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“In EM Corporate Debt, We Continue to See Opportunities across Various Sectors Especially in LatAm”

"En deuda corporativa emergente, vemos oportunidades especialmente en Latinoamérica" — CC-BY-SA-2.0, FlickrNish Popat, co-lead Portfolio Manager, Emerging Markets Corporate Debt team, Neuberger Berman.. "In EM Corporate Debt, We Continue to See Opportunities across Various Sectors Especially in LatAm"

Nish Popat, co-lead Portfolio Manager, Emerging Markets Corporate Debt team, at Neuberger Berman, explains in this interview with Funds Society why is a good moment to invest in emerging debt and why he is looking at opportunities in corporate debt in Latin America, as well as in Government debt in countries like like Azerbaijan, Ecuador, Hungary, Ivory Coast and Indonesia. In currencies, they currently have a long bias with overweight positions in the Indian rupee, Turkish lira and some Latin-American currencies, such as the Mexican, Chilean and Colombian peso.

Emerging markets have been almost reviled by investors in recent years. Is this situation changing, especially in the debt market?

Many investors have, over the past couple of years, been under-allocating their exposure to EM funds as several concerns about China/Brazil/ global slowdown/ commodities and oil & gas and the FED raising rates have all contributed to concerns about Emerging Markets, especially currencies. Over the past two months, as many of these factors have stabilised, we have begun to see strong inflows into Emerging Market Debt, mostly in hard currency but also positive flows in local currency.

What kind of investor is beginning to reinvest in emerging markets?

In the past few years most of the outflows from the asset class seemed to be coming from retail investors. This year, however, we are seeing inflows into EMD from both institutional and retail investors.

Are we currently seeing a good entry point at present?

Pressures on EMD fundamentals are starting to ease amidst a stabilisation in commodity prices and supportive monetary policies globally, while the sharp EM FX depreciation has resulted in current account adjustments in several EM countries. Sufficient FX reserves and low external debt levels continue to support Sovereign structural fundamentals, while elevated spread levels are now more than adequate to compensate for cyclical risks. Finally we see supportive technical at present as well, as investor demand is returning from generally underweight positions, while supply of new issues is relatively light. We believe that overall these factors justify an allocation to the asset class and we have increased risk across our blended EMD portfolios this year as we believe that those positive developments counterbalance the fundamental challenges that some EM countries are still facing.

How will EMD be affected by any Fed rate hikes? What do you expect from Janet Yellen?

The market was certainly impacted when the initial fears of a Fed hike emerged in 2013. Since then, we have seen how cautious the Fed has been in managing the markets fears to the speed and extent of that rise, that when it occurred the market virtually discounted the whole event and so it had virtually no impact on the EM asset class. We continue to believe that the Fed will be very cautious in their approach and at present see the impact on the EMD asset class as having been already priced in.

Is this a reason to favour short durations? What are the advantages of shorter duration in the portfolio?

The main advantage of a short duration approach is the more conservative risk profile with lower volatility and drawdowns, coupled with protection in case interest rates surge at some point. While we believe that this approach can be attractive for investors who are looking for a more conservative, absolute return approach to EMD, we acknowledge that such a strategy typically doesn’t fully capture the upside that the longer duration strategy offers in a rallying market.

Are you now taking increased credit risk or it is not necessary?

We have, over the past few weeks increased our overall risk appetite in the EM universe as we continue to believe that many investors remain under-weight and the stability of the various concerns suggests that the premiums offered by EM issuers were too high in light of the falling risk. We continue to be positive and expect the momentum to continue as the message from developed market central banks remains supportive to risk assets.

Is it possible to find quality investments (IG) in public and corporate debt in EM with good profitability?

Many IG companies in the EM world have continued to make profits, however these are lower than they were in the past as the slowdown in their economies or sectors has an overall impact on their bottom line. We have seen many companies actively manage the situation and expect that while profitability will be lower than 2015, many companies are dealing with the changing global environment better than many investors had anticipated.

What countries (government bonds) and sectors and enterprises (private debt) do you favour?

In EM corporate debt, we continue to see opportunities across various sectors especially in LatAm where many issuers suffered dramatically in 2015 as valuations reached levels which we believe were excessive even though many corporates are going through a difficult period at present. Going forward, we continue to believe that demand for yield will be key in investors’ minds as the Fed and the ECB continue to provide dovish comments and we believe that the momentum for EM corporates remains strong.

