With China hogging the emerging markets limelight in recent months, it has been easy to lose track of developments elsewhere. With China worries calming now, it seems a good time to review just how bad things have become in Latin America’s biggest economy. President Dilma Rousseff has suffered a series of painful setbacks since her election victory last year, and in many ways is now in political exile despite being nominally in power – approval ratings signal how rapidly the situation has deteriorated (chart 10). The corruption scandal at Petrobras and allegations over accounting irregularities in her campaign and government finances leave the president weakened even as the economy continues its tailspin. The combination of political and economic paralysis has seen a wave of growth and credit downgrades for Brazil, and it is hard to see a rapid turnaround. According to Schroders, it could be years before Brazil recovers meaningfully.
The Petrobras scandal (commonly referred to as the Lava Jato, or ‘Car Wash’), has continued to spread, contaminating larger and larger swathes of the corporate and political sectors in Brazil. It has now reached Dilma’s current political nemesis, Eduardo Cunha, speaker of the Lower House. Unlike much of the scandal to date, this revelation presents a possible boon to Dilma. Cunha is spearheading attempts to impeach the president, and his removal from office would provide an opportunity for Dilma to rebuild relations with the lower legislature. One tentative olive branch, in the form of a cabinet reshuffle which ceded more political power to the party of vice president Temer – the PMDB – appears to have backfired by angering other smaller parties in coalition with the PMDB, which were not included in the largesse. They have now splintered from the PMDB, creating a more fractured Lower House which will be even more difficult to reconcile. The reshuffle, which removed a key ally of the president, also leaves Dilma increasingly isolated within her own government, with former president Lula steadily building control in what some have dubbed a virtual regency (though Lula holds no position of power de jure, he remains influential within the ruling party and popular in Brazil at large). There are concerns that Lula’s next step will be to push for the removal of finance ministerLevy, who has bought the governmentwhat little fiscal credibility it has. Rumors of his resignation on Friday 16th October prompted downward pressure on Brazilian assets but have since been quashed – likely reflecting assurances from Dilma to Levy that the government would continue to back his fiscal consolidation efforts. This drive by Lula is also likely a result of the Lava Jato scandal, which has begun to implicate family members. Political analysts at Schroder’s Eurasia Group suggest that Lula’s only chance of avoiding prosecution would be if he could portray the investigations as an attempt to undermine the left, and that to do this he needs to reinvigorate his traditional electoral base. Attacking fiscal consolidation is one way to do this. It was mentioned above that the rumors around Levy fueled volatility in Brazilian assets. More generally, the backdrop for all of this power broking has been an increased likelihood of impeachment for Dilma, forcing the concessions discussed above. This has generated a good deal of volatility across Brazilian markets, with participants seemingly hoping for an impeachment and fresh government.
Dilma is increasingly powerless and under siege from enemies and allies alike. The corruption scandal is engulfing an ever growing share of the political class and ensuring political energies are focused upon the investigation rather than reform efforts or fiscal consolidation, while those politicians so far untainted are currently deeply unhappy with Dilma – in part because they are being egged on by the Lower House speaker, Cunha. As things stand it is difficult to see how Dilma can lead Brazil out of the mire. Even if Cunha is forced to step down due to the corruption allegations he faces, it is not certain that the new speaker will be any more amenable – there is a strong incentive for the main coalition party, PMDB, to push for impeachment. Vice president Temer, of the PMDB, would then assume the presidency. Though good for the PMDB, this would not necessarily be good for investors, given the exposure of that party to the Lava Jato scandal – so more of the same political paralysis. What would be a good outcome? One possibility is that Dilma’s re-election is declared void. The country’s highest court has authorized an investigation into the president’s re-election accounts, following revelations that kickbacks from a construction firm were paid into the campaign’s coffers. If compelling evidence is found that serious electoral violations took place and were significant enough to impact the race for the presidency, the election result could be revoked. Though obviously a disruptive event, this would clear the way for a more market friendly, and scandal free, government to be elected. They would find they had plenty to do.
