CC-BY-SA-2.0, FlickrPhoto: Charlie Awdry, China portfolio manager at Henderson. How to Invest in a Changing China?
Charlie Awdry, China portfolio manager at Henderson, looks back at 2015 and discusses where investment opportunities can be found in a country that is undergoing significant economic, political and social change.
What lessons have you learned from 2015?
First, the Chinese currency can depreciate but we find it odd to call August’s 2% move against the US dollar a devaluation, given other emerging market currencies have fallen as much as 35% during the year. Second, President Xi’s reform programme is reaching a critical stage and his vision of market forces includes both the invisible hand of the free market and the state’s visible and powerful hand working towards stability. Third, when markets move in an extreme fashion, correlations between stocks increase − this lack of discrimination is a reliable source of investment opportunities for our strategy.
Are you more or less positive than you were this time last year, and why?
We have been downbeat on the Chinese economy, but upbeat on the stocks we hold for quite a few years; that stance continues into 2016. Overall, economic activity continues to be squeezed by the competing needs of reform and deleveraging and challenged by a loss of competitiveness in the manufacturing sector. Rebalancing is taking place but declining commodity prices illustrate how significant the ‘old part of the economy’ is. Unfortunately, the vibrancy of the ‘new consumer economy’ is probably underrepresented in official growth measures. The tough macroeconomic situation means we should expect more volatility in markets.
What are the key themes likely to shape your asset class going forward and how are you likely to position your portfolios as a result?
We will continue to see diverging valuations between consumer-driven businesses, such as technology, consumer services and healthcare. These sectors will generally be generating profit growth, while sectors dominated by state-owned enterprises (SOEs), like energy, telecommunications and financials, will struggle to react to the tougher economic environment, and will most likely continue to be ‘inexpensive’.We do not own any banks and continue to strongly favour privately-managed consumer-driven businesses with strong profit margins and cash flows.
CC-BY-SA-2.0, FlickrPhoto: Omar Burgos
. Neuberger Berman Acquires Options Investment Team From Horizon Kinetics
Neuberger Berman on Monday announced that it has acquired from Horizon Kinetics an investment team that manages collateralized index-based options portfolios that seek to capture global volatility premiums. The team’s investment track records, proprietary research and client assets have also transferred to Neuberger Berman.
Neuberger Berman’s new options investment team is overseen by Doug Kramer, who joined the firm in November 2015 as Co-Head of Quantitative & Multi-Asset Class Investments (working alongside current Multi-Asset Class Chief Investment Officer Erik Knutzen). Derek Deven salso joins Neuberger Berman from Horizon Kinetics as a Managing Director and senior portfolio manageralong with research analysts, Rory Ewing and Eric Zhou. With the addition of this team, Neuberger Berman strengthens its lineup of systematic, outcome oriented investment capabilities.
Previously, Mr. Kramer was CEO of Horizon Kinetics, an investment management firm with approximately $8 billion in assets under management, and prior to that a Managing Principal of Quadrangle Group and a Partner of Goldman, Sachs & Co., where he served as Chief Investment Officer and Head of the Global Manager Strategies Group.
Joseph Amato, President and Chief Investment Officer, Equities, at Neuberger Berman, said “This highly differentiated global options strategy has a demonstrated, long-term track record of delivering attractive risk-adjusted returns. Doug’s leadership and investment expertise is valuable as we serve global investors seeking innovative, outcome-oriented solutions.”
Mr. Kramer said of coming to Neuberger Berman, “The breadth and rigor of Neuberger Berman’s investment capabilities is well-suited to serve a wide variety of client needs. I am excited to be working with such a talented group of investment professionals as we help clients achieve their unique investment objectives.”
CC-BY-SA-2.0, FlickrFoto: Skyseeker. BNP Paribas Investment Partners and Orion Partners Announce Strategic Partnership in Asia Alternative Investments
BNP Paribas Investment Partners, the asset management arm of BNP Paribas, and Orion Partners LP, announced a strategic partnership that brings together a leading Asia-focused alternative investment firm specialising in real estate and private equity, and a global key player in asset management.
