Serbia: Now, It’s All About Walking the Talk!

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Emergentes: Serbia sienta las bases para volver al crecimiento
CC-BY-SA-2.0, FlickrPhoto: Pedro Layant. Serbia: Now, It’s All About Walking the Talk!

In February 2015, Global Evolution visited Serbia for an extensive due diligence. Significant fiscal disappointments over the last year were recently reversed with prudent fiscal policy reforms in the context of a new IMF program.

However, the persistent recession and the unappealing business climate were key worries that Global Evolution addressed during the trip. It is now all about walking the talk – i.e. actually implementing the plan; with institutional capacity constraints being the main worry for the team!

Ahead of the trip, the investment management team conducted in-depth review of the Serbian economy through video- conference with the World Bank Mission Chief; and a pre-trip Debt Sustainability Analysis (DSA) was prepared to generate preliminary guidance to its investment process. During the trip the experts of the firm met with the National bank of Serbia, EBRD, Ministry of Finance, the Fiscal Council and the World Bank.

Fiscal anchor established with IMF precautionary program

Serbia is facing serious fiscal imbalances, and protracted structural challenges. The new government appointed in 2014 has a window of opportunity to address these issues, with support from a new IMF program. Strong fiscal consolidation over the program period – largely based on curbing mandatory spending and reducing state aid to state-owned enterprises (SOEs) – is needed to put public debt on a downward path.

In terms of program modalities, the IMF program supports the authorities’ medium-term policy goals to restore fiscal sustainability, bolster growth, and boost financial sector resilience by providing a precautionary 36-month Stand-By Arrangement with access of €1,122 million.
 

“We concur with the Serbian authorities and the IMF that the program will underpin Serbia’s resilience against adverse shocks that could give rise to a balance of payments need. The program structure is based on fiscal, monetary, financial sector, and structural reform pillars”, wrote Global Evolution in its reserch.

“The nominal reductions already legislated on – and budgeted with – with regard to wage levels and structures and pensions reforms combined with the real reduction coming from natural downsizing of the public sector labor force is likely to generate the required fiscal consolidation and we expect the government to strenuously follow this track of fiscal pain. It is now all about implementation which is challenged!”, continued the analisys.

The debt sustainability issue is also key for Serbia and the few- days-old IMF DSA reveals a flattening of the debt/GDP trajectory by 2016-2017 after which numbers start slowly improving. The debt/GDP ratio peaks in 2018 at 78.4% – a level that we see being rather optimistic.

“We believe that the number will exceed 80% and that the downward turn in the trajectory will last more than just to the end of 2016; rather we expect two more years of program implementation time for the consolidation process to be completed due to weak institutional capacity. But we categorize the degree of debt sustainability as Moderate since no dire threat to sustainability is present despite elevated levels”, point out Ole Hagen Jorgensen, research director at Global Evolution.

The lack of institutional capacity is, in our view, a key obstacle to implementing the fiscal consolidation and structural reform program. With a reduction in the quantity of public sector human resources, an uplift in the quality should compensate. This is likely to be a very slow process, but the World Bank is supporting the Government with Development Policy Loans (DPLs) to enhance wide-spread public sector management practices”, said Jorgensen.

In addition, loans have been granted but not disbursed due to severe institutional shortcomings – leading to no implementation of projects and, thus, no disbursements of already approved loans with the World Bank. For example, approximately $1bn in infrastructure financing was signed off by the World Bank, but only 8 km of highway was built so very little was disbursed; the rest was missed out on.

This is a general tendency with public sector projects and a key worry for the team- a development we will follow closely as the IMF program unfolds; thus the title of this.

Structural reform key for economic and fiscal efficiency

Broad-based structural reforms, notably to improve the business environment and resolve loss-making SOEs, should foster Serbia’s medium-term growth potential and reduce fiscal risks. There are 502 SOEs to privatize/restructure with 118 filing for bankruptcy.

“As a consequence, our view on Serbia’s outlook is that the coming 2-3 years will entail a process for paving the way for growth by fiscal and structural reform that enables growth. This will provide a platform from which growth can take off over the medium term—though expectedly not over the short term”, conclude the research.