In sovereign (government) debt we like Azerbaijan and Ecuador which we think sold off excessively on the oil price move, and we like countries that have been and continue to be on an improving credit quality path which we currently see in Hungary, Ivory Coast and Indonesia.

Is now a good time to take on currency risk or not?

We have become more constructive on EM FX exposure based on improving export growth and current accounts, while valuations and technicals are supportive as well. We currently have a long bias with overweight positions in the Indian rupee, Turkish lira and some Latin-American currencies, such as the Mexican, Chilean and Colombian peso.

Volatility has been strong in recent months, also due to the Chinese theme and commodities. Will this persist? Does that present a need for caution or a chance to seize the opportunity?

The “fear” factor at the end of 2015/ beginning of 2016 has certainly been one of the key reasons why many investors were nervous about investing in the EM asset class over the past year, combined with the increase in volatility as many countries were being downgraded and the China slowdown was certainly a major factor. Over the last 3 months, we have seen how this fear has, for now, diminished dramatically and returns in the asset class have been very strong. Certainly in the short term we see the positive momentum continuing, however the EM world is made up of many countries and companies and accordingly, while there may be issues in one region, the diversity of the asset class enables another part of the world to benefit and accordingly we have seen how resilient the asset class has been over the past years in light of the various issues that have arisen. It is important that investors look at EM on a longer term horizon and while in the short term there may be some headline risks, if we look at the asset class over the past 10 years, we have seen it return a very solid positive annualised return.

Advent International Appoints Enrique Pani as Mexico City Managing Director

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Advent International, one of the largest and most experienced global private equity investors, announced that Enrique Pani has joined the firm as a Managing Director in its Mexico City office. Enrique Pani will work alongside Luis Solórzano, head of Mexico for Advent, and 12 other investment professionals in the office. Advent has the largest dedicated private equity team in Latin America, with 41 investment professionals working from offices in Mexico City, Bogotá and São Paulo.

Prior to joining Advent, Enrique Pani was a Managing Director and Head of Investment Banking for Mexico at Bank of America Merrill Lynch (BAML). There he was responsible for managing the investment banking coverage and execution team based in Mexico City and was also a member of the BAML Management Committee.

Enrique Pani started his career as an equity research analyst and has over 20 years of investment banking experience in Mexico and New York. He established and was responsible for investment banking operations in Mexico at Deutsche Bank, BTG Pactual and, most recently, BAML. He has advised clients in the financial services, healthcare, retail and infrastructure sectors across Latin America and has raised more than USD 20 billion in capital for his clients.

“Enrique is a great addition to our firm as his broad experience and deep relationships in a number of our target sectors will benefit Advent as we continue to build on the local team’s achievements”, said Luis Solórzano, a Managing Director and Head of Mexico for Advent. “We have a 20-year presence in Mexico and continue to believe it is an attractive market for private equity. We look forward to welcoming Enrique to the team.”

Since opening its Mexico City office in 1996, Advent’s local team has invested in 25 companies in Mexico, the Caribbean and other Latin American and global markets. The team focuses on buyouts and growth equity investments in the firm’s five core sectors: business and financial services; healthcare; industrial, including infrastructure; retail, consumer and leisure, including education; and technology, media and telecom. Recent Mexican investments include; Viakem, a Mexico-based manufacturer of fine chemicals for the global agrochemical industry; Grupo Financiero Mifel, a Mexican mid-sized bank serving the mass-affluent retail segment and small and medium-sized companies; and InverCap Holdings, a Mexican mandatory pension fund manager.

“Advent is one of the leading private equity firms in Latin America, and I am excited to begin working with Luis and the team in Mexico as well as with Advent professionals throughout the region and worldwide,” said Enrique Pani. “Advent has a differentiated approach to investing and building value in Latin American companies, and I believe my prior experience and existing relationships will be quite complementary to this large and talented group.”

In the 20 years it has been operating in Latin America, Advent has raised more than USD 6 billion for investment in the region from institutional investors globally, including USD 2.1 billion raised in 2014 forLAPEF VI. LAPEF VI is the largest private equity fund ever raised for the region. Since 1996, the firm has invested in over 50 Latin American companies and fully realized its positions in 35 of those businesses.

