Concerns About a Sharp EM Correction are Overplayed

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Looking at the potential impact of the incoming 45th US President on emerging markets, the AXA IM Emerging Market debt team believes that trade and immigration policy has proved among the most contentious topics in the US elections. According to Olga Fedotova, Head of Emerging Market Credit Research at AXA IM: “Trump may find punitive trade measures counterproductive.” During their campaigns, Trump has proposed increasing import tariffs, scrapping regional and global trade deals, blocking worker remittances to Mexico, and has hinted at the mass deportation of undocumented workers. In contrast, Clinton has largely promised to oversee a continuation of the status quo. Takinf this into consideration, the specialist believes that concerns about a sharp EM correction are overplayed – “the direct impact of US trade on EM economies is modest, with EM countries sending just 16% of their exports to the US. However, Mexico remains singularly exposed, with 81% of its exports going to the US.”

Fedotova believes that 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. “China and South Korea take second place, with US imports making up 3%-4% of GDP. If Trump were to impose punitive tariffs against China, any counter action could inflict significant pain on US exports, whose third largest market is China. In EMEA, the trade ties with the US are modest, with Israel (1% of GDP) and Saudi Arabia (0.7% of GDP) the most exposed, although two-way links limit the risk to individual industries. For example TEVA, an Israeli pharma company which generates over half of its revenue in the US, produces Multiple Sclerosis drugs which current patents would make difficult to replicate. In Saudi, the trade account is balanced, with oil exports to the US offsetting imports of cars and machinery.”

In their view, the strength of the dollar is the main channel through which a US President affects EM. “Assuming some fiscal loosening, the Fed reaction determines the dollar impact. The new President inherits a strong dollar by historical levels and the major drivers of $/EM are turning favorable for EM. There could also be tension around “currency manipulation” and a high risk that the Trans-Pacific Partnership (TPP) is delayed or rejected.”

Meanwhile for Sailesh Lad, manager of the AXA World Funds Emerging Markets Short Duration Bonds fund “The severity of volatility and weakness in EM will depend on how quickly and what is implemented regarding the TPP. I recently attended the IMF meetings in Washington DC at which a panel debated whether Trump could rip up Nafta without government approval! This could have negative growth implications for not only EM but also US. If there is no room for fiscal expansion, then the Federal Reserve is the only institution who might be able to kick start the economy. Trade is clearly a point of contention, less so with Hilary than Trump, but it is important to note that US exports are a fifth of Mexico’s GDP, but only 4-5% in China and Korea and 2% or lower in the other manufacturing exporters. That said, a shock to global trade would clearly hurt all of EM.”

Overall they expect more volatility in markets in a Trump victory because of policy uncertainty. “In the medium term, the results of this election will have a global impact, not just an impact in EM countries. In my view countries with large external financing needs and high beta such as Turkey and South Africa may suffer and their debt underperform. Diverging foreign policy objectives could see shifts in geopolitical alignment. In our view Asia (ex- China) is least likely to be impacted. Ukraine may also suffer if Trump wins, as he is seen as being more pro-Russia, and therefore Russia could see more up-side than down-side. For example a victory for Trump could usher in a renewed détente with Russia, a relationship that has become increasingly strained under President Obama. While there are some fears about additional financial sanctions under Clinton, the marginal effect of further sanctions is likely to be limited.” Russian companies have largely adjusted through deleveraging, with total corporate external debt going down to USD 468bn in September 2016, from USD 678bn reported when sanctions were first imposed in 1Q 2014.2 Lastly, the Middle East could become more unstable with risk of more geo-political issues.

“A Clinton win should mean business as usual for Ukraine, as she doesn’t share Trump’s pro-Russia stance. We have been reducing our exposure to Mexico for both US election risk worries but overall we are slightly less positive on Mexico due to reform fatigue and concerns around certain Mexican corporate fundamentals. Also in Asia, we have been reducing overall exposure as we believe the region is expensive on valuation terms.”

Fedotova concludes: “Regardless of the winner, gridlock, pragmatism and self-interest are likely to prevent the market’s worst fears from materialising. Headline risk and volatility may increase, particularly with a Trump win, close trade linkages – 50% of US exports are destined for emerging markets, would make a fundamental shift in trade policy a case of beggaring thy self, rather than thy neighbour.”

