CC-BY-SA-2.0, FlickrFoto: arvind grover. Los mercados frontera en Asia alcanzan su punto demográfico ideal
The age demographics of Asia’s frontier markets are another indicator that they are poised for growth. Over the long term, GDP growth rates are generally determined by increases in the size of the labor force, capital accumulation and technology. Measured by the increase in the labor force and the favorable age profile of their populations, the frontier markets are in a demographic sweet spot.
In Cambodia, Laos, the Philippines, Bangladesh and Pakistan, one person in five is between 15 and 24 years of age. The median age in these countries is 25 or under, compared to over 34 in Japan, South Korea, Thailand and China. If people hit their productive peak at around 40, the younger countries stand to see steady productivity gains over the next 20 years.
Between 2010 and 2020, the labor force is projected to grow the most in Laos (37%), Pakistan (35%), Cambodia (31%), Bangladesh (29%) and the Philippines (25%). In India and Vietnam, the labor force is expected to expand by 20%. In contrast, the labor force is projected to shrink in Japan and South Korea. Between an increased labor force and the potential for increased productivity, frontier countries may well outstrip their counterparts in GDP growth.
Favorable demographics alone, however, are not sufficient to drive growth. Countries must be able to gainfully employ people entering the workforce, which drives earnings, savings and investment. This is where capital accumulation comes into the equation. Strong institutions, infrastructure and foreign direct investment (FDI) policies must be in place for a country to accumulate capital, either through domestic savings or foreign investment. Large-scale job creation requires active labor market policies and vocational training. Frontier markets would do well to emulate some of the successes of their East Asian and more developed Southeast Asian peers.
Another effect of relative youth combined with labor force growth is the “remittance dividend.” When a frontier economy cannot fully employ its workforce, large numbers of workers migrate to countries with stronger economies. They then send money back home to help support their families, which helps stimulate the economies of their native countries. Indeed, in certain situations, remittance flows to frontier markets can contribute substantially to their economies, varying between 1% of GDP in Indonesia to about 11% of GDP in the Philippines and Bangladesh.
Overall, the “demographic dividend” is expected to add 1.5% to annual GDP growth in Vietnam, 1.1% in Pakistan and 1% in India between 2011 and 2020.
Foto: Robin Müller. Backing the Right Horse: Equities Set to Rise Further in 2014
Equities are set to rise further in 2014 after the world returns to normality, with higher global growth and the end of easy money in the US. These are the key predictions of Robeco’s Chief Economist Léon Cornelissen in his outlook for markets next year.
Favorable climate for higher-risk investments
Stocks are Robeco’s preferred asset class for 2014, although returns may not be as strong as in 2013, when the MSCI World Index rose almost 16% in the first 10 months of the year in euros on the back of stimulus from quantitative easing (QE) programs.
“2014 will be a year in which higher-risk investment categories will provide satisfactory returns,” says Cornelissen. “Expanding global growth combined with continuing loose monetary policy favors higher-risk asset classes.”
High-yield bonds are favored in the fixed income sphere, as the end of QE – beginning with tapering by the US Federal Reserve (Fed) expected from the Spring – signals a new era of rising interest rates. This makes the returns on high-yield debt relatively more attractive than those available on sovereign bonds.
‘Less emphasis on austerity will support recovery in the Eurozone’
Politics will be the unpredictable part
However some political risk remains. The Eurozone has come a long way since the height of the euro crisis in 2011, with growth expected to rise towards 1% in 2014. “Less emphasis on austerity will support recovery in the Eurozone”, says Cornelissen. “This will mean that earlier deficit targets will again not be achieved.”
“It is nonetheless very unlikely that the European Commission will impose fines on miscreant nations; just as unlikely is a fine for Germany because of its continuing excessive current account surplus. Although in theory the Commission’s powers for achieving a more centrally directed budget policy have increased greatly in recent years, these will still turn out to be a paper tiger in practice, due to the lack of political support. The outcome of the European parliamentary elections in May 2014 will be an unsurprising but still unpleasant confirmation of this lack of support”, says Cornelissen.
The US also faces the potential wrath of voters after the world’s largest economy only averted debt default when the government was shut down amid wrangling over raising the debt ceiling. US Congressional elections will take place in November, potentially dislodging those Republicans who had opposed Democrat President Barack Obama during the shutdown.
