CC-BY-SA-2.0, FlickrPhoto: Vadim Timoshkin. What Effect Might ‘Helicopter Money’ Have On Markets?
Helicopter money refers to the situation where a central bank finances the fiscal expenditure of a government. The government prints money instead of raising taxes or debt to fund spending.
The economic effects of QE are still being debated, but they are presumed to be positive to date. With helicopter money, there would be a direct fiscal expansion financed by central bank purchase of (and cancellation of) government bonds. This direct fiscal spend would be economically expansionary, unless the announcement of helicopter money represented a shock to households and firms that was suficiently significant to offset the fiscal stimulus. The economic effects of fiscal expansion combined with new QE appear identical to those of helicopter money.
The market effect of the recent experience of QE has been lower discount rates, a weaker currency, and a strong environment for risk assets. We might guess that the market’s reaction to helicopter money would be similar, but given that past episodes of dominance by the fiscal authority over the central bank have been associated with fiscal indiscipline and high inflation, there is a reasonable chance that markets could react in a meaningfully different and negative way. The truth is that we just don’t know.
Figure 1 outlines the impacts of QE, of helicopter money (where debt is purchased by the central bank and written-off), and a combination of QE and fiscal expansion. With the unknown market impact of helicopter money, with prospective policy tools in the hands of central banks narrowed through debt cancellation, and with the economic benefits associated with helicopter money rather than straight fiscal expansion de minimis, it is not clear why policymakers will choose the path of helicopter money. Perhaps the real lesson is that monetary policy has its limits and that in the event of an economic slowdown, aggregate demand is best supported by fiscal rather than monetary policy. In the event that new fiscal expansion requires supplemental monetary support in the form of additional QE, this is a decision that could be made at some point in the future.
Helicopter money is often associated with incidence of hyperinflation. In their study of the 56 incidents of world hyperinflation during the last 300 years, Hanke and Krus found hyperinflation to be ‘an economic malady that arises under extreme conditions: war, political mismanagement, and the transition from a command to market-based economy to name a few’. By contrast, monetary financing has been used widely in the developed and developing world over time without ending in hyperinflation.
Until the US Fed Accord in 1951 the US operated a policy of fixing long-term bond yields, and as such increasing or decreasing the amount of reserves in the banking system, depending on private sector demand for these instruments. Canada used monetary financing for 40 years until 1975 under a free-floating exchange rate regime without calamitous macroeconomic effects, and India operated a policy of debt monetisation until 2006. Further examples abound. Indeed, of the 152 central bank legal frameworks analysed by the IMF, 101 permitted monetary financing in 2012. This is not to say that helicopter money is a desirable policy. It would be, in my opinion, a backwards step. But neither is it to be necessarily associated with hyperinflation.
So, in conclusion, helicopter money is not a weird and wacky new form of money. Indeed, once we understand how money works helicopter money looks pretty straightforward. The prospective economic, monetary and fiscal effects of helicopter money (absent the sticker-shock of a new unfamiliar policy being implemented) look identical to a normal fiscal expansion supplemented with additional QE. As such, it could be argued that the UK, US, and Japan have all already effectively experienced helicopter money. It is harder to say the same about the Eurozone, consisting as it does of government entities that are not monetary sovereigns. Indeed, the Eurozone is much more complicated.
Toby Nangle has been the Head of Multi-Asset and Portfolio Manager at Threadneedle Asset Management Limited since January 1, 2012.
Photo: Narch, Flickr, Creative Commons. Luxembourg Approves an Alternative Fund Structure
The law introducing a new Luxembourg alternative fund structure, the Reserved Alternative Investment Fund (RAIF), has been approved by the Luxembourg Parliament and will come into force three days after publication in Luxembourg’s Official Gazette Mémorial.
Welcoming the new law, Denise Voss, Chairman of the Association of the Luxembourg Fund Industry, says: “The Luxembourg RAIF Law provides an additional – complementary – alternative investment fund vehicle which is similar to the Luxembourg SIF regime. Unlike the SIF, the RAIF does not require approval of the Luxembourg regulator, the CSSF, but is supervised via its alternative investment fund manager (AIFM), which must submit regular reports to the regulator. Luxembourg managers will therefore have a choice, depending on investor preference. They can set up their alternative investment funds as Part II UCIs, SIFs or SICARs if they prefer direct supervision of the fund by the CSSF. Alternatively they can set up their alternative investment fund as a RAIF, thereby reducing time-to-market.”