Columbia Threadneedle Investments Appoints Kath Cates as Non-Executive Director

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Columbia Threadneedle Investments nombra a Kath Cates como directora no ejecutiva — CC-BY-SA-2.0, FlickrPhoto: Kath Cates. Columbia Threadneedle Investments Appoints Kath Cates as Non-Executive Director

Columbia Threadneedle Investments announces the appointment of Kath Cates to the Board of Threadneedle Asset Management Holdings Sarl (effective 10 May) and the Board of Threadneedle Investment Services Limited (effective 29 March), as a Non- Executive Director.

Ms Cates is also a Non-Executive Director of RSA Insurance Group Plc, where she Chairs the Board Risk Committee and is a member of the Group Audit Committee and the Remuneration Committee. In addition, she is a Non-Executive Director of Brewin Dolphin, where she chairs the Board Risk Committee and is a member of the Group Audit Committee.

Ms Cates’ most recent executive role was Global Chief Operating Officer for Standard Chartered Bank, a position based in Singapore which she held until 2013. In this role she led the Risk, IT, Operations, Legal and Compliance, Human Resources, Strategy, Corporate Affairs, Brand and Marketing functions across 60 countries. Prior to joining Standard Chartered Bank, Ms Cates spent over 20 years at UBS, most recently in the Zurich-based role of Global Head of Compliance. For the previous 10 years she was based in Hong Kong, as APAC General Counsel and then as Regional Operating Officer.

Ms Cates earned a First Class Honours degree in Jurisprudence from Oxford University and qualified as a Solicitor in England & Wales before specialising in financial services.

Tim Gillbanks, Interim Regional Head, EMEA at Columbia Threadneedle Investments said: “I’m pleased to welcome Kath to Columbia Threadneedle. She brings valuable financial services experience particularly in the areas of risk management, governance and regulation and operational excellence. We look forward to working with Kath and to the benefit of her contribution to our business.”

Capital Group Launches Flagship US Equity Strategy, Investment Company of America, for European Investors

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Capital Group, an active investment management firm with US$1.4 trillion of assets under management, has announced that it plans to launch its longest-established strategy, Investment Company of America (ICA), in Europe. Consistent with the plan announced in 2015 to provide European investors access to some of its most successful investment strategies, and following the launch of Capital Group New Perspective Fund (LUX) last year, Capital Group will make its flagship strategy from the US available to European investors in June 2016.

ICA will be launched in Europe as a Luxembourg-domiciled fund (UCITS) and will follow the same active, time-tested investment approach that has proved successful for more than 80 years. The new fund will be managed by the same investment team that manages the US strategy. Since its launch in 1934, the Capital Group ICA strategy has achieved a return of 12.9% per annum, compared with 10.7% for the S&P 500.

“The strategy’s research-driven, fundamental investment philosophy has remained consistent for eight decades with long-term investment horizons, valuation discipline and a focus on seasoned companies with an emphasis on future dividends. This has provided growth over different market cycles and has typically offered downside protection in depressed or volatile market conditions,” said Richard Carlyle, Investment Director.

“The ICA strategy can therefore be an attractive option for investors looking for long-term active exposure to US equities as part of a core equity portfolio, or looking to manage downside risk versus a passive investment approach.”

Hamish Forsyth, European President of Capital Group Companies Global, said “This new fund launch represents a further stage in our strategic plan to make available the best of Capital to European investors and to support the growth of our business activities across the region. We have had a very positive reaction from both institutions and financial intermediaries for our Capital Group New Perspective Fund (LUX), and believe that providing European investors with access to one of our largest and longest-standing strategies provides an important next step in this process.”

Capital Group has been serving investors in Europe since 1962, when the company opened its first ex-US office in Geneva. Capital Group employs more than 500 associates in Europe. It has offices and sales branches in Amsterdam, Frankfurt, Geneva, London, Luxembourg, Madrid, Milan and Zurich.

Robeco Announces a New Corporate Structure

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Robeco Groep N.V. will separate its activities into Robeco Institutional Asset Management B.V., which will have its own Supervisory Board and executive management to emphasize its position as an autonomous global asset manager, under the name Robeco, with its headquarters in Rotterdam, preserving the strong name and history, and Robeco Group (“RG”). The latter will be transformed from an operating company into a financial holding company.

