Trump’s Win And the Equity Markets

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The election results are a surprise to markets, say Hersh Cohen and Scott Glasser, Co-CIOs, ClearBridge Investments – a Legg Mason company.

“We believe it is too early to draw firm conclusions and prefer to see detailed policy proposals rather than relying upon campaign rhetoric. In our view, there are likely positive and negative implications for the U.S. economy and financial markets from a Trump presidency and a Republican Congress”.

The potential positives include tax reform, regulation and infrastructure investments. The co-CIOs have long advocated for tax reform and they believe a restructuring of the tax code for corporations and individuals – along with a more efficient vehicle to repatriate foreign cash – will be beneficial for economic growth and spending. They also expect a less stringent regulatory environment and “friendlier” oversight for consolidation (through mergers and acquisitions) to support market valuations. Finally, -they add- the country will benefit from strong fiscal policy to rebuild infrastructure. They view all of the aforementioned as market-friendly and stimulative to growth.

They also have some concerns including trade, monetary policy and the direction of interest rates. “Our biggest concern stems from commentary on trade and the potential impact of modifying existing treaties and agreements. We view potential restrictions on trade and any attempts to isolate or protect the U.S. from foreign trade as highly negative. In fact, this type of protectionism invokes memories of the 1930s when trade tariffs resulted in retaliation and caused the economy to eventually tumble into depression. While we do not expect this type of extremism, slower trade has the potential to mitigate some of the growth-oriented proposals”.

Lastly, monetary policy and interest rates remain a critical variable for both the markets and the economy generally, they note. “The proposed Trump policies are growth stimulative but also have the potential to push inflationary pressures back towards historical levels, thereby pushing up interest rates. While in the long run we believe this would eventually be healthy for savers and pensions and positive for spending, U.S. markets are very sensitive to changes in interest rates which have been excessively low for seven-plus years. Increased interest rate volatility would likely result in shorter-term market dislocations”.

They have had modest expectations for stocks for the last year and a half, primarily due to a combination of lackluster growth and elevated valuations, but believe sticking with a diversified approach across a portfolio that emphasizes companies with shareholder-friendly capital allocation policies is the prudent course as we enter a new presidential cycle.

The Markets are Red, While the House, Senate and Presidency Go Republican

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Markets around the world were in awe while the US election results were called on November 8th. At the end of the count, the House, the Senate and the Presidency were all red, and so were the markets. The Mexican peso, which throughout the campaign had been seen as a proxy for the President Elect‘s prospects, sank to its lowest level in history, plunging over 13% having its biggest fall since the so-called Tequila Crisis, in 1994.

Throughout his campaign, Donald Trump proposed increasing import tariffs, scrapping regional and global trade deals, and blocking worker remittances to Mexico. According to Nuno Teixeira, Head of Institutional & Retail Solutions Investment and client solutions investment division at Natixis, Donald Trump’s program seems more positive for equities, “with his proposal to cut back the maximum corporation tax rate from 35% to 15%, but his ultra- protectionist stance would dent companies with the most international exposure.” However the market’s first reaction was a sell-off.

While policy uncertainty will no doubt taint the markets, Natixis believes industrials, defense and oil would benefit from a Trump Presidency. Gold, is also expected to gain. Meanwhile, healthcare might get a surge given Trump wants to call into question the universal healthcare program implemented by the 2010 Obamacare legislation.

Emerging Markets, with the exception of Russia are expected to suffer in the short term. However, “in reality, if Trump were to keep to his Mexico trade agreements campaign promises, he may find punitive trade measures counterproductive given Mexico is the US’s second largest export destination and trade between the US and Mexico is interlinked.” Said Olga Fedotova, Head of Emerging Market Credit Research at AXA IM. Trump himself said in his speech, that he would be working with other countries.

According to Marco Oviedo, Barclay‘s Mexico Chief Economist and a former Mexican President Advisor the peso could fall to 22 per dollar, from an original level of 18.35 right before the election results. During the days prior to the election, the peso posted a four-day rally while expectations of a Democratic win grew. Mexico’s Central Bank Governor Agustin Carstens and Finance Minister Jose Antonio Meade have prepared a contingency plan but they informed in Mexico that they will not raise rates out of schedule. The next raise is expected to happen next week at their policy meeting.

