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Japan Wheels Out Its Helicopters

The BoJ sends an invitation to government, a challenge to markets.

The engines aren’t running yet, and the fuel is still on its way. But in last week’s announcements from the Bank of Japan there was the unmistakable sound of helicopters being wheeled out of their hangars.

Wednesday’s central bank doubleheader saw the Federal Reserve deliver the usual mix of hawkish tones and no action that we’ve come to expect, having already been upstaged by Bank of Japan Governor Haruhiko Kuroda’s headline-grabbing innovations.

‘Yield Curve Control’: A Step towards Helicopter Money

Markets had expected a commitment to negative rates combined with a tweak to the bonds purchasing program to steepen Japan’s yield curve. Instead, Kuroda announced a more aggressive commitment to a 2%-plus inflation target and a target for the 10-year yield: Bonds will be purchased to keep the latter “around the current level” of zero percent.

This is a commitment to negative deposit rates: Holding the 10-year yield at zero stops negative short rates from spreading out along the curve, and that upward slope should help banks and insurance companies survive as long as those negative rates are required.

It also doubles down on the QE “portfolio effect.” Should Japan one day succeed in generating growth and inflation, holding the 10-year at zero implies an increasingly negative real yield, and an ever-greater incentive to sell bonds and buy real assets.

But, most importantly, it is the clearest signal yet that the Bank of Japan wants the government of Japan to take on more debt and start spending aggressively. When you reach the outer bounds of what is possible with monetary policy alone, you need a fiscal policy that creates a genuine prospect of inflation, which in turn can provide the fuel for low rates to work through the portfolio rebalancing channel. Only then do the two arms of policy reinforce one another.

Back in July, we saw signs that the Japanese government was ready to contemplate new measures. By committing to buying 10-year bonds at a zero yield no matter what, the Bank of Japan has promised the “helicopter money” to finance those measures.

Some Market Players Will Fight This…

If this is an invitation to the government, it is also a challenge to financial markets. No good can come of such egregious market interventions and distortions, argue some very prominent investors; it’s unsustainable, and a lot of money can be made by those brave enough to try to break the policy. They point to failed interventions and policy targets of the past, from the Fed’s “Operation Twist” in the early 1960s, through various ill-fated currency pegs, to the unravelling of the European Exchange Rate Mechanism (ERM) after Black Wednesday in September 1992.

They may be right over the long term. Japan must hope it can rediscover modest growth and inflation with these policies before its enormous debt burden collapses the yen under its weight. That may prove impossible.

But would you bet on that failure now, when Japan has time and political commitment on its side? These are powerful forces. People have been shorting Japanese government bonds for 20 years already, and they keep getting carried off the field.

…But It Is Kuroda’s ‘Draghi Moment’

The world is very different than it was in 1992, when the ERM failed. The new era dates from 2012 and ECB President Mario Draghi’s defining pledge to do “whatever it takes” to preserve the integrity of the European single currency, the ERM’s successor. Before these words were uttered, the Greek debt crisis was dragging the euro to the edge of a very sheer cliff—and a lot of investors had been waiting years for the chance to push it over. Big, 100-year-old financial institutions had been shorted out of existence during the financial crisis, they reasoned. Surely it was a small step to do the same for the Eurozone?

They were denied their moment and we all learned the dangers of trying to short political entities out of existence when they have strong leadership and resolve.

If the ECB can hold its own while trying to satisfy 19 disagreeing masters, imagine what the Bank of Japan can do with the full backing of its government. It is already well on the way to buying up the second-biggest bond market in the world. Now its helicopters are out, and markets probably won’t have the ammunition to shoot them down.

Neuberger Berman’s CIO insight by Brad Tank

Despite Global Offshore Financial Market Growth Slowing in 2015, Unrest will Keep Industry Afloat

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While 2015 was a weak year for the global offshore financial market, with growth slowing to 1.6% over the previous year, there are notable differences between offshore centers and their propositions and performances, and wealth managers need to understand these differences to service customers more effectively, according to financial services research and insight firm Verdict Financial.