The new corporate governance structure will further separate the holding activities of RG, and the asset management businesses of its subsidiaries: Boston Partners, Harbor Capital Advisors, Transtrend, RobecoSAM and Robeco. The new structure reflects current global industry and market trends, guaranteeing continued expertise in investments, distribution and client servicing.

Robeco will get its own dedicated Supervisory Board. The Supervisory Board of Robeco will consist of the following members: Jeroen Kremers (chairman), Jan Nooitgedagt and Gihan Ismail. Further members of the Supervisory Board will be announced in the near future. Both Jan Nooitgedagt and Jeroen Kremers serve as members of the Supervisory Board of Robeco Groep. Gihan Ismail has 20 years’ experience in the financial services sector and is currently executive director at Marine Capital Limited.

Day-to-day management remains with Leni Boeren, Roland Toppen, Peter Ferket, Ingo Ahrens and Karin van Baardwijk, who form the Executive Committee of Robeco. Leni Boeren will lead the transition to the new governance and remain a member of the team until the transition is completed. The executives all have deep roots and experience within the asset management sector and all members have served Robeco for many years already, ensuring stability and continuity for the new Robeco, meeting the challenges of the future in the best interests of our clients.

Makoto Inoue, President and Chief Executive Officer of ORIX Corporation: “Robeco employs absolutely world class investment talent. All members of the Executive Committee of Robeco have developed themselves through the ranks of Robeco, which clearly underpins the quality and talent available at Robeco. This new structure will allow for this talent to flourish and help Robeco to further expand on its strong foundation.”

Leni Boeren, who has been a member of the Management Board of Robeco Groep since 2005, will leave Robeco Groep once the transition is completed. Currently Leni Boeren is vice-chairman of the Group Management Board and holds several board positions at Robeco’s subsidiaries Boston Partners, Harbor Capital Advisors, Transtrend, Robeco Institutional Asset Management and RobecoSAM and is Vice-Chairman of the board of the Dutch Fund and Asset Management Association.

Leni Boeren: “It has been a privilege to have been with Robeco for almost twelve years. The company has an impressive 87 year history and I am confident that these changes mean that Robeco is well-placed to continue to meet clients’ needs by delivering superior investment returns. It was a great pleasure to work with so many passionate professionals worldwide. I also want to express my appreciation to our clients for the trust they have put in me over all these years.”

Makoto Inoue: “I am grateful to Leni for her commitment to Robeco Groep and the valuable contribution she has made to the strong growth of the company and its subsidiaries. She also has successfully led many transitions within the group over the years.”

As a financial holding company, RG will not perform any asset management activities. Subject to final regulatory approval, the Supervisory Board and the Management Board will be replaced by a simplified financial holding board chaired by Makoto Inoue.

As part of the new governance structure, the outgoing chairmen of the two boards, Bert Bruggink and David Steyn respectively, have stepped down and will join ORIX Group. The other members of the Supervisory Board of Robeco Groep will step down once the transition to the new governance is completed.

Investec: “In Europe, The Headwind Has Turned To Become a Tailwind”

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Investec’s European Equity team is a part of the broader 4Factor investment team, one of seven distinct investment capabilities at Investec Asset Management. The 4Factor team is responsible for between $30-35 billion dollars of client assets. Ken Hsia, Lead Portfolio Manager of the European Equity Fund, summarized this investment process during his recent visit to Miami.

“We believe that equity markets are inefficient by definition, but the level of efficiency varies depending on the headlines,” he explains. Right now, investors are hearing news on the slowdown, the United States’ presidential election, or the referendum in the UK, the type of news that grabs their attention and which has created volatility in recent times, causing major inefficiencies in the markets. “As securities’ selectors, our job is to be able to exploit these inefficiencies.”

Why do these inefficiencies exist? “Due to market participants’ behavior errors; there are certain patterns that, when it comes to investing, cause investors to buy expensive and sell cheap” replies Hsia, adding: “We believe that by doing things right you can achieve better results consistently over time.”

To achieve this objective, they apply− from a benchmark, style, and capitalization agnostic approach− their “4Factor” process, which leads them to analyze four different aspects: high quality− those companies that have created value for their shareholders in the past−, attractive valuation−, those that are cheaper than the average in terms of cash flow return on investment and asset based valuations−; improved operating results−, those that are seeing their profit forecasts revised by analysts−, and increasing attention from investors−those starting an upward trend−.

