Richard Buxton, uno de los inversores más respetado de Reino Unido, es el nuevo CEO de OMGI - Foto cedida. Richard Buxton, nuevo CEO de OMGI, reportará a Martin Baines, responsable de la nueva división OM Wealth Investment
Richard Buxton, one of the UK’s most respected investors, becomes CEO of OMGI alongside the management of his portfolio. Reporting to Richard, Warren Tonkinson becomes MD of OMGI, enabling Richard to remain focused on his fund whilst providing overall investment leadership as CEO. Julian Ide is stepping down as CEO of OMGI and leaves with the gratitude and good wishes of the company.
Mr. Buxton will report to Martin Baines, who will lead the new Old Mutual WealthInvestment Division. Mr. Baines steps up from being CEO of Quilter Cheviot to become Chief Investment Director of Old Mutual Wealth. In Quilter Cheviot, David Loudon, a company and industry veteran with 25 years’ experience, is stepping up to be CEO and will also report to Martin Baines.
Richard Buxton comments: “I joined OMGI to help build an outstanding investment management business over the coming years, primarily through investment leadership and managing my UK Alpha funds. Today’s announcement is completely aligned with that goal and I look forward to contributing further to the realisation of OMGI’s ambitions. Investment remains my first passion and priority – I would not have accepted any additional responsibilities which would compromise my ability to invest on my clients’ behalf.”
The new organization presents the opportunity to more effectively leverage the combined investment knowledge of Quilter Cheviot and OMGI for the benefit of the clients, particularly in the multi asset areas. However, the brands and propositions of both remain distinct and their independence in regard to investment selection will be maintained and is assured.
Paul Feeney, CEO of Old Mutual Wealth, comments:
“At the heart of our wealth proposition is our ability to bring together the best investment minds in the market for the benefit of our clients. It therefore makes sense to bring Quilter Cheviot and OMGI together within one division under the leadership of Martin.
“I’m extremely grateful to Julian for his leadership in growing OMGI to be the exceptional business it is today. The quality of what Julian has created and the talent he has attracted is unparalleled in recent asset management history. OMGI’s phenomenal bench strength is a testimony to what Julian has delivered for clients.
“I can think of no better person to appoint as CEO of OMGI than Richard – his experience, exceptional investment skill and his principles will take our asset management business forward with a clear focus on delivering the wealth creation that is at the heart of our business.
Dario Epstein, Director at Research for Traders and member of the Advisory Board of Biscayne Capital - Courtesy Photo. "Just as in Life, in the Markets, it’s: Nothing Ventured, Nothing Gained"
“This crisis is new. Many of the large fund management companies talk about the “new normal” and, unfortunately, it is very difficult to extrapolate past experience and project it in order to resolve the current situation. Looking in retrospect no longer helps. We are charting a new path along the way, and the prudence partly stems from there: that the path is new”. That’s how Dario Epstein summarizes the current environment and the wait-and-see attitude of investors, with cash at the ready. But, just as in life, in the markets, it’s nothing ventured, nothing gained, he reflects. Epstein is Director at Research for Traders and recently joined the Advisory Board which Biscayne Capital created earlier this year.
When asked about the purpose for his joining the company, Epstein explains that private banking is currently going through a very dynamic phase driven by several factors, the most important of which is the regulatory factor. As a result, in recent months, the compliance department of the institutions has been strengthened significantly. Secondly, there’s the fiscal or tax issue, which has caused the United States, through FATCA, as well as other countries, to focus on trying to eliminate the loop holes, or tax havens, which facilitate tax evasion. In this context, the commercial development of wealth management networks poses a challenge to which the industry is responding. His experience as a former regulator, as well as in market analysis, allows the organization to be focused in these new aspects, and he contributes both his own personal input, as well as that of his company, in order to work more efficiently in the management of portfolios and investment recommendation.
Which products are the most interesting for the Biscayne Capital type of client in the current market environment?
Against this backdrop (China slowing, high probability of rising rates in the US, falling commodity prices, devaluation by China), we are currently adding coverage and protection for long positions and maintaining liquid reserves, although each profile, objectives, and risk appetite has its specific recommendation.
Indeed, in the past few days we have awakened to several consecutive devaluations of the renminbi, and commodity prices at historic lows, how far could this go?
