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.
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.
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.
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 (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.
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.
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.
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.”
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.
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.
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:
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.
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.
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.
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.
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.
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”.”
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.