The company’s latest report found that safe havens, such as the US and Switzerland, are rising in prominence, while more traditional offshore destinations, such as the Bahamas, are experiencing declines in offshore assets.

Heike van den Hoevel, Senior Analyst at Verdict Financial, notes: “Understanding the unique selling points of each offshore center is key to determine not only their performance, but also future prospects, and the reasons why investors will want to invest there.”

For example, the Bahamas, which is mainly known as a tax haven, has struggled in recent years. In light of recent scandals, in particular the Panama Papers, as well as increased media attention on tax evasion, investors and wealth managers are turning away from traditional offshore centers to avoid being tainted by association.

Switzerland, one of the world’s largest safe havens, represents another interesting example. Traditionally known for banking secrecy and numbered accounts, the Alpine state felt the full brunt of the increased pressure on offshore centers after the 2008 crisis, and retail non-resident deposits declined by 24% between 2008 and 2013. However, the tide is turning, and the Swiss government has made efforts to increase transparency and end bank secrecy in recent years, most notably committing to the automatic exchange of tax information as part of the OECD’s Common Reporting Standard, which will begin in 2018.

Van den Hoevel continues: “These efforts combined with the country’s safe haven status have seen non-resident deposits return in recent years. Various international developments – including Britain leaving the EU, the coup in Turkey, continuous unrest in the Middle East, slowing economic growth in China, and uncertainties surrounding Russia’s geopolitical ambitions – have all contributed to funds flowing back into Switzerland as investors seek a safe haven for their money.”

The Japanese Equity Market Remains Attractive

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On Wednesday both the Federal Reserve and the Bank of Japan decided upon leaving interest rates on hold. However, the BOJ shifted the focus of its monetary stimulus from expanding the money supply to controlling interest rates. Its policy announcement had two main parts. First, it committed itself to continue expanding the monetary base until the inflation rate “exceeds the price stability target of 2 percent and stays above the target in a stable manner.” Second, it will start targeting the yield on ten-year Japanese government debt (JGBs), while continuing to buy about 80 trillion yen in JGBs annually.

A decision that former Fed Chairman, Ben Bernanke, found puzzling given the curent policy looks to both setting a price and buying a given amount at any price but he believes “that the BOJ was concerned that dropping the quantity target would lead market participants to infer (incorrectly) that the Bank was scaling back its program of monetary easing. Over time, assuming that the BOJ does adhere to its new rate peg, the redundant quantity target is likely to become softer and to recede in importance. The BOJ’s communication will accordingly begin to emphasize the yield on JGBs, rather than the quantity of bonds in the BOJ’s portfolio, as the better indicator of the degree of monetary policy ease.”

According to Tomoya Masanao, Head of Portfolio Management Japan at PIMCO, “the decision is in part a reflection of the BOJ’s recognition that base money expansion itself has little easing effect and that Japan’s neutral yield curve, which is neither expansionary nor contractionary for the economy, is steeper than the bank would have thought. The actual yield curve should not be too flat relative to the neutral curve otherwise the economy will be negatively affected through weakening of financial intermediation.”

Paul Brain, Head of Fixed Income at Newton Investment Management commented: “This is no bazooka from the BoJ but it’s an interesting approach nonetheless. Targeting long term rates as well as short rates reminds us of the period in the 1940s and 1950s when the US fixed 10 year government borrowing rates. It opens the door for more government spending finance at very low rates without further undermining the banking system.” While Miyuki Kashima, Head of Japanese Equity Investments, BNY Mellon Asset Management Japan said he believes the mid to longer-term prospects for the Japanese equity market remain attractive “as the domestic economy is at a rare transitional phase, moving from a period of contraction to one of expansion. The market sell-off this year has been largely due to external factors, and while Japan will be affected by any global slowdown for a period, the country has a large domestic base and can weather such turbulence much better than most economies. Contrary to Japan’s image as export dependent, reliance in terms of GDP is only about 15%, much smaller than most countries in Asia or Europe. The lower oil price is positive for corporate profits overall.’

Wine Investments to Benefit From Brexit

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A survey of over 100 UK IFAs and wealth managers has found that over a quarter expect the demand for investments in wine to grow over the coming 12 months as investors look for more real assets and diversification in the wake of the decision of UK voters to leave the EU.

