Thomas Angermann. Courtesy photo. "We Definitely See More Opportunities in European Equities and Particularly in Small and Mid Caps than Three Months Ago"
Thomas Angermann is a member of the Specialist Equities Team at UBS Global AM, based in Zurich. Specifically he is responsible for the management of a number of Pan European small and midcap mandates. In this interview with Funds Society, he explains why the growth potential currently offered by Small Caps is higher than the one that can be found for Large Caps.
Do you think the current momentum is good for European Equities? Has the equity valuation improved after the market correction in August?
After the recent market correction the valuation for European equities looks interesting now. We definitely see more opportunities in European equities and particularly in Small and Mid caps than three months ago. We think the current correction is healthy as the market is pricing out the too high growth expectations.
Which will be the key factors for the revaluation? Which factor will have a greater importance: Profits, QE support or other macro factors?
Three main drivers should be mentioned. First, the potential earnings growth for the next year as well as the current expectations about this growth potential. Second factor, the Chinese economy, it seems we see first signs of stabilization, however we are still waiting for robust evidence on this. The adjustment from the pure investment driven economy of the past to a more balanced consumer driven economy of the future will take years. That will also create a lot of opportunities. The third factor is monetary policy by the central banks. We think they will stay accommodative but we do not count on any additional measures yet.
In general, what are the risks of short/medium tern correction in European stocks markets? In particular for Small Caps?
As before, three main risk drivers should be highlighted. The first risk we face are Emerging market turbulences. Specifically how the Emerging markets growth pattern will behave in the upcoming months and the level of volatility of EM currencies. We should keep an eye on how this will impact European export driven economies. The second driver is the behavior of the European consumer and to what extent it will remain supportive. A third risk factor would be given by central banks. However, as previously mentioned, we do not expect any upcoming change in their policies and it seems a first interest rate hike by the Fed is desired by the markets.
What extra value are Small Caps going to add vs. Large/Midcaps? Can Small Caps offer greater potential opportunities?
First of all the growth potential currently offered by Small Caps are higher than the one that can be found for Large Caps. Additionally Small Caps offer M&A opportunities, as in the current low growth environment larger companies might add growth by buying smaller companies. We expect that the M&A activity will increase, founding its main targets in the Small Caps universe rather than in the Large Cap world. A second factor is the daily volatility. Surprisingly during last months the volatility registered for Small Caps has often been lower than the one for Large Caps. However we will need further evidence of this pattern.
Is the SC sector affected anyway by general elections (such as the Spanish ones)?
Regarding elections, Small Caps sector is as much affected as the Large Caps sector is. We do not expect any remarkable long term impact coming from the Spanish political situation. However there might be short term effects.
Do you think that volatility will increase in the upcoming months? In this sense, which would be the consequences of a volatility increase regarding your investment style?
Since volatility has already been increased since end of last year with additional acceleration during August and September we do not expect further significant increases under current market conditions. However, in the case of a “Black-Swan-Event” (occurrence of something important which was not expected) we will see an further increase. Nevertheless we would not change our investment style and we would stick to our stock picking approach but would have an even closer look at our risk systems.
Foto: Thomas8047
. Los hedge funds van camino de registrar su peor ejercicio desde 2011, aunque superan al S&P 500
The Preqin All-Strategies Hedge Fund benchmark returned -1.44% in September, marking another difficult month for hedge funds as relative value funds were the only top-level strategy to see positive performance. This is the fourth consecutive month of negative returns for hedge funds, the longest negative period since Jun – Nov 2008. Overall returns for 2015 YTD now stand at only 0.18%, with the year on course to have the lowest returns since 2011. However, with the S&P 500 currently returning -3.14% for the year so far, hedge funds are still outperforming public markets.
On Monday October 19th, the Government of Uruguay, following the line used by other emerging countries, sought after external funding prior to the US Federal Reserve decides to raiseinterest rates. Uruguay, which has investment grade ratings of Baa2 / BBB / BBB-, launched a global bond US dollar denominated maturing at 2027, and it also offered to buy back government bonds maturing at 2017, 2022, 2024 and 2025; whose outstanding amount is around 2,800 million dollars, according to Reuters.