Freddy Brausch, Vice-Chairman of ALFI with responsibility for national affairs, adds: “In order to ensure sufficient protection and regulation via its manager, a RAIF must be managed by an authorised external AIFM. The latter can be domiciled in Luxembourg or in any other Member State of the EU. If it is authorised and fully in line with the requirements of the AIFMD, the AIFM can make use of the marketing passport to market shares or units of RAIFs on a cross-border basis. As is the case for Luxembourg SIFs and SICARs, shares or units of RAIFs can only be sold to well-informed investors.
Denise Voss concludes: “The new structure complements Luxembourg’s attractive range of investment fund products and we believe this demonstrates the understanding the Luxembourg legislator has of the needs of the fund industry in order to best serve the interests of investors.“
You can click here to access the legislative history in French.
CC-BY-SA-2.0, FlickrMarc Bolland . Marc Bolland to Become Head of European Portfolio Operations at Blackstone
Blackstone, one of the largest asset managers in the world has appointed Marc Bolland as Head of European Portfolio Operations of its private equity businesses. Bolland was formerly Chief Executive of Marks and Spencer and previously Chief Executive of Morrisons and Chief Operating Officer of Heineken. He will start on September, 19th, 2016.
Joseph Baratta, global Head of Private Equity at Blackstone, said: “We are delighted that Marc is joining us. He has had an outstanding career leading and developing major international businesses, and I am sure he will add great value to our current and future portfolio businesses.”
Marc Bolland said: “I am very pleased to be joining a firm of the quality and scale of Blackstone. I look forward to working with its extraordinary team and the businesses owned by Blackstone funds to drive growth and to add value for investors.”
Bolland was named The Times “Businessman of the year” in 2008.
CC-BY-SA-2.0, FlickrPhoto: Paramita. It's Getting Late In The Business Cycle
While the United Kingdom’s decision to leave the European Union (Brexit) has temporarily undermined market confidence, my confidence in equities was on the decline in advance of the vote. So let’s take a break from Brexit for a few minutes and look at some longer-term fundamentals.
I remain disenchanted with stocks and I need to see improvement in five key metrics before changing my view:
Improved pricing power for US based multi-national companies
Better consumer spend on goods and services
A weaker dollar relative to other currencies
Rising capital expenditures, especially in information technology
Moderating labor and health care costs
I’m focused on the behaviour of the private sector and its ability to generate free cash flows. During this business cycle, which began in July 2009, the US and many developed markets experienced record high profit margins, best-ever free cash flows relative to the size of the overall economy and high returns on equity. This surprised many cautious investors given that both the global and US growth rates had fallen below trend. The reasons for the high profit generation, which were complex, included gains in manufacturing sector efficiency, productive use of technology, rapid asset turnover, capital-light strategies, employment of global labor, use of operating leverage instead of financial leverage and low energy costs.
During the last three quarters most of these tailwinds for risk markets began to falter. Margins narrowed not just in the materials and mining sectors, but throughout much of the S & P 500, countering well-established trends that dated back to 2009. Now, selling, general and administrative (SG&A) expenses have been rising as a percentage of revenues. Financial leverage is replacing operating leverage, and both return on equity and margins continue to weaken into midyear.
All of these measures feed into a very important metric for me—the share of US gross domestic product going to the owners of capital. When the share of the economy going to the owners as profits begins to subside, a direct casualty is capital expenditure and durable goods spending.
Both are now weakening. Big ticket expenditures like purchases of machine tools by manufacturing firms and information technology spending by most firms, are a key to future growth of both jobs and profits and tend to perpetuate the cycle. These large expenditures by businesses have been weakening and the trend is downward.
The US consumer is doing better. Spending is increasing, but consumers have not spent the extra income afforded by the earlier oil price decline. And now, worryingly, energy prices are rebounding. The US dollar had been weak during much of this cycle, but now because of interest rate differentials and a flight to safety, the dollar has been heading back up. The strong company fundamentals that were the signature of this longer-than-usual cycle, have weakened in almost all categories.
Overall I am biased toward being underweight equities. Within equities I would favor US shares relative those of the UK, Eurozone and Japan. Some emerging markets look attractive, particularly Latin America and Eastern Europe, but selectivity is very important, as always. In fixed income I prefer high yield because fundamentals in the US remain solid with odds favoring the US avoiding recession near-term, in my view.