According to Cult Wines, a specialist in the acquisition and investment management of fine wines, the research into the views of 101 UK intermediaries in July this year found that 27% expect Brexit to drive investments in this area.

Industry benchmark the Liv-ex Fine Wine 100 index gained 3.6% in June alone in the wake of the Brexit vote. This was the largest positive monthly movement since November 2010, and the index’ monthly closing level of 269.07 was the highest since August 2013.

In the week after the Brexit vote, Cult Wines says its trade sales rose 106%. The trend of strong sales has continued since then, the company says, as US and Asian investors have benefitted from weaker sterling against the dollar and the Hong Kong dollar.

The diversification element of invesing in a real asset such as wine is cited by about half, 48% of those intermediaries who see increasing investments in fine wine. Some 42% cited “attractive medium to long term returns”. The compounded annual return on investable wines since 1988 has averaged 10.65%, Cult Wines says.

Intermediaries also noted that awareness of wine as an invesable area has been rising among high net worth retail investors – as it has for alternative physical investments generally.

Cult Wines estimates the fine wines sector to be worth over $4bn annually, adding that “fine wines tend to perform well when the pound is weaker and boasts a number of defensive characteristics. Holdings in wine are not normally linked to other asset prices, with the long term correlation between wine prices and the FTSE 100 at just 0.04.”

Tom Gearing, managing director at Cult Wines, said: “An allocation towards fine wine provides investors with a number of guarding characteristics, and has the advantage of not necessarily following the general trend of lagging behind the rest of the market during economic expansion because demand is consistently strong. Real assets remain an attractive option as they tend to change in value independently of the core financial markets.”

Globally, sales of fine wines to investors continue to grow. Cult Wines opened an office in Hong Kong earlier in 2016; the market estimates that half of Bordeaux’s fine wines went to Asia last year, while its share of the Bordeaux export market has more than doubled over the past decade. Cult Wines’ own sales to Hong Kong in the first half of 2016 were £1.6m, and it expects annuals sales over £5m. Compound annual growth experienced in the region in the past four years has been 235%, and it expects annuals sales of £20m by 2020.

Net Sales of UCITS See Strong Rebound in Q2 2016

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The European Fund and Asset Management Association (EFAMA) has recently published its latest Quarterly Statistical Release describing the trends in the European investment fund industry in the second quarter of 2016.

The Highlights of the developments in Q2 2016 include:

Net sales of UCITS rebounded to EUR 71 billion, from net outflows of EUR 7 billion in Q1 2016.
Long-term UCITS, i.e. UCITS excluding money market funds, posted net inflows of EUR 44 billion, compared to net outflows of EUR 5 billion in Q1 2016.
- Equity funds continued to record net outflows, i.e. EUR 18 billion compared to EUR 4 billion in Q1 2016.
- Net sales of multi-asset funds increased to EUR 14 billion, from EUR 6 billion in Q1 2016.
- Net sales of bond funds rebounded to EUR 42 billion, from net outflows of EUR 9 billion in Q1 2016.
- Net sales of other UCITS increased to EUR 5 billion, from EUR 2 billion in Q1 2016.
UCITS money market funds experienced net inflows of EUR 28 billion, against net outflows of EUR 2 billion in Q1 2016.
AIF net sales increased to EUR 55 billion, from EUR 43 billion in Q1 2016.
- Net sales of equity funds fell to EUR 3.7 billion, from EUR 6.7 billion in Q1 2016.
- Net sales of multi-asset funds fell to EUR 15.2 billion, from EUR 20.3 billion in Q1 2016.
- Net sales of bond funds rebounded to EUR 7.3 billion, from net outflows of EUR 170 million in Q1 2016.
- Net sales of real estate funds fell to EUR 3.3 billion, from EUR 8.0 billion in Q1 2016.
- Net sales of other AIFs increased to EUR 22.5 billion, from EUR 11.5 billion in Q1 2016.
Total European investment fund net assets increased by 2.1% in Q2 2016 to EUR 13,290 billion.