The first two, both traditional ones, are the ones which help to find high quality corporations at attractive valuations, and the last two, related to behaviors, the ones which help to choose the right moment to take or leave positions and to avoid behavior errors.

Why Europe, and why now?

Corporate revenues and profits will grow, thanks to commodities.

European markets, which Hsia considers to be at an early stage of the profit cycle, have not had any returns in recent months to evidence the start of the recovery to which the fund manager refers, but he explains that the fall in commodity prices during the last 12-to 18 months (e.g. oil has dropped from more than $ 100 a barrel to oscillate between 35 and 45, and iron has dropped from over $ 100 per ton to between $40 and $50) is weighing heavily on the ROEs. And whether or not they appear in his own portfolio, Royal Dutch, Total, BHP Billiton, or other securities with exposure to commodities, weighed on the fund’s benchmark- the MSCI Europe.

“The two most interesting facts are that for 2017 analysts expect an increase in earnings in European corporations of an ample double-digit, and that commodities will shift from curbing their growth, to propelling it,” while during 2014 and 2015, the underlying trend in earnings per share (EPS), excluding commodities, approached 5%, and for 2016 the general consensus places it at between 4 and 6%.

There are signs of recovery.

“We have identified two cyclical sectors that provide some recovery signs”. On the one hand, car sales, which are a clear indicator of the confidence of investors, have been recovering since 2013, and in Europe grew by 8% in the first quarter of this year, although with differences between countries. Although still at a level of 15% below their previous highs, the fund manager is confident that these will once again reach their previous peaks, as car sales have done in the US during this recovery; the other sector with telltale signs is the cement industry. For example, the greatest difference between this product’s peak and lowest consumption rates in Spain was 80%, and 50% in Italy, both of those markets are now in recovery.

Given the slow recovery process−which frustrates some investors− and to provide depth to the study, the team looks at each sector in detail, therefore, Hsia speaks, of commercial real estate, for example, which, especially in southern European countries, is in the hands of private families or insurance companies, which have received no incentive to reinvest. “Energy efficiency in Italy or Spain is not optimal, as only 15% of office complexes obtained the highest (“A”) rating, while in France and Germany more than 30% have achieved that rating, with up to 40% in the United Kingdom, so it is necessary to improve the system” But we’re also seeing actions that will change the sector, such as that regulation in Italy is shifting from favoring property owners to favoring tenants, and the emergence of REITS in Europe, which are facilitating the inflow of capital to carry out these improvements in the sector.

These are just some examples showing recovery, says the fund manager, who admits to having mixed feelings, because, while he wishes improvement for that environment, which in turn favors the whole world, he believes that it’s best for investors if recovery doesn’t come too fast because “when economic growth is very strong there is more competition.”

Balance sheets are growing.

Corporate balance sheets are in recovery and much healthier than in 2008-2009, thanks to improved operating cash flows that the gradual growth of the economy and strengthening demand have brought about, as well as the fact that some companies no longer rely on high future economic growth and are streamlining their costs and cleaning up their balance sheets, which will also create more value. Should we expect more mass layoffs? Not necessarily, says the strategist, cost rationalization can also be achieved by an improvement in the production process, acquisitions, etc. We think that unemployment should fall.

Valuations remain attractive

With a cyclically adjusted P/E ratio 15x earnings and a historical average of between 20 and 21, the opportunity seems clear, and the strategist is confident that it will return to maximum levels. Another favorable factor is the lack of issuance of sovereign bonds by the ECB, which will cause the flow of investment into other types of assets, such as equities.

“In short, there are signs of growth, sometimes frustratingly slow, but that is what increases the difference between winners and losers.”

“In an environment such as this, we see that there are sectors whose indicators improve, such as the industrial, although in our portfolio it remains underweight in relation to the benchmark; in this, we have included Siemens, which is shifting from obsolete businesses to creating a new supply line more tailored to current consumer requirements. Other sectors we like are information technology, the most overweight in our portfolio, and consumer discretionary. Not so with consumer staples, where we don’t see any value, or healthcare.”

Regarding the financial sector, adds Hsia, in which we are overweight by 2% in relation to the benchmark, we are pragmatic about its enormous volatility, but we like FinTech, banks focused on retail business in countries where consolidation has already occurred, such as France, Benelux and the United Kingdom, and not so much in those in which there is still much fragmentation− Germany, Italy and Spain−, because, although we see some consolidation, we can’t see any creation of shareholder value. Nor do we like investment banks in Europe and we are underweight in insurance and real estate.