Uruguay launched its new 2027 maturing US dollar denominated bonds at a spread of Treasuries plus 245bp, according to one of the lead managers of the transaction. The launch spread is at the tight end of guidance of 250bp area and inside initial price thoughts of 265bp area. The amortizing bond has an average life of around 11 years and is part of a broader liability management operation.
The deal is being done in conjunction with a one-day cash tender for outstanding 9.25% 2017s, 8% 2022s, 4.5% 2024s and 6.875% 2025s, for which Uruguay is offering a purchase price of 114, 127.50, 106.00 and 119, respectively.
The new money component of the trade is around US$ 1.2 billion, the lead manager said. Citigroup, HSBC and Itau BBA are the lead managers on the transaction.
Photo: KMR Photography. Equity Income: Why Big Is Not Necessarily Best When it Comes to Dividend Yield
The Henderson Horizon Euroland Fund utilises a proprietary analytical screening tool to identify stocks that are being incorrectly priced and offer value in the market. This is a model that fund manager Nick Sheridan has been developing since he first started running money in the late 1980s. The model is based around four key metrics: ‘Dividends; Earnings; Net Asset Value; and Value of Growth’, with the portfolio constructed from those stocks that offer the most overall value. This article looks at the ‘Earnings’ pillar in more detail.
“Higher corporate earnings has been the missing piece of the puzzle for European equities, but this seems to have finally started to come through, with most companies at least in line with estimates during the latest earnings season. Loose monetary policy and quantitative easing (QE) have helped, as has the currency advantage provided by a weaker euro” points out Sheridan.
Furthermore, while the negative effects of falling energy costs are well known, for many companies (and particularly those involved in travel, transportation and retail, plus energy-intensive industries) lower energy costs provide a significant boost to net earnings, freeing up money to spend on expansion and employment. Indirectly, with consumers benefiting from what is effectively a tax cut, companies can also profit from a consequent boost to consumer spending, explain the portfolio manager.
But Sheridan warns that any assessment of earnings should be viewed with an element of caution, and as just one metric to assess the investment potential of a stock. While a company may offer a sustained level of earnings, this may already be reflected in its price, with the risk being that an investor may be forced to pay a premium for the stock.
Companies in the portfolio are likely to be durable, well-established names with experience of trading through varied economic and business conditions. This should help to make the fund’s earnings profile more robust. RELX, Bayer and ASM International are a few examples from the current portfolio.
According to Axa IM, you can add risky assets in the short term “but beware of 2016”. The asset manager believes that after a sharp slowdown in the first half of the year, the global economy is stabilizing. “Yet, sluggish demand, -especially in China, led us to trim our global GDP forecast for 2016 from 3.3% to 3.1%.”
They believe that while US consumers remain on a strong footing, weaker global demand will weigh on the manufacturing sector, thus they see US growth at 2.2% in 2016, down from the previous 2.5%. In regards to China, because of a construction overhang, their estimate is 6.3%. In Europe and on the back of the VW scandal, they believe growth will be of 1.4%.
Considering the softer environment lived in the first half of 2015, Axa thinks growth will prevail. “If anything, the next quarters might see a gentle improvement in growth momentum” they say, adding that they do not believe that the later-than- expected Fed hike is a negative, that valuations have corrected sufficiently and that equity markets “are simply oversold”.
Nevertheless they warn that “While we remain overweight in the near term, we reckon that clouds are gathering over our longer term equity view. Today we suggest reducing our long-held overweight. First, 2016 is expected to see mildly weaker overall growth around the globe and the risks for 2017 are presumably skewed to the downside.”
Brazil has been facing the perfect storm since the re-election of Dilma Rousseff in October 2014 and asset prices in Latin America’s largest country have collapsed. Credit default swaps on Brazil 5-year sovereign debt in US dollar and hard-currency corporate bond spreads widened to as much as 545 bps and 938 bps respectively, as at the end of September 2015, which is higher than during the 2008/09 global financial crisis and the highest since Brazil’s 2002 crisis. The adequate level of foreign exchange reserves – one of the few positives for the country – did not prevent S&P from downgrading Brazil’s sovereign rating to junk last month, which was inevitable given the weak macroeconomic and political environment.