Muzinich & Co Achieves Double Award Success

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Muzinich & Co logra dos premios como especialista en renta fija
CC-BY-SA-2.0, FlickrPhoto: Investment Week Specialist Investment Awards 2016. Muzinich & Co Achieves Double Award Success

Muzinich & Co, an institutional asset manager specialising in corporate credit, earned two fixed income awards in the Investment Week Specialist Investment Awards 2016.

The Muzinich Europeyield and Muzinich ShortDurationHighYield funds won the European High Yield and Short-dated Bond categories.

In addition, Muzinich Americayield was highly commended in the US High Yield category and the company was highly commended in Specialist Fixed Income Group of the Year.

The awards were judged using a combination of quantitative and qualitative criteria, based on independent performance data and analysis by a panel of leading industry figures.

Josh Hughes, Managing Director of Marketing & Client Relations at Muzinich said: “We take great pride in the fact that a panel of highly respected industry figures have recognised our success in delivering superior risk-adjusted returns for our investors, which has been the focus for Muzinich & Co for more than two decades.

It underlines the quality and specialist expertise of our credit team, who we believe are among the most experienced in the industry.”

The awards are designed to recognise consistency of returns by asset managers focused on specialist asset classes. Muzinich & Co was also recognised in last year’s awards when it earned four awards and was highly commended in two categories.

The US Is King In The Global Hedge Fund Community

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Estados Unidos domina la industria global de hedge funds
CC-BY-SA-2.0, FlickrPhoto: foreverseptember . The US Is King In The Global Hedge Fund Community

The US is the dominant component of the global hedge fund community, accounting for 72% of the approximately $3.1tn of global assets under management (AUM), as of 30th June 2016. Although other regions are emerging as regards hedge fund activity, the US is home to 3,170 of the 5,092 (62%) institutional investors active in hedge funds, and 3,209 of the 5,377 (60%) active hedge fund managers tracked by Preqin.

The US hedge fund industry has also seen strong growth in recent years, increasing by $13bn in the first half of 2016 – despite global outflows – and by $138bn since the start of 2015. Moreover, in Preqin’s recent survey of over 270 hedge fund managers, notably more US-based managers reported an increase (26%) in the proportion of their AUM allocated by investors than reported a decrease (4%), depicting a positive outlook for the US hedge fund industry.

Hedge funds located in Pennsylvania charge the lowest average performance fee (17.54%) of the top 10 most active US states, with funds based in Virginia charging the highest average fee of 20.00%. Massachusetts-based vehicles charge the lowest mean management fee, at 1.25%, while those located in Illinois have the highest fee of any state (1.58%), on par with New York-based funds (1.57%). 


Hedge funds based in Texas have generated 3-year annualized performance of 8.96%, the highest of any of the top 10 US states, while Virginia-based vehicles have recorded returns of 8.13%. Hedge funds in Illinois, Connecticut and Massachusetts have fared less well over the same period, with annualized returns of 2.54%, 2.80% and 2.88% respectively. 


Over one-third (37%) of US-based fund managers are based in New York, and collectively these firms hold $1.1tn worth of assets – 36% of global industry AUM. Furthermore, New York represents nearly half (46%) of US-based funds incepted since 2009. 


New York has the most active institutional investors (544) of any state in the US, while California are second in the list with 341 investors located in the state. The 77 New Jersey-based investors have an average current allocation to the hedge fund industry of 18.8%, by the far the highest of any state. 


 

 

Six Reasons for the Recent Bond Sell-Off

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Six Reasons for the Recent Bond Sell-Off
CC-BY-SA-2.0, FlickrFoto: Lynn Greyling. Seis razones de la última oleada de ventas en deuda

October was a bad month for bond markets. German Bunds have risen 30bps, making it their worst month since 2013, whilst U.S. Treasuries have climbed to their highest levels since May 2016. According to Pioneer  Investments, the main reasons for the sell-off are:

