Markets across the globe are under pressure, with Asia and emerging markets seeing the worst year-to-date returns driven by a growing concern over China’s ability to manage its slowing economy and the related impact that is having on commodities and related industries.
In the U.S. the economy overall continues to grow at a moderate pace. However, weak manufacturing numbers and growing credit concerns, evident in high yield and other credit spreads, have combined with the China worries to cause a painful six percent drop in S&P 500 this week.
Scott Glasser, Co-Chief Investment Officer, Managing Director and Portfolio Manager at Legg Mason points out that ten-year U.S. Treasury yields dropped notably last week. “For the moment, deteriorating credit, falling commodity prices, emerging markets weakness and the potential for slower growth have become more worrisome to investors than the timing of fed fund increases”, explained.
Over the last several years, said Glasser, the market has appreciated significantly and well in excess of underlying earnings growth, making it vulnerable to disappointment. “We have had very little volatility in the broader market averages with no ten-percent correction for at least three years. This is rare from a historical perspective”, commented Glasser.
“However it must be noted that this is a mature bull market in its 6th year and recently we have seen a narrowing of stocks still participating in the rally. The precipitous drop in individual stocks over past few months reflected lack of conviction by speculators. This was not evident in the broader market averages as a whole until this week. We will continue to focus on market breadth or participation as an indicator of market health in months ahead”, said the portfolio manager.
According to Legg Mason, the market decline has been somewhat equally spread across stocks and sectors as liquidations of exchange-traded funds (ETFs) to raise cash or reduce exposure have resulted in broad declines across portfolios. However, momentum driven names have experienced the worst declines.
“Sentiment indicators like put/call ratios and trin ratios which show breadth of market participation show capitulation and are at extreme levels arguing for a likely snap back rally shortly”, said Glasser.
Based on history, Legg Mason believe the market is in the process of making a low. However, the selling typically needs to be followed by a quick reversal with strong buying support indicating that prices have become low enough to attract strong buying demand. The quality (strength and broadness of participation of the rally) can typically provide valuable clues as to whether the bottom is likely to be durable longer term.
“We have maintained all year that after the last several years of outsized large returns it would logical to expect markets to digest past gains and grow into existing market valuation that was high by historical standards. Said differently, it was our belief that stock returns would be up modestly in 2015. While the risks may be higher, that continues to be our expectation”, concluded.
CC-BY-SA-2.0, FlickrPhoto: Hubert Figuière
. Three Important Things about the European Investment-Grade Fixed Income Market
The European Investment-Grade Fixed income team at Pioneer, lead by Tanguy Le Saout, Head of European Fixed Income, Executive Vice President, talked last week about certain developments in the fixed income markets to keep in mind in the short term:
1. Inflation – Down Down, Deeper and Down
Perhaps the reason that global bonds initially rallied was that the Renminbi (RMB) move was seen as a global deflationary move. A weaker RMB (and other Asian currencies) should mean weaker commodity prices, and lower U.S. and European import prices. However, oil is probably the main driver behind some of the big moves in the inflation markets. This week West Texas Intermediate (WTI) fell to a 6.5 year low. The reason? In our opinion, not so much a lack of demand, but rather a surplus of supply. The International Energy Agency described global oil supply as growing at “breakneck speed”. Coupled with modest demand growth, the situation might suggest further downward pressure on the oil price before a bottom is found. Little wonder then that inflation breakevens globally are falling back towards recent lows. The market appears to be moving away from expecting a pick-up in inflation, to expecting falling inflation again. That could happen in the short-term, but longer-term we believe inflation will move higher.
2. Greece and the ECB – “Hello, Mr Draghi, my old friend”
Former British Prime Minister Edward Heath once remarked that “a week was a long time in politics”. What an apt description for the week that Greek Prime Minister Alex Tsipras has enjoyed. Firstly, encouraging noises are being made about concluding negotiations on a third bail-out package in time to meet the next repayments to the ECB on 20 August. Secondly, the fiscal targets being set in this package appear to be considerably easier than initially suggested. Thirdly, and probably most surprisingly, Greek Q2 2015 GDP was reported as a stronger-than-expected +0.8%, as opposed to consensus expectations for a fall of 0.5%. So it is worth asking exactly when Greek bonds might be eligible for the ECB’s QE bond-buying programme? The ECB would have to reinstate the waiver of the minimum rating criteria for Greek government debt. However, that could come potentially as soon as European Stability Mechanism approval of the first tranche of loans. Could you have imagined back in early July that the ECB might be buying Greek government bonds by the end of 2015? No, us neither.
