Fed Minutes – Failure to Communicate

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In the minutes of the June meeting, we learned that despite a great deal of public commentary from Fed officials since the April meeting – including a statement from Chair Janet Yellen herself on 27 May that a rate hike could be appropriate “in the coming months” – many participants remained fixated on communication:

“Several participants expressed concern that the Committee’s communications had not been fully effective in informing the public how incoming information affected the Committee’s view of the economic outlook, its degree of confidence in the outlook, or the implications for the trajectory of monetary policy.”

That was a concern we also saw earlier this year, in the minutes of its April meeting, when the Federal Open Market Committee (FOMC) conveyed that:

“Some [FOMC] participants were concerned that market participants may not have properly assessed the likelihood of an increase in the target range at the June meeting, and they emphasized the importance of communicating clearly over the intermeeting period how the Committee intends to respond to economic and financial developments. … It was noted that communications could help the public understand how the Committee might respond to incoming data and developments over the upcoming intermeeting period. Some members expressed concern that the likelihood implied by market pricing that the Committee would increase the target range for the federal funds rate at the June meeting might be unduly low.”

Which according to Richard Clarida, PIMCO’s global strategic advisor, it translates to: To value bonds, stocks and currencies, market participants need to understand how the Federal Reserve will react to incoming macro data and developments. In April, at least some members “expressed concern” that the market then didn’t understand the Fed’s reaction function and that more communication could help.

Coming clean on the reaction function
Clarida believes that perhaps the problem is not inadequate communication, but rather the need for transparent communication that this Fed does not have a reaction function. “Or more precisely, perhaps the problem is that the FOMC has 16 individual reaction functions plus the reaction function of the chair, which she is either unwilling or unable to persuade the entire FOMC to adopt.” He beliebes that the minutes of the July Fed meeting released on Wednesday confirm this impression. They tell us that “some” voting members of the FOMC want to hike rates “soon,” and that a couple of participants – which can include nonvoting members – wanted to hike at the July meeting. However, at least a “couple” of members wanted to wait for “more evidence that inflation would rise to 2% on a sustained basis.” Noteworthy in this regard was the minutes’ discussion of core PCE inflation, the Fed’s preferred measure. Core PCE inflation is increasing at close to a 2% annual rate, “but it was noted that some of the increase likely reflected transitory effects that would be in part reversed during the second half of the year.”  which claridas believes tell us that Fed “communications released in conjunction with the June FOMC meeting were interpreted by market participants as more accommodative than expected.”

“This is a Fed that continues to be mystified why it is misunderstood by market participants and observers. Right now, observers think a September policy rate hike is off the table. Chair Yellen will have her chance at Jackson Hole to put September in play. But after these minutes, “soon” does not look like September.” Claridas concludes.

Kristin Snyder Named Co-Head of SEC’s Investment Adviser/Investment Company Examination Program

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La SEC nombra a Kristin Snyder co directora del programa de inspección de Investment Adviser/Investment Company
CC-BY-SA-2.0, FlickrPhoto: Adrian Clark . Kristin Snyder Named Co-Head of SEC’s Investment Adviser/Investment Company Examination Program

The Securities and Exchange Commission has announced that Kristin Snyder was named Co-National Associate Director of the Investment Adviser/Investment Company examination program in the Office of Compliance Inspections and Examinations (OCIE).  She joins Co-National Associate Director Jane Jarcho who has led the program since August 20, 2013 and was named OCIE’s Deputy Director on February 3, 2016.  Together, Jarcho and Snyder oversee more than 520 lawyers, accountants, and examiners responsible for inspections of SEC registered investment advisers and investment companies. 

Snyder has been the Associate Regional Director for Examinations in the SEC’s San Francisco office since November 2011 and will continue in that role while also assuming this new leadership position in the national investment adviser/investment company program.  She joined the SEC in 2003 and spent eight years as a Branch Chief and a Senior Counsel in the San Francisco office’s enforcement program.

