Markets around the world were in awe while the US election results were called on November 8th. At the end of the count, the House, the Senate and the Presidency were all red, and so were the markets. The Mexican peso, which throughout the campaign had been seen as a proxy for the President Elect‘s prospects, sank to its lowest level in history, plunging over 13% having its biggest fall since the so-called Tequila Crisis, in 1994.
Throughout his campaign, Donald Trump proposed increasing import tariffs, scrapping regional and global trade deals, and blocking worker remittances to Mexico. According to Nuno Teixeira, Head of Institutional & Retail Solutions Investment and client solutions investment division at Natixis, Donald Trump’s program seems more positive for equities, “with his proposal to cut back the maximum corporation tax rate from 35% to 15%, but his ultra- protectionist stance would dent companies with the most international exposure.” However the market’s first reaction was a sell-off.
While policy uncertainty will no doubt taint the markets, Natixis believes industrials, defense and oil would benefit from a Trump Presidency. Gold, is also expected to gain. Meanwhile, healthcare might get a surge given Trump wants to call into question the universal healthcare program implemented by the 2010 Obamacare legislation.
Emerging Markets, with the exception of Russia are expected to suffer in the short term. However, “in reality, if Trump were to keep to his Mexico trade agreements campaign promises, he may find punitive trade measures counterproductive given Mexico is the US’s second largest export destination and trade between the US and Mexico is interlinked.” Said Olga Fedotova, Head of Emerging Market Credit Research at AXA IM. Trump himself said in his speech, that he would be working with other countries.
According to Marco Oviedo, Barclay‘s Mexico Chief Economist and a former Mexican President Advisor the peso could fall to 22 per dollar, from an original level of 18.35 right before the election results. During the days prior to the election, the peso posted a four-day rally while expectations of a Democratic win grew. Mexico’s Central Bank Governor Agustin Carstens and Finance Minister Jose Antonio Meade have prepared a contingency plan but they informed in Mexico that they will not raise rates out of schedule. The next raise is expected to happen next week at their policy meeting.
Many Asian institutions are struggling to meet their targeted portfolio returns or have recorded negative returns amid the global market turbulence since mid-2015. This has forced them to look beyond core asset classes for yield and search for more non-traditional strategies as they seek to boost returns and reduce fee expenses on their portfolios.
This is one of the key findings from global research and consulting firm Cerulli Associates‘ newly released Institutional Asset Management in Asia 2016 report. While the number of traditional mandate issuances from Asian institutions declined, the pace of alternative searches and use of other non-traditional avenues like smart beta strategies have markedly increased among asset owners in China, Korea, Hong Kong, and Taiwan.
Alternative allocations, in fact, gave institutions like Korea’s National Pension Fund and Korea Teachers Pension Fund the strongest returns on their respective investment portfolios last year. This has strengthened the resolve of many Korean institutions to beef up their alternative exposures, with some of them aiming to invest at least 20% of their portfolios in alternatives before 2020. Apart from the allure of alternative investments, the underperformance of active managers has also prompted Asian institutions to think more about passive products or smart beta products. In Taiwan, assets allocated by pension funds to smart beta strategies surged by 62.2% to US$10.9 billion, accounting for 31.9% of their total overseas mandates as of June 2016.
However, Asian institutions are unlikely to have full-scale expertise in these areas any time soon, and will have to rely on external managers. “This burgeoning demand for alternatives and passive products will provide more opportunities than ever to managers known for their strong alternative capabilities,” says Manuelita Contreras, an associate director with Cerulli, who led the report.
This certainly puts pressure on traditional asset managers. In Cerulli’s survey of institutional asset managers in Asia, they ranked competition from alternatives and passive products among their top five challenges over the next two years. Many traditional asset managers have even jumped on the alternative bandwagon and built their alternative capabilities.