By country, the UK, which although accounting for 24.7% of its assets− with much diversification−, is 5% underweight; France is 6% overweight, and Germany, by slightly higher than 6%, is the one he likes best. “When we saw the first ECB rate cut, we believed that there would be opportunity in Germany, but then Japan, its largest competitor, lowered rates and this was circumvented. However, we do find good ideas now.

Seizing the opportunity that Hsia lives in London, we asked about the sectors which could be most affected if the referendum to be held in June in UK propels a “disengagement” from the EU. He doesn’t seem worried about this and points out that, large corporations have a “B” plan and perhaps one of the most affected would be agriculture, but neither banks nor other big companies worry him because “they hopefully will have enough time, and have the resources to prepare their structure for an environment which could change.”

Once again, he summarizes: “The biggest driver of European equities will be corporate earnings, as the headwind has turned to become a tailwind”.

Pro-invest Group Signed a Fund Administration Agreement with Apex

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Pro-invest Group, a Private Equity Real Estate investment firm, announced on Monday the signing of a fund administration agreement with global independent fund administrator, Apex Fund Services. The partnership will deliver Pro-invest Group with the specialist private equity real estate fund accounting, regulatory reporting and middle office support services required to provide the required infrastructure and support investments.

Apex’s global presence and breath of service capabilities spanning the full value chain of a fund will ensure Pro-invest is supported by administrative resources that enable them to deliver cross-border services to their clients. With $300m (AUD) in committed capital, Pro-invest’s vision to provide tailored products to clients from Europe, the Middle East, Asia and North America will be reinforced by Apex’s local office presence and expertise in these regions.

Ronald Barrott, Chief Executive Officer, Pro-invest Group said, “Pro-invest Group recently reached a significant milestone through the opening of Australia’s first Holiday Inn Express hotel in March this year. At this important stage in our growth and success, it is essential that we work with an administrator who understands our business model but also more importantly our guiding principles of trust, integrity and commitment. Apex and Pro-invest have a shared vision in this area and Apex’s approach to service provision echoes our core values. As we look to capitalise on unique investment opportunities for our clients, we need flexible service providers who can evolve along with us. This partnership will allow us to confidently focus on our investment mission, whilst being operationally supported by qualified experts to achieve our growth goals.”

Srikumar TE, Managing Director at Apex Fund Services APAC, said: “We are delighted to be working with Pro-invest Group at this time. The flexible nature of Apex’s approach to service provision makes us ideally suited to administer a private equity and real estate fund of this nature. We are fully invested in supporting Pro-invest’s mandate to deliver tailor-made services and investment opportunities to clients. As an independent provider we have the ability to align our solutions and support services to robustly support real estate investments. Apex has experienced 35% growth in private equity and real estate clients over the past year, and we now host eight private equity and real estate centres of excellence across the group. We have built a focused and flexible solution to support Pro-invest with strong internal controls and experienced staff to ensure their commitment to achieving success is continually realised.”

UBS Takes Stake in SigFig And Forms a Strategic Alliance for Technology Development

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UBS Wealth Management Americas (WMA) has made an equity investment in SigFig, an independent San-Francisco-based firm wealth management technology company. Also, they have agreed to form a strategic alliance to develop financial technology for UBS WMA, its financial advisors and their clients. Additionally, both companies will create a joint Advisor Technology Research and Innovation Lab, where the companies will continually collaborate on new wealth management technology tools. The companies envision the lab as a forum where financial advisors, product experts and technologists can join with SigFig’s experts in digital technologies and design to develop leading technology capabilities for UBS WMA and its clients.

As part of this strategic alliance, the WM technology company will create and customize digital tools and services for the America´s division of the swiss bank´s 7,000 advisors that will complement their expertise and enhance their clients’ digital experience. This platform will improve the ability of the advisors to efficiently provide advice on assets held at the bank and other institutions, a critical factor in providing truly personalized financial advice across the complete range of client needs.

Why Are Markets in Denial About Inflation?

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Cómo ganar con activos ligados a la inflación — CC-BY-SA-2.0, FlickrPhoto: GIO IAB. Why Are Markets in Denial About Inflation?