China upset the apple cart and surprised everyone. While devaluation is not important, the impact it later had on all the variables was, deepening the crisis in the currency and equity markets of emerging countries in particular, which are currently less competitive at exporting to China. Even the People’s Bank of China could not stop the trend, indicating on the third day that there is no basis for further depreciation of the yuan (at around 6.40 USDCNY) due to the strong economic fundamentals of the country. That is precisely what is being questioned in the markets. Thursday’s close saw three straight days of devaluation. It is true that the strong fiscal and international reserves position provide good support for the exchange rate, but the slowdown is greater than expected and devaluation was a last resort.
I worry that China may abandon the development of the domestic market, which is its point of inflection in order to grow internally, and devalue its currency for the purpose of increasing competitiveness of its external sector and exports. There are two references (yen and euro)which have devalued strongly in recent years, and with the currencies of emerging countries in sharp depreciation against the dollar, it was to be expected that China take some compensatory measures.
With regard to the prices of commodities, they are very low, my opinion is that they are finding their footing and we expect some insignificant technical rebound. What we do see is that the shares of emerging countries, net exporters of commodities, still have a wide margin of decline, measured in terms of multiples, and may yet fall another 15% -20%.
The Shangay Composite has lost 3.4 trillion dollars and received injections of 900 billion renminbi, according to Goldman Sachs, who says that the regulator still has more than 160 billion dollars: will they have to use them?
It Depends. China is investing money in the market to avoid losses through purchases or provisions to short selling. Obviously the Chinese market has been impacted by two factors: firstly, the monthly addition of millions of new accounts of the country’s residents and, secondly, some slippage in the margin lending which led stock prices to a bubble, contrary to what was going on in the real economy. According to some Chinese market experts this market is extremely trend follower. In this case, the losses were not greater because many companies have suspended their stock exchange and it is now in the hands of the regulator to calm the markets. As I published a few days ago, the Chinese have discovered that capitalism is not easy.
Goldman analysts also believe that the index will range between 3,000 and 4,000 in the short term. Is that possible?
Yes it is, but only if the regulator continues to participate in the process. If it breaks 3,400 there is no significant resistance until 2,800. If the regulator is not involved, the 3,000 barrier will be broken. Although there may be an abrupt change following a more aggressive devaluation; if the currency starts to devalue, the market trend may change.
What does the supposed beginning of rate hikes by the FED add to this situation?
If the FED starts to eliminate all incentives, there will be a negative impact on global growth and the strength of the dollar will increase. The impact of a rise of a quarter point will be liquefied in the first two months. If the market goes up, you run the risk that more investors follow the trend and that we enter into a period of more complex markets in mid-2016.
How will this affect the stock markets in the American continent?
The effect will spread. Brazil is being very badly affected. Its neighbors (Colombia, Peru) will notice the impact on the region, and in Venezuela, where oil is the strong point, it will have great effect. It is very difficult to find countries in the region that are isolated. In terms of currencies and commodity prices we have seen the worst. While there is room for depreciation, we will stabilize in this situation. Some currencies have already devalued; we could be finding a point of balance of the Real at around 3.50. Same with commodities. Not so with the shares, they could still fall.
Which LatAm markets and sectors offer the lowest risk?
Right now our position is more conservative in Latin America.
Brazil is in a very complicated process, entering a recession with negative growth projected in 2015 and 2016. Venezuela is being hit hard, Ecuador going through a difficult process. Basically, after 10 years of very favorable terms for the region, the countries which had the vision to invest in infrastructure and to generate twin surplus (balance of payments and foreign trade), and those who managed to create reserves and countercyclical funds to weather this situation will mark the difference. Brazil has 300 billion dollars in reserves; Peru, Colombia, and Chile also have good reserves.
With respect to Argentina, the markets discern that any of the presidential candidates will have a much more pro-market and international integration rationale. In this backdrop, Argentine assets, which have been underweight in the past, may have an interesting evolution, as so far as other emerging markets do not derail.
Then, where should one be right now?