The undead economy
Activity continues to flatline, with corporate investment moribund in the wake of the Lava Jato scandal, consumers crushed by their debt burdens (chart 12), and government spending squeezed by attempts at fiscal consolidation. Yet despite this, inflation has continued to climb, in hideous parody of a booming economy. The Brazilian zombie economy, lifeless and yet animated, is enough to make policymakers hide behind the sofa.
Certainly, the current trend is a negative one, as reflected by the recent S&P and Fitch downgrades, which take the country’s sovereign debt within a whisker of junk status, driven by concern over the fiscal consolidation process. Schroders has written many times, too, on the supply side issues plaguing the economy, contributing to the persistent inflation problem, and the ‘Dutch disease’ inflicted by the multi-year commodity boom, which drove up unit labor costs and rendered Brazilian industry uncompetitive. On the fiscal and supply side concerns, there is little hope for immediate relief. The political situationall but guarantees a lack of productive legislation until a new government comes to power, unencumbered by corruption allegations and infighting. However, market forces are beginning – if only by a war of attrition – to generate an improvement in other metrics. For example, unit labour costs (chart 13) have finally begun to decline as unemployment builds, which ought to lead to an improvement on the trade balance, as seems to be happening (chart 14).
All in all, Brazil’s horror story is far from its final act, but perhaps a glimmer of hope is becoming apparent on the very distant horizon. There can though be no painless resolution; perhaps the best case scenario is an early exit for Dilma followed by new elections that allow a purging of the rottenness seemingly embedded at the political core and a new energy with which to pursue reforms.
Sailesh Lad, Senior Portfolio Manager within AXA Investment Managers’ (AXA IM) global emerging markets fixed income team and Olga Fedotova, Head of Emerging Market Credit at AXA IM, discuss their outlook for emerging markets, including the main triggers that could create buying opportunities next year and where the opportunities currently lie for the asset class.
On the future for emerging markets (EMs) Sailesh Lad comments: “While emerging market growth is unquestionably slowing, EMs are still growing at a faster pace than developed markets (DMs). Arguably investors had come to expect growth closer to 5% over the past 20 years, and will in time acclimatise to levels of 3-4% growth. So I think that EM growth will pick up, and will continue to be stronger than DM. Similarly, EM currencies have depreciated a lot in the past year or two, but having appreciated too quickly in the past, we may now see appreciation reoccurring albeit at a slower pace. The fundamental background growth story is still there for EM, and these countries will continue to develop.
“People tend to talk about EMs as a group of very basic countries with little infrastructure, but what is now classed as emerging markets are actually very developed economies in absolute terms, that happen to retain the label.”
Olga Fedotova added: “We are also seeing broad investors become more familiar with EM corporate names now. Investors have moved from a top-down approach to more bottom-up, fundamental analysis, and will increasingly distinguish strong companies that perform well, even in the current currency climate. Ultimately, the strong names will become stronger and therefore more expensive – and weaker companies will continue to struggle.”
Looking ahead to 2016, Saliesh Lad highlighted: “Current market conditions suggest there will be three main triggers that could create buying opportunities and lure investors back to the EM market next year. This includes:
The Federal Reserve will have to provide some clarity on the rate cycle. We think this will start gradually, but with cash levels at four-year highs, ultimately the cycle just needs to start. Investors can identify potential opportunities, but lack the conviction to invest right now because of the persistent uncertainty for interest rates.
China will remain a burning issue, but investors should start to acclimatise to the reality of the economy making a structural shift from an industrial economy to a consumer led one and growth being closer to 6% than 7%. Clarity from China’s authorities on future central bank policy will also be welcomed by investors.
Commodity prices need to stabilise. Ideally we would like to see 3-6 months of stability, particularly in oil and metals, to settle the dynamics for countries with high export dependencies.”
Looking to the more immediate future, Sailesh Lad continues to see solid opportunities in EMs: “While it might be quite a consensus view, I still think that India is a strong growth story. The closed nature of its economy means it is relatively insulated from China’s growth worries. It’s an EM that is still growing, and this insulation provides safe-haven qualities while also promising the potential of attractive returns.”