Against this backdrop, many bond investors are looking at Brazilian assets in the same way they opportunistically eyed Russia at the beginning of this year. Russia, which was downgraded to junk by both S&P and Moody’s respectively in January and February of this year, has generated one of the best returns year to date in the emerging market debt universe. Russian hard-currency corporate bond spreads have tightened by more than 30% (or 273bps) year to date despite the ongoing economic sanctions from Western countries, low oil prices and weak Ruble and Russia 5YR CDS has rallied 32% (180bps) year-to-date to 370 bps as at 9th October 2015.
When looking at corporate bonds as per the above graph, Brazil’s recent widening in spreads with a peak after the September sovereign downgrade to junk shows some similarities to what Russia experienced earlier this year in January/February when a number of Russian corporate issuers became fallen angels to speculative grade. While they never recovered their investment grade ratings, Russian corporate bonds then outperformed the rest of emerging markets. Will Brazilian corporate bonds follow the same path in the short term? This is unlikely as Brazil is not Russia.
First, the macro picture is very different. Although both economies have plunged into recession this year, it was the result of external factors for Russia while Brazil is arguably facing more domestic headwinds than external threats. The Russian economy has been hard hit by the international sanctions and low oil prices. For Brazil, political issues (an out-of-favour President and the massive Petrobras corruption scandal) are arguably at least as detrimental to investor sentiment as low commodity prices are to its negative terms of trade.
Second, Russian issuers have shown incredibly resilient credit fundamentals in the current economic environment. The weak Ruble has been helping exporters (oil & gas, metals & mining, chemicals) to improve their competitiveness as their costs are in local currency and their revenues are in US dollars. Facing a virtually closed primary market over the past 12 months, Russian issuers have also shown strong discipline in keeping leverage down and maintaining adequate cash levels in order to meet debt maturities. Finally, the scarcity of bonds has been helpful from a market technicals point of view. In Brazil, this is quite the opposite. Many issuers have significant external debt on their balance sheet and the weakening Real has materially increased debt levels in US dollars and interest expenses for domestic players with no hedging in place. Leverage is on the rise as both debt levels increase and earnings reduce on the back of the recession in Brazil and weak commodity prices. In addition, the “Lava Jato” (Car Wash) corruption scandal is likely to remain an overhang on almost all corporate debt issuers in the country.
In this context, we expect default rates to increase in Brazil. Unlike Russia, which has been broadly a macro call in the first 9 months of this year, credit differentiation in Brazil will be critical and bond returns uneven. There is no doubt that some opportunities for decent returns have emerged among unduly punished bonds, but Brazilian corporate bonds as a whole are unlikely to generate such strong returns in the short term as those seen in Russian credit so far in 2015.
Foto: August Brill
. Londres supera a Nueva York y lidera el Global Financial Centers Index
London has moved ahead of New York to reclaim the number one position in the eighteenth Global Financial Centres Index, published by Z/Yen Group and sponsored by the Qatar Financial Centre Authority. This year edition of the Index (GFCI 18) rates 84 financial centers.
This are the top 10
London climbed 12 points in the ratings to lead New York by eight points. The GFCI is on a scale of 1,000 points and a lead of eight is thus fairly insignificant. “We prefer to see London and New York as complimentary rather than purely competitive” says the company. It is noticeable that assessments for London have been higher since the general election in May 2015.
London, New York, Hong Kong, and Singapore remain the four leading global financial centers. New York, in second place is now 33 points ahead of Hong Kong in third. Tokyo, in fifth place, is 25 points behind the leaders.
Western European centersshow signs of recovery. The leading centers in Europe are London, Zurich and Geneva as in GFCI 17 and Frankfurt has moved up into fourth place just ahead of Luxembourg. Of the 29 centers in this region, 23 centers rose in the ratings with Dublin doing particularly well. Liechtenstein appears in the GFCI for the first time and is ranked 60th. Reykjavik continues to reverse some of its recent decline.
Eastern European and Central Asian centers prosper. The leading center in this region is now Warsaw in 38th place, just ahead of Istanbul. The top seven centers all saw an increase in their ratings but the largest decline in this region was St Petersburg.
Twelve of the top 15 Asia/Pacific centers see a rise in their ratings. With the exception of Hong Kong and Singapore, the top Asia/Pacific financial centers have all seen their ratings increase in GFCI 18. Hong Kong, Singapore, Tokyo and Seoul remain in the GFCI Top 10.