Cash. The wealthiest families have a high dose of cash and are very expectant. There is much awareness that part of the growth of real estate prices, stocks, and bonds are a result of monetary stimulus, and not of market fundamentals. And at certain prices investors prefer to continue in cash, AAA short-term bonds, banks … the scenario can change within 10 days. In this environment, the strategy is very short-term, waiting on opportunities that may result from the FOMC meeting of the FED, from an acceleration of devaluation in China, or from other macro scenarios.
Is Greece a closed issue?
Today it’s a closed issue, within a year we will have to discuss Greece again because with the current austerity plan, Greece cannot grow. Spain, Italy, and Portugal are facing similar situations: high youth unemployment and austerity. While it is true that a country can’t live in permanent deficit, there are times that countercyclical policies are necessary, and the orthodox prescription of the IMF and Germany is not helping the peripheral economies in Europe to takeoff.
This year we have elections in Spain, Portugal and Ireland. The poor performance by the political left in Greece has weakened the chances for similar groups to gain power in other countries where there is a social demand which must be addressed. Let’s say that the Greek issue is now concealed for a while.
Foto: Tax Credits
. Dos filiales de Citigroup pagarán 180 millones de dólares para liquidar cargos por fraude de hedge funds
The Securities and Exchange Commission today announced that two Citigroup affiliates have agreed to pay nearly $180 million to settle charges that they defrauded investors in two hedge funds by claiming they were safe, low-risk, and suitable for traditional bond investors. The funds later crumbled and eventually collapsed during the financial crisis.
Citigroup Global Markets Inc. (CGMI) and Citigroup Alternative Investments LLC (CAI) agreed to bear all costs of distributing the $180 million in settlement funds to harmed investors.
An SEC investigation found that the Citigroup affiliates made false and misleading representations to investors in the ASTA/MAT fund and the Falcon fund, which collectively raised nearly $3 billion in capital from approximately 4,000 investors before collapsing. In talking with investors, they did not disclose the very real risks of the funds. Even as the funds began to collapse and CAI accepted nearly $110 million in additional investments, the Citigroup affiliates did not disclose the dire condition of the funds and continued to assure investors that they were low-risk, well-capitalized investments with adequate liquidity. Many of the misleading representations made by Citigroup employees were at odds with disclosures made in marketing documents and written materials provided to investors.
“Firms cannot insulate themselves from liability for their employees’ misrepresentations by invoking the fine print contained in written disclosures,” said Andrew Ceresney, Director of the SEC’s Enforcement Division. “Advisers at these Citigroup affiliates were supposed to be looking out for investors’ best interests, but falsely assured them they were making safe investments even when the funds were on the brink of disaster.”
According to the SEC’s order instituting a settled administrative proceeding:
The ASTA/MAT fund was a municipal arbitrage fund that purchased municipal bonds and used a Treasury or LIBOR swap to hedge interest rate risks.
The Falcon fund was a multi-strategy fund that invested in ASTA/MAT and other fixed income strategies, such as CDOs, CLOs, and asset-backed securities.
The funds, both highly leveraged, were sold exclusively to advisory clients of Citigroup Private Bank or Smith Barney by financial advisers associated with CGMI. Both funds were managed by CAI.
Investors in these funds effectively paid advisory fees for two tiers of investment advice: first from the financial advisers of CGMI and secondly from the fund manager, CAI.
Neither Falcon nor ASTA/MAT was a low-risk investment akin to a bond alternative as investors were repeatedly told.
CGMI and CAI failed to control the misrepresentations made to investors as their employees misleadingly minimized the significant risk of loss resulting from the funds’ investment strategy and use of leverage among other things.
CAI failed to adopt and implement policies and procedures that prevented the financial advisers and fund manager from making contradictory and false representations.
CGMI and CAI consented to the SEC order without admitting or denying the findings that both firms willfully violated Sections 17(a)(2) and (3) of the Securities Act of 1933, GCMI willfully violated Section 206(2) of the Investment Advisers Act of 1940, and CAI willfully violated Section 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8. Both firms agreed to be censured and must cease and desist from committing future violations of these provisions.
Photo: Dan Nguyen
. S&P Dow Jones Indices Launches Spin-Off, IPO and Activist Interest Indices
S&P Dow Jones Indices (S&P DJI) has announced the launch of the S&P U.S. Spin-Off index, the S&P U.S IPO and Spin-Off index and the S&P U.S. Activist Interest index. These three new indices broaden S&P DJI’s event driven index family which includes merger arbitrage indices.