History tells us a weakening of the profit cycle can herald recession. Usually a profits recession comes as rising interest rates hijack consumer and business spending. US recession risks are rising, but the risk of rates rising seems remote now. Rather than a recession unfolding soon, I see a continuing plague of profit disappointments but no economic collapse. A kind of investor’s limbo, if you will. I hope the five points above reverse, but unless they do, late cycle flags should be a caution to investors.
James Swanson, CFA, MFS Chief Investment Strategist.
CC-BY-SA-2.0, FlickrPhoto: Moyan Brenn. The Implications Of Brexit For The Emerging World
In the end, the implications of Brexit are larger for the UK and Europe than for the emerging world. But this does not mean that Brexit does not impact EM.
Firstly, if there is a prolonged risk aversion in global markets, eventually it should affect the weakest links most. Large parts of the emerging world are still suffering from weak growth, the excessive leverage built up in the past years that limits the room for a domestic demand recovery, a high reliance on foreign capital and increased political risk.
Secondly, Brexit has increased the likelihood of an extended period of US dollar strength. This is never good for emerging markets: EM currencies are likely to depreciate and capital outflows should increase. Also, a stronger USD index normally means that the price of oil and other commodities declines. This affects the commodity‐ exporting countries, which in general are the fundamentally weaker economies.
Thirdly, the uncertainty caused by Brexit should lead to an adjustment in growth expectations for the UK and Europe. This hurts central Europe and Asia, for which Europe is the main trading partner. And global trade was already weak. It has recovered a bit in recent months, from ‐3% in January to +2% in April, but we should question the sustainability of this pick‐up now. Also relevant in this context is the weakening of the euro. This does certainly not help the Asian exporters.
And fourthly, with the globalisation trend already struggling in the past few years, Brexit could turn out to be a new negative factor. Trade between the UK and Europe is likely to be affected in the first years after Brexit and more headwinds for global trade could emerge after the US elections. The emerging economies have poor domestic demand growth prospects mainly due to the large debt overhang after many years of excessive credit growth. As a consequence, global trade has become even more important for a possible recovery. Globalisation in reverse would justify an adjustment in longer‐term growth expectations for the emerging world as a whole.
Willem Verhagen is Senior Economist and Maarten-Jan Bakkum is Strategist, Emerging Markets Equity at NN Investment Partners.
CC-BY-SA-2.0, FlickrPhoto: Juan FernandezG. Ignacio Pedrosa Joins BTG Pactual in Chile
BTG Pactual Chile hired Ignacio Pedrosa, as Executive Director of its Internatonal Funds division.
Pedrosa has had a successful career in Asset Management and Private Banking with over 20 years experience. Prior to joining BTG Pactual he was in charge of the Spanish operations of French Tikehau Investment Management. Before that he served in Spain’s most renowned independent asset managers, Bestinver and EDM and was a member of the Board of the United Investors Sicav Luxembourg. Between 1999 and 2005 he held various positions at Banco Urquijo (Sabadell) including Regional Private Banking Director.
He holds and Economics and Business BA from the San Pablo CEU University in Madrid.
CC-BY-SA-2.0, FlickrRoger Ibbotson set up Zebra Capital in 2001.. Kepler Launches New UCITS Platform with A Global Equity Beta Neutral Fund Advised by Zebra Capital
Kepler Partners LLP has raised $81m via its new UCITS platform, Kepler Liquid Strategies (KLS), for a global equity beta neutral fund. This is the first sub-fund of the KLS ICAV, which is a Dublin domiciled UCITS structure designed to give investors access to high quality managers selected by the team at Kepler Partners.
The fund, KLS Zebra Global Equity Beta Neutral, began trading on June 30th and saw significant interest from investors across Europe, despite the chaos in financial markets around the Brexit referendum.
Kepler has appointed Connecticut based Zebra Capital Management LLC as investment advisor on the fund, who will manage the portfolio based on their established investment process and philosophy. The KLS Zebra Global Equity Beta Neutral fund mirrors a strategy run by Zebra Capital in an existing offshore hedge fund. As a beta neutral strategy, it is designed to avoid the kind of volatility which markets have been experiencing in recent weeks. The new fund targets a net return of 7-8% per annum over a market cycle with a volatility of 5-6% per annum.