Three scenarios for quantitative easing
With regard to quantitative easing, there are three different scenarios, with differing likely outcomes. “Quantitative easing will come to an end in the US, will probably not start in Europe, and will be expanded in Japan,” says Cornelissen. He predicts that tapering the Fed’s QE program will cut the value of government bonds purchased from USD 85 billion a month to zero over a period of six to nine months from March or April. “Limited long-term interest rate rises in the Eurozone and the US are likely, but this will probably not happen in Japan because of financial repression,” Cornelissen says.
That is because the extraordinary Japanese economic experiment known as ‘Abenomics’, in which Prime Minister Shinzo Abe has combined QE with an assault on deflation and a pledge for structural reform, faces its biggest test next year. VAT will be raised by three percentage points in April to encourage greater spending in the first quarter, thereby averting deflation. But it runs the risk of triggering a recession similar to the one that followed the last VAT-rise experiment in 1997.
In the long-embattled Eurozone, Cornelissen expects “moderate economic recovery”, eventually rising above 1.0% a year. However, the chief economist warns: “Positive investment growth is also necessary to achieve recovery in the region. And it is necessary to control political tensions for this recovery to work.”
Japan GDP Growth Rate Figure 1: The Japanese VAT hike risks putting the country back into recession. Source: www.tradingeconomics.com | The Cabinet Office.
Mixed bag for emerging markets
Globally, Cornelissen expects “moderately increased growth in the developed economies outside Japan”, but the picture for emerging markets is expected to be mixed.
“China will slow down to some extent, while other emerging markets will speed up to a limited degree”, says Cornelissen. “Accelerated Chinese growth is not sustainable and the authorities are again taking the path of monetary tightening. All in all, we are counting on growth in the order of 6.0% against 7.5% in 2013”.
“Because of the economic recovery in the developed world, we believe there is a plausible case for limited recovery in Brazil (where there are also elections in 2014), India and Russia.”
Earnings will be key to success for stocks
“Overall, the macroeconomic climate will be more favorable for stocks in 2014 than in 2013,” he says. “Gradual interest rate rises in a low-interest rate climate are a positive signal that the US economy is in principle strong enough to support corporate profits by increasing consumption and investments. But earnings will be the key to success in 2014.” Figure 2: Profit margins have steadily risen for US companies since 2009. Source: Bloomberg / Robeco.
Equity price rises in 2013 were mostly driven by stocks achieving higher multiples – a company’s share price divided by its earnings per share – as both profits and business sentiment generally improved due to stimulus from QE. This may not be repeated next year when QE begins to be withdrawn, Cornelissen warns.
“We expect to see a more gradual expansion of price/earnings ratios, modest profit growth and somewhat greater market volatility,” he says. “These factors will make it difficult for stocks to equal or exceed their excellent 2013 performance in 2014.”
Bond yields will gradually rise
In fixed income, high-yield bonds are preferred. “Low interest-rate policies in recent years have given businesses sufficient opportunities to issue longer-term bonds at favorable rates,” says Cornelissen. “Still, we note that this asset class is losing some of its glamour. The reward for credit risk has dropped to 450 basis points and therefore lies below the 10-year average of 610 basis points.”
For emerging market debt, the current return on credit risk is 500 basis points. While this is 50 basis points higher than the equivalent return on high-yield corporate bonds with a similar duration, Cornelissen does not believe it will compensate for the significant currency risk seen in 2014. This is due to emerging markets currencies continuing to devalue against the US dollar as they struggle with economic growth.
“As emerging markets catch up economically, the current undervaluation of currencies (at this time over 40% based on purchasing power parity) will gradually translate into currency profits and offer solid returns on emerging market bonds in the longer term,” Cornelissen says.
For sovereign bonds, the Fed’s tapering plans mean higher yields – and bond values falling in tandem – as interest rates gradually rise.
“Both US and German government bonds are approximately 100 basis points lower than one would expect due to money market interest rates, inflation and growth prospects,” says Cornelissen. “We expect that bond yields will gradually increase during 2014 towards the levels that would be appropriate with further increasing economic growth”.