The growing competition for assets from the usual institutional investors in the region has also prodded managers to find opportunities at smaller institutions, including private banks, smaller pension funds, benefit associations, and small and mid-sized insurers. “Nowhere is this more evident than in Korea, where a slew of them have poured money into overseas investments, with some having even leapfrogged from passive to alternative investments,” says Rui Ming Tay, an analyst with Cerulli, who co-led the report.
According to Philippe Waechter, chief economist at Natixis, on election day, the economic context continues to look uncertain. Growth in the US has been weaker in 2016, while the world economic outlook is on a moderate slope. World trade is not progressing much and fails to act as a growth driver for the US. In other words, if the US economy wants to get back on the path to growth, it will have to rely on its domestic market, rather than external impetus.
In this respect, he believes the two presidential candidates’ programs offer very different, and often vastly diverging, solutions:
In the Democrats’ program, as embodied by Hillary Clinton, the overall approach is based on the acknowledgment of the current long-term stagnation in economic growth i.e. a situation characterized by insufficient private demand to ensure robust growth, as well as by major revenue inequality. The solution put forward by Hillary Clinton is to implement an infrastructure investment program, which would be financed by more hefty income tax on the highest earners, thereby giving domestic activity a boost and hence reducing inequality in order to gradually eliminate the risk of long-term stagnation. The program’s aim is to put growth back on an upswing by reallocating resources towards infrastructure investment, and this increased investment should in turn heavily encourage private investment. The program would be financed by higher taxes, so the impact on the public deficit would be limited and the public debt profile would only increase very slightly, and probably not be much different to what is currently projected by the US authorities.
Donald Trump’s program takes a different take on the economy. It is based on two major principles: the first is to considerably cut back household and corporation tax in order to bolster domestic demand; the second is to give the United States back its power and independence of bygone days. This involves pulling out of trade commitments and treaties, and international political commitments, as well as the implementation of a more protectionist framework with a significant hike in customs duties, particularly with China. The overall aim is to drive the domestic market, while reinforcing the United States’ independence from the rest of the world.
The choice of candidate will have lasting and very diverging consequences for the economy. For the rest of the world, the impact will also be very different depending on who wins. If the Democratic party wins, we know that Clinton is not opposed to free trade, although she is not a fervent supporter either (particularly the TTIP), so in other words she will not take protectionist measures but neither is she like to force greater trade agreements between countries or zones. From a political standpoint, the role the US plays in the worldwide equilibrium would continue.
If the Republican candidate is wins, then the situation will look very different. The shock on world trade would affect all participants in the world economy, driving activity down. No-one will escape this negative shock, and in particular China. Canada and Mexico, which do considerable trade with the US, would also be penalized, and Europe would also be affected by this radical change. The other point to note is that the Republican candidate does not want to see the US guarantee world security, contrary to the situation we have witnessed since the Second World War, and this would cast doubt over NATO membership. There is a risk that this situation would create a context for mistrust and suspicion, which is never good news for growth.
At Natixis, from a tactical standpoint, they maintain a considerably more positive stance on equities than bonds, based on:
projections for world growth that are still weak but downward risks are easing;
extreme valuations on the bond market, even after the rise in rates seen since the start of September;
the feeling that Eurozone investors should gradually factor in the upward inflationary trend out to mid-2017 and the likely announcement from the ECB in December of a less generous approach to its quantitative easing program during 2017, thereby promoting an upward normalization of long-term rates.
“In view of the likely Hillary Clinton victory, we maintain a positive view on emerging markets, particularly on emerging debt, once the rise in short-term US bond rates and the dollar has been processed.” Says Nuno Teixeira, Head of Institutional & Retail Solutions Investment and client solutions investment division.
The end of the Fed’s independence?