Net assets of UCITS went up by 1.7% to EUR 8,073 billion, and total net assets of AIFs increased by 2.8% to EUR 5,217 billion.

Bernard Delbecque, Senior director for Economics and Research at EFAMA commented: “Net sales of UCITS rebounded during the second quarter of 2016 thanks a signification increase in the demand for bond funds and money market funds, which can be partly explained by the low interest rate environment and renewed expectations of further falls in interest rates.”

RIAs Continue to Win Marketshare, Growing at 6% While Wirehouses Shrink

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New research from global analytics firm Cerulli Associates reports that asset managers have identified registered investment advisors (RIAs), broker/dealer (B/D) mega teams, and home-office due diligence relationships as the groups with the largest pockets of opportunity to generate revenue and increase marketshare. These channels are also leading the trend toward more sophisticated, investment- and data-focused interactions that have traditionally been reserved for firms operating within the institutional space.

“In our survey of national sales managers, 67% rank increasing the technical skills of existing wholesalers to address more sophisticated advisor teams as the top priority,” says Emily Sweet, senior analyst at Cerulli. “We believe this expanding institutional influence in the retail market, especially in the areas growing most quickly, will continue for the foreseeable future.”

Cerulli projects that within these areas of growth, the independent RIA and hybrid RIA channels combined will increase their asset marketshare from 23% in 2015 to 28% in 2020. “While wirehouses still hold a substantial share of assets, RIAs are the growth story,” explains Kenton Shirk, associate director at Cerulli. “To build a relationship within an independent practice, wholesalers need to truly understand a firm’s investment philosophy and decision-making process.”

Cerulli’s latest report, U.S. Intermediary Distribution 2016: Evolving Roles in Distribution, focuses on the convergence of the institutional and retail markets and its influence over distribution strategies. In addition, the report analyzes trends related to advisor product use, portfolio construction, and allocation changes across industry segments.

Cash Levels Remain High

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According to the latest BofA Merrill Lynch Global Research report, cash levels rose from 5.4% in August to 5.5% in September – the two most popular reasons cited for high cash levels are a “bearish view on markets” (42%) and a “preference for cash over low-yielding equivalents” (20%).

Manish Kabra, European equity quantitative strategist, said that, “European investors have increased cash allocations to cover their sector underweights in Banks and Commodity sectors. Macro optimism is firmly at pre-Brexit levels, with economic growth expectations at their strongest since June.”

“Investors see an unambiguous vulnerability to ‘bond shock’ among risk assets, with the most crowded negative interest trades and EM equities susceptible should the Fed and especially the BoJ fail to reduce bond volatility in September,” said Michael Hartnett, chief investment strategist.

Other highlights include:

An all-time high, net 54%, of investors say equities and bonds are overvalued
Equity allocation relative to cash allocation is effectively the lowest it has been in 4 years, and is now at levels which have historically been a good entry point to stocks
83% of investors believe the BoJ and ECB will maintain negative rates over the next 12 months
Global growth expectations continued to rise, with a net 26% of investors expecting the global economy to improve over the next 12 months
Investors cite Long High Quality stocks as the most crowded trade, followed by Long US/EU IG corporate bonds and Long EM debt – all of which are dependent on everlasting negative interest rate policy (NIRP)
Hedge fund exposure to stocks at its highest level since the May 2013 “taper tantrum,” underscoring the market’s vulnerability to a bond shock
Allocation to US equities falls to net 7% underweight from net 11% overweight last month
Allocation to Eurozone equities improves modestly to net 5% overweight from net 1% overweight last month
Allocation to EM equities jumps to the highest overweight in 3.5 years – net 24% overweight from net 13% overweight last month
Allocation to Japanese equities falls to net 8% underweight, the biggest underweight since December 2012

As Polls Tighten, the U.S. Election May Start to Sway the Markets

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The “dog days” of summer have shown their teeth. Last week we saw some action on the S&P 500 at last. But this doesn’t feel like a real correction.

It’s worth remembering that not even a surprise like Brexit could knock equity markets off course. What set off last week’s wobble? Dovish Boston Fed Chair Eric Rosengren telling us there was a “reasonable case” for a rate hike and that ducking it could delay the economic recovery. Theories circulated that Fed board member Lael Brainard, another dove scheduled to speak three days later, was there to soften us up for a hike this Wednesday.