John Calamos. Calamos AM will Allow Senior Portfolio Management and Executives to Participate in Ownership of the Firm
Calamos Asset Management announced lasr Wednesday that Nick Calamos, aged 52, is leaving the Calamos Board of Directors to further pursue his interests in education and philanthropy. The move follows his decision to step away from his day-to-day role with the firm in August 2012 and his agreement to sell to John P. Calamos, Sr., aged 73, his private interest in Calamos Family Partners. The separation agreement includes non-compete and non-solicitation provisions which extend for a period of four years following Nick’s departure.
As a result of this transaction, John P. Calamos, Sr., Chief Executive Officer and Global Co-Chief Investment Officer of Calamos Investments, has announced his intention to form Calamos Partners, in order to allow senior portfolio management and executives of the firm to participate in the private ownership of Calamos Investments. In discussing the formation of Calamos Partners, he stated, “Over the years, I have sought to align senior portfolio management and executives with the long-term objectives of the firm and interests of our shareholders. Calamos Partners will enable the firm to strengthen its alignments with key talent.”
John P. Calamos, Sr. also said, “We wish Nick the best in his future pursuits. Over the last 18 months we have significantly strengthened the Calamos Board of Directors with the appointments of Global Co-CIO Gary Black, Thomas Eggers, Keith (Kim) Schappert and William Shiebler, all of whom have held the role of CEO at asset management firms.”
He continued, “The firm is well positioned for future growth thanks to the strengthening of our investment team and the expansion of our investment strategies, including alternatives, value and high yield.”
Nick Calamos said, “Now is a good time for me to step down so that I can focus more on my academic and charitable activities. Our new Board members are working very well together. John and Gary have added significant resources to the investment team and investment performance has improved on several key strategies. I know the firm’s future is bright.”
Five years after being roiled by the onset of a financial crisis, the global investment environment appears to be approaching an inflection point. This view was discussed by T. Rowe Price investment professionals who shared their thoughts at the company’s annual Investment and Economic Outlook press briefing in New York City on December 3rd
The briefing’s overriding theme for 2014: Be careful. Many financial markets around the world have been in bull market territory since the nadir of the crisis in March 2009. U.S. stocks are up more than 160% off of their lows in 2009, while non-U.S. stocks are up more than 107%. For most of this time, markets have climbed a “wall of worry” and many investors stayed on the sidelines. Recently, however, money has begun to move into riskier asset classes. While attractive investing opportunities continue to exist in many global financial markets, T. Rowe Price believes that investors should temper their expectations as the strong performance in many of these markets over the last five years is unlikely to be matched during the next five years.
Investment and Economic Observations
The U.S. economy and many other economies around the world are poised to gain traction in 2014, albeit in a slower-growth mode than they enjoyed before the crisis began. Tapering from the U.S. Federal Reserve is coming in the next three to six months, and could lead to volatile conditions in global equity and fixed income markets. With unemployment still high in the U.S. and inflation pressures muted, the pace of monetary policy adjustment is likely to be gradual.
Alan Levenson, Chief Economist stated:“The economy should gain momentum next year, with housing construction likely to pick up. The impact of political uncertainty in Washington should be less than it was this year, once we get past the January sequestration talks and the focus turns to elections.”
Despite the bull market, equity valuations appear to be reasonable overall. On the international equity front, many developed markets are seeing improving fundamentals. Europe’s economic recovery is still in its early stages, which could give European stocks more room to run than their U.S. counterparts. In Japan, government reform efforts have the potential to pull the moribund economy from its chronic slump, but structural challenges remain, including ineffective corporate governance and dated labor and regulatory rules. In emerging markets, equity valuations appear to be inexpensive relative to historical norms.
Bill Stromberg, Head of Equityexpressed: “Confidence has been restored, but it is important to be vigilant as the U.S. bull market is aging. International investments, especially in emerging markets, represent the best long-term value from here in fixed income and equity.”
John Linehan, Head of U.S. Equity, shared a similar message, highlighting his doubts over the US market rally: “Moving forward, U.S. stocks are unlikely to match their recent strength. This bull market has lasted for 57 months so far, which is the average length of bull markets since 1930. On the plus side, corporate health remains strong and valuations are neutral. There are still attractive areas, such as companies that are benefiting from the reindustrialization of America. Market tailwinds and headwinds are now more balanced, so we believe it’s time to be cautious.” On the other hand Dean Tenerelli, portfolio manager of the T. Rowe Price European Stock Fund was more positive on his asset class”European equities are undervalued and the economies are recovering. Luxury goods companies, banks in consolidated markets, broadcasters, and Spanish utilities are a few examples of where we see opportunity.