3. What’s happening to the Swiss Franc?
In all the excitement about the Chinese RMB movements, not much attention is being paid to the recent surprising depreciation of the Swiss Franc. Following the surprise abandonment of the floor against the Euro back in January 2015, the Swiss Franc had settled around the 1.05 level against the Euro. But in the last few weeks, it’s fallen about 4% to a level of 1.09. Perhaps the resolution of the Greek situation has led to some reversal of safe-haven flows. Or maybe, the Swiss National Bank is quietly intervening in the market. And one thing we on the European Fixed Income Investment-Grade Team have noticed is that liquidity is quite scarce in the Swiss Franc, as investors have struggled to understand the Swiss National Bank’s currency policy. Therefore, intervention would have a bigger impact in an illiquid market. Either way, for the moment, it’s a currency that we prefer to watch rather than trade.
Photo: phylevn
. Alternative Investments Grew by 19% Amongst Minority Investors
According to a report published by the Money Management Institute estimating the increase recorded in 2014 at 19%, the popularity of alternative investments is growing rapidly among minority investors, indicating a paradigm shift not seen since the advent of exchange-traded funds in 1993.
Institutional investors have, for a long time, used alternative strategies, a broad category which includes everything from real estate and private equity to hedge funds and private-placement debt, as a vital tool to cover the risk of more traditional long-term strategies, which make up most of their equity portfolios.
But now it’s not just them, but individual investors are also positioning themselves in line with the investment options, especially following the global downturn in the financial markets in 2008. Since then, their focus has expanded beyond shares and bonds, to a world of assets which provide a high level of diversificationnon-correlated with the average ‘Main Street’ portfolio.
Historically, access to these alternative investments was limited to qualified investors, but that barrier is fading, largely because the financial services industry has created vehicles that provide access to alternatives. Thus, mutual funds, with ETFs following closely behind, are currently the most popular vehicles for minority investors.
With a retail market of $ 11.6 trillion in mutual funds, it is not surprising that the financial industry is wildly running to accommodate the growing demand for alternative investment vehicles. Although the amount of $ 139 billion currently included in alternative investment funds is relatively small, that figure has grown steadily over the past five years. Although hedge funds experienced an outflow amounting to $ 6.9 billion in 2013, liquid alternative investment funds gained a further 40 billion during the same period.
Private investors may also gain access to alternative strategies through a network of investment advisors. A large number of private investors already have their own registered investment adviser (RIA) to enter the world of real estate, private placement debt, and direct investments, as well as other alternative strategies. Meanwhile, over 81% of investment advisors are already working with alternative investments for their clients, compared with 74% last year, according to an industry survey.
Prodigy Network, one of the world’s largest Crowd-investing platforms, which invests in Manhattan real estate, is an example of a successful and innovative prospect. The company has successfully raised more than $ 850 million, 30% of which comes from more than 6,200 investors who make up their “crowd”. Together with FlexFunds, an ETPs issuer (Exchange Traded Products), it created a solution that would provide a management and distribution system which would allow investors to participate directly through its investment account.
Another company which fits entirely into the alternative investment category is NXTP Labs, a private investment fund with an accelerated program focused on growing new technology companies with global or regional business in Latin America, which has a strong track record in supporting, accelerating, and selling companies. In its case, it created an ETP, also through FlexFunds, which provides investment advisors with a vehicle, which allows its clients to participate in the direct investment segment of alternative investments.
It seems that, as the alternative investment sector grows, the most innovative platforms, associations, and efficient services, will evolve with them.
Jay Pelham - Courtesy Photo. TotalBank Creates a Private Client Group Headed by Jay Pelham
TotalBank has announced the creation of a new division, Private Client Group, and the appointment of Jay Pelham as its Executive Vice President. Pelham will be responsible for overseeing the Private Client Group division that also houses the Bank’s Total Wealth Management. Private Client Group will also include concierge banking, lending, and wealth management to high-net-worth individuals and professionals.
In his new position, he will also service and enhance existing private client relationships and develop profitable relationships with new clients, targeting professionals and high-net-worth individuals.