“With Kristin’s experience in examinations and enforcement, she is well-positioned to develop and lead national initiatives in our investment adviser and investment company program that support OCIE’s mission to improve compliance, prevent fraud, monitor risk, and inform policy,”  said OCIE Director Marc Wyatt.

Snyder said, “I am truly honored by this opportunity to lead OCIE’s IA/IC program with Jane.  I look forward to expanding my role to work with our talented and dedicated colleagues throughout the country as we continue to develop and implement important national initiatives in the asset management industry.”

Prior to joining the SEC, Snyder practiced law at Sidley Austin Brown & Wood in San Francisco.  She received her law degree from the University of California Hastings College of the Law and received her bachelor’s degree from the University of California at Davis.

OCIE conducts the SEC’s National Examination Program through examinations of SEC-registered investment advisers, investment companies, broker-dealers, self-regulatory organizations, clearing agencies, and transfer agents.  It uses a risk-based approach to examinations to fulfill its mission to promote compliance with U.S. securities laws, prevent fraud, monitor risk, and inform SEC policy.

 

 

Muzinich & Co. Expands European Syndicated Loans Capabilities

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Muzinich & Co. Expands European Syndicated Loans Capabilities
CC-BY-SA-2.0, FlickrFoto: Christos Tsoumplekas, Flickr, Creative Commons. Muzinich & Co. ficha a cuatro profesionales para ampliar sus capacidades en préstamos sindicados europeos

Corporate credit specialist Muzinich & Co. has announced that Torben Ronberg, Stuart Fuller, Sam McGairl and Alex Woolrich will be joining the firm.

These very talented investment professionals will focus on syndicated loans in Europe. “Their long-standing expertise complements our current activities in European publicly traded corporate bonds and European private debt”, says the firm in a comunication.

“This expansion of our team forms part of our global effort to invest across the capital structure and provide compelling investment opportunities for our investors”.

They will join from ECM Asset Management, a subsidiary of Wells Fargo.

What We Have Learned from the 2Q Earnings Season?

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¿Qué hemos aprendido de la temporada de resultados del segundo trimestre del año?
CC-BY-SA-2.0, FlickrPhoto: d26b73. What We Have Learned from the 2Q Earnings Season?

According to the US National Bureau of Economic Research – the arbiter of US recession dating – the economic recession associated with the great financial crisis ended in June 2009. Since then, trailing 12-month S&P 500 operating earnings per share (EPS) have more than doubled, up 115% from under USD 54 to USD 116. Proportional to the US earnings recovery, the S&P 500 price index increased by nearly 130% in the seven-year period ending 30 June, dwarfing the market gains in non-US developed and emerging markets.

Ultimately, equity markets in the Eurozone, the UK, Japan, and emerging markets have lagged the US over the past several years, since earnings in these regions failed to keep up with the V-shaped US profit recovery.

But as UBS AM experts say, after three consecutive quarters of year-over-year earnings declines, it is reasonable for investors to question whether the profit cycle – and the US bull market – has run its course.

Mark Haefele, Global Chief Investment Officer Wealth Management, and Jeremy Zirin, Head of Investment Strategy Wealth Management Americas,  say their research “suggests that the recent profit slump is nearing its end. Rebounding corporate profits should drive further US equity market gains again. The second-quarter earnings season has supported this view.” They we note the following:

  • “Less worse” is a good start. S&P 500 EPS fell by 6% in the first quarter, the worst year-over-year decline since 3Q09. The second quarter looks better. Aggregate EPS is on track to be flat to down 2%. We expect this sequential earnings improvement to continue in the second half of the year as earnings start to grow again as early as this quarter.
  • Excluding energy, there was no profit “recession.” Most of the damage to US corporate profits in recent quarters occurred due to the collapse in energy sector earnings, which fell by over 80% in 2Q to mark the sixth straight quarter of year-over-year declines of 50% or more. The silver lining is that: 1) energy earnings now make up just 2% of S&P 500 profits compared to 11% at the end of 2014; and 2) excluding energy, S&P 500 profits have actually only declined in a single quarter (1Q16, by just 1%). Ex-energy, US earnings were up 2–3% in the second quarter.
  • Big-cap technology, big earnings beats: Overall, 73% of S&P 500 companies by market cap beat consensus estimates by an aggregate 3.5%. Some 83% of tech stocks exceeded consensus by an average of 7.4%. Accelerating revenue growth for mega-cap internet software companies has been propelling technology (the largest S&P 500 sector) shares into the third quarter.

