinese insurance market. There were 40 approved QDII insurers as of June 2016.