The S&P U.S. Spin-Off index is designed to measure the performance of U.S. companies that have been spun-off from a parent company within the last four years. It is based on the S&P U.S. Broad Market Index (BMI). At each monthly rebalancing, spin-offs that are added to the U.S. BMI and have a float-adjusted market capitalization of at least $1 billion are added to the Index and remain in the Index for up to four years.
The S&P U.S. IPO and Spin-Off index calculates the performance of U.S. companies with in the S&P U.S. BMI that have had initial public offerings (IPOs) or have been spun-off from a parent company within the last five years. The spin-offs should have a float-adjusted market capitalization of at least $1 billion as of the rebalancing reference date while the IPOs are subject to the same criteria but as of the close of their first day of trading.
The S&P U.S. Activist Interest index measures the performance of U.S. domiciled companies that have been targeted by activist investors within the last 24 months. It is an equal-weighted index based on the S&P U.S. BMI. Companies subjected to an activist investor campaign as determined by SEC Form 13D filings are added to the Index, at each monthly balancing, and remain in the Index for a maximum of 24 months.
“Boards of American companies have become more active in pursuing spinoff opportunities and merger activity,” says Vinit Srivastava, Senior Director of Strategy Indices at S&P Dow Jones Indices. “Historically, spin-offs, IPOs and firms targeted by activist investors have generally outperformed the broad market as they uncover value and increase efficiencies. These three new indices, in addition to our existing S&P Merger Arbitrage Index, provide investors sophisticated and transparent benchmarks that reflect how these significant events impact a company’s performance.”
CC-BY-SA-2.0, FlickrPhoto: Wilson Hui. Global Divergence
No one talks about decoupling anymore. It is one of those pieces of vocabulary associated with 2008 and the hope that emerging market fundamentals would insulate those economies from what turned out to be the greatest recession since the Great Depression. That hope was not entirely misplaced, of course, says Alex Johnson, Head of Absolute Return Fixed Income at BNP Paribas IP.
Exhibit 1 below shows, first, Chinese GDP on a year-on-year basis (the green line). While during the Great Financial Crisis in 2008 -2009 Chinese GDP was nearly halved—and Chinese equities performed dismally—there was a sharp rebound on the back of enormous fiscal stimulus. Now BNP Paribas IP may be seeing its inverse, and that is best illustrated by the other line (the blue line) on the chart, the Shanghai Stock Exchange Composite Index, down 8.5% on Monday, July 27, alone.
Some commentators have suggested that this does not really matter. Exhibit 1 illustrates the rationale to their thinking: year-to-date, the index has gained 15.18% (to July 27), and the one-year gain is over 75%. While the highs were higher, the averages are looking good.
“There is a degree of merit to this argument. The Shanghai Composite has never been a bellwether of the Chinese economy in the sense that the S&P 500 might be said to be for the US. It exhibits no meaningful correlation with GDP, and it has not been a vehicle for significant retirement planning”, poin out Johnson. The A-share market is not easily available to overseas investors, and the price movements are driven almost entirely by domestic flows, limiting contagion.
Johnson believes there are serious flaws in this view. First, he says, the composition of the investor base has changed even this year, with more and more small retail investors participating in the market ‑ and thus suffering losses. Many of these investors blame the central government, which they have accused of encouraging them to invest in the first place. There is some truth to this, unfortunately. To pick one example, Bloomberg Business cited the Xinhua News Agency in September 2014, which ran eight articles in that week alone advocating buying equities, and the futures exchange cut margin requirements in that same week. Buying shares on margin is common: such financing exceeds CNY2 trillion (US$322 billion).
Recognising this, Chinese authorities have already put in place controls, including preventing shareholders holding more than 5% of a stock from selling for six months, and they have begun purchasing stock outright. The track record for controls such as this is unedifying. There are broader issues, too. The Chinese government maintains its legitimacy on the basis of improving living standards and good custodianship of the economy, and the suggestion that there are developments beyond its control could be damaging and lead to unpredictable outcomes. There is also a wealth effect, and we can expect a reduction in consumption commensurate with the shock.