“The corporate profit cycle in the US has stalled over the past few quarters, largely due to collapsing energy prices. The combination of a reasonably healthy US economy and easier quarterly comparisons in the energy sector should cause US earnings to grow again in the quarters ahead.” They conclude.

Desjardins Global Asset Management chooses Mirova for Delegated Management of a Green Bond Fund

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Desjardins Global Asset Management elige a Mirova para delegar la gestión de su fondo sostenible de renta fija
CC-BY-SA-2.0, FlickrPhoto: Dying Regime. Desjardins Global Asset Management chooses Mirova for Delegated Management of a Green Bond Fund

Mirova, an asset management company dedicated to responsible investment, got selected by Desjardins Global Asset Management to provide delegated management of an international green bond fund, the Desjardins SocieTerra Environmental Bond Fund, for a total of 100 million Canadian dollars.

The Desjardins SocieTerra Environmental Bond Fund puts the Global Green Bond strategy managed by Mirova into action. This fund will receive the recognized expertise of Mirova’s bond specialist teams, which are leaders in the area of green bonds.

Like Mirova’s Global Green Bond strategy, the Desjardins SocieTerra Environmental Bond Fund will be steered with active management and conviction management. The fund’s main performance driver will be investment in debt securities that support the environmental and energy transition, described as green bonds by Mirova’s responsible investment research team. As such, the management approach will combine financial and non-financial tactics: specific analysis of each project financed, Environmental Social Governance (ESG) analysis of the issuer, and fundamental analysis to determine the bond’s financial attractiveness. The fund will try to benefit from different international economic cycles by diversifying in terms of geography, economic sector, and credit rating.

The Desjardins SocieTerra Environmental Bond fund will be managed by Christopher Wigley, with Marc Briand, co-manager and head of fixed-Income at Mirova who will particularly rely on Mirova’s responsible investment research team of 12 analysts.

Philippe Zaouati, CEO of Mirova, commented on the announcement: “We are proud to have received this management mandate from Desjardins Global Asset Management. It is proof that our expertise in green-bond management is recognized on the market. Additionally, this mandate is part of our international growth strategy at Mirova, a strategy that is clearly beginning to pay off.”

Michel Lessard, Vice President of Desjardins Global Asset Management added: “By financing tangible assets, green bonds fill direct, concrete needs: they enable issuers to diversify their investor base and investors to actively participate in financing the energy transition. We are delighted, alongside Mirova, to commit to this energy transition by launching the Desjardins SocieTerra Environmental Bond Fund, the first green bond fund on the Canadian market.”

China Allows for Mutual Stock Market Access Between Shenzhen and Hong Kong

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China aprueba la fusión de las bolsas de Hong Kong y Shenzhen
CC-BY-SA-2.0, FlickrPhoto: TreyRaatcliff, Flickr, Creative Commons. China Allows for Mutual Stock Market Access Between Shenzhen and Hong Kong

The China Securities Regulatory Commission (CSRC) and the Securities and Futures Commission (SFC) have approved the establishment of mutual stock market access between Shenzhen and Hong Kong (Shenzhen-Hong Kong Stock Connect) in order to promote the development of capital markets in both the Mainland China and Hong Kong. The organisms have also agreed to abolish the aggregate quota under Shanghai-Hong Kong Stock Connect.