Pelham was most recently at Gibraltar Private Bank & Trust as Executive Vice President of Private Banking. He began his financial services career at SunTrust Bank more than 25 years ago in commercial lending, later transitioning to private banking in 2000 as the Private Banking Manager for Miami-Dade County.
Pelham graduated magna cum laude from the University of Tennessee with a bachelor’s degree in economics. He is also a certified financial planner and holds licenses in life, health and variable annuities
Photo: Jean-Marc Stenger, CIO for Alternative Investments at Lyxor, pick up the award in the ceremony. Lyxor AM Wins "Transparency" Award at Distrib Invest’s Ceremony
Lyxor AM won the Transparency award «Les Coupoles» in the “Integrated Financial Groups” category at Distrib Invest’s ceremony, which took place on June 18th in Paris.
The magazine Distrib Invest reward French fund distributors and fund selectors for the quality of their financial reporting.
In its category, Lyxor won this award ahead of La Française and Amundi. “This distinction confirms the success of Lyxor’s strategy, which is based on the quality and transparency of its investment solutions”, said Lyxor.
Jean-Marc Stenger, CIO for Alternative Investments at Lyxor, pick up the award in the ceremony.
In the statement after its July meeting, the Federal Open Market Committee altered language about the near-term path of interest rates by noting that a first policy rate increase would occur once there is ‘some further improvement’ in the labour market. Steven Friedman, Director, Official Institutions at Fischer Francis Trees & Watts (FFTW), subsidiary of BNP Paribas IP, believes that this set a fairly low hurdle for the start of policy normalisation and indicated that the committee believed the economy was approaching full employment.
“Last week’s July employment report provides Fed chair Yellen with additional comfort that commencing a gradual normalisation process should not derail the labour market and prospects for returning inflation to mandate-consistent levels in the coming years. Should the August employment report (the final one before the September FOMC meeting) show similar payroll gains, it certainly would seem to qualify as “some further improvement” in the labour market”, points out Friedman.
Other recent data should also provide the committee with confidence that the economy can withstand an initial rate increase in September and a very gradual normalisation thereafter. Recent construction, factory and trade data indicates that second-quarter GDP will be revised up to around 3%. In addition, while the price deflator for core personal consumption expenditures is not anywhere near the committee’s inflation objective, it has shown signs of stabilising in recent months – one of Yellen’s stated preconditions for beginning to raise rates.
The Fischer Francis Trees & Watts expert says that interest-rate futures now discount only a bit more than even odds of a September rate increase. That investors remain unconvinced of a September move reflects skepticism in the committee’s slack-based framework for inflation given that global disinflationary pressures emanating from China and elsewhere should keep US inflation low even as the economy moves past full employment.
In addition, investors appear concerned that declines in commodity prices could partly reflect a loss of global growth momentum and suppress inflation over the medium term. And an increase in US policy rates at a time when other G10 central banks are either easing further or maintaining accommodative policy fuels concern that policy normalisation may be difficult to sustain given the risk of renewed appreciation of the US dollar.
“It is difficult to find significant evidence that these concerns are affecting asset prices meaningfully. While the Treasury curve has begun to flatten in recent weeks, the pace of the move is similar to what was observed ahead of the tightening cycle in 2004 (see Exhibit 1 below). Similarly, major US stock indices are not far off of their recent peaks and have been weighed down primarily by energy-related stocks. Declines in longer-dated measures of inflation compensation are consistent with the renewed slide in energy prices. In short, markets appear to be preparing for an initial rate increase in a largely intuitive manner, and we remain far from seeing risks of a policy error reflected in asset prices”, conclude Friedman.
Photo: Trey Raatcliff, Flickr, Creative Commons. Renminbi Devaluation: The Impact, Country by Country
China has devaluated its currency, Renminbi. Theses moves shows China is using both domestic (fiscal, monetary) and external (currency) levers to support growth. CNY depreciation will have a negative impact on commodities (given China is the largest consumer) and commodity exporting countries -Indonesia, Malaysia-. If this leads to further easing from other countries, it will be positive for equities, says Mirae Asset.
Impact in China
PBOC’s weakening of CNY may lead to further depreciation, which might not be all negative. “Historically, we have seen currency adjustment as a beneficial tool to boost exports and therefore economic growth”.
However, the risks of currency wars remain. China is in a strong position to defend its currency thanks to it’s large FX reserves and low offshore borrowing. Rather than looking at USD/CNY, China might prevent further appreciation of REER. Emerging Asia constitutes about 20% of China’s total trade, with Europe and Japan accounting for around 40%, according to the experts.
