The Fed’s dovish turn coming out of its March 15-16 meeting took many market participants by surprise. The Federal Reserve’s median projection for Fed Funds rate increases in 2016 fell from four in December to two, reflecting concerns about the impact of lower global growth and tighter financial market conditions on US GDP and inflation.
The median forecast for core PCE inflation at the end of 2016 remained unchanged at 1.6%, while the forecast for headline PCE fell from 1.6% to 1.2%. Finally, perhaps in recognition of relatively moderate wage inflation, the estimate for longer run median NAIRU (non-accelerating inflation rate of unemployment) was reduced to 4.8% from 4.9%.
The Fed took these decisions despite having up to the minute economic and market data that should have, in our view, allayed their concerns about the impact of both global growth and tighter conditions on US GDP and inflation. Recent US GDP, employment and inflation data have remained stable or are somewhat better than December levels, despite lower global growth. Having recovered from the early year sell-off, financial conditions on March 15, the day prior to the release of their statement, remained similar to those observed in December, when the Fed decided to raise rates. After reviewing the available data, one may conclude that either the Federal Reserve has erred in its current decision, and has given up some of its flexibility to raise rates, or that the Fed decided that their December hike was a mistake.
Below, we have highlighted a number of relevant economic and market levels at December 16, following the release of the Fed’s December statement and projections, and on March 15, prior to their release of their March 16 statement and projections.
Foto: Terry Johnston
. Neuberger Berman Trust Company nombra CIO a Richard Gardiner
Neuberger Berman has announced that Richard Gardiner has joined the firm and is appointed chief investment officer of Neuberger Berman Trust Company, an affiliate of Neuberger Berman. Mr. Gardiner will also lead the firm’s Investment Strategy Group and join the firm’s Asset Allocation Committee.
As part of his role within the $11.4 billion Neuberger Berman Trust Company, Mr. Gardiner will work along with Neuberger Berman’s wealth advisors and trust officers on high-net worth individual and foundation and endowment clients. With oversight of asset allocation, manager selection, and portfolio construction, Mr. Gardiner and the Investment Strategy Group will identify the most appropriate managers and investment strategies across multiple regions to provide the most optimal outcomes for Neuberger Berman clients.
“Richard’s skill set complements and enhances our approach to wealth management and investing, including traditional and alternative investments. His diverse background working in wealth management and in alternative investment strategies for a wide range of clients is a great match for his role as chief investment officer of the Neuberger Berman Trust Company. We are delighted to have him join us in that position as well as leading the firm’s Investment Strategy Group,” said Erik Knutzen, chief investment officer of multi-asset class portfolios at Neuberger Berman.
Prior to joining the firm, Mr. Gardiner was a consultant at the Reservoir Capital Group and chief investment officer and co-founder of an independent wealth management firm. Earlier, Mr. Gardiner was at Man Investments as head of Arbitrage & Credit and a member of the firm’s Investment Committee. Before joining Man, he was responsible for convertible sales and trading at J.P. Morgan and Goldman Sachs. Currently, Mr. Gardiner is a board trustee of the Emma Willard School and a member of the school’s Investment Committee and Finance & Audit Committee. Mr. Gardiner graduated cum laude from Yale University and earned his M.B.A. from Harvard Business School.
CC-BY-SA-2.0, FlickrFoto: Bastiaan, Flickr, Creative Commons. Capital Group abre oficina en Ámsterdam y ficha a Martin Hofman como Country Marketing Manager para Benelux y regiones nórdicas
Capital Group, one of the largest and most experienced investment management firms worldwide, has announced the launch of its office in Amsterdam, as well as the appointment of Martin Hofman as Country Marketing Manager for the Benelux and Nordics regions.
Capital Group continues to focus on delivering high-quality long-term investment services to investors and institutions throughout Europe. The launch of the Amsterdam office and appointment of Mr Hofman, alongside other recent investment and business development hires, highlight this commitment.
Speaking at the office opening last night in Amsterdam, Rob Lovelace, Senior Member of Capital Group’s Management Committee and a Portfolio Manager, commented: “Capital Group recognises the importance of enhancing its relationships on a global, regional and local basis, in order to build upon its long-standing heritage. Our Dutch office is the latest in a series of new European offices we have opened over the past two years and is an essential part of our ambition to deliver long-term, reliable asset management services for Dutch, and European, investors, as well as expanding our global footprint.”
Mr Hofman will be based in the Amsterdam office and joins Feike Goudsmit and Marnix van den Berge, who respectively lead Capital Group’s business development activities in the Benelux institutional and financial intermediaries markets.He will play a key role in expanding Capital Group’s services in the Benelux and Nordics regions.