The key features of Shenzhen-Hong Kong Stock Connect, including the shares eligible to be traded under the scheme, eligible investors and daily quotas, are set out in the joint announcement.  HKEX expects it should take approximately four months from today to complete the preparations for the launch of the Shenzhen-Hong Kong Stock Connect.

“We are excited about Shenzhen-Hong Kong Stock Connect, which will open up another Mainland market for international investors and strengthen the Mainland’s links with Hong Kong,” said HKEX Chairman C K Chow.

“Under ‘One Country, Two Systems’, Hong Kong is in a unique position to build important connectivity with the Mainland markets and to facilitate the gradual opening of China’s capital account,” Mr Chow said.  “This will further enhance Hong Kong as an international financial centre.”

“We look forward to launching Shenzhen-Hong Kong Stock Connect, which will be an extension of our successful mutual market access programme with Shanghai, so investors in our market and the Mainland market will have an additional secure, reliable channel for investment in the other market in an environment that they’re familiar with,” said HKEX Chief Executive Charles Li.  “We also look forward to enhancing Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect with additional products in the future.

“We aim to build Hong Kong into a mature, comprehensive financial centre that can serve as an offshore wealth management centre for Mainland investors, an offshore pricing centre for the Renminbi and global asset classes for the Mainland, and an offshore comprehensive risk management centre for Mainland investors.”

It’s All Rate for Some in Europe

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Rating agencies, advisors, and asset managers are set to play a greater role in the world of environmental, social, and governance (ESG) investing, according to the latest issue of The Cerulli Edge – Global Edition.

While Cerulli Associates, a global analytics firm, regards ESG ratings for funds as a creditable step toward improving the asset management industry’s ESG transparency and awareness, it also warns of the need for caution.

“Independent ratings will likely force managers to reveal more detail on the implementation of their ESG policies–those that fail to comply may suffer low ESG ratings, which may well result in outflows,” says Barbara Wall, Europe managing director at Cerulli. “However, these ratings may contain size or industry biases, therefore asset managers and asset owners should not unreservedly trust the accuracy or comparability of an ESG score.”

Cerulli expects that retail investors and private banks will be the main market for ESG funds ratings. “Although institutional investors are the primary drivers of demand for sustainable investment, they prefer mandates and bespoke solutions–thus generic ESG scores will be of little value to them,” says Wall.

Justina Deveikyte, a senior analyst at Cerulli, adds that rating agencies can produce very different ESG ratings for the same companies or funds. “It is therefore crucial that users understand the differences in the methodologies used by the agencies, and not blindly count on one ESG score,” she says.

Cerulli points out that a number of asset managers are launching sustainable funds across a broad range of asset classes, while ratings agencies are eyeing opportunities to provide ESG ratings for funds as well as for individual companies. “Rating agencies may well start partnering with data providers,” says Deveikyte, noting that Morningstar and MSCI recently introduced sustainability ratings for mutual funds and for ETFs.

Weak Corporate Investment Jeopardises the Potential for Economic Growth over the Medium Term

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Domestic consumption continues to be favourable but corporate investment is particularly weak, jeopardising the potential for economic growth in the US over the medium term. This is the view of Guy Wagner, Chief Investment Officer at Banque de Luxembourg, and his team, in their monthly analysis, ‘Highlights’.

US GDP data for the second quarter confirmed the continuation of stable, moderate growth despite economic activity being increasingly fragile. Domestic consumption continues to be favourable but “corporate investment is particularly weak, jeopardising the potential for economic growth in the US over the medium term,” indicates Wagner, and continues: “In Europe, political uncertainties have not so far led to an economic slowdown and growth is weak but positive.” In Japan, the government announced a new public spending programme to stimulate economic growth. In China, the short-term economic goals are reached on the back of public stimulus measures.