Under the terms of the transaction, BNPP IP -through its alternative and incubation specialist BNP Paribas Capital Partners- will acquire a minority stake in a new partnership based in Hong Kong. Orion Partners will continue to operate under its existing leadership and remain independent in all its businesses and investment decisions.
Going forward, BNPP CP and Orion Partners plan to develop and launch new funds to meet growing client demand for Asia-focused alternative investment funds. BNPP IP and Orion Partners believe there is tremendous opportunity to provide these various alternative investment products to retail and institutional investors throughout the world using BNPP IP’s highly-regarded platform and global distribution capabilities and Orion Partners’ local specialist expertise.
Gilles Guerin, CEO of BNPP CP, commented: “The partnership with Orion Partners provides us with an excellent opportunity to broaden our exposure to fast growing alternative investment opportunities in Asia, managed by a leading Asian-based and Asian-focused firm. Having worked closely together for more than 10 years to develop and distribute some of their products to institutional investors across the globe, we value their expertise and excellence in the creation and protection of value for their clients.”
CC-BY-SA-2.0, FlickrPhoto: Skyseeker. Martin Currie Buys Japan Equity Boutique
Martin Currie has completed the acquisition of the business assets and investment management team of PK Investment Management, the London based long/short Japan Equity boutique.
Led by Paul Kirkby and including manager Claire Marwick, PK IM has overall AUM for the enlarged team are $425m (€395m).
Kirkby has also been appointed as lead manager of the Legg Mason Japan Absolute Alpha Fund the Luxembourg domiciled Ucits fund.
Andy Sowerby, head of Sales and Marketing at Martin Currie comments:- “This is an exciting milestone in the development of our Japanese long/short capability.
By capitalising on the combined strength of our collective resources we can further establish ourselves as a leading manager in this specialist area.
“Paul has over 30 years’ experience in managing Japanese equities and is backed by a proven team who together have combined experience of the Japanese market in excess of 97 years.”
CC-BY-SA-2.0, FlickrPhoto: OTA Photos. Groupama and Orange Enter Exclusive Negotiations for the Creation of “Orange Bank”
Groupama and Orange announced that they are entering exclusive negotiations with a view to working in partnership to develop a new banking model that will enable Groupama to strengthen its online banking business and Orange to successfully diversify into banking services.
The launch of “Orange Bank” is planned for the start of 2017 in France, followed by other European markets such as Spain or Belgium. The services offered will cover all standard banking services as well as savings, loans and insurance services.
These negotiations could result in the acquisition by Orange of a 65% stake in Groupama Banque, enabling it to benefit from an existing operational infrastructure for the launch of Orange Bank.
From its creation, Groupama Banque has positioned itself as a multi-channel bank. Orange will bring its digital knowledge to develop a 100% mobile offer corresponding to new uses increasingly employed by the two partners’ customers. The partnership with Orange will accelerate the deployment of such innovative banking offers and will leverage the network of local Orange stores as well as the highstreet branches of Groupama and its subsidiary Gan.
During the presentation of the “Essentiels2020” strategic plan in March 2015, Stéphane Richard, Chairman and Chief Executive Officer of Orange, announced the Group’s ambition to diversify its operations by capitalizing on its assets and in particular by concentrating its efforts on mobile banking, which offers important growth prospects. The plan’s objective is to reach 400 million euros of revenues in financial services in 2018.
CC-BY-SA-2.0, FlickrFoto: John Walsh. Bill Gross Recomends Looking at Developed Countries, Long Inflation and Short Fixed Coupons
Bill Gross continues to believe that the overall situation is a very complicated one. In its latest publication the formerly known as the king of bonds warns of a demographic boom.