Olga Fedotova added: “I like Russian and selective Brazilian credits for completely different reasons. The Russian credit story is very robust over a longer time horizon, and technical conditions for Russian corporates remain supportive because of local investors. Russian corporates are also low leveraged, natural exporters, and can comfortably serve their debt, thanks in part to sharp rouble depreciation, prudent cost cutting and more conservative financial policies. Some Brazilian companies are also attractive, but you have to be very careful, as they have underperformed DM and EM alike at the overall level. Stronger names, that are not exposed to oil and gas, with relatively low debt levels and a high proportion of export revenues (for example food, paper and pulp producers) will benefit from cheaper valuations as investor sentiment towards EM is improving.”
According to Detlef Glow, Head of EMEA research at Lipper, assets under management in the European exchange-traded fund (ETF) industry increased from €427.97 billion to €464.15 billion during October.
After performance drove down European ETF’s AUM in September, this increase of €36.18 billion in October has much to thank to it. The underlying markets’ performance accounted for €30.36 billion, while net sales contributed €5.8 billion to the overall growth of assets under management in the ETF segment.
In terms of asset classes, bond funds (+€3.7 billion) enjoyed by far the highest net inflows for the month, followed by equity funds (+€2.8 billion), and alternative UCITS products (+€0.1 billion).
The best selling Lipper Global Classifications in October where:
Equity US with €62.8 billion
Equity EuroZone with €47.2 billion
Equity Japan with €38.3 billion
Amongst ETF promoters, iShares with €4.1 billion (iShares accounts for 49.45% of the overall AUM with €229.5 bn), db x-trackerswith €0.5 billion and Amundi ETF €0.4 billion, were the best selling ones.
The best selling ETF for October was the iShares Core EURO STOXX 50 UCITS ETF, which accounted for net inflows of €460 m or 7.90% of the overall inflows
Regulation allowing retiring defined contribution (DC) savers in the United Kingdom to invest their DC pots, not only to buy an annuity, will help underpin the growth of platforms in this evolving market, according to the latest Cerulli Associates’ European Defined Contribution 2015 report.
At least 60% of the fund platforms from the United Kingdom, Germany, and Sweden surveyed by Cerulli had more than half of their assets under administration (AUA) from DC pensions. This was nearly double the proportion (33%) of platforms surveyed that had more than half of their AUA from defined benefit (DB).
Cerulli found most asset managers surveyed are targeting platforms to some degree, to sell funds variously to UK and German DC savers this year. In the United Kingdom platforms are rivalled by consultants as asset managers’ most popular DC distribution channel, whereas in Germany insurers are comfortably the favorite channel.
Platform providers Cerulli spoke to for the report said that clients were attracted to the flexibility and clarity on charges. In the near term it will be the more financially literate investor and their financial advisors who use them. Over time platforms will need to develop products and services if they are to appeal to a wider clientele.
“According to one research manager at a UK platform provider, some 75% to 80% of fund managers’ new business flows are coming via platforms,” says David Walker, director of European institutional research at Cerulli and the author of the report. “Therefore managers need to seriously consider listing their funds on them,” he adds.
Platforms should not ignore the “institutional” end of the UK DC industry, where platforms can be used to help design DC default funds, for example. Platform providers should take note that, according to Cerulli research for this report, managers expect default funds to use non-mainstream investments more in future. If this happens, platforms may have to relax current strictures they have regarding fund dealing terms.
“It will challenge default fund designers, out to 2017, to fit more non-mainstream assets into defaults, but managers expect it,” says Walker. “But Europe’s DC fund platform industry will either need to give ground on frequent dealing stipulations, or risk thwarting asset managers’ default design expectations with regard to alternative assets,” he adds.
Foto: Historias Visuales, Flickr, Creative Commons. El crecimiento mundial será anémico en 2016 y 2017 pese al petróleo barato, los tipos bajos y el menor lastre emergente
Mark E. DeVaul, portfolio manager of North America Value Fund and a member of the Nordea’s investment team (through the firm The London Company), explains in this interview with Funds Society how to be a good value investor in these high volatile markets. Recent additions to the portfolio have come from multiple sectors including Consumer Discretionary, Industrials, and Consumer Staples.