After the Brexit: Bank of England cuts interest rates
At the Federal Reserve’s monetary policy committee (FOMC) meeting in July, the monetary authorities left interest rates unchanged despite the recent improvement in economic statistics and the stock market rebound since the British referendum. “There is still uncertainty over a second hike in key interest rates – following that in December 2015 – due to the weakness of economic growth. The flattening of the US yield curve since the start of the year could continue”, thinks the Luxembourgish economist. The European Central Bank is continuing to execute its planned programme of buying up debt securities from corporate and public issuers in the eurozone. The Bank of England cut the interest rates to 0.25% to offset the unfavourable economic and financial impact of ‘Brexit’.

Equity markets have fully recovered from Brexit decision
In July, the main stock markets posted gains. Guy Wagner: “Paradoxically, the British decision to leave the European Union has had a positive impact on share prices due to the central banks declaring that they would introduce support measures in the event of unfavourable economic and financial repercussions from Brexit.” The recent improvement in US economic statistics also boosted risk assets. The S&P 500 in the United States, the Stoxx 600 in Europe, the Topix in Japan and the MSCI Emerging Markets (in USD) gained during the month. Given the central banks’ strategies to support equity markets and the lack of alternatives, share prices are continuing to rise despite less than encouraging economic prospects and a proliferation of political risks.

Euro appreciated slightly against the dollar
In July, the euro appreciated slightly against the dollar. The recent improvement in US economic statistics helped the dollar strengthen slightly at the beginning of the month. But the Federal Reserve’s decision to leave interest rates unchanged subsequently put pressure on the US currency.

Political Risk is Here to Stay

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The Brexit lesson has been learned: political risk is here to stay, and should be treated with caution. The good news for the coming quarter, according to Gaël Combes, Equities Fundamental Analyst, and Florian Ielpo, Head of Macro Research in Cross Asset Solutions at Unigestion, is that growth across developed economies should be slightly better, as consumption should remain supportive.

Emerging economiesare still set on an improving trend and the combination of improvements in both sets of countries is an encouraging sign for financial assets correlated to growth. However, politics is not the only risk: China’s gigantic level of debt is a natural source of concern as well. Risks are not off the table, but the outlook for the quarter to come is slightly better than for the previous one. That will be contingent on central banks’ planning – but that is business as usual.

Enlarge

Growth in GPD per capita (left) and country shares in global GDP (right). Source: IMF and Unigestion

For now, the first of the potential market stress triggers is, naturally, political risk. There is a rise in anti-establishment votes across developed economies, reflecting the perceived failure of liberal capitalist economies to keep their promises of a better tomorrow. Globalization fears and a slower rate of improvement in standards of living have been two salient features of the past three years. Increasing wealth and income inequality or the migration scare are also factors in this new political situation.

The good old left and right parties’ political system is struggling to adjust to this new political map as populism no longer belongs specifically to one of the two sides. A similar situation has occurred over the past 20 years – the Greek Syriza party is probably the best example of all – but never did one of the 10 biggest countries show such an endorsement for an anti-establishment electoral proposal. Indeed, the Brexit vote shows two things: first, what has long remained a minority of unhappy voters using political extremes to show their disgruntlement may now become an actual governing force.

Second, it is also a demonstration to other countries – especially in Europe – that the vox populi can turn institutions upside down: “if they did it, so can we”, a message of hope for other dissident political parties. After the Brexit vote, the next political event to watch will be the Italian referendum in October and then the US elections in November.

The success of the Italian referendum is a condition for the current Italian Prime Minister Matteo Renzi not to step down from his current position: the vote will offer leverage against the political establishment, creating the temptation to express frustrations. It is not an event on the scale of Brexit, but it could be another hint of what is happening across Europe: Eurosceptics are on the rise.

The US election could be a more significant step in this process, and the battle stands a good chance to be close: wealth and income inequality are particularly strong in the US, and the social unrest that it creates is supportive of Donald Trump. This list of events will extend itself next year, with the French, Dutch and German elections. The Netherlands is a country particularly at risk, with the PVV party enjoying strong success: an eventful political perspective for the quarters ahead.

What is the Millennials’ Impact on the Economy?