The two candidates’ attitude on the Federal Reserve is also very different according to Waechter. “We can expect few changes from Democrats: the candidate would guarantee the Fed’s independence and Janet Yellen could seamlessly continue to manage US monetary policy. The Republican candidate’s approach is radically different. This can be seen in the vast number of criticisms of Janet Yellen’s strategy. The danger is that he could attempt to reduce the Fed’s independence, either heavy-handedly by changing the law, or by revisiting an objective from Republicans in Congress to cut back the central bank’s leeway, all with the aim of forcing the Fed to follow precise rules in its management of monetary policy. The Fed could still be independent in legal texts, but in practice it would not be.” He concludes.
State Street Global Advisors (SSGA), the asset management business of State Street Corporation, announced a partnership with Credicorp Capital which will serve as promotion agent for SPDR ETFs to institutional investors in Chile, Peru and Colombia. The partnership, which became effective September 12, 2016, will provide institutional clients throughout the region with local, dedicated SPDR ETF resources to help meet their portfolio management needs.
“Latin America is a strategically important market to the SPDR business and we are pleased to enhance our resources for clients throughout the Andean region,” said Nick Good, co-head of the Global SPDR business at State Street Global Advisors. “SSGA’s global ETF capabilities paired with Credicorp’s deep local relationships and expertise will result in an improved client experience.”
“We are thrilled to partner with State Street Global Advisors to represent their market leading family of SPDR ETFs. The Global SPDR business is the unquestioned ETF leader for institutional investors and we look forward to delivering enhanced resources to our clients across the Region,” said Alejandro Perez Reyes, head of Asset Management at Credicorp Capital.
Foto: Boegh
. Vanguard abrirá un centro de innovación en 2017
Vanguard has announced that the company has created a new operation entirely focused on developing services to meet the evolving needs of its individual, financial advisor, and institutional clients. The Vanguard Innovation Center, expected to open in the second quarter of 2017, will be located in Philadelphia at the nexus of the city’s robust academic and business communities, and in proximity to the region’s transportation hubs and the firm’s global headquarters in Malvern, PA.
“Innovation is woven into Vanguard’s DNA, from our unique mutual ownership structure to bringing the first index mutual fund to market for individual investors,” said Vanguard CEO Bill McNabb. “The Innovation Center is a tangible commitment that we’ll continue our strong track record of building capabilities that we believe give our clients the best chance for investment success, and we’re pleased to take this significant next step in Philadelphia.”
Today, more than 90% of Vanguard’s interactions with its 20 million clients occur digitally, enabling the company to increase productivity, lower costs, and improve the investor experience. A recent example is Vanguard Personal Advisor Services, a hybrid advice offering that combines the virtual engagement, customized financial plan, and sophisticated computer modeling of robo-advisors with the judgment and behavioral coaching of a human financial advisor. Introduced in May 2015, Personal Advisor Services now manages $47 billion in assets.
Innovation Center to capitalize on tech revolution While still in the early stages of development, Vanguard envisions the Innovation Center as an internal, entrepreneurial team of initially 20 crew members dedicated to galvanizing existing innovation efforts and serving as a catalyst for new ideas and solutions. The Center’s team will also evaluate mutually beneficial partnership opportunities with other businesses and universities as a way to share experience and expertise, from research to process to technology, across industries.
“We are in the midst of a great technological revolution – from self-driving cars and package-delivering drones to smart phones and 3D-printers – that is changing the way we live, work, and, in Vanguard’s realm, invest. With a centralized, and centrally located, Innovation Center, Vanguard seeks to harness emerging technologies and new processes to create value for our clients by improving their investing experience and their investment outcomes,” said Mr. McNabb.
Vanguard returns to Philadelphia roots Vanguard traces its roots to Wellington Fund, one of the mutual fund industry’s first balanced funds, which was founded by Philadelphia accountant Walter L. Morgan in 1929. Today, Vanguard Wellington Fund is the largest balanced fund with more than $92 billion in asset1. Vanguard also operated a walk-in investment center in Center City from 1984 to 1999 to serve individual investors making deposits to their mutual fund accounts or contributing to their IRAs.
Lombard Odier announces the appointment of Joséphine Verine in the newly created role of COO Marketing in the Marketing and Communication Department of the Lombard Odier Group.