Mr Hofman joins Capital Group from Columbia Threadneedle Investments, where he began as Regional Marketing Manager for the Benelux and Nordics regions in 2008. Since 2014, he has been responsible for leading the institutional marketing activities in the EMEA region, including strategy planning, and development and execution of regional and global campaigns.
Capital Group has also continued to expand on its European operations by making several new appointments in the past year. These include the appointments of Christophe Braun in January 2016 and Julie Dickson in December 2015 as investment specialists in the London office.
Capital Group currently has sales branches in eight locations across Europe: Amsterdam, Frankfurt, Geneva, London, Luxemburg, Madrid, Milan and Zurich.
The bond market’s response to the European Central Bank’s (ECB) latest easing measures was immediate and broadly positive, but the implications for the real economy are harder to gauge.
The market’s immediate reaction to the latest easing measures announced by the ECB on 10 March was, in some respects, counter-intuitive. Most investors will be used to seeing government bond yields fall in the wake of greater-than-expected policy easing, but in this instance, 5-year and 10-year Bund yields rose steeply.
This is because Bund yields had already been driven to extremely low levels during January and February’s firmly ‘risk-off’ market tone. The ECB’s latest support measures cheered markets, and resulted in some of the ‘safety premium’ embedded in Bund valuations being reduced.
A boost for bond bulls
Indeed, there is little doubt that the latest steps from ECB President Mario Draghi are positive for financial markets. The first phase of ECB asset purchases, in early 2015, focused on buying government debt. This pushed government bond prices up and nudged investors into riskier assets to replace the lost yield.
The fact that risk assets – currently non-banking investment grade corporate bonds – are now included in the expanded €80 billion-a-month asset purchase scheme, means that the ECB is driving down the cost of risk more directly. We expect investment grade corporate bonds will continue to perform strongly from here. Credit spreads should narrow, and investors will reach for higher-yielding corporate assets. This impact has also been positive for equity markets, because the cost of capital has improved.
Will the changes make a “real” difference?
The implications for the real economy are less clear-cut. A high proportion of the liquidity which should have entered the US economy through its own QE schemes became ensnared in the banking system, and the velocity of money didn’t appreciably pick up. There was no real spike in lending, and regulatory changes meant that the mortgage market remained somewhat impaired. Of course, if QE had never been implemented, then the condition of the US economy could have been far worse.
In our view, the likelihood of the ECB achieving its vaunted 2% inflation target, even within five years, is low. The output gap, which bears down on both worker and company pricing power, is too significant for prices to improve to the 2% target growth rate. Economic growth – currently forecast to be around 1.4% in 2016 – is insufficient to close this output gap quickly. The ECB, in our view, will need to do more.
The waiting game
This, then, begs the question of why Mario Draghi followed up the latest policy announcements with the suggestion that further rate cuts are “unlikely”. The euro, having fallen after the deposit rate was reduced, rose as soon as Mr Draghi made the comment. However, we see his observation as largely practical. Running a negative interest rate policy is unlikely to work in the long term, as it would encourage investors to hoard cash. Excessively negative rates mean that even the cost of insuring cash deposits ‘in-house’ could be less significant than the cost of depositing funds with the ECB.
However the ECB proceeds from here, it seems unlikely that the deposit rate will be the tool that they reach for. For now, we believe that the amended policy environment has bolstered existing support for risk-asset markets and settled simmering nerves. Patience will be required to see quite how effective the measures will be for stimulating more economic growth.
The policy statement released on Wednesday by the Federal Reserve’s Federal Open Market Committee (FOMC) represents a continuation of the “wait-and-see” trend anticipated by the market. The Fed continues to keep the door open to interest rate policy normalization, which it began in December, with the pace of change dictated by economic data and financial conditions. Overall, economic data in the U.S. have marginally deteriorated since the central bank embarked on rate normalization away from emergency conditions, but the Fed’s mandated objectives of full employment and price stability are still largely on track for continued tightening this year, even if at a slower pace than anticipated. Indeed, the language of today’s statement highlighted some of those concerns, for example mentioning that “business fixed investment and net exports have been soft.” Also, vitally, the FOMC stated that “…global economic and financial developments continued to pose risks,” underscoring the extent to which external economic and financial market stresses can influence Fed policy today.
Further, the FOMC’s changes to its Statement of Economic Projections (SEP) also highlight the likely slower path of interest rate change this year, and some continued uncertainty over U.S. growth prospects in a world of slowing economic growth overall. For example, the Fed downgraded real GDP growth projections in 2016, from the 2.4% it had assumed in December to 2.2% today, with 2017 growth also witnessing a modest reduction. We agree that the data will continue to marginally deteriorate from here, which justifies the Fed’s lowered anticipated “dot-plot” path of one or two more hikes by year-end, versus the four implied by the December SEP. We believe the door was open to beginning this normalization process a couple years ago, and to some extent the Fed missed its optimal window of opportunity to normalize rates in an easier manner. Today, the central bank must contend with payrolls growth that is likely peaking, challenging financial market conditions from abroad, and an inflation rate that appears to be firming.