All North American centers are up in the ratings. However, due to continuing rise of some Asian centers, San Francisco, Chicago, Boston, Vancouver and Calgary and suffered small declines in the ranks. Toronto remains the leading Canadian center and is now the second North American center behind only New York.
Sao Paulo and Rio de Janeiro rise strongly. Sao Paulo remains the top Latin American center in GFCI 18, and along with Rio de Janeiro, made significant progress n the ratings and rankings. Mexico was the only center that fell in the GFCI ratings. The Cayman Islands and the Bahamas also showed good improvements.
Mark Yeandle, Associate Director at the Z/Yen Group and the author of the GFCI said “Whilst London and New York still lead the field, the next four centers are all Asian.”
Even though the rapid decline in oil prices is coming to an end, for many oil producers -like those in the shale market in the US and offshore oil fields-, the current oil price is a problem. According to Chris Iggo, CIO Fixed Income Europe and Asia at AXA Investment Managers, “lower prices are pushing commodity-reliant countries to devalue their currencies and Saudi Arabia recently announced that the current oil price has forced them to sell some foreign investments to cover a fund deficit.”
Nick Hayes, manager of the AXA WF Global Strategic Bonds, believes that“The declining oil price has also impacted high yield markets… We favour nominal bonds over inflation-linked bonds given the outlook for inflation. The main concern for us now is where oil prices will settle, and it’s important for fixed income investors to lower their expectations of inflation given the chance that falling commodity prices will continue to impact the level of inflation.”
During the last year, the managers have been decreasing the amount of high yield and emerging market debt exposure and they believe that we will see a rise in government bond yields once the current risk-off environment subsides. “A bear market in credit has created opportunities for us – especially with the increase in the number of negative credit ‘events’ which means we can increase credit allocations at higher spreads and yields,” says Hayes.
In regards to the Federal Reserve’s (Fed) policy, they believe that “the US economy will continue to prosper, which will periodically get people excited about the potential for a rate hike, but the global economic environment is likely to stay weak. The domestic US labour market is still very tight, but wages are picking up, as they are in the UK. However, higher wages don’t immediately translate into inflation. Core inflation has so far stayed low, removing oil from the calculation. It’s difficult to have a view on 1-2 year inflation figures, but central banks will continue to set rates to reach inflation targets. What I would like to see is the Fed being more decisive – raise the rates and be confident about the state of the US economy.” Considering this, Hayes prefers the Eurozone over US interest rate risk. “Given attractive valuations, we have increased our allocation to investment grade corporate bonds, which has started to offer interesting yield levels for high quality credit, ” he comments.
Photo: Michael Kooiman. Hedge Funds Bleeding Slowly versus Market Hemorrhage
The Lyxor Hedge Fund Index was down -1.4% in September. 3 out of 11 Lyxor Indices ended the month in positive territory. The Lyxor CTA Long Term Index (+4.0%), the Lyxor CTA ShortTerm Index (+2.3%), and the Lyxor L/S Equity Market Neutral Index (+0.4%) were the best performers.
In contrast with the sell-off by last fall, the current recovery process is proving more laborious. Continued soft macro releases, several micro turbulences (VW, GLEN, the US Healthcare) and signs that the Fed might be more concerned about global growth, drove markets to re-test the end-of-August lows. L/S Equity Long bias funds and Event Driven funds were yet again the main victims. Conversely, CTAs, Global Macro and L/S Equity funds with lower or variable bias, successfully navigated these challenging times.
“Quantitative easing combined with tighter regulation is growingly questioned. The former is boosting re-leveraging, the latter is trapping liquidity within banks. Both are increasing market risks. With few obvious growth gears in sight, we expect moderate and riskier asset returns.” says Jean-Baptiste Berthon, senior cross asset strategist at Lyxor AM.
Pressure remained on the L/S Equity Long bias funds. They continued to underperform, with broad markets bleeding back to the end-of-August lows. Their drawback accelerated by month-end on the healthcare sector’s debacle. They held their largest allocation in the non-cyclical consumers sectors (which includes healthcare stocks). The H. Clinton’s tweet, tackling drug prices hikes at one specialty-drug company, resulted in a sudden re-assessment of the whole sector’s revenues and M&A prospects. Indeed, these drug pricing anomalies reflect a broader transformation of the healthcare space since 2014. Since then, waves of Biotech and Generic companies’ acquisitions granted Pharma with much greater pricing power. The current correction might be bringing back M&A premiums and fundamental forecasts to a more sustainable profitability regime.