Asian Institutions Face Pressure to Lift Returns

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Many Asian institutions are struggling to meet their targeted portfolio returns or have recorded negative returns amid the global market turbulence since mid-2015. This has forced them to look beyond core asset classes for yield and search for more non-traditional strategies as they seek to boost returns and reduce fee expenses on their portfolios.

This is one of the key findings from global research and consulting firm Cerulli Associates‘ newly released Institutional Asset Management in Asia 2016 report. While the number of traditional mandate issuances from Asian institutions declined, the pace of alternative searches and use of other non-traditional avenues like smart beta strategies have markedly increased among asset owners in China, Korea, Hong Kong, and Taiwan.

Alternative allocations, in fact, gave institutions like Korea’s National Pension Fund and Korea Teachers Pension Fund the strongest returns on their respective investment portfolios last year. This has strengthened the resolve of many Korean institutions to beef up their alternative exposures, with some of them aiming to invest at least 20% of their portfolios in alternatives before 2020. Apart from the allure of alternative investments, the underperformance of active managers has also prompted Asian institutions to think more about passive products or smart beta products. In Taiwan, assets allocated by pension funds to smart beta strategies surged by 62.2% to US$10.9 billion, accounting for 31.9% of their total overseas mandates as of June 2016.

However, Asian institutions are unlikely to have full-scale expertise in these areas any time soon, and will have to rely on external managers. “This burgeoning demand for alternatives and passive products will provide more opportunities than ever to managers known for their strong alternative capabilities,” says Manuelita Contreras, an associate director with Cerulli, who led the report.

This certainly puts pressure on traditional asset managers. In Cerulli’s survey of institutional asset managers in Asia, they ranked competition from alternatives and passive products among their top five challenges over the next two years. Many traditional asset managers have even jumped on the alternative bandwagon and built their alternative capabilities.

The growing competition for assets from the usual institutional investors in the region has also prodded managers to find opportunities at smaller institutions, including private banks, smaller pension funds, benefit associations, and small and mid-sized insurers. “Nowhere is this more evident than in Korea, where a slew of them have poured money into overseas investments, with some having even leapfrogged from passive to alternative investments,” says Rui Ming Tay, an analyst with Cerulli, who co-led the report.

Andy Rothman: “The Chinese Debt Problem is Concentrated to Some Sectors and Standardization Will Not Be Traumatic”

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Andy Rothman: "The Chinese Debt Problem is Concentrated to Some Sectors and Standardization Will Not Be Traumatic"
CC-BY-SA-2.0, Flickr. Andy Rothman: "The Chinese Debt Problem is Concentrated to Some Sectors and Standardization Will Not Be Traumatic"

Many experts predict a dramatic story for China, claiming that an economic crisis or a hard landing of the Asian giant is just around the corner. But the reality is less dramatic: Although China faces many challenges, it is more likely to continue to account for about one-third of global growth than to be at the center of a collapse.

Speaking at Matthews Asia’s 2016 Investment Forum in San Francisco, Andy Rothman, investment strategist at the firm, explained that a misunderstanding of how much the economy has changed in recent years is what drives the extreme pessimism for China’s prospects.

“China’s growth deceleration is indeed a fact, but, How possible is a ‘hard landing’?” he queried. “From the media’s point of view, the story of China’s collapse is very appealing, and given the misunderstanding of its economy, it’s an argument that easily gains adherents,” he said.

“The average citizen in developed economies imagines China as an economy which is fully controlled by the state, with a very communist background, ghost towns, “zombie” companies, and a huge weight of exports and investment in its GDP. But the reality of China’s economy is more like this:

  1. 80% of employment in China is in private hands.
  2. All employment growth is generated by SMEs
  3. China has become a market for entrepreneurs
  4. It is headed for its fifth consecutive year in which services and consumption account for a larger part of its economy than manufactoring and construction.”

The rebalancing of the Chinese economy from investment to consumption implies lower growth, said the expert, “but we must not forget that last year China was responsible for 35% of the global economy’s growth and that, ultimately, what happens in China has a huge impact on the global economy and in most of the companies in which we invest, both inside and outside China. Therefore, it is important for investors to understand what is really happening there,” Rothman pointed out.