Global Evolution, an asset management firm specialized in emerging and frontier markets debt, is represented by Capital Stragtegies in the Americas Region.

Man GLG Launches European Mid-Cap Strategy for Moni Sternbach

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Man GLG lanza una estrategia de renta variable mid-cap europea gestionada por Moni Sternbach
Photo: Giuseppe Milo. Man GLG Launches European Mid-Cap Strategy for Moni Sternbach

Man GLG, the discretionary investment management business of Man Group, is pleased to announce the launch of a new UCITS compliant fund, Man GLG European Mid-Cap Equity Alternative fund.

The Fund will be domiciled in Ireland and managed by GLG Partners LP. The portfolio manager is Moni Sternbach, who joined Man GLG from Cheyne Capital in January 2015. It will seek to provide attractive risk-adjusted returns through both long and short investments primarily in European securities with a market capitalisation of €500m to €10bn.

Moni Sternbach, a mid-cap specialist, joined Man GLG after almost three years as lead manager of the Cheyne European Mid Cap Long/Short strategies. Prior to Cheyne, Sternbach was head of European smaller companies at Gartmore Investment Management, where he worked from 2002 to 2011.

The Fund will seek to deliver returns through stock selection and active portfolio management driven by meeting management teams and undertaking rigorous research. Research forms the bedrock of the investment process, and will leverage the expertise within the GLG business.

Man GLG’s co-CEO Teun Johnston said: “Moni is a very experienced portfolio manager who has been investing in this segment of the European market since 2002. We believe that his expertise, combined with our robust infrastructure, will create a compelling proposition at a time when the asset class has become more inefficient and the wide dispersion of returns has created opportunities for stock pickers.”

Moni Sternbach said: “The new strategy fits very well within the Man GLG investment framework and offers significant synergies with the European stock picking team and its sector specialists. We believe the European mid-cap equity market segment has become an increasingly compelling asset class for stock pickers due to poor and worsening sell-side analyst coverage, which provides the potential for us to generate attractive risk-adjusted returns for investors.”

A European Tactic Could Help Improve U.S. Market Liquidity

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When liquidity in a market dries up, it can contribute to financial disruptions such as the Flash Crash of 2010, when the Dow Jones dropped almost 1,000 points in a matter of minutes.

Traditional thinking has been that natural market forces create enough liquidity to keep markets moving, but an interesting tactic some European companies use caught the attention of Dr. Hendrik Bessembinder, an A. Blaine Huntsman Chaired Presidential Professor in the David Eccles School of Business Finance Department at the University of Utah.

In some European countries, companies will hire what’s called a Designated Market Maker to improve liquidity. Bessembinder detailed his findings in the paper he co-wrote, “Market Making Contracts, Firm Value, and the IPO Decision,” which has been accepted for publication in the Journal of Finance.

“We sat down to do some mathematical modeling of the economics of these markets, and found that indeed there is reason to think that competitive market forces don’t provide as much liquidity as the markets actually need and could benefit from,” Bessembinder said. “In other words, a contract where somebody is hired to improve liquidity can make sense and improve a company’s value by more than what the designated market makers need to be paid.”

Congress is working to improve liquidity through a pilot program that will increase the tick size of certain small stocks from a penny to a nickel to see if that will increase liquidity. The goal of the pilot program is to encourage IPOs.

“Our model and our study actually lead us to be skeptical that this will be an effective mechanism for enhancing IPOs. In fact, our model says that a designated market contract which is intended to decrease the bid-ask spread can enhance IPOs by improving liquidity and encouraging investors to pay more for shares in an IPO,” Bessembinder said. “The U.S. Securities and Exchange Commission is going to implement the pilot program where they widen the bid-ask spread. So, it will be of great interest to see if this in fact improves the liquidity of the stocks.”

Bessembinder thinks DMMs could work in U.S. stock markets, but FINRA Rule 5250 expressly prohibits the use of DMMs.

“We actually think that the situation would be improved if the FINRA rule would be repealed to allow firms to have designated market makers in order to improve liquidity,” Bessembinder said.