“We are seeing some effects already. Oil has sunk to new recent lows of under US$48 per barrel. While that will be at least partly related to the lifting of Iranian sanctions, other commodities are reacting similarly. This puts direct pressure on many emerging market commodity exporters ‑ and some not-so-emerging-markets, such as Australia and Canada, and their currencies”, explains BNP Paribas IP expert.
However, says Johnson, in Europe and the US, the picture seems different. Germany released its monthly Ifo survey, with all three components—business climate, current assessment, and expectations—beating expectations. That is in line with the ZEW survey released two weeks ago and a raft of other data, including the stock market up over 13% year-to-date; France’s has gained almost 16%, and Spain’s 21%. Now that Greece is, temporarily at least, behind us, the world’s largest and wealthiest trade grouping has defied all of last year’s gloomy prognostications.
The US picture is less positive. The earnings season in particular has not hit the high notes of previous quarters, with IBM notably pointing to China. Data is generally strong: initial jobless claims were the lowest for 42 years, and housing data has also been particularly robust. “What remains elusive is evidence beyond the merely anecdotal of wage growth. In addition, a leak of confidential staff forecasts used during the June 17 Federal Open Market Committee (FOMC) meeting showed staffers had lower expectations for the path of federal funds than the Committee does itself. At the margin, this may lengthen the odds of a hike in September – and events in China are not helping either”, sumamarizes.
. Deutsche Asset & Wealth Management Hires Nick Angilletta to Lead Wealth Management Capital Markets Business
Deutsche Asset & Wealth Management (Deutsche AWM) announced that Nicholas Angilletta has joined the Bank as a Managing Director and the Head of Wealth Management Capital Markets in the Americas.
In this new role, he is responsible for managing the trading activities of Deutsche AWM’s Wealth Management Capital Markets business in the Americas. Based in New York, Angilletta reports directly to Yves Dermaux, the Head of the Solutions & Trading Group for Deutsche AWM, and regionally to Jerry Miller, Head of Deutsche AWM in the Americas.
“We are excited Nick has joined our team, as he has extensive experience leading capital markets teams, delivering product solutions, and deepening client relationships,” said Dermaux. “His experience will play a critical role as we look to evolve our wealth management capital markets business in the Americas.”
Angilletta is a 25-year veteran in the financial services industry, focusing his entire career in the wealth management capital markets space at Morgan Stanley. Most recently, as a Managing Director and the Director of Capital Markets and Consulting Group Sales Strategy. Previously, he held various positions at the firm including Head of Sales for Morgan Stanley Wealth Management’s Global Investment Solutions and Asset Management Business and Head of Smith Barney’s Private Client Sales and Trading desks.
“As we continue to expand Deutsche AWM’s presence in the Americas, we must further enhance our capital markets business on both the asset and wealth management sides of the business to anticipate the needs of our clients and capture greater market share in this important growth region,” said Miller.
. Global Dividends Fall in Q2 as The US Dollar Soars In Value, But Underlying Growth Is Strong
Global dividends fell 6.7% year on year in the second quarter to $404.9bn, a decline of $29.1bn according to the latest Henderson Global Dividend Index. This is the third consecutive quarter of declines, mainly owing to the strength of the US dollar against major world currencies.
The euro, yen and Australian dollar were all a fifth weaker year on year and sterling was down a tenth. The rising dollar knocked a record $52.2bn off the value of dividends paid during the quarter. The HGDI ended the second quarter at 155.1, down 4% from the 161.5 peak in September last year.
Underlying growth, however, which strips out exchange rate movements, special dividends, index changes and changes in the timing of payments, was an encouraging 8.9%.
Q2 is dominated by Europe ex-UK, so trends in that region characterise the global results this quarter, and largely explain the weak headline global growth figure. Two thirds of Europe’s dividends are paid in the period and these fell 14.3% on a headline basis (to $133.7bn), a drop of $22.3bn, with most countries seeing double digit declines. This was almost entirely due to the sharply lower euro against the US dollar. The negative exchange rate effect was a record $29.5bn in the quarter.