Even if China does want to reverse the appreciation of CNY vs other Asian currencies, it would imply a ~10% depreciation in CNY. On various models, RMB is around 10% overvalued on an average of various frameworks.
“Overall, for the financial sector, we are entering into a lower growth environment, with the asset quality cycle turning and a not-so-conducive operating backdrop. As a result, we maintain an Underweight the financial sector. In such an environment we prefer countries where monetary easing will have the ability to deliver a boost to domestic demand and those with low credit penetration (India, Indonesia, Philippines). Apart from these countries, we continue to like Chinese life insurance companies where protection gap is significant and the industry is showing signs of turnaround for the past 18 months”, says Mirae Asset.
Negative for exporters and ASEAN countries
However on a broader macro perspective, it is negative for exporters to China (or countries with close linkages with China) like Korea, Taiwan, Hong Kong and Singapore. ASEAN may be impacted due to second order effects with their currencies depreciation and reducing the scope of interest rate cuts as currencies remains under pressure.
Regarding the US rate hike, “on the flip side, it might possibly lead to a postponement of US rate hikes, as strong USD and disinflation- ary impulse due to actions of various central banks (CN, EU, JP) might impact the conditions within the US. Furthermore, the notion of substantial real weakness in China (which the FX move indirectly signals) is, in itself, not inmaterial”.
Mirae Asset also analyses the impact of the devaluation in Renminbi, sector by sector:
A new survey of financial services professionals conducted by Cipperman Compliance Services (CCS) reveals that asset managers, broker-dealers, and other firms are embracing compliance as a core function of their business, with an equal number of respondents reporting that they now spend as much on compliance as they do their legal counsel.
The second annual “C-Suite Survey”, drawn on responses from 180 leaders tasked with compliance in the financial services industry, finds that although a greater number of firms have formed compliance committees and conducted reviews of their compliance programs in the past year, only18% allocate more than the industry-benchmark 5% of revenues to such activities.
As regulatory scrutiny of the industry continues, client pressures have driven an industry-wide march toward adopting formal compliance procedures.
Eighty-one percent of respondents are “concerned” or “very concerned” by the Securities and Exchange Commission’s practice of naming and prosecuting individuals. Moreover, 70% of respondents also report that prospective clients have asked to review compliance policies or interview compliance personnel, suggesting that compliance is now seen as an integral part of a desirable financial firm.
“Gaining the trust of clients is essential in asset management,” said CCS Managing Principal Todd Cipperman. “A manager’s ability to demonstrate a strong compliance program is a big factor in landing asset management business from institutional and individual investors.”
Accordingly, firms have taken concrete steps to formalize their compliance procedures. Sixty-three percent of asset managers indicate they have a compliance committee at their firm, rising from 48% reporting the same in 2014. Moreover, 88% of all respondents report that they have conducted a compliance review in the last year, as opposed to the 67% who answered as such in 2014.
“Firms are choosing to vest these duties with committees and individuals whose sole responsibility is compliance, as opposed to wearing multiple hats, which has proven to be the most effective means of maintaining a culture of compliance,” said Cipperman. “Truly dedicated compliance personnel reduce conflicts of interest, stay on top of the shifting regulatory landscape, and ensure compliance doesn’t take a backseat to other business functions.”
Resources Don’t Match Commitment
Even as firms report dedicating personnel to compliance, they have yet to fully devote the appropriate amount of resources to their programs. Just more than half of respondents, 53%, report spending between 0 and 5% of their total revenues on compliance.
Alarmingly, a significant number of respondents (who are charged with compliance activities at their firms) were unaware of how much they spend altogether. Twenty-nine percent of asset managers, 35% of broker-dealers, 14% of alternative managers, and 31% of wealth managers could not identify what they spend on compliance.
“These figures show, as they did last year, that it is much easier to talk the compliance talk then walk the walk,” noted CCS Managing Director Jason Ewasko.“Firms should spend a minimum of 5% of revenues or two basis points of assets under management on compliance in order to have an effective program. Less than that and they are putting their businesses, and in extreme cases their personal finances, at risk.”