As the US labor market continues to improve, investors are still waiting for signs that inflation will pick up. And with US consumer prices posting only a slight uptick in March, the Federal Reserve continues to assure markets that it will “proceed cautiously” in normalizing its policy rate.

Amit Agrawal, senior portfolio manager of developed markets investment grade credit at PineBridge Investments, discusses what’s going on with the Fed’s hawk-dove game and how investors can position portfolios for rising inflation.

Inflation has been benign for years in the US. Why are markets suddenly talking about it again?

Inflation has become a hot topic over the past two to three months because core inflation – which excludes the volatile food and energy components – has risen over 2% for the first time in four years. What many people haven’t noticed is that core inflation has been brewing for a while; 14 months ago it was at 1.6%. If you strip out goods, inflation has been trending over 3% over the past few months.

Why has the core trend flown under the radar?

Because low oil prices have dragged down the headline inflation rate, presenting a mixed picture.

The interesting thing is that despite these moves, the market is still sanguine about inflation. Investors are not convinced that it’s real, and neither is the Federal Reserve. In fact, the Fed is forecasting lower inflation for 2016 than we’re seeing right now. But if you look at past 50 years, US inflation has averaged around 4%; with core inflation at 2% currently, the risk of rising inflation is certainly there. For now, oil has stabilized, the Fed’s messaging is more dovish, and the dollar is trending sideways. These are all positive tailwinds for inflation in the near term.

Why are so many market participants unconvinced? And when do you think they’ll embrace the rising inflation trend?

The reason has to do with wages. The labor market has been improving for five or six years, while wages have been stuck around 2% over that time. Only over the past six months have we seen wages tick up around 2%-3% year over year. In past recoveries, wages have risen 3%-4%. Historically, when labor market slack disappears, inflation tends to show up in higher wages.

As far as when investors will come around, right now, we’re in what I call a “show-me” market. Inflation will have to run higher to convince people it has really arrived.

Several disinflationary trends have made people complacent about inflation: technological advances, demographics, the end of the commodity “supercycle,” and the China slowdown. These do seem like fair reasons for markets to expect inflation to remain low for a long time. (Although I’d argue that demographics may actually be inflationary as baby boomers enter retirement and require more in terms of health care and other services.) In fact, a recent survey by OppenheimerFunds found that, among the top 10 concerns among institutional investors for the next decade, inflation is nowhere to be found.

Unemployment is at 4.9% right now. As slack reduces further, wages will pick up on a broad-based measure. Indeed, the Fed recently reported an increase in wages in nearly all regions of the country in the “beige book,” its survey of economic conditions.

How does the US dollar fit in?

Fed research has shown some impact of the dollar on core inflation, but not a significant one. It’s more about sentiment; inflation expectations can be self-fulfilling.

The impact of the dollar is stronger on headline inflation through oil prices and lower import prices from China. This is why the Fed has been more dovish in recent commentary; the Fed is undermining the dollar because it doesn’t want the dollar to strengthen. (This “ultra-gradualism” is one of the Fed’s unspoken objectives.) By doing that, the Fed will have more conviction in its inflation and growth outlook – growth because of healthy exports, and inflation because it will help keep oil prices from deteriorating further.

Ampliar

What is your inflation forecast?

We expect core inflation to remain in the 2%-2.5% range over the next couple of years. I don’t expect to see a major pickup, but if wage inflation continues to rise, we expect core inflation could grow as high as 3% over that period.

The important thing is that the market is pricing in an average of 1% core inflation over the next five years. That’s a low bar, and it means inflation assets are very attractive; mispricing means opportunity.

Can you describe the opportunity set in inflation assets?

The opportunity set runs the gamut: Treasury Inflation-Protected Securities (TIPS), overseas markets, European inflation-linked bonds, commodity bonds, gold, real estate, and real estate investment trusts (REITs).

In the US, 30-year Treasury bond yields are about 2.5%, while 30-year TIPS are trading around 0.8%. TIPS are a much better investment than nominal Treasuries from a risk/reward perspective. The 30-year TIPS breakeven rate, which is the inflation component in the TIPS market, currently is below 1.8%. In the last 17 years, we have seen only four instances where TIPS traded below 1.8%.