Joséphine Verine will report to Fabio Mancone, Executive Vice President and Chief Branding Officer of the Lombard Odier Group.
She will be responsible for ensuring that marketing operations and project management run smoothly across units, markets and departments. In her role, she will also directly oversee events, publications, editorial content and client experience.
Joséphine Verine has more than 20 years of experience in the luxury sector. She joins from Chanel where she has been Managing Director of the Haute Couture Division for the last three years. Prior to that, she occupied a number of senior management positions in marketing, communication and retail at Dior, Céline, Armani and Louis Vuitton.
Joséphine Verine brings to Lombard Odier her valuable expertise and sensibility to luxury clients’ relationship management and service.
Joséphine Verine will be based in Geneva. Her appointment is operational as of 15 November 2016.
Looking at the potential impact of the incoming 45th US President on emerging markets, the AXA IM Emerging Market debt team believes that trade and immigration policy has proved among the most contentious topics in the US elections. According to Olga Fedotova, Head of Emerging Market Credit Research at AXA IM: “Trump may find punitive trade measures counterproductive.” During their campaigns, Trump has proposed increasing import tariffs, scrapping regional and global trade deals, blocking worker remittances to Mexico, and has hinted at the mass deportation of undocumented workers. In contrast, Clinton has largely promised to oversee a continuation of the status quo. Takinf this into consideration, the specialist believes that concerns about a sharp EM correction are overplayed – “the direct impact of US trade on EM economies is modest, with EM countries sending just 16% of their exports to the US. However, Mexico remains singularly exposed, with 81% of its exports going to the US.”
Fedotova believes that if Trump were to keep to his Mexico trade agreements campaign promises, he may find punitive trade measures counterproductive given Mexico is the US’s second largest export destination and trade between the US and Mexico is interlinked. “China and South Korea take second place, with US imports making up 3%-4% of GDP. If Trump were to impose punitive tariffs against China, any counter action could inflict significant pain on US exports, whose third largest market is China. In EMEA, the trade ties with the US are modest, with Israel (1% of GDP) and Saudi Arabia (0.7% of GDP) the most exposed, although two-way links limit the risk to individual industries. For example TEVA, an Israeli pharma company which generates over half of its revenue in the US, produces Multiple Sclerosis drugs which current patents would make difficult to replicate. In Saudi, the trade account is balanced, with oil exports to the US offsetting imports of cars and machinery.”
In their view, the strength of the dollar is the main channel through which a US President affects EM. “Assuming some fiscal loosening, the Fed reaction determines the dollar impact. The new President inherits a strong dollar by historical levels and the major drivers of $/EM are turning favorable for EM. There could also be tension around “currency manipulation” and a high risk that the Trans-Pacific Partnership (TPP) is delayed or rejected.”
Meanwhile for Sailesh Lad, manager of the AXA World Funds Emerging Markets Short Duration Bonds fund “The severity of volatility and weakness in EM will depend on how quickly and what is implemented regarding the TPP. I recently attended the IMF meetings in Washington DC at which a panel debated whether Trump could rip up Nafta without government approval! This could have negative growth implications for not only EM but also US. If there is no room for fiscal expansion, then the Federal Reserve is the only institution who might be able to kick start the economy. Trade is clearly a point of contention, less so with Hilary than Trump, but it is important to note that US exports are a fifth of Mexico’s GDP, but only 4-5% in China and Korea and 2% or lower in the other manufacturing exporters. That said, a shock to global trade would clearly hurt all of EM.”