US equities have experienced a strong rally in recent years. Investing with a value perspective requires discounts to be found. Is this possible in a more expensive stock market scenario?
US stocks have been strong since the bottom of the market back in March of 2009. Valuations have improved and the US economy is in much better condition compared to the depths of the great recession. It is more difficult to find great investing ideas today vs. 5-6 years ago, but we are still finding them. We attempt to purchase strong companies when they are trading at a roughly 30-40% discount to our estimate of intrinsic value. We calculate intrinsic value using a process we call Balance Sheet Optimization. Our goal is to build the investment thesis for each holding around the strength of the company’s balance sheet and not rely on future growth.
What return potential are you currently detecting for your portfolios, taking into account market prices? Has the safety margin tightened compared with before?
We don’t have a specific return goal each year. Our goal is to outperform the broader market over full market cycles (5-6 years) while maintaining more attractive risk characteristics (better downside capture, lower beta, lower standard deviation). Yes, the discount to intrinsic value is lower today vs. a few years ago.
Value management is characterised by patience and long-term convictions… Do you believe it is possible to maintain a buy&hold management approach in view of the current high volatility?
We believe it is an advantage to follow a buy and hold approach. Many investors have a very short time horizon. We think time is one of the few remaining market inefficiencies. We look at each company as if we were going to buy the whole firm. Our average holding period is five years. We build diversified portfolios of 30-35 holdings. Each holding is meaningful and can drive value to shareholders over a multi-year holding period.
In this regard, have you made any changes to your management approach as a consequence of the market volatility in recent years?
No, we have not made any changes to our investment approach because of recent volatility.
As regards sectors or companies in which you are currently detecting value, which sectors are you concentrating on?
We build our portfolios following a bottom up approach and pay little attention to sector weights. Our goal is to have a strong margin of safety in each holding. Recent additions to the portfolio have come from multiple sectors including Consumer Discretionary, Industrials, and Consumer Staples.
What impact could the Fed’s decision to raise interest rates have on your portfolios? Could the volatility that has been created be useful in any way?
The Fed’s timing of interest rate increases will not have much of an impact on our portfolio. We are aware of the risk and on the margin have stayed away from some of the sectors that investors may view more like bonds because of the high dividend yields (REITs, Telecom, Utilities). If rates begin to move higher, we take that into consideration as part of our balance sheet optimization approach in determining intrinsic value.
To what extent do you take into account macro considerations when it comes to making your investment decisions?
Our process is 100% bottom up so there is limited impact from macro considerations. That said, we are aware of what is going on at the macro level and try to avoid major headwinds when possible.
I imagine that you invest bearing in mind the fundamentals of the company. Do you think the exposure of US companies to China and other EMs will impact their fundamentals?
Exposure to China and other EMs may have some impact. In our large cap portfolio, roughly 30% of sales from the companies in the portfolio are generated outside the US. So we recognize there is some impact. However, the impact is fairly limited as we attempt to buy companies with very little growth expectations priced into the shares.
. Erste Asset Management Acquires Investiční Společnost České Spořitelny
On 18 November 2015 the Czech subsidiary Investiční Společnost České Spořitelny (ISCS) was merged into Erste Asset Management GmbH (EAM). This move will turn the wholly-owned subsidiary of EAM, which manages assets worth 7.9 billion euros, as of September 2015, into a branch office. “Starting with this step EAM continues to improve the product quality and expands the product range offered on the Czech market” said the firm on a press release.
Local expertise will still be actively used
The former Czech subsidiary is now legally a part of EAM, but will retain its registered office in Prague. ISCS will use the umbrella brand of EAM with immediate effect. “The merger will not change much for our Czech colleagues, because we will continue to rely on our local expertise and even hand over responsibilities to our colleagues regarding the whole EAM, for instance our equity management,” as Heinz Bednar, CEO of Erste Asset Management, explains. “We have worked towards this merger for more than a year, and we are now happy to have reached this step. At this point we can also show on a formal level what we are and have been: a strong team, regardless of the location.”