Investors Should Prepare for Fed Rate Hike

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Uncertainty about the timing of a U.S. Federal Reserve rate hike continues to intensify. But, warns a leading global analyst at one of the world’s largest financial advisory organizations, investors should start preparing now for when the inevitable rise comes – and there are three key approaches to consider.

The warning from Tom Elliott, International Investment Strategist at deVere Group, follows Minneapolis Fed President Narayana Kocherlakota on Tuesday setting out his case for waiting until the second half of 2016 to start raising interest rates. This is contrary to the opinion of most Fed Policymakers, including the Fed Chair Janet Yellen, who believes that rates will need to start rising this year.

Mr Elliott explains: “Currently, the situation regarding when the Fed might move away from its zero rates policy of the last six years, is as clear as mud. However, when, finally, the Fed does start to raise interest rates the impact on capital markets could be severe. Therefore, investors who are, understandably, uncertain, should start preparing for this.  I would advise investors to consider three steps.”

He continues: “First, find a multi-asset benchmark that you trust will deliver solid risk-adjusted returns throughout the business cycle. It maybe a 60 per cent global equity, 40 per cent global fixed income portfolio or a variation of that. Having such a benchmark should be a part of your long-term investment strategy.”

Second, refuse to take active positions in what looks like a difficult investment environment.  Hog the benchmark.  Sitting on the fence is better than being caught on the wrong side of a central bank decision.  Rebalance quarterly, forcing yourself to cash in winners and to buy losers. This discipline will protect you from rash decision making during periods of market volatility.

Third, wait until the Fed has begun tightening monetary policy before returning to active bets.”

Mr Elliott adds: “Finally, if the need to take active positions is too strong to resist, I do think that Europe, excluding the UK, and Japan will continue to outperform. Europe, because of improved economic growth and the weak euro; and Japan because of rapidly improving corporate governance that is resulting in dividend and return on equity growth. It could be worth considering balancing this position with an underweight in U.S. large cap and emerging equities.”

EM Growth to Bottom Out in Second Half, NN Investment Partners Says

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El crecimiento de los mercados emergentes tocará fondo en la segunda mitad del año, dice ING IM
Photo: Institution for Money, Technology and Financial inclusion. EM Growth to Bottom Out in Second Half, NN Investment Partners Says

After five years of growth adjustment, the risks within the emerging markets start to look more balanced, according to Maarten-Jan Bakkum, Senior Emerging Market Strategist at  NN Investment Partners (former ING IM)

Global headwinds and obstacles to growth remain, but are not getting worse. Without an accident in China, emerging market growth should bottom in Q3 or Q4. China demand slowdown is structural and continues to put pressure on the emerging markets in terms of trade, but a correction in the housing market is slowing and monetary easing has started. US monetary policy normalisation continues to put pressure on EM capital flows, but ECB QE has refuelled the global search for yield. In this context, EM central banks see room to cut interest rates.

Maarten-Jan Bakkum, Senior Emerging Market Strategist at NN IP, said: “Rapid leverage growth has created macro imbalances and system vulnerabilities, pushing policy makers into action in some countries, including: Indonesia, South Africa and Brazil. Policymakers in Indonesia in particular, stood out. Reducing macro imbalances within the country with the central bank remaining relatively prudent and president Joko Widodo’s government removing fuel subsidies and thereby creating fiscal room for infrastructure investments.”

Also, South Africa has shown better growth momentum, strong earnings growth, improving terms of trade, and the government has shown more fiscal discipline.

Bakkum continues: “Other areas that are currently showing promise, include Mexico. Mexico is one of the few markets with a positive growth momentum. Its large exposure to the US and low sensitivity to China are key positive factors making this an overweight for us.”

ING IM believes that strong earnings momentum and solid capital inflows are the main reasons to like the Philippines at the moment. Reforms and more policy discipline continue to have a positive impact on growth prospects of India, where the lower oil price helps too. Also, better economic governance and lower political risk have helped Egypt’s growth to recover to pre-2011 levels.