Global fixed income markets are vulnerable to interest rate increases, but value can still be found in certain pockets, including emerging market debt. Credit fundamentals are trending up for many states and municipalities, leading to generally good conditions for U.S. municipal bonds. Moreover, revenues are increasing, due to economic improvement and tax rate hikes, while budget gaps are shrinking. T. Rowe Price favors revenue-backed municipal bonds, especially in areas such as public utilities, transportation authorities, and hospital systems, all of which have limited regional competition and essentially operate as monopolies.
Mike Gitlin, Head of Fixed Income thinks that “Opportunities still exist. The market for emerging market local bonds is relatively liquid and offers attractive risk/reward characteristics. Bank loans and high yield bonds have low expected default rates, strong credit fundamentals, and reasonable yields.”
Allstate announced the launch of its first emerging manager program to invest with smaller private equity and private real estate equity asset managers, with a focus on minority and women-owned firms.
“We believe Allstate is leading the insurance industry in establishing this emerging manager investment program,” said Edgar Alvarado, Allstate’s group head of real estate equity. “We see this program as our farm team – a way to identify the next generation of investment stars, break down the high barriers to entry for these talented managers, and have Allstate be a catalyst in the success of emerging managers. Just as important, Allstate expects its socially responsible investments to achieve strong returns – we truly can say we do well by being a force for good.”
The Allstate program will be administered by the Customized Fund Investment Group (CFIG). Allstate and CFIG are seeking managers with strong investment track records and who are raising their first, second or third institutional funds and with less than $500 million in assets under management. In addition, at least 33 percent of a participating firm will be owned or controlled by women and/or minorities, or at least 50 percent of fund carried interest will be paid to women or minority staff.
The program’s fund managers will identify investments in the United States that meet Allstate‘s desired risk-return profile.
Photo: Raul Heinrich. Henderson refuerza su equipo en Singapur al contratar a un director de renta variable asiática
Henderson Global Investors has hired Andrew Gillan to head up its Asia (ex-Japan) equities team. He will be based in Henderson’s Singapore office. He joins from Aberdeen Asset Management where he was senior investment manager on its Asia Pacific (ex-Japan) equity team and manager of the Edinburgh Dragon Investment Trust, which has gross assets of over £600 million, making it the UK’s largest Asian (ex-Japan) Investment Trust.
Andrew joined Aberdeen as a graduate trainee on the UK equity desk, via Aberdeen’s acquisition of Glasgow-based Murray Johnstone in 2000, before moving to Singapore in 2001.
Andrew will take over as lead manager of the £200 million Henderson Asia Pacific Capital Growth Fund and the US$33 million Henderson Horizon Asian Growth Fund.
Commenting on his appointment Graham Kitchen head of equities, says, “We have been very clear of our intention to continue growing our business internationally, particularly in Asia and the US. Andrew has built up an enviable track record. Having spent over 10 years in Singapore, he is the ideal person to lead our build out there. In addition, and in keeping with our desire to increase our ‘on the ground’ investment talent, we will also be moving a number of our Asian equity analysts to Singapore in the New Year.”
In total Henderson manages US$2.3 billion assets in Asia (ex-Japan) equities on behalf of European, Asian and US clients. Products range across Growth, Income, China and long/short equity.
There are currently 16 investment professionals in Henderson’s equities business in Singapore which includes nine portfolio managers, three analysts and four dealers.
The number of advisors practicing in the registered investment advisor (RIA) model grew at an annualized rate of 8% between 2004 and 2012, while every other advisory channel declined by more than 1% during the same timeframe, according to the latest research from Cerulli Associates.
The December 2013 issue of The Cerulli Edge-U.S. Asset Management Edition examines the RIA channel’s evolution, how third-party vendor platforms reach advisors who value flexibility, and the emergent phenomenon of ETF strategists.
According to Cerulli, multiple factors have fueled the growth of this channel, most prominently the so-called “breakaway broker” – an advisor or team with an established practice choosing to leave an employee broker/dealer (B/D) and creating their own advisory firm. Transitioning advisors have not only come from employee B/Ds, but also from independent B/Ds.