Investment area will be expanded
In preparation for the merger EAM already re-structured its investment area in March. Štěpán Mikolášek will be the head of the newly created equity management team of Erste Asset Management and thus be in charge of all equity activities across the entire Erste Asset Management holding. “The repositioning has created one single, cross-border team of equity specialists to which all experts will contribute their know-how regardless of where they are based,” Bednar points out.
Martin Řezáč, CEO of the Czech ISCS, sees a chance to strengthen the local service: ”The merger allows us to focus more strongly on the clients’ local interests. The common brand highlights our international company profile in the investment area.”
Foto: jacinta lluch valero
. Para el 80% de los inversores los beneficios de sus co inversiones superan a los de sus inversiones en fondos
Preqin’s latest survey of fund managers and investors examines the increasing appetite for co-investments among both parties. It finds that 80% of limited partners (LPs) have seen their co-investments outperforming private equity funds, with 46% seeing their co-investments outperform by a margin of over 5%. This level of performance is the biggest draw for investors, with two-thirds of LPs citing better returns as the biggest benefit of co-investing alongside GPs.
Co-investment opportunities from fund managers (GPs) are also becoming more common, with 87% of them either currently offering, or considering offering, co-investment rights to their investors. Furthermore, 30% of managers included co-investment rights in 81-100% of limited partnership agreements in their most recent fund. For fund managers, Co-investments are seen as a way to improve relationships with LPs, gain access to more capital for deals, and improve the chance of a successful fundraise.
“The most common motivation among LPs for co-investing beyond their typical fund commitments is the prospect of better returns, with many anticipating notably higher returns compared to their traditional private equity fund commitments. The majority of LPs surveyed have seen significant outperformance from their co-investments, although many say that it is too early to tell how their stakes will ultimately perform.
Direct investments, including co-investments, have increasingly become part of private equity discourse. Significant interest arising from LPs has been matched by increased co-investment opportunities provided by GPs. Provided LPs have sufficient resources available, co-investment opportunities should remain attractive due to their lower fees and greater potential returns.” Says Christopher Elvin – Head of Private Equity Products, Preqin.
Photo: Google . Who are the 15 most Relevant Latin American and US Offshore Private Banking Industry Professionals?
Terrapinn, in collaboration with Wealth Management Americas, has published a list of the 15 most influential industry professionals from private banking and wealth management in Latin America and US Offshore. Voters have valued excellence in customer service, in addition to wealth planning and preservation, and portfolio management. The ranking this year includes professionals from 14 private banks and four different countries; eight are located in Brazil; five based in the United States, with one professional in Mexico and another one in Switzerland.
Beatriz Sanchez, of Goldman Sachs, United States, was the highest ranked with 252 votes, closely followed by Emerson Pieri, of Barings Investments, Brazil, with 247, and Diego Pivoz, of HSBC USA, with 235. The Spaniard, Conchita Calderon of JP Morgan, Mexico, and Ernesto de La Fe, of Jeffries, United States, rounded out the top 5 with 211 and 198 votes respectively.
Between the fifth and tenth positions, are two industry professionals based in the United States, and three in Brazil: Gabriel Porzecanski, of HSBC, USA; Adriana Pineiro, of Morgan Stanley, USA; Renato Cohn, of BTG Pactual Brazil; Joao Albino Winkelmann, of Bradesco, Brazil; and Francisco J. Levy of UBS, Wealth Management Brazil.
Four other professionals based in Brazil, and the only one located in Switzerland to obtain a position in the ranking of the 15 most influential professionals, appear between the tenth and fifteenth positions: Charles Ferraz, of Itau Unibanco, Brazil; Guilhermo Morales, of Audi Bank, Switzerland; Raphael Guinle, of BTG Pactual, Brazil; Felipe Godard, of Deutsche Bank, Brazil; and Renato Roizenblit, of SLW Brazil.