Outsourcing Compliance Function Grows in Appeal
On the heels of recent acknowledgements by the SEC of outsourced compliance activities and court rulings validating the practice, the C-Suite Survey found that the industry has rapidly adopted the practice. Fifty-seven percent of all respondents say they outsource some or all of their compliance function, a rise from the 24% who outsourced in 2014. Leading the trend of firms embracing outsourcing are broker-dealers at 65% and alternative managers at 68%.
Foto: Luis, Flickr, Creative Commons. Los fondos monetarios captan 77.000 millones de dólares en julio ante la incertidumbre en el mercado
Global assets under management did not move significantly in July and stood at $35.9 trillion USD at the end of the month. Estimated net inflows amounted to $114.9 billion USD, while market movements in the reporting month delivered an $86.7 billion USD loss. In terms of market share, the trend continues to favour Equity Funds (+0.2 %) over Bond Funds (-0.2%) and Money Market funds (+0.1%), according to Lipper Thomson Reuters figures.
All asset types posted negative average returns, with Commodity Funds taking the biggest hit (-8.7 %) due to a further drop in energy prices after settling the Iran deal and a significant decline in precious metal prices. A further depreciating Euro versus US Dollar (-0.8%) had an additional impact on Lipper’s USD calculated fund market statistics.
Regardless of negative average returns, nearly all asset types except Bond and Commodity funds could profit from net inflows. Leading the way was Money Market Funds with $77.7 billion USD inflows, indicating some money being put aside because of uncertain market outlook, followed by Equity Funds with $29.5 billion USD. Bond Funds lost $0.6 billion USD and Commodity Funds some $1.7 billion USD, due to outflows.
Apart from the two big Money Market Classifications US Dollar ($41.0bn) and Euro ($29.5bn), the Equity Global ex US ($17.0bn), Equity Japan ($9.4bn), and Equity Europe funds with $7.1 billion USD estimated net inflows were able to attract the greatest interest from investors. As was the case in June, the Equity US fund classification had to accept redemptions, this time amounting to $7.3 billion USD which marked this the worst classification for fund flows in the top 50 Lipper Global Classifications league.
“The outlook for the securities market does not give a clear indication where it is heading. On the one hand it is anticipated that the FED will raise interest rates this year but, on the other, this seems unlikely as US macroeconomic data shows little signs of significant improvement. Cheap money (from borrowing at low rates) isn’t finding its way into the real economy, as investors prefer to stay on the sidelines, accepting lower interest rates for less risk in fixed income markets”, Otto Christian Kober, Lipper’s Global Head of Methodology and author of the report, comments.
“The situation is not much different in Europe. It doesn’t look like the ECB will raise interest rates any time soon, due to highly-indebted southern European countries. For Europe as a whole, the money continues to flow into Equity markets, with notable movement into Money Markets as well.”
Photo: YoTuT
. Nikko AM Appoints Sumi Trust as Fund Administrator
Sumi Trust Global Asset Services has won a mandate from Nikko AM Global Cayman, a subsidiary of Nikko Asset Management, to serve as their fund administrator and provide a full range of fund administration and asset support services.
SuMi Trust will provide fund administration services to Nikko Asset Management’s Japanese-domiciled and off-shore fund structures which will be launched in the future. Nikko Asset Management has entrusted six new funds, in addition to six existing funds from other administrators, to Sumi Ttust.
The funds, which are all Cayman-domiciled, together account for $2.7bn (€2.4bn) in AUM, with each following a dedicated investment strategy. These strategies include global and regional equities, currencies, fixed income and natural resources securities.
Nikko Asset Management, which holds assets under management of $161.9bn (€146.5bn) as of March 2015, is one of Asia’s largest, oldest and most respected asset management firms. Nikko Asset Management is part of Sumitomo Mitsui Trust Bank, which owns Sumi Trust Global Asset Services.
Nikko Asset Management’s decision demonstrates the benefits of the cross-integration of services between complementary business units within the SMTB group. Meanwhile, this recognition by the asset management firm underscores Sumi Trust’s ability to service funds trading a large number of different asset classes.
Hiromitsu Tanaka, CEO of Sumi Trust Ireland, commented: “With a track record of more than 25 years of providing fund administration support for both regulated and off shore fund structures, we’re very proud that Nikko Asset Management decided to entrust a greater share of their assets to Sumi Trust.
“Our fund administration business in Ireland has enjoyed tremendous success over the past year in attracting business from independent asset managers that are looking to launch new products and replace their administration partner in response to the increasing demands of the global financial services industry.”