Underlying growth was 8.6%, an impressive result for the region with Italy, the Netherlands and Belgium enjoying the highest underlying growth, boosted by a strong performance from financials. Indeed, the region’s financials as a whole significantly increased their payouts, led by Allianz in Germany, which is raising its payout ratio.
This encouraging performance from the sector is part of a growing trend around the world. Danish shipping conglomerate Moller Maersk paid a very large special dividend, while France, the region’s largest payer, saw a slowdown (underlying growth was 2.3%, headline was -20.2%), with weakness at Orange and GDF Suez affecting growth there. German dividends fell 16.0% to $29.9bn, but were 6.6% higher on an underlying basis, with a similar result in Spain (-24.4% headline, +6.0% underlying). In Switzerland, headline dividends fell 2.4% to $17.0bn, owing to a weaker Swiss franc. They rose 5.9% on an underlying basis, with a large increase at UBS contributing to the improvement in European financial dividends.
Once again, US companies grew their dividends rapidly, with almost every sector increasing payouts. Here too, financials showed rapid growth, with Bank of America and Citigroup quintupling their distribution. Overall headline growth was 10.0%, taking the total to $98.6bn, and the US HGDI to a record 186.0. This strong performance marked the sixth consecutive quarter of double digit increases. Underlying growth was a similarly strong 9.3%.
Q2 is also an important quarter for Japan, accounting for almost half the annual total. Headline dividends fell 7.1%, but underlying growth was very impressive, up 16.8% to $23.4bn, as rising profits combined with higher payout ratios to drive dividends higher. Japanese companies are responding to calls from investors and the government to increase the proportion of their profits they return to shareholders (from a very low base compared to other developed markets). South Korea is among other countries seeing the same pressures, and that helped push South Korean dividends higher by 37.4% on an underlying basis year on year, with large increases from Samsung Electronics among others.
Though technology dividends rose fastest, in line with a long running trend, financial dividends grew 0.3% at a headline level year on year, far outperforming the 6.7% global headline decline, and indicating rapid underlying growth. Financials account for roughly a quarter of annual global dividends, so improvements to dividend payments in this industry can make a real difference to income investors.
With underlying growth so encouraging, Henderson has upgraded its forecast for 2015 by $29bn. It now expects global dividends of $1.16 trillion this year, which is down 1.2% at a headline level, but up 7.8% on an underlying basis. The strength of the US dollar against all major currencies explains the marginal headline decline.
Alex Crooke, Head of Global Equity Income at Henderson Global Investors said: “Though the headline decline seems disappointing, it is concealing very positive underlying increases in dividends. The strength of the US dollar had a significant impact again this quarter but our research shows that the effect of currency movements even out over time and investors adopting a longer term approach should largely disregard them. At the sector level, it is encouraging to see increases from financial companies as they start to slowly move towards higher payout levels. But this is less about a renewed boom to financial payouts and more about a gradual return to normality.
“This means a dividend paying culture is extending into new markets, beyond those where paying an income to equity investors is already deeply entrenched, highlighting the increasing income opportunities available to investors who adopt a global approach”, said.
China’s desperate efforts to enhance its competitiveness are putting a lot of pressure on its Asian neighbours. This is why currencies in the region are tumbling: the South Korean won, the Australian dollar, the Thai baht and the Taiwanese dollar have all, amongst others, fallen sharply against the greenback, said Patrice Gautry, Chief Economist at UBP.
“Once again we find ourselves facing a deflationary shock. China is a heavyweight in international trade and, whilst we do not expect a repeat of the 1997 crisis, the rest of the global economy was much more vibrant back then, and the only country not to devalue its currency was China itself. Nowadays, in a world where demand is already sluggish, these beggar-thy-neighbour policies could have a lasting impact on growth and earnings”, says UBP.
“For the last two years we have not recommended holding or buying bonds in local EM currencies; this has also been true for yuan-denominated securities. We recommend continuing to have no exposure to these securities”, the experts add.
They remain highly cautious on EM equities, as what they have outlined above is going to have a negative impact on margins, earnings and cash flows. “EM equities will continue to underperform, so we recommend staying markedly underweight, as it is too early to go back into them”.
And the impact in DM?