Gross believes that Fantasy Sports, cellphone game apps, sexting, and fast food are the new era “Cake” and “day at the Coliseum” to appease the masses. Used to distract the population of an incipient growth in the value of wages, and manipulation of monetary policies for Wealthy corporations… “It’s a wonderful life for the 1% and a Xanax existence for the 99″.
According to the investor, in the 2016 US elections nothing will change. However, the demographic situation in his country, should change the direction of financial markets in the not too distant future. “I speak specifically though to liabilities associated with the Boomer generation: healthcare, private pensions, Social Security and the unestimable costs of global warming,” Gross mentioned before emphasizing that the U.S. government has current outstanding debt of approximately $16 Trillion or close to 100% GDP, but that the present value of programs such as Medicaid, Medicare and other social totals $66 trillion or another 400% of GDP.
Looking ahead to the construction of portfolios, Gross believes that-taking into account that developing countries have a younger population, “then developed nations could and should transfer an increasing percentage of their financial assets to emerging markets to help foot the demographic bills back home. Long-term then, as opposed to currently, think about increasing your asset allocation to the developing world… It’s also commonsensical that if higher Millennial wages are the probable result of a shortage of healthcare workers relative to Boomer requirements, then an investor should go long inflation and short fixed coupons.” U.S. 10-year TIPS at 80 basis points seem like a good hedge in that regard. Looking at particular sectors, Gross is optimistic about the healthcare sector, and believes that insurance companies as well as the bonds of underfunded cities and states such as Chicago and Illinois have a bleak future.
To conclude the manager mentioned that if you think things are bad today, the coming decades will be even worse and “extra dose of Xanax” will be needed.
CC-BY-SA-2.0, FlickrPhoto: Begoña. Weakening Renminbi Puts More Oil on the EM Fire
2015 ended with falling commodity prices, weakening EM growth momentum and increasing concerns about EM capital outflows. Deepening political crises in Brazil, South Africa and Turkey caused additional market nervousness in the last weeks of the year. The combination of expectations of tighter US monetary policy on the one hand and concerns about EM deleveraging, financial risks and deepening political crises in the problem countries should keep the pressure on the emerging world high in 2016 as well. The most important issue remains the Chinese situation of declining growth, increasing leverage growth, less effective economic policies and accelerating capital outflows.
The most recent source of EM risk aversion has been the depreciation of the Chinese renminbi. Since the mini-devaluation of last August, the authorities in Beijing have been managing the renminbi exchange rate relative to a basket of currencies of main trading partners. After the nominal effective exchange rate had appreciated by some 30% since 2011 (when most EM currencies started to depreciate), it stabilized in the second half of 2015. From the recent sharp daily moves relative to the US dollar – something which the Chinese had always avoided – we can now deduct that Beijing is strongly committed to avoid appreciation against the basket of main trading partners.
This decision makes a lot of sense given the weakness in the Chinese export sector and the importance of this sector for Chinese employment. Even more so because of the capital outflows that to a large extent are driven by the perception that the renminbi remains overvalued.
The problem for financial markets, however, is that a rapidly weakening renminbi means that an important anchor for EM currencies has disappeared. With the renminbi allowed to weaken relative to the US dollar, it is likely to keep pace with the other EM currencies and the euro. The latter is particularly relevant given the efforts by the ECB to push the euro weaker. Europe is China’s largest trading partner.
Another reason why the recent large CNY moves have created new unrest in financial markets is that they suggest that the economic problems in China might have become too big for the old gradual policy approach.
M.J. Bakkum is Senior Emerging Market Strategist at NN Investment Partners.
CC-BY-SA-2.0, FlickrPhoto: AlfonsoBenayas, Flickr, Creative Commons and I will treat emerging markets as emerging (yet again), among them. UBS AM: Market Resolutions for 2016
The latest edition of UBS Asset Management’s Economist Insights, authored by Joshua McCallum and Gianluca Moretti, speaks about market resolutions for 2016. Joshua has been Senior Economist with UBS Asset Management’s Fixed Income area since 2005, and prior to this he was a macroeconomist at the UK Treasury. Gianluca joined the firm in 2010 from the central bank of Italy.