The Fed False Alarm

In her remarks, Brainard stayed with her dovish instincts. Fed Funds futures went from pricing in a 24% probability of a September hike to 15%—lower than before Rosengren spoke. The S&P 500 bounced 1.5%, led by the high-yielding stocks that had sold off in response to Rosengren.I’m no professional Fed watcher, but I’ll stick my neck out and predict that Janet Yellen will hold again on Wednesday.

And so then we’ll turn to the Q3 earnings season. Current expectations are for a flat quarter. To meet expectations for 2016 earnings, that implies a pop up to high single-digit growth in Q4, and given recent weakness in economic data, that seems very optimistic. But if markets stay true to recent form they will likely worry about that in December.

Before December, we have the small matter of a U.S. presidential election. With Labor Day behind us, the campaign is beginning to impinge on the market’s consciousness just as it is on the minds of voters at large.

Election Polls Are Tightening

We can see that in recent opinion polls. A month ago, the New York Times analysis of state and national polls put the probability of Hillary Clinton winning the White House at 85%. Since then, a surge for Donald Trump has pulled that back to 76%.

The latest national poll average has 44% of voters opting for Clinton and 42% for Trump, but the Electoral College math, which makes it more important to win in certain states rather than others, still favors the Democrat.

One key state to watch is Ohio, where the winner has nearly always claimed the presidency. George W. Bush in 2004 and Barack Obama in 2012 were both taken over the 270 College-vote threshold by Ohio. Trump is now slightly ahead in the Ohio polls. It’s also worth noting that his recent boost has put Trump ahead in five of the 12 most crucial states, and that in two others Clinton has only a marginal lead.

The U.S. is waking up to the possibility that this race could go to the wire.

Markets Have Been Pricing Gridlock

Financial assets have been discounting a Clinton White House, a Democratic Senate and a Republican House of Representatives. Markets would seem to prefer this outcome because a balance of power limits the potential for extreme policies. Less cynically, there is some evidence of bipartisan support for infrastructure spending. Debate about how much to spend and where to spend it could still leave the idea bogged down in Washington, but a well thought-out fiscal stimulus program could be a driver of stronger growth.

But a strong consensus for a certain electoral outcome like this creates the potential for volatility should polls start to signal a Trump presidency, or Democratic control of the House.

With more uncertainty now coming through in the polls, investors have to ask themselves what these candidates’ policies will really look like. The first debate in a week’s time may make things clearer, but at the moment that’s a challenge: Trump has no track record and his pronouncements have often been vague, and while Clinton clearly has form it’s still difficult to know how seriously to take her statements on issues like drug-pricing policy.

In other words, a few shocks in the polls could leave us facing considerable political uncertainty. That’s likely a recipe for more volatility.

The Weighing Machine Needs the Voting Machine

The great value investor Benjamin Graham once said, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” His words resonate during times like these.

Those of us who, like Graham himself, think of markets as weighing machines, guiding prices gradually towards economic fundamentals, acknowledge the role the voting machine plays in giving us compelling entry points for long-term investments.

We appear due for a re-pricing of risk. Brexit couldn’t provide it. The Fed appears unwilling to. Step forward the American voter.

Neuberger Berman’s CIO insight written by Joe Amato

PIMCO Launches an Actively Managed US Investment Grade Corporate Bond Fund

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PIMCO, a leading global investment management firm, has launched the PIMCO GIS US Investment Grade Corporate Bond Fund, which is a portfolio consisting of high quality USD-denominated corporate bonds. It is designed for investors seeking a high-quality fixed income alternative to government bonds or domestic corporate bonds, with the potential for higher yields and enhanced portfolio diversification. The fund is managed by a team led by Mark Kiesel, Managing Director and Chief Investment Officer Global Credit.

Mark Kiesel said: “With yields on European government and corporate bonds at historic lows, and in some cases negative, the U.S. corporate bond market continues to be one of the main areas offering much needed yield.”