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¿Cómo transformará la economía la generación de los millenials?
CC-BY-SA-2.0, FlickrPhoto: John Rudoff. What is the Millennials’ Impact on the Economy?

Most of us follow the same life cycle. We start out as children, then we become young single adults. We pass from student to working life, form couples, become parents, grands-parents and then retirees. At each of these stages, our financial behaviour evolves and adjusts to our needs of the moment. And when a large group of individuals undergoes these same shifts at the same time, the economy is affected. This is the case of certain generations that have brought about major changes in the global economy.

Generally speaking, says Fabien Benchetrit, senior portfolio manager at BNP Paribas, a generation is a sub-population whose members are more or less the same age or who have lived at the same time, and who thereby have had many common experiences. However, some experts take another approach to this and extend the baby-boom generation to persons born in the United States between 1935 and 1961, as seen in the graph below from the trough to peak.

Exhibit 1: This highlights the evolution of US births in millons

The baby-boom generation of 105 million individuals (not counting immigrants) according to the Census Bureau, had a major impact on the United States, which was unable to adjust supply to demand. For example, the job market was sluggish, with unemployment rising from 3.50% at end-1969 to 8.2% at end-1975. Likewise, the real-estate market underwent a boom until the 2000s, driven by all of those baby-boomers simultaneously buying property.

American families’ expenditures peak when the parents are on average 46 years old. In general, couples have their first child between 28 and 33. When their first child goes to university at age 18, parents’ expenses often spike, with tuition, room, board and related expenses. “The impact of baby-boomers’ heavier spending is visible in various economic indicators. The graph below highlights a close correlation between US equity market capitalisation (adjusted for the expansion in the Fed’s balance sheet) and baby-boomers that are 46 years old.” The expert writes in the company’s blog.

Exhibit 2: This graph shows how US births shifted and US market capitalisation occured

While demographics clearly affect the economy, there are other major factors involved, such as legislation, government policy, monetary policy, wars and geographical tensions, etc.

And, now, another generation that is just as important is emerging – millennials. Based on the same broad definition of a generation, millennials are individuals born in the US between 1976 and 2010 – a period of 34 years. So this generation of 136 million individuals (excluding immigrants) is actually larger than the baby-boom generation. This is also the first “digital” generation, i.e., born with the Internet. They trust social media more (e.g. Facebook, Tweeter, Instagram etc.) than they do companies. Their lives, in fact, revolve around social media.” Says Benchetrit.

“However, millennials’ impact on the economy is different from that seen with the baby-boomers. For one thing, they are a smaller portion of the population. While baby-boomers accounted for up to 57% of the US population US (in 1960), millennials made up 43% in 2014. In addition, they were born over a longer period than the baby-boomers were.” Says Benchetrit.

Millennials born before the first peak of births in 1990 have now completed their studies and started working. They are now numerous enough to affect the economy but conditions have not been in their favour. They arrived on the job market, carrying debt, in the midst of the subprime crisis in 2008. The US economy was resilient enough for them to find jobs, but those jobs were less well-paid and delayed their financial autonomy. In 2015, for the first time since 1960, 31.6% of young people aged 18 to 34 still lived with their parents.

Exhibit 3: This demonstrates the number of young adults (18-34 years of age) living with their parents

The behaviour of baby-boomers and millennials is having a clear impact on the economy. Nevertheless, financial markets are currently trading in a “demographic dip” between the baby-boomers, who are reducing their expenditure, and the millennials, who are not numerous enough to have reached their prime spending years.

“A better understanding of each of these generations’ behaviour will allow asset managers to create value, for example, by focusing on healthcare and pharmaceuticals as US baby-boomers get older.” He explains.

According to the blog, the managers could also try to identify new countries that have the same features as the United States at the start of the 1960s, i.e., those undergoing urbanisation and lightly indebted countries with economic growth similar to what the baby-boomers experienced and a population consisting of a high proportion of young, skilled workers who have put some money aside.