  1. Increased probability of a Fed rate hike in December (now 73%) – the recent economic data in the U.S. (and globally) has been just about strong enough to allow the Fed to hike in December and not, in our opinion, upset markets.
  2. All about inflation breakevens – real rates haven’t moved. In the major markets, the majority of the recent sell-off can be attributed to a rise in inflation expectations, due to the increase in the oil price over the last 12 months.
  3. Stronger UK data sees market pricing next rate move as a hike – as mentioned below, Q3 GDP data in the UK was sufficiently strong to make the market consider that further rate cuts may not be needed.
  4. Euro OverNight Index Average (EONIA) no longer pricing in rate cuts – as in the UK, recent strong economic data in Europe (better IFO survey data and German Industrial Production numbers), along with increasing inflation makes it unlikely that the ECB would cut the deposit rate further.
  5. Stretched positioning – data from the Eurex futures exchange and anecdotal evidence from counter-parts suggest that many investors were long duration. The cutting of these positions as bond yields rose exacerbated the selling pressure.
  6. Bond volatility had been close to historic lows – the Merrill Lynch Option Volatility “MOVE” index showed bond market volatility had moved back towards the very lows levels seen in May 2013 and August 2014. In both cases, volatility rebounded sharply higher shortly afterwards.

Pioneer’s David Greene says: “Whilst we have some sympathy with the move higher in yields, and are running a short duration position ourselves in Europe, we don’t subscribe to the belief that this is the start of another “taper tantrum”.”

 

Thomson Reuters Has Launched a U.S. Election App

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Thomson Reuters Has Launched a U.S. Election App
CC-BY-SA-2.0, FlickrFoto: VectorOpenStock. Thomson Reuters lanza la app Eikon Election para ofrecer datos sobre las elecciones estadounidenses

Thomson Reuters has launched a U.S. Election app on its flagship desktop product Eikon that provides financial professionals a one-stop location for market data, news, commentary, and analysis leading up to and after the November 8 election.

The election app provides inter-day analysis and visuals, both U.S.-specific and global, across key segments of the capital markets including foreign exchange, equities, fixed income, and commodities. The app is broken out by financial segment and includes ongoing news commentary from Reuters related to the specific market. Users have access to select Chartbook content from Thomson Reuters financial time series database Datastream.     

The app further provides a continuous Reuters news feed of election-related news, and links to Reuters polls, the Reuters Election 2016 Live Blog, Reuters TV, and the Reuters States of the Nation App, an interactive product that allows users to create their own election scenarios.“

U.S. presidential elections traditionally create short- and long-term ramifications for all segments of the global economy and the financial markets,” said Debra Walton, global managing director, customer proposition, Thomson Reuters Financial and Risk. “Financial professionals are inundated by information from multiple sources, so by merging content from across Thomson Reuters, we are providing our customers with a comprehensive portfolio of news, data, and analysis all at a single location, enabling them to make more informed investment decisions.”

Thomson Reuters Eikon is a powerful and intuitive next-generation open platform solution for consuming real-time and historical data, enabling financial markets transactions and connecting with the financial markets community. Its award-winning news, analytics and data visualization tools help its users make more efficient trading and investment decisions across asset classes and instruments including commodities, derivatives, equities, fixed income and foreign exchange. Eikon is a leading desktop and mobile solution that is open, connected, informed and intelligent.

Users can connect with clients and/or peers through Eikon Messenger in a secure and compliant manner, and provides access to a messaging community of over 300,000 financial professionals. Eikon Messenger is available as part of an Eikon subscription or as a free, stand-alone service. 

 

Active vs. Passive? Choose Both

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The active/passive management conversation doesn’t have to be a debate. Those are better left to the politicians. As MFS Co-CEO Michael Roberge says in his October 18 opinion piece in the Wall Street Journal, investors can choose both. And they may want to consider that, given the potential diversification benefits of having active alongside passive in their portfolios.

With active management facing criticism of late, Mike sheds some light on the rhetoric and how to recognize a manager with skill. He also makes a compelling case for active’s risk management capabilities and the importance of excess return in an environment fraught with return-generating challenges.

Investors know this. In a recent survey conducted by MFS, nearly three-quarters of professional investors surveyed in the US cited strong risk management as an important criteria when selecting actively managed investments

So passive has its place. Active has its advantages. And there are some real merits to a “bipartisan” portfolio. Here’s what Mike has to say:

  • It is true that flows into passive strategies have picked up. But U.S. advisers are still allocating 70% of their clients’ assets to active investment strategies, according to our recent survey.1 Investment flows can be fickle and aren’t always a good barometer for long-term shifts in sentiment.
  • Most of it points to the average active manager’s inability to consistently beat their benchmark, net of fees. And while that might be true for average managers, there are skilled active managers who have consistently outperformed their benchmarks over a full market cycle. But how do you distinguish between skilled and average? It really comes down to conviction and risk management.
  • Investors caught in the active/ passive debate need to under- stand the issues—but stay focused on the outcome. Market returns might look appealing. Excess return will matter more. And managing the downside is essential. Long term, the bipar- tisan portfolio probably wins.