“We have to assess the impact on developed equity markets of this reversal of policy in China. Might it shift when the Fed starts to normalise its monetary policy? For now, we do not know, although it will undoubtedly weigh on import prices and consequently on inflation figures. Central banks are on alert, ready to provide more liquidity should the markets and risk assets come under too much pressure. Nevertheless we recommend maintaining equity and risk-asset allocations at the levels recommended by the Investment Committee, but no higher than that”. Developed equity markets are still on an upward trend, but their momentum is weakening.
Context
China’s move to weaken its currency on Tuesday morning came as a surprise. The size of this first devaluation may appear insignificant, but it represents a u-turn in the country’s currency policy. The dollar peg was seen as a tool to attract foreign investment – luring it in with a stable currency – but it also helped the yuan to gain the status of a reserve currency; it went on to form part of central banks’ forex reserves around the world.
“Growth is slowing down quickly in China”, according to Gautry “The Chinese government was hoping to kick-start domestic consumption thanks to a vibrant stock market, which translated into wealth effects for Chinese households. With the recent crash and the panicked official reaction to counter it, these hopes have been dashed. The fall in commodity prices around the world (these are currently at their lowest levels in twelve years) is undoubtedly linked to recent events in China, where much slower economic growth has meant lower demand for commodities in general”.
The only option left was to boost exports – which fell sharply recently – by devaluing its currency. Recently, the yuan has been under pressure and, in order to maintain its peg, the PBoC had to sell dollars, which explains why its domestic reserves have fallen significantly since the beginning of the year. Weakening the currency could be seen as a cheap way to boost exports, but that signal will push many investors and corporations to sell even more yuan, making it harder for the PBoC to oversee a steady depreciation of the yuan.
Bolsa de París. Foto: Francisco J.González, Flickr, Creative Commons. Una consolidación temporal que no afecta al potencial alcista de las acciones europeas
China’s Central Bank has taken steps to devalue the renminbi. The initial direct impact on eurozone equities is fairly limited but certain sectors and companies have more pronounced exposure.According to Martin Skanberg, European Equities Fund Manager at Schroders, debate has raged surrounding the rationale behind China’s currency devaluation. One interpretation puts this week’s moves down to political considerations, with China seeking to create a more market-driven exchange rate that would allow its currency to gain admission to the IMF’s Special Drawing Rights basket -an international reserve asset, created by the IMF, which member countries can use to supplement their official reserves-.
“Nonetheless, markets have focused on the possibility of further steep declines in the renminbi, and we are mindful that the change in Chinese monetary policy may also be indicative of weaker fundamentals and the deteriorating health of the economy. Slowing GDP growth is backed up by anecdotal company feedback which points to a considerable contraction in Chinese trade data, with export and import levels both meaningfully lower. As a result, global risk premia may need to adjust higher to reflect lower global growth. This could see an acceleration of emerging market stress which is likely to continue to have a negative impact on commodities and energy prices”.
Risk of deflationary pressure
One consequence is that we may see deflationary pressures re-emerge. These are also in evidence from lower factory gate prices (producer price index) in China which are currently at -5% year on year. Emerging market contagion, currency wars and the potential for spill over into the Asia Pacific basin represent a wider risk to European equities. A more pronounced period of competitive devaluations cannot be entirely ruled out as the renminbi is generally regarded to be some 5-10% overvalued against the dollar, but the gap is much more considerable against other emerging market currencies, says the expert.
On the other hand, another scenario is that imported deflationary pressure into the eurozone and adjacent economies such as the UK could lead the European Central Bank to extend its quantitative easing policy. This would likely be supportive for sentiment towards eurozone equities. Additionally, the risk of an extreme devaluation would be nullified if the authorities’ intention is simply to create a more flexible exchange rate.
Eurozone exposure to China is moderate
Around 6% of total eurozone exports go to China, with some 10% of the region’s imports coming from China (source: Citibank). While this is not immaterial, the overall level is fairly moderate and highlights the fact that domestic intra-eurozone trade is far more important to eurozone GDP. Further currency devaluations would act as a headwind to export pricing, but cheaper imports may offset this and support domestic consumption in the eurozone.
“Moreover, we need to ensure that perspective is retained over the Chinese devaluation. Given the euro’s weakness against the dollar over the past year, the euro has in fact depreciated by c.2% against the renminbi over the last 12 months and is nearly 9% weaker over the past two years. Consequently, eurozone exporters are still enjoying currency tailwinds at current levels”.