As an example of this transformation, the strategist mentioned the prevalence of private companies, and not of state-run enterprises, as is widely believed. Also, the services and consumption sectors already exceed manufacturing and construction.

Mistrust indata

It is true that when dealing with the macroeconomic data published by China, there is certain mistrust, which is very hard to overcome. For the Matthews Asia fund manager, skepticism is quite clear. “There are reports that growth in electricity consumption is much lower than the GDP growth data. And that is so. That does happen, but the same is true in the United States. Growth comes from companies and industry sectors which are much less electricity intensive, such as Alibaba,” he explained.

“Another thing which is also frequently mentioned is the drop in imports of raw materials, but that data is always reported in dollars, not volume. And the reality is that the price of raw materials has plummeted in recent years, so when looking at imports of raw materials in terms of volume (tonnes), the slowdown is far less dramatic,” he said.

Debt

“The debt problem is serious, but the risk of a hard landing or banking crisis is, in my view, low. The key reason for that is that the potential bad debts are corporate, not household debts, and were made at the direction of the state—by state-controlled banks to state-owned enterprises,” Rothman said. This provides the state with the ability to manage the timing and pace of recognition of nonperforming loans. It is also important to note, he points out, that the majority of potential bad debts are to state-owned firms, while the privately owned companies that employ the majority of the workforce and account for the majority of economic growth have been deleveraging. Additional positive factors are that China’s banking system is very liquid, and that the process of dealing with bad debts has begun.

A massive devaluation of the Renminbiis not expected

Last year, the Renminbi depreciated by about 6% against the dollar, while so far this year, it’s down by about 4%. “The Chinese currency is unlikely to depreciate, or appreciate by more than 5% per annum, and the direction will most probably vary depending on the strength of the dollar against the other world currencies. The reality is that China remains a competitive exporter, even though wages have grown on average 15% annually in recent years and the Renminbi has appreciated over 40% against the dollar from 2005 to 2015” Rothman, concluded.

Maitland Restructures its Institutional Client Team

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Maitland rediseña su equipo directivo para organizarlo por tipo de producto
CC-BY-SA-2.0, FlickrPhoto: Federico Mena Quintero . Maitland Restructures its Institutional Client Team

Maitland, a global advisory and fund administration firm, has announced a major organisational restructure of the leadership team of its institutional client services arm. The management team will now reflect the five fund services products on offer – Traditional Fund Services, Transfer Agency, Hedge Fund Services, Private Equity & Real Estate Fund Services and ManCo Services.

The move reflects Maitland’s impressive expansion over recent years, both in terms of size and geographical reach as well as breadth of internal expertise and talent. The product approach empowers each product head to drive all aspects of the delivery to clients, both in terms of day-to-day service as well as longer-term strategic alignment.

The entire institutional product offering will be led by Jim Clark, who joined Maitland in May 2014 from State Street and brings over thirty years of industry experience to the role. The TFS team will be led globally by Rob Leedham, with Guido Frederico leading the South African business. TA and HFS teams are led globally by Mark Bredell and Ben Pershick respectively while Bruce McGlogan will head up the PERE team as it builds on its current period of success in Europe and South Africa.

Steve Georgala, CEO of Maitland, said: “Maitland is a unique firm in terms of its product capability and breadth of services we are able to offer institutional clients. We are delighted to have a leadership team full of deep industry experience, with each member bringing substantial knowledge and expertise to their domain. Our focus is to stabilise the areas of Maitland that have enjoyed substantial growth recently, whilst continuing to actively grow products and regions where our offering is attracting considerable market interest. Given this, it made sense to restructure our organisation to reflect our client-centric approach, and to empower our business leaders to deliver the best service possible. These are exciting times for the company.”

How will Bond and Currency Markets React to the US Election Result?

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La renta fija estadounidense vivirá escenarios diferentes dependiendo de si gana Clinton o Trump, mientras el dólar subirá
CC-BY-SA-2.0, FlickrPhoto: Colleen P. How will Bond and Currency Markets React to the US Election Result?