Easier financial conditions can compensate temporarily for the lack of structural change but EM currencies remain vulnerable. More depreciation is likely to be needed to enforce the reforms that reduce macro imbalances and create engines of future growth.

Aberdeen AM: “It is Becoming Important to Reconsider the Fact of Not Having any Exposure to Japanese Equities”

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Aberdeen AM: “Empieza a ser importante replantearse el no tener nada de exposición a Japón”
Over 30 professional investors attended Aberdeen Asset Management’s presentation on Asian Equities in Miami. Aberdeen AM: "It is Becoming Important to Reconsider the Fact of Not Having any Exposure to Japanese Equities"

Over 30 professional investors attended Aberdeen Asset Management’s presentation on Asian Equities in Miami last month. Adrian Lim, CFA and senior investment manager for the management company, shared his views on the effect of US rates and the evolution of the US dollar over Asian equity assets, as well as the impact of falling oil prices and the effectiveness of reforms. During the event, the management company submitted its equity strategies for the Asia Pacific region and Japan. Following the presentation, attendees enjoyed a cocktail on the terrace of one of the most emblematic buildings in Downtown Miami, the heart of its financial center.

China vs Hong Kong

Aberdeen AM is known as a stock picking management company. Therefore, Lim maintains that “quality is the first thing we look for when selecting an asset.” One example that epitomizes this philosophy is that Aberdeen’s Asia Pacific strategy portfolio has a debt to equity ratio that is half of that recorded by its benchmark. As well as focusing on asset quality, Aberdeen looks for companies with attractive valuations to create concentrated portfolios (the Asia Pacific strategy portfolio currently has about 55 assets), in which stability is the main priority. “Of the Top 10 holdings on our portfolio, six have been in the portfolio for over 10 years,” Lim points out.

In this strategy, which does not include Japan, Aberdeen now has an overall weight in China and Hong Kong similar to its benchmark. Separately, however, exposure to Hong Kong is higher than the index, while exposure to continental China is lower. Lim again stressed the importance of quality when selecting stocks: “Chinese companies are generally of lower quality, Chinese rule of law is less strict, and there has been cheap access to capital in China for many years, and therefore companies have not had to focus too much on getting a good return on their business; they have become very large, but really not too profitable.”

Citing a Korean cellular phone manufacturer as an example, with very strong exposure in the cell phone market in China, Lim also adds that “it is not necessary to invest in shares listed in China to access Chinese domestic consumption.”

A Look at the Japanese Market

When talking about Japan, Lim says that “talking to an investor who has spent 20 years investing in Japan, and who, fed up with not profiting from their investment, most likely left the market at the beginning of this last rally, is not the same as talking to someone who has been investing in Japan only during the last three years, and who, therefore, has had a much better experience.”

Can we believe that it will be different this time? According to Lim, Shinzo Abe has been in power longer than most recent governments. “His commitment to introduce inflation in the economy is tremendous, and even if its not very popular with the Japanese population, he has managed to get reelected and to push a number of reforms, although he still has a long way to go.” In any case, as pointed out by the Senior Investment Manager, “it is becoming important to reconsider the fact of not having any exposure to Japanese equities.”

Even though the environment in Japan is currently more positive, we mustn’t forget that we are talking about an economy whose growth remains weak, and so “we choose exporter stocks such large tobacco or automotive manufacturers, whose behavior does not depend on domestic consumption, or companies selling components and materials to Japanese companies whose final market is an exporter, so that ultimately the demand comes from outside,” says Lim.

In terms of valuation, Lim points out that we have to take into consideration that we are talking about a developed market with high multiples, although not as high as those in Europe or the US.

India, an Emerging Market in its Purest Form

When talking about India, Lim explains that it is the purest example of an emerging market in the region. “It’s a challenging market, but at the same time, very subjective, with much ‘noise’ for the investor,” he says. According to Lim, the Modi government has been the best for the country in recent years, but you cannot ignore the fact that the Indian economy is slowing down, “and Modi cannot do much to prevent it; we cannot expect Modi to work an economic miracle for the whole of India such as the one he orchestrated in the state of Gujarat, of which he was governor before being elected as Prime Minister.” In such a market, it is particularly important to be a good stock picker: “If in Japan we are more inclined towards exporting assets, stock selection in India is purely directed towards the domestic consumer market,” says Lim.