In contrast, Variable bias funds continued to successfully navigate a challenging space, in Europe especially. They finished the month only slightly down. They adequately not re-weighted yet their net exposure. Instead they actively traded around positions.
Market Neutral funds managed to weather the mid-month Fed sector repositioning. They also benefitted from wider quantitative factors differentiation, with Momentum outperforming Value. The short-term backdrop for the strategy remains riskier, less likely to profit from a potential rebound, and threatened by higher rotation risk, in the healthcare sector in particular.
Event Driven funds were again and by far, the main losers. Bargain hunting in the most beaten down securities allowed Event Driven to start the month on the right foot. However the valuation recovery didn’t last, caught up by the post-FOMC uncertainty. The losses accelerated in the last two weeks. In tandem with L/S Equity funds, they got hit by the healthcare meltdown. Strongly allocated through Merger arbitrage and special situation, the sector severely hit the whole Event Driven space. Valleant, Baxter, Allegan, Perrigo were amongst the largest return detractors.
L/S Credit Arbitrage funds’ returns were in line with the global index. The perception of risk remained elevated, factored in widening HY spreads, in the US especially. Lyxor L/S Credit funds remained reasonably conservative. There was volatility in cross credit Fixed-income arbitrage ahead of the Fed FOMC: this sub-strategy slightly underperformed.
CTAs, stars of the month. After being initially hit on their short energy exposures, CTAs then hoarded gains from their long bond exposures. With limited or negative exposures to equities, they dodged most of the market turmoil. They recorded small losses in FX and agricultural.
The sell-off since the end of August combined fundamental and technical drivers. CTAs’ involvement in the debacle was recently debated. Lyxor observes that Long term models cut their equity allocation to a conservative net exposure of 25% before the sell-off. During the sell-off, they further cut their equity exposure to around 5-10%: not a key factor in the selling pressure. During the sell-off, most Short term models further cut their about-zero net exposure down to -25%. The ST models move was more aggressive. But they manage a tiny portion of total CTAs’ AuM (less than 15% of the around $300bn CTAs’ total assets). The firm therefore see little evidence that CTAs were a substantial culprit for the equity sell-off.
By focusing on FX and rates, Global Macro dodged most of the September equity volatility. With limited exposure to commodities and shrinking allocation to equities (from 15 to less than 10% in net exposure), Global Macro dodged most of the September volatility. The bulk of their directional exposure was in the FX space. Their long in USD vs. EUR, GBP and CAD, produced marginally positive returns. Their market timing on rates added gains. They rapidly rotated their bond exposures back to the US, as it became probable that the Fed’s normalization process would be postponed.
Schroders was awarded the coveted ‘Best International Fund Group’ award at The Incisive Media International Fund & Product Awards 2015 held in London on October 7th. The award recognises Schroders for the excellence of its digital strategy and strength of its product proposition, as well as outstanding fund performance over three years.
In a highly competitive category, Schroders scooped first place above other well-known players in international asset management, which included the likes of GAM, BlackRock, Fidelity and more.
Additionally, Schroders’ Chief Executive, Michael Dobson, has been awarded the 2015 ‘Financial News Decade of Excellence’award, which recognises his leadership in the strong growth of Schroders’ profits and assets under management since 2001.
Of the award, Carla Bergareche, Head at Schroders Spain and Portugal commented “We have a strong local distribution presence around the globe and in all the major global financial centres, stretching back over 50 years. Through this we have nurtured long-standing relationships with our clients, maintaining an open dialogue based on professionalism and trust.” Adding that “We believe that digital is a key area of development to enhance our approach to servicing, engaging and communicating with our clients. We have put this into effect via the recent launch of the Schroders incomeIQ initiative, a knowledge centre which features investment guides and tools. People can also take the incomeIQ test designed to reveal investors’ behavioural biases and provide useful tips to empower advisers and investors in their decision making. We are pleased to have won the awards in recognition of our drive for excellence in delivering added value to our clients and wider society. We will continue to innovate across all aspects of our business to help meet the needs of our clients.”
You can review the list of winners and Finalist in the following link