With the latest polls suggesting the race to become the 45th President of the United States is neck and neck. Bond and currency managers around the world are currently trying to assess how a win for either candidate might affect their portfolios. M&G’s Anthony Doyle offers his best estimate as to what might happen.

A Clinton win

A Clinton victory is seen by the markets as a continuation of the current US political environment, particularly if the Republicans retain control of the House of Representatives. This would be the most benign scenario for bond and currency markets as measured by price volatility. Following a Clinton win, the bond market would likely price in a higher probability of a move in interest rates, with the removal of perceived political uncertainty paving the way for a Fed rate hike in December. The US dollar stands to be the main beneficiary of this change in market pricing in the immediate future, though any gains are likely to be measured.

Ampliar

 

In a Clinton win scenario, bond prices across the Treasury curve would likely remain under pressure in the coming weeks given the high chance of a rate hike, rising inflationary pressures, and the possibility of an easier fiscal policy stance by a Clinton administration. A Clinton win is not likely to radically alter bond investors or economists views on the outlook for the US economy. If Clinton is able to implement easier fiscal policy in the US in the medium term, US growth and inflation would likely increase, meaning a rise in term premiums and a steeper yield curve.

A Trump win

A Trump victory would result in heightened volatility across a number of markets given the uncertainty around what the implications are for the US economy. Following the result, risk aversion would likely increase meaning a rising US dollar, lower bond yields and a weaker US high yield corporate bond market. In the fixed income universe, emerging market bonds and currencies would likely be hit the worst in this environment given Trump’s tough stance on China and Mexico. This market reaction could look similar to previous US risk-off events such as the 2008 financial crisis, the 2011 loss of the US government AAA rating, and the 2013 taper tantrum. Equally, should the Fed push ahead with a rate hike in an uncertain political environment, we may see an adverse reaction in markets similar to the 2014 rate hike.
 

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Turning to credit markets, Trump’s proposal of a repatriation tax holiday would likely be positive for US investment grade corporate bonds at the margin and may lead to a reduction in corporate bond issuance. It is estimated that companies hold almost $1trn offshore, with around 60% denominated in US dollars. The big question is how companies would use this cash: will they pay out special dividends to shareholders? Will they increase capital expenditure and expand their operations? High yield companies would be less affected, as most companies have domestic sources of revenue.

Over the medium term, Trump’s proposals on large tax cuts for all is the equivalent of a large Keynesian injection of cash into the economy which would benefit economic growth but also raise inflation. The implementation of trade barriers would also be inflationary, as import prices rise from current levels. Immigration reform means the already tight US labour market would tighten further, leading to higher wages. Fed policy would need to counteract the rise in inflation, meaning much higher interest rates and a bear market for bond markets. The US treasury market would return to a world of higher yields and a much steeper yield curve. In this environment, the US dollar would likely strengthen given the contrasting monetary policy stance with other developed market economies. A Trump win would be good for government bonds in the short term, bad for bonds in the long term.

The bottom line

A Clinton victory would likely result in lower volatility in the near term relative to a Trump victory. In the immediate aftermath of a Clinton win, there may be some slight risk-on moves from investors but over the medium term much will depend upon the make-up of the United States Congress. Credit markets should prove to be relatively resilient, given that default rates are expected to remain low and the Fed remains cautious in removing policy accommodation, thereby reducing the chances of a policy error.  A Trump victory would be seen as a risk-off event in the short-term, resulting in lower treasury yields, a higher US dollar and weaker risk sentiment towards emerging market assets. Given both candidates are advocates of an easier fiscal policy stance, government bond prices are likely to come under pressure in 2017 under both scenarios. Over the longer term, like a Clinton win scenario, the policies that Trump is able to implement given the make-up of Congress will be key to determining the outlook for the economy and consequently bond and currency markets.
 

US Elections: The End of the Fed’s Independence?

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According to Philippe Waechter, chief economist at Natixis, on election day, the economic context continues to look uncertain. Growth in the US has been weaker in 2016, while the world economic outlook is on a moderate slope. World trade is not progressing much and fails to act as a growth driver for the US. In other words, if the US economy wants to get back on the path to growth, it will have to rely on its domestic market, rather than external impetus.