Amanda Augustine Joins BBVA Compass Research Team

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Amanda Augustine Joins BBVA Compass Research Team
CC-BY-SA-2.0, FlickrFoto: Moyan Brenn. Amanda Augustine se incorpora al equipo de análisis de BBVA Compass

Amanda Augustine has joined the BBVA Compass economic research team, led by the chief economist Nathaniel Karp. The bank’s six-member research team analyzes the U.S. economy and Federal Reserve monetary policy. The economic research team also follows a variety of issues that affect the Sunbelt states where BBVA Compass operates.

Before joining the bank, Augustine worked as a project manager at consulting firm American World Services Corp. in Washington, D.C., focusing on the health care sector.

“We are pleased to have Amanda join us as her expertise on health care will add depth on a topic that’s so important to our economy,” said Nathaniel Karp, chief economist for BBVA Compass.

Augustine earned her MBA from the IESE Business School in Barcelona, Spain, and a bachelor’s degree in business administration and Spanish from American University in Washington, D.C.

Global ETP Flows of $36.1bn in March Ensured that 2015 Began With the Best Opening Quarter on Record

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Los flujos globales de ETP sumaron 36.100 millones de dólares en marzo, consolidando el mejor trimestre de la historia
Photo: Bert Kaufmann. Global ETP Flows of $36.1bn in March Ensured that 2015 Began With the Best Opening Quarter on Record

Global ETFs gathered $36.1bn in March to lift Q1 flows to $97.2bn, nearly triple the total from Q1 2014. The figures came largely from investor demand for non- U.S. equities, whereas the all-time high of $138.0bn from Q4 2014 was concentrated in U.S. equities. This demonstrates the ability of the ETP industry to respond quickly to changing market conditions while maintaining strong growth. Only one other quarter outside of the past two has ever topped asset gathering of $100bn, showed BlackRock ETP Research.

March was driven by accelerating non-U.S. developed markets equity flows of $32.6bn, nearly as much as the prior two months combined. Year-to-date flows of $71.0bn have almost reached the full-year total from 2014, spurred on by attractive valuations in Europe and Japan relative to the U.S. The divergence of increasingly accommodative ECB and Bank of Japan monetary policy with that of the Fed has also been a key factor.

Flows for Europe and Japan, as well as broad developed markets (EAFE), have benefitted significantly from currency-hedged equity funds, which had a record month gathering $13.4bn. This trend is expected to persist. The consensus is the U.S. dollar is in the midst of a strengthening cycle and these cycles have historically lasted for six to seven years.
 

Europe equity established a new monthly high of $14.8bn. While pan-European equities led with $13.4bn, German equities added $1.4bn and have already captured $4.8bn year-to-date.

Investors recognized attractive valuations in European equities following the announcement of the European Central Bank’s ambitious quantitative easing program, adding $36.5bn into pan-European ETFs in Q1. European-listed ETFs are close to reaching $500bn in assets, as investors from Europe, Asia and Latin America added $34.2bn of new flows in Q1, the best quarter ever for the European ETF industry”, said Amy Belew, global head of ETP research at BlackRock.

Japan equity brought in $8.3bn, the second highest monthly total ever. Flows were diversified across Japan-, U.S.- and Europe-listed funds. Japanese stocks retain upside even as the Nikkei 225 index approaches its highest level in 15 years. Corporate governance reforms have shown progress and pensions have announced further reallocation of assets to equities.
 

 

U.S. equity flows improved by $6.2bn in March, helped by the Fed indicating after its March meeting that though rates may soon rise, the pace could be slower than previously expected. It was the second consecutive month of inflows, but year-to-date redemptions are still ($8.4bn) due to the impact of large cap weakness during January.

Emerging markets equity outflows resumed, hitting ($7.3bn) after stabilizing briefly in February. Broad EM equity and China equity redemptions overwhelmed a thirteenth consecutive month of India equity inflows.