“In terms of eurozone equity exposure, detailed data is limited. It is estimated that c.12% of market cap weighted sales (for Eurostoxx 50 companies) go to the Asia Pacific region, with only 2% going directly to China. We should note that these figures capture only direct sales, and do not fully reflect value added domestic sales that may ultimately become China exports. However we would estimate the exposure to earnings to be slightly higher, approximately 6%. Once again, this demonstrates the reliance on domestic European trade (c.59%). Hence we anticipate only a moderate impact from the foreign exchange move on the wider eurozone markets”.
Luxury goods and autos among the most affected sectors
That said, within this there are sectors and companies that have significant exposure. These include sectors such as luxury goods, technology, automotive, capital goods and materials (mining and chemicals in particular). “For these, translated profits will be impacted but it is also possible that competitive transactional disadvantages may emerge due to revitalised competition (for example, this could impact some industrial and chemical companies which face strong Chinese competition)”.
According to the fund manager, whilst the dispersion is wide across the eurozone, there are many domestic industries that have by definition limited or no direct exposure including banks, insurance, travel, media, utilities and telecom services to name but a few.
Domestic eurozone exposure is preferred
“In terms of our positioning, we have a clear preference for stocks with eurozone exposure, including banks, which have improving momentum amidst the domestic recovery. Meanwhile, consumer resilience in the eurozone is well underpinned thanks to the stimulus offered by low or negative interest rates, cheap oil, rising bank credit impulse and pent-up demand from the recovery of peripheral Europe. By contrast, we have limited exposure to luxury goods and automotives which should prove beneficial if these sectors continue to lag the wider market.
As ever, we remain on the lookout for mispriced opportunities, and future foreign exchange induced stockmarket volatility may well lead to exaggerated movements which can be exploited by active managers”.
Foto: Jonathan, Flickr, Creative Commons. Julius Baer nombra a Jimmy Lee nuevo responsable para Asia Pacífico
Jimmy Lee will join Julius Baer on 1 October 2015 to become Head Asia Pacific and a member of Bank Julius Baer’s Executive Board with effect from 1 January 2016. In the past 25 years, Jimmy Lee has had a proven track record in the private banking industry in Asia and thus brings a wealth of expertise to Julius Baer.
Having worked at Credit Suisse Group for a total of eleven years, he was most recently Market Group Head Hong Kong at Credit Suisse. Previously, he acted as Chief Executive Officer Asia of Clariden Leu from 2009 to 2012 and headed the integration of the bank into Credit Suisse in the Asia Pacific region in 2012/13. Prior to that, Jimmy Lee was Head Private Wealth Management Southeast Asia / South Asia at Deutsche Bank for five years and also held a number of other top management positions in the financial industry in Asia.
After successfully building up and leading Julius Baer’s business in Asia Pacific for ten years and managing the seamless integration of Merrill Lynch’s International Wealth Management business (IWM) into the Bank’s local operations, Dr Thomas R. Meier, current Region Head Asia Pacific, has expressed the wish to return to Switzerland to continue his distinguished career at the Group’s headquarters. As of 1 January 2016, he will be non-executive Vice Chairman Wealth Management, reporting to Chief Executive Officer Boris F.J. Collardi. As part of this new role, he will take over various key tasks at the Group level.
Boris F.J. Collardi, Chief Executive Officer of Julius Baer, commented: “I am very pleased that we have been able to win Jimmy Lee and warmly welcome him to Julius Baer. With Jimmy’s vast experience and his extensive network, we will launch the next phase of growth and take our presence in Asia to the next level.”
Boris F.J. Collardi added: “In the past ten years, Tom Meier has led our operations in Asia Pacific from modest beginnings to being one of the major players in this most important growth market today. I would like to thank him for this truly extraordinary achievement. In his new role as non-executive Vice Chairman, we can continue to draw on Tom’s vast and valuable private banking knowledge.”
Today, Asia is Julius Baer’s second home market with nearly a quarter of the Group’s assets under management globally. After the successful integration of the IWM business in 2014, Julius Baer is now one of the leading international wealth managers in the region.