In this respect, he believes the two presidential candidates’ programs offer very different, and often vastly diverging, solutions:

  • In the Democrats’ program, as embodied by Hillary Clinton, the overall approach is based on the acknowledgment of the current long-term stagnation in economic growth i.e. a situation characterized by insufficient private demand to ensure robust growth, as well as by major revenue inequality. The solution put forward by Hillary Clinton is to implement an infrastructure investment program, which would be financed by more hefty income tax on the highest earners, thereby giving domestic activity a boost and hence reducing inequality in order to gradually eliminate the risk of long-term stagnation. The program’s aim is to put growth back on an upswing by reallocating resources towards infrastructure investment, and this increased investment should in turn heavily encourage private investment. The program would be financed by higher taxes, so the impact on the public deficit would be limited and the public debt profile would only increase very slightly, and probably not be much different to what is currently projected by the US authorities.
  • Donald Trump’s program takes a different take on the economy. It is based on two major principles: the first is to considerably cut back household and corporation tax in order to bolster domestic demand; the second is to give the United States back its power and independence of bygone days. This involves pulling out of trade commitments and treaties, and international political commitments, as well as the implementation of a more protectionist framework with a significant hike in customs duties, particularly with China. The overall aim is to drive the domestic market, while reinforcing the United States’ independence from the rest of the world.

The choice of candidate will have lasting and very diverging consequences for the economy. For the rest of the world, the impact will also be very different depending on who wins. If the Democratic party wins, we know that Clinton is not opposed to free trade, although she is not a fervent supporter either (particularly the TTIP), so in other words she will not take protectionist measures but neither is she like to force greater trade agreements between countries or zones. From a political standpoint, the role the US plays in the worldwide equilibrium would continue.

If the Republican candidate is wins, then the situation will look very different. The shock on world trade would affect all participants in the world economy, driving activity down. No-one will escape this negative shock, and in particular China. Canada and Mexico, which do considerable trade with the US, would also be penalized, and Europe would also be affected by this radical change. The other point to note is that the Republican candidate does not want to see the US guarantee world security, contrary to the situation we have witnessed since the Second World War, and this would cast doubt over NATO membership. There is a risk that this situation would create a context for mistrust and suspicion, which is never good news for growth.

At Natixis, from a tactical standpoint, they maintain a considerably more positive stance on equities than bonds, based on:

  • projections for world growth that are still weak but downward risks are easing;
  • extreme valuations on the bond market, even after the rise in rates seen since the start of September;
  • the feeling that Eurozone investors should gradually factor in the upward inflationary trend out to mid-2017 and the likely announcement from the ECB in December of a less generous approach to its quantitative easing program during 2017, thereby promoting an upward normalization of long-term rates.

“In view of the likely Hillary Clinton victory, we maintain a positive view on emerging markets, particularly on emerging debt, once the rise in short-term US bond rates and the dollar has been processed.” Says Nuno Teixeira, Head of Institutional & Retail Solutions Investment and client solutions investment division.

The end of the Fed’s independence?

The two candidates’ attitude on the Federal Reserve is also very different according to Waechter. “We can expect few changes from Democrats: the candidate would guarantee the Fed’s independence and Janet Yellen could seamlessly continue to manage US monetary policy. The Republican candidate’s approach is radically different. This can be seen in the vast number of criticisms of Janet Yellen’s strategy. The danger is that he could attempt to reduce the Fed’s independence, either heavy-handedly by changing the law, or by revisiting an objective from Republicans in Congress to cut back the central bank’s leeway, all with the aim of forcing the Fed to follow precise rules in its management of monetary policy. The Fed could still be independent in legal texts, but in practice it would not be.” He concludes.

State Street Global Advisors Announces New Promotion Agent for SPDR ETF Business in South America

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State Street Global Advisors (SSGA), the asset management business of State Street Corporation, announced a partnership with Credicorp Capital which will serve as promotion agent for SPDR ETFs to institutional investors in Chile, Peru and Colombia. The partnership, which became effective September 12, 2016, will provide institutional clients throughout the region with local, dedicated SPDR ETF resources to help meet their portfolio management needs.