PIMCO’s global investment process involves a three-step process including top-down considerations, bottom-up fundamentals, and valuations. The firm’s specific expertise in credit builds on a team of more than 50 credit analysts and more than 50 credit portfolio managers. In 2012, Mark Kiesel and PIMCO’s credit team were awarded Morningstar’s U.S Fixed Income Fund Manager of the Year.

PIMCO has been managing U.S. investment grade credit strategies since 2000, and has delivered over 1.75 percentage points of outperformance relative to the index, before fees, since inception.

The fund has been added to PIMCO’s UCITS compliant Global Investor Series (GIS) fund range. This Dublin-registered range now comprises 55 sub-funds with $98.5 billion under management as of 31st August 2016. With daily liquidity, investors can gain exposure to a broad range of asset classes, from the more traditional global and regional core fixed income funds, through credit portfolios, to enhanced equity, asset allocation and alternative solutions. The fund will be accessible in a variety of share classes in different currencies, depending on client requirements.

As of September 19, the PIMCO GIS US Investment Grade Corporate Bond Fund is registered in Austria, Denmark, France, Germany, Holland, Ireland, Italy (institutional share class only), Luxembourg, Norway, Spain, Sweden, and the UK.

Sotheby´s Appoints Mari-Claudia Jiménez as Managing Director of Trusts & Estates and Valuations

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Sotheby’s has announced that Mari-Claudia Jiménez will join Sotheby’s this September. Based in New York, Jiménez will lead Sotheby’s Trust & Estates and Valuations efforts as Managing Director.

As a Partner at Herrick Feinstein LLP – which has one of the world’s most prominent art and cultural property law practices, which she joined in 2004 – Jiménez has been involved in an impressive number of major acquisitions, consignments and cases, working with a wide range of clients including prominent museums, galleries, estates, top collectors and auction houses.

Some of Mari-Claudia Jiménez’s notable public cases include: in 2006, she and Herrick Feinstein LLP represented Neue Galerie New York in its acquisition of Gustav Klimt’s Adele Block-Bauer I, one of the artist’s greatest achievements and now a crown jewel of the museum’s collection. The heirs of Kazimir Malevich have been long-term clients of Mari-Claudia Jiménez, working together on the restitution and subsequent sales of five paintings by the artist that included Suprematist Composition, which set the current auction record for the artist at Sotheby’s New York in 2008 with a final price of $60 million. Jiménez was also a key player in the sale of the estate of Mrs. Sidney F. Brody at Christie’s New York in 2010. The collection included hundreds of items across multiple categories and was led by Pablo Picasso’s Nude, Green Leaves and Bust, a then-record price for any work of art at auction.

Mari-Claudia Jiménez said: “I am honored to be joining Sotheby’s vibrant business. Over the last 12 years, I have worked alongside high-profile estates and collectors in the art world as they consigned and purchased at auction and private sale. I am excited to bring to Sotheby’s my perspective on what works best for clients, and to contribute to their experience collecting and selling at all levels.”

Hugh Hildesley, Vice Chairman of Sotheby’s Americas, commented: “We are delighted to welcome Mari-Claudia to Sotheby’s, where she will join esteemed colleagues in our Trust & Estate and Valuations teams. Her impeccable credentials and wealth of knowledge in the world of art law will be major assets to the business, which continues to grow.”

Since joining Herrick Feinstein LLP in 2004, Mari-Claudia Jiménez has been an integral member of the Art Law Group. While building relationships over the course of weeks, months and years, she counseled her clients on transactions, advised on the maintenance of collections, and managed litigations. In addition to guiding private and institutional clients on consignments and purchases, arranging for loans at museums and galleries, and organizing the logistics required in between, Jiménez has also played an important role in domestic and international claims; she had particularly noteworthy success in cases relating to the restitution of art looted in Europe and in Cuba, to which she maintains a strong connection through her Cuban-Spanish heritage.

Mari-Claudia Jiménez is a graduate of Fordham University Law School and Fordham University Graduate School of Arts and Sciences. Prior to attending law and graduate school, Jiménez studied Art History at Williams College, and continues to support her alma mater as a board member of its Museum of Art Visiting Committee.