Overall they expect more volatility in markets in a Trump victory because of policy uncertainty. “In the medium term, the results of this election will have a global impact, not just an impact in EM countries. In my view countries with large external financing needs and high beta such as Turkey and South Africa may suffer and their debt underperform. Diverging foreign policy objectives could see shifts in geopolitical alignment. In our view Asia (ex- China) is least likely to be impacted. Ukraine may also suffer if Trump wins, as he is seen as being more pro-Russia, and therefore Russia could see more up-side than down-side. For example a victory for Trump could usher in a renewed détente with Russia, a relationship that has become increasingly strained under President Obama. While there are some fears about additional financial sanctions under Clinton, the marginal effect of further sanctions is likely to be limited.” Russian companies have largely adjusted through deleveraging, with total corporate external debt going down to USD 468bn in September 2016, from USD 678bn reported when sanctions were first imposed in 1Q 2014.2 Lastly, the Middle East could become more unstable with risk of more geo-political issues.
“A Clinton win should mean business as usual for Ukraine, as she doesn’t share Trump’s pro-Russia stance. We have been reducing our exposure to Mexico for both US election risk worries but overall we are slightly less positive on Mexico due to reform fatigue and concerns around certain Mexican corporate fundamentals. Also in Asia, we have been reducing overall exposure as we believe the region is expensive on valuation terms.”
Fedotova concludes: “Regardless of the winner, gridlock, pragmatism and self-interest are likely to prevent the market’s worst fears from materialising. Headline risk and volatility may increase, particularly with a Trump win, close trade linkages – 50% of US exports are destined for emerging markets, would make a fundamental shift in trade policy a case of beggaring thy self, rather than thy neighbour.”
With the U.S. election now just 24 hours away, I’ve been recalling what it was like to sit in a car with each of my three teenage children when they were learning how to drive.
Quite early on you tackle the principles of steering safely. My advice was an exhortation to “Aim high!” whenever I sensed that eyes were drifting down toward the dashboard or out toward the sidewalk.
It’s counterintuitive advice—but that’s why it’s so useful. Your attention is inevitably drawn to the potential obstacles and dangers closest to you, in the foreground of your vision. But let it stay there and you end up swerving rather than steering, careering toward one obstacle as you try to avoid another. “Aim high,” keeping your eyes on the middle of the road well ahead of you, and you drive smoothly on your way.
On the Nature of Uncertainty
This is a paradox we’ve tackled in a few of our recent CIO Perspectives. Investors have a lot of politics clouding their peripheral vision right now. It’s not as though politics are irrelevant to investment portfolios, any more than sidewalks and parked cars are irrelevant to the learning driver. But the safest way to address them is to acknowledge that they are there while looking past them, focusing on the long-term center ground to which they are likely to converge rather than the short-term extremes where they now sit.
This is the nature of events loaded with uncertainty. In the lead-up to such events and in the immediate aftermath, the uncertainty is high; as time passes, some of that uncertainty diminishes.
For example, it’s now 20 weeks since the Brexit referendum. Before the vote, uncertainty was high, and in the immediate aftermath, the U.K. government’s position that “Brexit means Brexit” kept us guessing. But by last week we had an important High Court judgment that, while adding uncertainty to the timing of the U.K.’s exit from the European Union, reduced the uncertainty around the type of exit it might be—more “soft” than “hard.”
Tomorrow’s Election Results Are Only the Start
Faced with events of extreme uncertainty that diminish over time, the investors who drive most smoothly are usually the ones who recognize that their greatest advantage is their long-term time horizon.
By then, we should have more information than we do now, but it’s not a certainty. The shape of Congress will be clearer. But the presidential election polls are close and one candidate has been calling the integrity of the process into question; recall that it took a month to confirm who won in 2000.
As I suggested back in February, when Brexit and candidate Trump still seemed like low-probability outcomes, exploiting your long-term time horizon in an environment like today’s involves hedging specific risks where possible, reducing whole-portfolio risk, and taking contrarian positions when market pricing moves too far. Those able to adopt options strategies can almost literally sell short-term uncertainty in exchange for long-term certainty via put writing. I believe that’s a compelling opportunity at the moment.
In other words, “aim high.” The time to hold fast to rational argument, a calm outlook and high principles is precisely when others are swayed by innuendo, hyperbole and low rhetoric. While they swerve from one outrageous revelation to the next, we can look further down the road to the time when the checks and balances of the political and the economic systems have restored some equilibrium. If you ever learned to drive, you know it’s the right thing to do.