The opportunity is even more robust in Europe, where the market is pricing in only 0.5% inflation over the next five years – much lower than in the US. Europe is in the midst of a huge push from the European Central Bank to create inflation through quantitative easing (QE). We think they will be successful in raising inflation much more than in the US. The market is way too pessimistic in Europe.

An indirect way to get exposure to the inflation opportunity is commodity bonds associated with energy and metals and mining companies. Many investors are shying away from these due to the broad slide in commodities prices. What they may not realize is that a lot of bonds from strong companies are trading at yields between 5% and 9%. These are companies we believe will survive the industry downturn. So while many investors have given up on commodities because of high volatility, we think select commodities bonds offer lower volatility with attractive upside.

Gold is a particularly interesting investment because it’s not only a commodity but a currency. With the Fed and the G3 undermining their currencies, many investors are turning to gold because it’s the only currency that governments don’t control. Gold was the best performing asset class in first quarter of this year; we expect prices from here will be range-bound, possibly moving up if we see a stronger rise in inflation or if central banks continue to undermine their currencies.

Real estate is another way to gain exposure to inflation. We think there is still some value left in REITs if you believe the US housing market will continue to recover. A big component of inflation in the US is shelter, which includes buying and renting. Home prices are growing at an annual rate of 3%-3.5%, and we expect this momentum to continue. The US has also seen a shift toward more renting, especially in metro areas, with an annual growth rate of 3%-5%.

Finally, investors can also buy direct exposure to real estate, though it’s important to realize that, unlike the other opportunities I’ve discussed, real estate is an illiquid investment.

How do you recommend investors position their portfolios for rising inflation?

If you expect inflation to rear its ugly head in the next couple years, and you own a high-quality portfolio with nominal Treasury bonds, you may want to consider selling those Treasuries in exchange for TIPS. Reallocating this way would allow you to gain exposure to inflation while maintaining the same credit quality.

We think gold is a good asset to own as part of a larger portfolio, not only for inflation down the road but as a safe haven as global central banks cut rates to negative. Equities and REITs are also good hedges against rising inflation.

Overall, you don’t need to make wholesale changes to your portfolios; we would recommend allocating about 10%-15% of a portfolio to instruments that are linked directly or indirectly to inflation.

This information is for educational purposes only and is not intended to serve as investment advice. This is not an offer to sell or solicitation of an offer to purchase any investment product or security. Any opinions provided should not be relied upon for investment decisions. Any opinions, projections, forecasts and forward-looking statements are speculative in nature; valid only as of the date hereof and are subject to change. PineBridge Investments is not soliciting or recommending any action based on this information.

Christian Theulot, New Chief Retail and Digital Officer at Lyxor AM

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Lyxor AM nombra a Christian Theulot como nuevo responsable de mercado minorista y desarrollo digital — CC-BY-SA-2.0, FlickrPhoto: Christian Theulot . Christian Theulot, New Chief Retail and Digital Officer at Lyxor AM

Lyxor AM announces the appointment of Christian Theulot as Chief Retail and Digital Officer. The appointment took effect on 15 March 2016.

In this newly created position, Christian Theulot will be responsible for accelerating Lyxor’s digital transformation, supporting its commercial development and fostering excellence in its business processes. He is also tasked with strengthening Lyxor’s presence in distribution, where it is already well established, especially among private banks.

Lionel Paquin, Lyxor AM CEO, said: “The digital transformation presents many opportunities for asset management, whether for enhancing investor experience or for developing digital tools to optimise management processes. Christian Theulot’s appointment will allow us to fully seize them, while enhancing our ties to distribution and delivering Lyxor’s proven expertise and innovation capabilities to this segment.”

Based in Paris, Christian Theulot will report to Guilhem Tosi, Head of Products, Solutions and Legal and a member of Lyxor’s executive board.

Before joining Lyxor, Christian Theulot was Head of Marketing and Development for the Retail Partners & Investment Solutions business line at the Amundi Group for four years. Christian began his career at the Paribas Group, where he spent some ten years in various Marketing/Partnerships managerial roles (Cardif, Cortal-Consors, Compagnie Bancaire). At the beginning of the 2000s, Christian joined AXA’s holding as Senior Vice-President e-business. In 2004 Christian was recruited by the Société Générale group, where he spent seven years as Head of Savings Products for the French network.

Christian Theulot is a graduate of Kedge Business School and holds an MBA in Marketing from HEC.