“While the ‘Breakaway Broker’ has been an important driver of change, it is not the sole source of growth for the RIA channel,” Waldert explains. “Nontraditional competitors, such as law and accounting firms, have entered the advisory industry.”
“The unique challenges of business ownership are no longer an obstacle for a breakaway advisor,” Waldert continues.
“The RIA channel expanded from a cottage industry to an essential element within the financial advisory and asset management space”, concludes the report.
Cormac Weldon, director de Renta Variable EE.UU. en Threadneedle. EE.UU. está más caro que otras regiones debido a los puntos fuertes de los que otras regiones carecen
Cormac Weldon, Head of US Equities at Threadneedle, addresses some of the questions currently on the minds of US equity investors. Overall, he believes that US stocks remain attractively valued and that some sectors offer particular value. Cormac also points out the positive aspect of the political division in Congress over the budget deficit and the debt ceiling.
US stock markets are higher now than before the 2008 financial crisis. How is that possible?
Earnings have recovered and surpassed their previous peak so therefore it is entirely understandable that the market should have performed so well.
European stocks have yet to regain their previous highs. Why has the US performed so much better?
The reason that US earnings have recovered is that America quickly implemented dramatic steps to stabilize the economy in 2008 and 2009. Measures included forcing the banks to accept fresh capital and to raise equity and capital levels. As a result, US banks are well capitalized and loan growth is positive. By contrast, European banks remain poorly capitalized and lending growth is negative on the Continent.
Moreover, the US is much stronger in terms of innovation and companies that are dramatically changing industries have driven some of the stock market gains. Examples include Google and Facebook and other internet companies that are changing how companies advertise and gaining market share through innovation.
What do you think of the current level of valuations in the US? Are stocks still attractive?
We believe that the market remains fairly valued and is certainly not overvalued in historical terms although neither is it cheap. However, when compared with other asset classes such as bonds, stocks do look attractive.
How do US valuations compare to other regions?
The US is clearly more expensive than other regions but we believe this simply reflects strengths that other regions lack including: well-contained inflation; positive economic growth; innovation; and a robust banking system.
Many experts have increased their allocation in US equities. Is that a good move?
It certainly has been in terms of performance over the year to date and we believe it will probably remain prudent to have a good allocation to US equities, particularly given that the Federal Reserve is targeting employment levels, which means that is also focusing upon economic growth. Given that inflation remains low, this is almost certainly a very good environment for equities to continue to perform well.
Does the debt ceiling issue pose a serious threat to the economy?
Although the political shenanigans in Washington generate many headlines, we believe they are very much a secondary issue in terms of their impact upon markets and the economy. While there may be some negative effects, we believe that these will be more than offset by the Federal Reserve’s willingness to prolong quantitative easing.
Moreover, we would rather see political bickering than a situation where the Democrats controlled Congress and were able to do as they pleased. This is because the major long-term challenge facing the US is the budget deficit, particularly given that healthcare expenditure will explode in 10 years or so. It is very clear to us that the Democrats are reluctant to address an issue that the Republicans are at least discussing. Thus, we would prefer to see some political turbulence over the budget deficit than a government able to ignore it entirely.
What do you think about the appointment of Janet Yellen to head the Federal Reserve?
We can only comment upon what we have read about her. She is clearly experienced and we are impressed by the fact that her economic forecasts have been more accurate than other policymakers within the Federal Reserve. This record appears a very positive factor.
What are your expectations for the coming months and for 2014?
We believe the market will make further gains. It tends to at this time of the year while all should be quiet on the political stage for a while. Whilst the economy is growing moderately, the Federal Reserve continues to stimulate the economy by buying treasuries and maintaining interest rates at very low levels.
Can you give examples of two companies in your top 10 holdings and explain why these stocks are interesting?
We like Google, where revenues and earnings are growing at healthy double-digit rates – with earnings probably expanding at 20% plus per annum. This has been the case for a number of years and we anticipate this pace will continue given that it is changing the face of the global advertising industry. Although it trades at 19 times next year’s earnings, it is important to remember that earnings will double over the next four years if it maintains a 20% earnings growth rate.