The underlying strategy is typically made up of 650 long and 450 short equity positions and uses a unique ‘popularity factor’ developed by the Zebra team which includes former Yale Professor Roger Ibbotson, who set up Zebra Capital in 2001. The core theory revolves around the idea that fundamentally strong but unpopular stocks tend to outperform fundamentally weak but popular companies. Ibbotson was described by the FT this year as the ‘pioneering analyst of the equity risk premium’ and the ‘godfather of smart beta’.
Georg Reutter, head of research at Kepler Partners, said: “Given the current uncertainty in global markets, we feel it is a good moment to be bringing a beta neutral strategy to the market. We are very pleased that our research based approach has led us to partnering with Zebra Capital as the first fund on the KLS platform.”
Laurie Robathan, head of sales, added: “Kepler has raised $1.3bn for UCITS fund clients since 2010 and, after biding our time for some years, it is exciting to have now made the logical step into this space by launching our own dedicated UCITS platform”. “We are very pleased to be working with a group of Zebra’s calibre and their total commitment as a firm to this project has been clear from the outset. Given the turmoil of recent weeks, the success of this launch is a clear signal from the market that this is the right fund at the right time.”
KLS Zebra Global Equity Beta Neutral Fund has an annual fee of 1% and a performance fee of 10%.
CC-BY-SA-2.0, FlickrPhoto: Intv Gene. GAM announces acquisition of Cantab Capital Partners and launches GAM Systematic investment platform
GAM announced the acquisition of Cantab Capital Partners (Cantab), an industry-leading, multi-strategy systematic manager based in Cambridge, UK. Cantab manages USD 4.0 billion in assets for institutional clients worldwide.
Purchase price consists of an upfront cash payment of USD 217 million, funded from GAM’s existing cash resources, and deferred consideration based on future management fee revenues. GAM is the industry’s third-biggest provider of liquid alternative UCITS funds.
At the same time, GAM launches GAM Systematic, a new investment platform dedicated to systematic products and solutions across liquid alternatives and long-only traditional asset classes including equities, debt and multi asset. Cantab will form the cornerstone of GAM Systematic.
By moving into the growing segment of scalable systematic investing, GAM takes an important step to deliver on its long-term objective to expand and diversify its active asset management business. Leading systematic strategies are attracting substantial allocations from investors globally due to their compelling returns and their rigorous, disciplined investment processes.
GAM Systematic will complement GAM’s successful active discretionary investment offering. It will also serve as the Group’s innovation hub for the development of new technologies, investment ideas and approaches for systematic strategies and products.
Alexander S. Friedman, Group Chief Executive Officer of GAM, said: “We have been evaluating how best to enter the systematic space for the past 18 months because we believe it represents an important capability for an active investment firm in the current environment and in the decades to come. GAM Systematic will offer our clients a compelling range of unique products complementary to our strong discretionary product range at a time when the investment industry is challenged to provide cost-efficient, liquid and diversified sources of returns.”
CC-BY-SA-2.0, FlickrPhoto: Michael Baldinger. Michael Baldinger To Leave RobecoSAM, Reto Schwager To Be Appointed CEO Ad Interim
RobecoSAM, the investment specialist focused exclusively on Sustainability Investing (SI), today announced that Michael Baldinger, RobecoSAM CEO since 2011 and Member of the Executive Committee (ExCo) since 2009, has decided to leave the firm. He will join the asset management division of an international bank as Global Head of Sustainable & Impact Investing, and will be based in New York.
Reto Schwager, Head of Private Equity at RobecoSAM and Member of the Company’s ExCo since January 2015, will be appointed CEO ad interim per August 15, 2016, subject to FINMA approval. Michael Baldinger will leave the Company once a smooth handover to the CEO ad interim has been completed. A search process for a permanent replacement of Michael Baldinger has already begun. Both internal and external candidates will be considered.
Michael Baldinger joined RobecoSAM in July 2009 as Global Head of Distribution & Marketing and ExCo Member. In January 2011, he was appointed CEO.
Albert Gnägi, PhD, Chairman of the RobecoSAM Board of Directors: “The Board of Directors regrets Michael Baldinger’s decision and thanks him for his contributions over the last years. Michael Baldinger, his ExCo colleagues, and all the dedicated specialists at RobecoSAM have built the world’s foremost platform for SI, upon which the firm will continue to build and grow. We wish Michael all the best for his personal and professional future.”