Based on the experiences of 2015, they once again suggest some New Year’s resolutions for the market. Among others:
I must behave like an adult if I want central banks to treat me like an adult;
I must acknowledge that lower potential growth mean searlier rate hikes;
I will start the year with more humble expectations of growth;
I will treat emerging markets as emerging (yet again);
I will think of Greece as a holiday destination, rather than as destroyer of the Euro;
I will recognize that the global economy is diverging.
You can download the full document in the following link.
CC-BY-SA-2.0, FlickrPhoto: Vicent_AF. Asia's Long-Term Growth Prospects Still Look Good
I think it is fair to say that sentiment toward China, and by extension, Asia, within the U.S. investment community, is quite polarized. Whereas some investors I have met recently see opportunity in the weakness of the second half of the year, doubts over the reality of recent growth rates and anxiety over a slower headline rate of growth has caused many others to be quite fearful of China as a deflationary force in the world economy. I think this caution is mirrored by investors around the world, albeit that the degree of discomfort with China and Asia is perhaps less acute in Europe. Whilst those in Asia appear to be much more optimistic about the region’s own long-term growth prospects (and less suspicious about the quality of China’s historic growth), most investors are still in a “wait-and-see” mode.
It is not hard to see why. Indeed, let us just list the headwinds that Asia faces in the near term: the prospect of further tightening by U.S. monetary policy—this time in the form of rising rates; slowing nominal growth; low margins and disappointing earnings growth; a strong dollar and weak local currencies; increasing credit spreads; and poor momentum in the equity markets. And all of this is happening at a time when valuations, whilst not expensive, cannot be regarded as cheap in absolute terms. It is understandable that people may be waiting for some event or some improvement in valuations before they turn more positive. And it is rational, and almost always your best first guess, to assume that current trends will persist when you are trying to forecast the near-term future.
Now, let me just suggest that we have some data that should allow us to be more confident over Asia’s ability to weather the world’s deflationary forces. First, current accounts in Asia are generally positive. That means Asia’s countries are saving more domestically than they invest domestically. And so, they are relatively less reliant on foreign capital. There are some exceptions—India and Indonesia. But even here, reliance on U.S.-dollar capital markets has reduced dramatically over recent years. Second, inflation rates are low across much of the region (again Indonesia and India are exceptions, even though they have been successful at moderate price rises). These low inflation rates mean that Asia’s policymakers have a lot of room to offset deflationary impulses by either monetary policy or even government spending or tax cuts. A return to a more inflationary environment would relieve some pressure on margins, earnings and valuations.
The question is: are we seeing any signs of such a response? I think we are. First, there are the natural responses of markets—prices adjust. Most obviously, in the face of deflationary U.S. pressures, Asia’s currencies have taken the strain. Acute declines have been limited to commodity-related currencies, such as the Malaysian ringgit and Indonesian rupiah. Elsewhere across the region, moderate currency declines (nowhere near as severe as what Latin America has suffered) have acted as a sort of pressure valve to protect domestic employment and maintain domestic demand. Although this is a drag on U.S. dollar returns and (to a lesser extent) Euro-based investors, the fact that currencies have been able to act as stabilizers of demand shows how far we have progressed in Asia since the late 1990s.
Then, we have the active response of policymakers. In India, we have seen the central bank successfully squeeze down core inflation rates without too severe an impact on industrial profits (perhaps helped by lower commodity prices). Now, India’s central bank seems ready to ease. In China, we are seeing authorities raise the growth rate of narrow money, continue to press with financial system reforms, and support the property market. Japan is continuing its policy of reflation and structural reform initiatives. So, in the face of a deflationary U.S. policy, the three Asia giants seem to be leaning in the other direction. The degree of offset is perhaps still small. But talking to clients and investors around the region leaves me to believe that there is no great liquidity crisis. Indeed, if the acutely bearish reaction to the Chinese currency re-pegging in the middle of 2015 taught us anything it is that, in the wake of a fall in equity prices, value was quick to emerge and buyers were quick to enter the markets.