CC-BY-SA-2.0, FlickrFoto: Lynn Greyling. Seis razones de la última oleada de ventas en deuda
October was a bad month for bond markets. German Bunds have risen 30bps, making it their worst month since 2013, whilst U.S. Treasuries have climbed to their highest levels since May 2016. According to Pioneer Investments, the main reasons for the sell-off are:
Increased probability of a Fed rate hike in December (now 73%) – the recent economic data in the U.S. (and globally) has been just about strong enough to allow the Fed to hike in December and not, in our opinion, upset markets.
All about inflation breakevens – real rates haven’t moved. In the major markets, the majority of the recent sell-off can be attributed to a rise in inflation expectations, due to the increase in the oil price over the last 12 months.
Stronger UK data sees market pricing next rate move as a hike – as mentioned below, Q3 GDP data in the UK was sufficiently strong to make the market consider that further rate cuts may not be needed.
Euro OverNight Index Average (EONIA) no longer pricing in rate cuts – as in the UK, recent strong economic data in Europe (better IFO survey data and German Industrial Production numbers), along with increasing inflation makes it unlikely that the ECB would cut the deposit rate further.
Stretched positioning – data from the Eurex futures exchange and anecdotal evidence from counter-parts suggest that many investors were long duration. The cutting of these positions as bond yields rose exacerbated the selling pressure.
Bond volatility had been close to historic lows – the Merrill Lynch Option Volatility “MOVE” index showed bond market volatility had moved back towards the very lows levels seen in May 2013 and August 2014. In both cases, volatility rebounded sharply higher shortly afterwards.
Pioneer’s David Greene says: “Whilst we have some sympathy with the move higher in yields, and are running a short duration position ourselves in Europe, we don’t subscribe to the belief that this is the start of another “taper tantrum”.”
CC-BY-SA-2.0, FlickrFoto: VectorOpenStock. Thomson Reuters lanza la app Eikon Election para ofrecer datos sobre las elecciones estadounidenses
Thomson Reuters has launched a U.S. Election app on its flagship desktop product Eikon that provides financial professionals a one-stop location for market data, news, commentary, and analysis leading up to and after the November 8 election.
The election app provides inter-day analysis and visuals, both U.S.-specific and global, across key segments of the capital markets including foreign exchange, equities, fixed income, and commodities. The app is broken out by financial segment and includes ongoing news commentary from Reuters related to the specific market. Users have access to select Chartbook content from Thomson Reuters financial time series database Datastream.
The app further provides a continuous Reuters news feed of election-related news, and links to Reuters polls, the Reuters Election 2016 Live Blog, Reuters TV, and the Reuters States of the Nation App, an interactive product that allows users to create their own election scenarios.“
U.S. presidential elections traditionally create short- and long-term ramifications for all segments of the global economy and the financial markets,” said Debra Walton, global managing director, customer proposition, Thomson Reuters Financial and Risk. “Financial professionals are inundated by information from multiple sources, so by merging content from across Thomson Reuters, we are providing our customers with a comprehensive portfolio of news, data, and analysis all at a single location, enabling them to make more informed investment decisions.”
Thomson Reuters Eikon is a powerful and intuitive next-generation open platform solution for consuming real-time and historical data, enabling financial markets transactions and connecting with the financial markets community. Its award-winning news, analytics and data visualization tools help its users make more efficient trading and investment decisions across asset classes and instruments including commodities, derivatives, equities, fixed income and foreign exchange. Eikon is a leading desktop and mobile solution that is open, connected, informed and intelligent.
Users can connect with clients and/or peers through Eikon Messenger in a secure and compliant manner, and provides access to a messaging community of over 300,000 financial professionals. Eikon Messenger is available as part of an Eikon subscription or as a free, stand-alone service.