Michael Baldinger, departing CEO of RobecoSAM: “I am proud of having built, together with my colleagues, the world’s leading platform for SI. After more than seven years with the firm, it is the right time for me to take the next step in my career. I want to thank everyone at RobecoSAM for their dedication and passion to SI and for having given me the opportunity to lead such a wonderful firm.”
It has been a lousy few years for the relationship between economic data and financial markets. Whether data is strong or weak, the markets have pretty much ignored it. All the market seems to really care about is what the central banks are going to do. But at least the economic data has company to share its misery: the market now seems to be ignoring geopolitical events as well.
The UK’s vote to leave the EU was seen as bad news for the market. Just as with other negative events, the market expects the central bank to step in with a monetary stimulus to make everyone feel better. So, if the result of a geopolitical event is positive then risk assets rally, and if the result is negative the central bank can offset any downside for risk assets. Heads you win, tails you don’t lose.
Towards the end of last year the market had been expecting the Bank of England (BOE) to hike rates by 2016 at least and then proceed with about one hike a year (chart 1a). When worries about the global economy worsened at the beginning of the year, the probability of rate hikes was reduced. But in February, when the date of the referendum was announced, the market decided that monetary policy would most likely remain on hold for another three years. Following the surprise result to leave, the market is now fully pricing in one rate cut by the BOE this year. Probably the only reason the market is not pricing in more cuts is because the BOE is averse to zero or negative rates. But there could still be an expansion of quantitative easing.
So much so sensible: this is a UK-specific shock and in the absence of fiscal policy the BOE has to deal with the shock. But the market has also decided that the Federal Reserve (Fed) is going to be on hold for another couple of years as well (chart 1b). The Fed has been striking a more dovish tone of late, but there was still a substantial drop in rate expectations following the UK referendum result. For example, there was about a 50% probability of a rate hike priced in for 2016, which was wiped out overnight. Now the first rate hike is not fully priced in until the end of 2018.
This impact on the Federal Reserve looks a little bit surprising. The trade channel between the UK and the US is significant but hardly large enough to affect the Fed. The GBP fell a lot against the USD, but the broader index of USD strength is little changed. That only leaves financial contagion channels, but if anything the market reaction has been much more restrained than almost anyone expected beforehand. There looks to be something inconsistent between the UK financial markets and the expected need for the Fed to react.
Take for example the FTSE 100, which is above its pre- referendum levels (chart 2). Of course, the FTSE 100 is not really a UK index; the vast majority of revenues come from overseas. A weaker currency increases the GBP value of those foreign earnings. The more domestic-oriented FTSE 250 has fared worse, but still recovered a lot of the ground that was lost when the referendum result was announced.
The currency impact is not just important for revenues, it is also important for foreign buyers. If you are sitting outside the UK, then you don’t care about the GBP value of the FTSE; you care about the value in your currency. So BOE rate cuts help you less because rate cuts push down the currency. Even if existing holders are mostly hedged, the marginal buyer will look at the FTSE and decide if it is worth buying. For example, on a USD-basis both the FTSE 100 and FTSE 250 have fallen substantially but not recovered. In other words, foreign investors are not attracted to buy UK equity despite the fact that it is now cheaper to them.
Over in the rest of the EU, many in the market expected a pretty harsh risk off reaction in the Eurozone. Sure enough, on the day both Italy and Spain sold off by 20 basis point and Germany rallied by the same amount (chart 3). But soon after Spain started to rally (their election was relatively market friendly) and even Italy rallied. Now Spain trades tighter to Germany than it did before the UK referendum, and Italy has the same spread – but at a lower absolute rate.
The market seems very blasé about the consequences for the rest of the Eurozone of the UK’s departure. Once again there is an expectation that the central bank will step in to make everything better. But the European Central Bank is finding it more and more difficult to conduct monetary policy (largely due to its own rules), so this may turn out to be too optimistic. And the market is also implying that if anything the UK leaving will drive the Eurozone closer together, rather than further apart. Given opinion polls in many countries, that also looks dangerously optimistic.
In a globalised world, the interdependence of major economies and their central banks is both strong and complicated. But if anything it looks like the market may be expecting too big an impact on the US, and too little of one on the remainder of the EU.
Joshua McCallum is Head of Fixed Income Economics UBS Asset Management.