Global Middle Class Spending
In this context, Asia’s long-term growth prospects still look good. High savings rates, large manufacturing bases, reformist governments pursuing financial, legal, and corporate reforms mean that Asia should continue to invest and potentially grow at higher rates than the rest of the world. Over time, this investment will continue to raise real wages across the region. This trend should not only support currencies and growth but also may lead to big changes in Asia’s households. We have noted before that on current trends, Asia stands to account for two-thirds of global middle class spending by 2050. We believe this is just the beginning of a sustained growth in the kinds of businesses that will help generate profits from facilitating this revolutionary change in lifestyles: consumer brands, restaurants, leisure, media, insurance, property, consumer banking and wealth management. In industry, automation equipment and IT software will help companies offset higher wages. Increased government and private spending on health care, the environment, and general welfare will open up new opportunities for companies to create competitive advantages and raise profits and shareholder returns.
In light of these trends, we should remember the monetary environment that dominates our discourse and the media headlines: By how much the Fed will raise rates? This environment, whilst important in the short-term, is to an extent just a veil that distracts our attention from the real economic changes that are evolving almost undetected before our eyes. With that said, nevertheless, we have to admit that 2016 is likely to be a landmark year in U.S. monetary policy—the first rise in rates in a decade.
Within Asia, our focus remains on the companies that will support the real economic growth trends, across all countries. However, it is true that some countries currently appear to be more fertile grounds for corporate research than others. On valuation grounds, India looks moderately expensive, with disappointing earnings growth and a lot of expectations over the still-unfulfilled reforms by the prime minister. In China, valuations are much more reasonable—parts of the Hong Kong market look cheap. And after a difficult time in 2015, the Association of Southeast Asian Nations once again looks to offer new opportunities, even as stock prices in some parts of the North Asian markets, particularly in Korea, seem to be quite advanced. Japan, at least, offers some value and some hope of better corporate returns, though one should be wary of hyping Abe’s third arrow too much.
Overall, I look forward to 2016. Although the headwinds are currently considerable, Asia’s businesses seem to be weathering the storm, and so long as we keep our eye on the long term, the investment environment should offer up some good opportunities.
Robert J. Horrocks is CIO and portfolio manager at Matthews Asia.
CC-BY-SA-2.0, FlickrPhoto: Chuck Coker
. House Prices Continue a Slow Recovery, IMF Says
Globally, house prices continue a slow recovery, according to The Global House Price Index, released by IMF in December. The Index, an equally weighted average of real house prices in nearly 60 countries, inched up slowly during the past two years but has not yet returned to pre-crisis levels.
If prices went up in The United States, Colombia and Spain, in Brazil, Chile, Mexico, and Peru they decreased. The areas with the biggest growth were Qatar, Ireland and Hong Kong while the biggest decreases took place in Ucraine, Russia and Latvia.
As noted in previous quarterly reports, the overall index conceals divergent patterns: over the past year, house prices rose in two-thirds of the countries included in the index and fell in the other one-third.
Credit growth has been strong in many countries. As noted in July’s quarterly report, house prices and credit growth have gone hand-in-hand over the past five years. However, credit growth is not the only predictor for the extent of house price growth; several other factors appear to be at play. While in Brazil credit and prices went down, and in Colombia and The United States both grew, in Spain prices grew while credit decreased, and in Mexico priced did not while credit did.
For OECD countries, house prices have grown faster than incomes and rents in almost half of the countries.House price-to income and house price-to-rent ratios are highly correlated, as documented in the previous quarterly report.