Investors – Focus on State Polling as U.S. Election Nears

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Inversores: ahora centren su atención en las encuestas estatales
CC-BY-SA-2.0, FlickrPhoto: Indi Samarajiva . Investors - Focus on State Polling as U.S. Election Nears

With less than a week to go until the U.S. presidential election, investor anxiety about next Tuesday’s outcome is running high, as evidenced by the recent move in risk assets. So what should investors (and others) focus on between now and Election Day? According to PIMCO, state polling in the coming days will be especially important.

Libby Cantrill, PIMCO’s head of public policy, says that since last Friday’s revelation that the FBI is considering other possible “pertinent” emails in the Hillary Clinton case, several national polls have shown the presidential race tightening, continuing a trend we had observed even before Friday’s news.

But at the end of the day, national polls can only tell us so much. Because of the unique way people elect their presidents in the U.S. – through the Electoral College, rather than the popular vote – a handful of key battleground states will likely dictate next Tuesday’s outcome, as in so many prior races.

Between 10 and 12 of these battleground states are important, but arguably only a subset are truly critical to get to the needed 270 electoral votes to win the White House: Florida, Ohio, North Carolina and Pennsylvania. That is because Donald Trump would have to win all four if Clinton maintains her relatively healthy leads in the battleground states of Colorado, Virginia, Michigan and Wisconsin.

Pathways to the White House

In other words, even considering Friday’s news, Trump’s pathway to 270 electoral votes, although possible, remains narrow. To be even more reductive, it is unlikely Trump wins the White House if he does not win Florida.

Similarly, most pathways for a Clinton victory require her to win Pennsylvania. She can afford to lose certain battleground states (including Florida, Ohio and North Carolina) given her polling in others, but it’s hard to see her winning the White House if she loses Pennsylvania.

Polling in Ohio shows Trump with more than a three-point lead on average and shows Trump tied with Clinton in Florida and North Carolina (according to Real Clear Politics). Clinton’s lead in Pennsylvania remains solid, however, with an average four-point lead over Trump.

We should be getting more state polling in these four states (and the other battleground states) in the coming days, and we think these data are what investors should focus on – not simply the national polls.

Regardless, with a tightening race and a larger number of undecided voters this election cycle, the chances of an unexpected election outcome are not immaterial – and that could cause continued repricing in the market, as we’ve seen over the past few days.
 

Chinese HNWI Choose The USA As Most Suitable Country For Emigration

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Chinese HNWI Choose The USA As Most Suitable Country For Emigration
Foto: Paul Arps . Una parte importante de los HNWI chinos tienen en mente emigrar, y Estados Unidos es su opción preferida

The Hurun Research Institute and Visas Consulting Group jointly published a report –on its third year- on Immigration and the Chinese HNWI. The 2016 report features a bespoke index on the Most Suitable Countries for Emigration and a bespoke list of the Preferred Cities to Buy Houses and Emigrate to.

The USA led for the second year of the index, followed by the UK, which held onto second place despite Brexit. Canada was third, followed by Australia and Singapore. The Republic of Ireland broke into the Top 10 for the first time, shooting straight into sixth place. Six of the Top 10 are European countries.

Overseas property purchases are most popular form of overseas investment. The West Coast of America is the most attractive destination for Chinese HNWI to settle in, particularly Los Angeles, San Francisco and Seattle. Rupert Hoogewerf, Chairman and Chief Researcher of Hurun Report, said “Seattle has been shooting up the rankings of Preferred Destinations for Chinese HNWI for the second year in a row, even surpassing New York to break into the top three this year.”

Over the next three years, 60% of HNWIs intend to invest in overseas property. Rupert Hoogewerf said: “China currently has 1,340,000 high net worth individuals, defined as individuals with US$1.5m, so that means we are looking at a massive 800,000 individuals who want to buy property overseas over the next three years.”

International Asset Allocation

More than half of the HNWI are concerned about the depreciation of the yuan, with other prominent concerns including the US dollar exchange rate and overseas asset management. Rupert Hoogewerf said, “The trend this year goes beyond emigration to global asset allocation. For rich Chinese today, the target is to have one third of their wealth overseas. Buying houses and foreign exchange deposits lead the way.”