Charter Communications is another favored stock. The cable business had been poorly managed but under a new chief executive, who took over two years ago, has benefited from hefty investment. Consumers are buying more services, such as digital movies and broadband internet, from the company and are paying higher prices for them. Consequently, we believe the company will enjoy good growth in the coming years. Moreover, it is possible that Charter will be involved in any further consolidation within the US cable industry.
Foto: Awesome Sasquatch. FATCA crece con dos nuevos acuerdos firmados por Costa Rica y las Islas Caimán
The U.S. Department of the Treasury announced that the United States has signed intergovernmental agreements (IGAs) with the Cayman Islands and Costa Rica this week to implement the Foreign Account Tax Compliance Act (FATCA).
“Today’s announcement marks a milestone in the effort to promote global tax transparency,” said Deputy Assistant Secretary for International Tax Affairs Robert B. Stack. “These agreements underscore growing international cooperation in the effort to end tax evasion everywhere.”
FATCA, enacted in 2010, seeks to obtain information on accounts held by U.S. taxpayers in other countries. It requires U.S. financial institutions to withhold a portion of payments made to foreign financial institutions (FFIs) that do not agree to identify and report information on U.S. account holders. FFIs have the option of entering into agreements directly with the IRS, or through one of two alternative Model IGAs signed by their home country.
Signed on November 29th, the Cayman Islands IGA is a Model 1B agreement, meaning that FFIs in the Cayman Islands will be required to report tax information about U.S. account holders directly to the Cayman Islands Tax Information Authority, which is the sole channel in the Cayman Islands for the provision of tax-related information to other governments. The Cayman Islands Tax Information Authority will in turn relay that information to the IRS. Additionally, the United States and the Cayman Islands also signed a new Tax Information Exchange Agreement (TIEA), to take the place of the original TIEA signed in 2001.
“By working together to detect, deter, and discourage offshore tax abuses through increased transparency and enhanced reporting, we can help build a stronger, more stable, and accountable global financial system. We look forward to collaborating with the Government of the Cayman Islands to further these objectives,” said Julie Nutter, Minister-Counselor for Economic Affairs at the U.S. Embassy in London, who signed on behalf of the United States.
The Costa Rica IGA was signed on Tuesday, November 26, and is a Model 1A agreement, meaning that the United States will also provide tax information to the Costa Rican government regarding Costa Rican individuals with accounts in the United States.
“Today’s signing marks a significant step forward in our efforts to work collaboratively to combat offshore tax evasion – an objective that mutually benefits both our countries,” said Gonzalo R. Gallegos, Chargé d’Affaires of the U.S. Embassy in Costa Rica, who signed on behalf of the United States.
In addition to the 12 FATCA IGAs that have been signed to date, Treasury has also reached 16 agreements in substance and is engaged in related conversations with many more jurisdictions.
For the signed Costa Rica IGA, click here. For the signed Cayman Islands IGA, click here.
Marcos Martinez, presidente ejecutivo y CEO de Banco Santander Mexico. Santander México completa la compra de ING Hipotecaria por 41,4 millones de dólares
Grupo Financiero Santander Mexico announced on Novembr 29th that its subsidiary, Banco Santander Mexico, has completed the acquisition of the equity stock of ING Hipotecaria, a subsidiary of ING Group, as announced on June 14, 2013.
Upon receipt of all required regulatory approvals and authorizations for the acquisition, Banco Santander Mexico purchased ING Hipotecaria for Ps.541.4 million (approximately US$41.4 million) in cash. As of September 30, 2013, ING Hipotecaria’s loan portfolio totaled Ps.11.9 billion, its customer base exceeded 28,000 clients, and its distribution network consisted of 20 branches throughout Mexico.
Marcos Martinez, Executive Chairman and CEO, commented, “We are very pleased to have completed the acquisition of ING Hipotecaria, which strengthens our core portfolio and solidifies Santander Mexico’s position as the second largest banking mortgage provider in Mexico with an estimated market share that increases from 15.8% to 17.8% with this acquisition. We have successfully grown our mortgage business over the years through a prudent combination of organic and external growth initiatives, and we believe the acquisition of ING Hipotecaria fits perfectly into our ongoing strategy. Going forward we intend to continue to expand our mortgage business, providing our clients with innovative products and services while leveraging opportunities for cross-selling our other banking products and maximizing the cost synergies we have identified for this acquisition.”