The Wealth Management Americas 2015 forum, organized by Terrapinn, took place this week, with the participation of two of the professionals ranked in the top 5: Diego Pivoz, of HSBC, who shared his view on deregulation and transparency, and Ernesto de la Fe, of Jeffries, who talked about client relationship management, and how the private banking industry needs to adapt to the increasingly global presence of its clients.
Foto de Céline Colin
. Nicaragua Should Strengthen its Macroeconomic Policy Framework
The mission from the International Monetary Fund (IMF) that visited Managua last month, concluded that the country’s macroeconomic outlook is positive. However, the mission stressed the need to reinforce the policy framework in some areas in order to build buffers to face fiscal and external vulnerabilities.
The mission reviewed recent economic developments and discussed the economic prospects of Nicaragua, with officials from the Central Bank, the Ministry of Finance and Public Credit, and other members of the economic cabinet, as well as members of the economic commission of the National Assembly, business community and labor leaders, academic groups, and representatives of think tanks.
Gerardo Peraza, Head of the mission said, “Nicaragua continues to experience a favorable economic performance. The Gross Domestic Product (GDP) growth in the past three years has averaged 4.8 percent and is among the highest in the region. In 2014, the consolidated public sector deficit was 2 percent of GDP and public debt (including all the debt relief of the Highly Indebted Poor Countries Initiative) fell by 2.2 percentage points to 40.8 percent of GDP. The deficit of the external current account was reduced from 11 in 2013 to 7 percent of GDP, and international reserves increased to the equivalent of 4.1 months of imports excluding free trade zone imports.”
By end-2015, they expect GDP growth of 4 percent and, while inflation is projected at 3.5 percent. However, the deficit and the debt of the consolidated public sector are projected to rise, respectively, to 2.7 percent and about 42.5 percent of GDP in 2015. As well as that the external current account deficit will widen to 8 percent of GDP and that the coverage of international reserves will remain stable. For the medium term, the mission projects that GDP growth will converge to its potential level (about 4 percent) with inflation at about 7 percent annually.
The mission suggests an additional fiscal effort in 2017 to build fiscal buffers in case risks materialize; policy measures that could be considered include a reduction in tax exemptions and improved targeting of electricity subsidies to poor households. Looking further ahead, the mission recommends identifying economic measures to strengthen the financial viability of the social security institute, as well as maintaining an adequate level of international reserves remains a critical objective of macroeconomic policy. “This is crucial to reduce the vulnerability of the Nicaraguan economy to downturns in the global economy or abrupt changes either in the terms of trade or in the availability of external financing. The mission welcomes the central bank’s efforts to strengthen short-term liquidity management in the financial system. Moreover, the authorities should continue to monitor the rapid growth in credit and strengthen banking supervision,” said Peraza.
The mission also emphasizes the need to continue strengthening the statistical framework, continue strengthening the mechanisms to collect data, the procedures to monitor the quality of statistics, and the communication strategies. The IMF will continue assisting the authorities with these strengthening efforts.
KKR announced the appointment of Marcus Ralling as a director in KKR’s Real Estate team. In his role, Mr. Ralling will be responsible for the asset management of KKR’s European real estate portfolio.
Prior to KKR, Mr. Ralling was at Pramerica, as managing director and head of U.K. and European asset management, and joint head of asset management at Threadneedle Property Investments.
Guillaume Cassou, head of European real estate at KKR, said: “I am delighted that Marcus is joining the team based in London. As we continue to build our real estate effort in Europe and scale our real estate portfolio, Marcus’s knowledge and experience in asset management will be of great value.”
Marcus Ralling commented on his appointment: “I am excited to join an investment firm with such an outstanding global reputation. KKR’s growing presence and ambitions in real estate across Western Europe are particularly attractive.”
Since launching a dedicated real estate platform in 2011, KKR has committed over US$ 2.5 billion to 50 real estate transactions in the U.S., Europe and Asia as of September 30, 2015. The global real estate team consists of over 30 dedicated investment professionals.