“Latin America is a strategically important market to the SPDR business and we are pleased to enhance our resources for clients throughout the Andean region,” said Nick Good, co-head of the Global SPDR business at State Street Global Advisors. “SSGA’s global ETF capabilities paired with Credicorp’s deep local relationships and expertise will result in an improved client experience.”

“We are thrilled to partner with State Street Global Advisors to represent their market leading family of SPDR ETFs. The Global SPDR business is the unquestioned ETF leader for institutional investors and we look forward to delivering enhanced resources to our clients across the Region,” said Alejandro Perez Reyes, head of Asset Management at Credicorp Capital.

Vanguard To Open an Innovation Center

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Vanguard To Open an Innovation Center
Foto: Boegh . Vanguard abrirá un centro de innovación en 2017

Vanguard has announced that the company has created a new operation entirely focused on developing services to meet the evolving needs of its individual, financial advisor, and institutional clients. The Vanguard Innovation Center, expected to open in the second quarter of 2017, will be located in Philadelphia at the nexus of the city’s robust academic and business communities, and in proximity to the region’s transportation hubs and the firm’s global headquarters in Malvern, PA.

“Innovation is woven into Vanguard’s DNA, from our unique mutual ownership structure to bringing the first index mutual fund to market for individual investors,” said Vanguard CEO Bill McNabb. “The Innovation Center is a tangible commitment that we’ll continue our strong track record of building capabilities that we believe give our clients the best chance for investment success, and we’re pleased to take this significant next step in Philadelphia.”

Today, more than 90% of Vanguard’s interactions with its 20 million clients occur digitally, enabling the company to increase productivity, lower costs, and improve the investor experience. A recent example is Vanguard Personal Advisor Services, a hybrid advice offering that combines the virtual engagement, customized financial plan, and sophisticated computer modeling of robo-advisors with the judgment and behavioral coaching of a human financial advisor. Introduced in May 2015, Personal Advisor Services now manages $47 billion in assets.

 

 

Innovation Center to capitalize on tech revolution
While still in the early stages of development, Vanguard envisions the Innovation Center as an internal, entrepreneurial team of initially 20 crew members dedicated to galvanizing existing innovation efforts and serving as a catalyst for new ideas and solutions. The Center’s team will also evaluate mutually beneficial partnership opportunities with other businesses and universities as a way to share experience and expertise, from research to process to technology, across industries.

“We are in the midst of a great technological revolution – from self-driving cars and package-delivering drones to smart phones and 3D-printers – that is changing the way we live, work, and, in Vanguard’s realm, invest. With a centralized, and centrally located, Innovation Center, Vanguard seeks to harness emerging technologies and new processes to create value for our clients by improving their investing experience and their investment outcomes,” said Mr. McNabb.

Vanguard returns to Philadelphia roots
Vanguard traces its roots to Wellington Fund, one of the mutual fund industry’s first balanced funds, which was founded by Philadelphia accountant Walter L. Morgan in 1929. Today, Vanguard Wellington Fund is the largest balanced fund with more than $92 billion in asset1. Vanguard also operated a walk-in investment center in Center City from 1984 to 1999 to serve individual investors making deposits to their mutual fund accounts or contributing to their IRAs.

 

 

 

Joséphine Verine Appointed COO Marketing of the Lombard Odier Group

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Lombard Odier announces the appointment of Joséphine Verine in the newly created role of COO Marketing in the Marketing and Communication Department of the Lombard Odier Group.

Joséphine Verine will report to Fabio Mancone, Executive Vice President and Chief Branding Officer of the Lombard Odier Group.

She will be responsible for ensuring that marketing operations and project management run smoothly across units, markets and departments. In her role, she will also directly oversee events, publications, editorial content and client experience.

Joséphine Verine has more than 20 years of experience in the luxury sector. She joins from Chanel where she has been Managing Director of the Haute Couture Division for the last three years. Prior to that, she occupied a number of senior management positions in marketing, communication and retail at Dior, Céline, Armani and Louis Vuitton.

Joséphine Verine brings to Lombard Odier her valuable expertise and sensibility to luxury clients’ relationship management and service.

Joséphine Verine will be based in Geneva. Her appointment is operational as of 15 November 2016.