Overseas financial investment accounted for 15% of the wealth of the individuals surveyed.  Rupert Hoogewerf said, “The main reasons for investing overseas are to spread their investment risk, children’s education and with emigration in the back of their minds.”

When investing overseas, asset safety is the top priority. 64% chose ‘risk control’ as their foremost consideration. Foreign exchange deposits are the investment of choice, at 31%, followed by funds with 15 and insurance accounting for more than 10%. Rupert Hoogewerf said, “For Chinese HNWIs today, their investments overseas are conservative nest eggs, not risk capital.”

Eight out of ten HNWIs have ‘passion investments‘, with the two most popular ones, paintings and watches, accounting for 24% and 16%.  Stamps (7%), wine (4%) and classic cars (2%) are other popular options. Compared with last year, the proportion investing in painting showed a considerable increase, up 33%, while wine investments fell by 2%.

Chinese Immigrants Index

This index considers the most suitable countries for Chinese high net worth individuals to emigrate to, taking into consideration a basket of eight factors, including education, ease of investment, immigration policy, property investment rules, taxation, medical care, visas and ease of adaptation for Chinese emigrants.

Preferred Destinations for Emigration and Overseas Property Purchases

The report draws on a survey of around 300 Chinese high net worth individuals (HNWIs), carried out between August and October 2016, with average wealth of 27 million yuan, who have either emigrated or considered emigrating. A Chinese high net worth is defined as a family with net wealth of 10 million CNY, equivalent to US$1.5 million.

 

François Farjallah, New Global Head of the Middle East Region at Indosuez

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Indosuez Wealth Management, the global wealth management division of Crédit Agricole Group, has appointed François Farjallah as global head of the Middle East region.

Based in Indosuez regional hub in Switzerland, he will drive and coordinate all wealth management activities in the region.

Indosuez’s Middle East business is primarily developed from offices located in Switzerland, in the United Arab Emirates (Dubai & Abu Dhabi) and Lebanon (Beirut).

Farjallah joins from Societe Generale Private Banking where he spent nine years and held a number of senior executive roles across Switzerland, Luxemburg, Greece, and the UAE.

Formerly, between 1998 and 2007 he worked at Credit Suisse across Switzerland and the Levant.

Indosuez Wealth Management had €110bn in AUM as at end of December 2015.

M&G to Resume Trading in M&G Property Portfolio

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Los fondos de real estate británicos vuelven a operar con normalidad tras suspender reembolsos ante el Brexit
CC-BY-SA-2.0, FlickrPhoto: David Lofink . M&G to Resume Trading in M&G Property Portfolio

Effective from noon on Friday 4 November 2016, M&G Investments (M&G) will resume trading in the shares of the M&G Property Portfolio and its feeder fund, the M&G Feeder of Property Portfolio. The M&G Property Portfolio is a broadly diversified fund, which after all sales, will invest in 119 UK  commercial  properties  across  retail,  industrial  and  office  sectors  on  behalf  of  UK  retail  investors. 

The decision was taken in agreement with the Depositary and Trustee and the Financial Conduct Authority has been informed. The fair value adjustment originally applied on 1 July 2016 has also been removed in full.  

M&G  announced  a  temporary  suspension  on  5  July  2016  after  investor  redemptions  rose markedly  due  to  high  levels  of  uncertainty  in  the  UK  commercial  property  market  following  the outcome of the European Union referendum.  

William Nott, chief executive of M&G Securities, says: “Suspending the fund wasn’t a decision we took lightly, but we felt it was the only way to protect the interests of investors in what were very unusual circumstances in the aftermath of the referendum. Suspension created an environment more akin to normal conditions, allowing us time to choose the most appropriate assets to sell at the right price in order to preserve the integrity and future of the fund. As such, the fund manager has kept higher quality assets while reducing the exposure to assets deemed riskier than their prime counterparts, putting the portfolio in a good position for any further volatility that may be experienced in the lead up to Brexit.” As confidence returns to the market, 58 properties have been sold, exchanged or placed under offer for a total of £718 million.  

Meanwhile, and effective January 1st, 2017, Sam Ford will be the new manager of the £598 million M&G UK Select Fund given the incumbent  manager, Mike Felton is  leaving M&G. Until the end of the year, the fund will be managed  by  co-deputy  managers  Garfield  Kiff  and Rory Alexander.