Fixed income flows stayed ahead of record pace for the year, but slowed to $4.3bn in March. Appetite for European fixed income remained healthy as the ECB began the bond buying program announced in January. Flows totaled $3.6bn across sovereign as well as high yield and investment grade corporate bonds.

U.S. fixed income, however, had modest outflows of ($0.2bn). Investment grade corporate and broad U.S. funds each gathered $1.1bn, but high yield corporate momentum from recent months stalled and U.S. Treasuries experienced outflows of ($3.2bn).

Worldwide Investment Fund Assets Reach All-Time High at EUR 28 Trillion in Q4

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Los activos de los fondos de inversión a nivel mundial se situaron en un nuevo máximo histórico a finales de 2014
Photo: Jeff Belmonte. Worldwide Investment Fund Assets Reach All-Time High at EUR 28 Trillion in Q4

The European Fund and Asset Management Association (EFAMA), has released its latest international statistical release containing the worldwide investment fund industry results for the fourth quarter of 2014 and the whole year 2014. 

Investment fund assets worldwide stood at a new all-time high of EUR 28.29 trillion at end 2014, reflecting growth of 3.9 percent during the fourth quarter and 18.9 percent since end 2013. In U.S. dollar terms, worldwide investment fund assets totalled US$ 34.35 trillion at end 2014

Worldwide net cash inflows increased in the fourth quarter to EUR 335 billion, up from EUR 290 billion in the third quarter, thanks to strong net inflows to worldwide money market funds.

Long-term funds (all funds excluding money market funds) recorded net inflows of EUR 220 billion during the fourth quarter, slightly down from the EUR 223 billion registered in the previous quarter.

  • Equity funds attracted net inflows of EUR 44 billion, up from EUR 24 billion in the third quarter.
  • Bond funds posted reduced net inflows of EUR 63 billion, down from EUR 79 billion in the previous quarter.
  • Balanced funds also registered reduced net sales of EUR 52 billion, down from EUR 72 billion in the third quarter.
  • Coincidently, long-term funds registered net inflows of EUR 68 billion in both the United States and Europe during the fourth quarter.
     

Money market funds registered net inflows of EUR 115 billion during the fourth quarter, compared to EUR 67 billion in the third quarter of 2014. This result is largely attributable to positive net sales recorded in the United States of EUR 98 billion, whereas Europe registered net outflows during the quarter of EUR 10 billion.

Overall in 2014, worldwide investment funds attracted net sales of EUR 1,169 billion, up from EUR 848 billion in 2013. Worldwide long-term funds registered net inflows of EUR 1,015 billion in 2014, as all categories of funds registered net inflows during the year. The United States recorded net inflows into long-term funds of EUR 302 billion, with Europe registering net inflows of EUR 471 billion.

At the end of 2014, assets of equity funds represented 40 percent and bond funds represented 22 percent of all investment fund assets worldwide. Of the remaining assets money market funds represented 13 percent and the asset share of balanced/mixed funds was 12 percent.

The market share of the ten largest countries/regions in the world market were the United States (51.2%), Europe (28.2%), Australia (4.7%), Brazil (4.4%), Canada (3.7%), Japan (3.1%), China (2.1%), Rep. of Korea (1.0%), South Africa (0.5%) and India (0.4%).

BancTrust Announces the Launch of its UK Trading Desk

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BancTrust Announces the Launch of its UK Trading Desk
Carlos Fuenmayor - Foto cedida. BancTrust abre mesa de trading en Reino Unido

BancTrust has annunced that its London-based subsidiary, BancTrust Securities (Europe), has received a Variation of Permissions notice from the Financial Conduct Authority to enable it to commence secondary trading. The firm will now be dealing as principal for Asset Managers and Financial Institutions mainly based in Europe and the Middle East interested in investing in Emerging Markets Fixed Income.

Carlos Fuenmayor, CEO of BancTrust & Co., stated: “I’m honored to say that our London office has now been granted permission to operate its trading desk and offer true market color as well as execution. Our specialists in Emerging Markets provide unequaled coverage as well as exceptional investment opportunities.”