Unlike some others, we don’t believe the U.S. economy will enter a recession anytime soon, but labor market growth will slow in the quarters ahead, as companies are scaling back expenditures of all kinds (capital expenditures, hiring, and inventory-builds, for example), as their top-line revenues and earnings decelerate. Moreover, changes to headline payrolls tend to lag corporate earnings/profits changes by a six-month time frame, so the rolling over of the growth rate of corporate profits in recent quarters should feed through to a worsening jobs picture by the back half of 2016. Further, temporary hiring has started to slow, which historically has been a signal of future weakness in payrolls growth, as it hints at changes in the supply/demand of labor. All these dynamics put the Fed in a difficult position regarding normalizing rates, since the economic cycle may be moderating as the central bank seeks to raise rates.
We are not arguing that these dynamics represent a tangible economic weakness that threatens the recovery, but rather that slowing payrolls growth is likely to keep the Fed’s rate normalization path more contained than outlined at the December meeting, and perhaps even than the path implied by today’s SEP. We also think there is a tangible wage and inflation lag, and believe that this will also play out going forward, as we have recently witnessed with current inflation data, such as Average Hourly Earnings, the CPI and Core PCE readings.
Generally speaking, it is not the U.S. consumer that concerns us, as consumer spending is likely to support the economy on the back of very strong employment growth over the past few years and potentially improved wage growth in the year ahead. What does concern us, though, is another potential economic fault line, the fact that a variety of corporate sector metrics have been disappointing of late. Years of extraordinarily easy monetary policy stoked corporate borrowing and financial engineering, and some companies are now struggling with the increased debt load as revenues and profits begin to roll over (see graph).
Additionally, what is ironic is that while everyone (understandably) focuses on the domestic economic situation, the factor that has opened the door again for the Fed to keep moving rates this year, which seemed impossible only a few weeks ago, is the improvement in financial conditions. That has largely come on the heels of China policy makers making a decision to not aggressively devalue their currency to protect against capital flight, an aggressive ECB, and a stabilization in oil’s persistent price descent. Thus, while we think that the U.S. data is marginally deteriorating, and may continue to do so, we think that financial conditions, including the potential strength of the USD (and its related influence on global growth and corporate earnings), will be one of the primary determinants of whether that door for further Fed moves stays open or gets slammed shut due to global economic/market duress.
Hence, keeping an eye on the Fed for market price-action going forward may also mean keeping the other eye focused outside the U.S., and somewhat outside the Fed’s core dual mandates of employment and price stability. Indeed, the path of monetary policy change in the year ahead may be determined as much by what occurs outside the country’s borders than within them; more so than any time in recent history.
For many years, a constant within the capital markets was that emerging markets equalled growth. This also served as the universal argument for investing in emerging markets. For Marc Erpelding, fund manager of the BL-Emerging Markets fund, emerging markets will experience a slower rate of growth in the future.
“The days of “simple” growth, backed by state investment programmes and exports based on low wage levels are pretty much gone. Going forward, the service sector and the domestic consumption will play an ever greater role. However, studies have shown that there is no link between economic growth and stock market performance. So “growth” is not a valid reason for investment, not even for emerging markets.” Therefore, according to Erpelding, the slowdown in growth should not necessarily be considered a negative development.
His investment process includes focusing on firms “which are in a position to create added value in the long term for their customers and shareholders; ideally, they can do this independently of macroeconomic trends. Firms that have high barriers to entry, present robust balance sheets and generate strong positive cash flows generally have the advantage of seeing less correction in bear markets and often emerge on top after crises. In addition, we only invest in easy-to- understand business models. It does not matter to us whether or not these companies are included in the index or what their weighting is.” This consistent investment approach can result in them being very underweight in financials or commodities. “We often find that banks lack transparency and, in the case of commodities firms, the investment decision tends to depend more on the commodity cycle than on the company itself.”
In the years 2010 to 2014, the MSCI Emerging Markets index mainly moved sideways. “However, we are less interested in the direction of the index than in the price performance of the high-quality companies we are tracking. Since May 2015, we have seen sharp corrections in this segment too, which we have used to raise the equity ratio from around 68% to approximately 84% at present. This is the highest equity ratio in the fund since the financial crisis. The corrections have led to more attractive valuations for many high-quality firms and allowed us to add to existing positions or initiate on new companies. These are purely bottom-up decisions. We will increase the equity ratio further, should high- quality companies increasingly undergo correction.. In an asset class that is (unfortunately) still regarded as satellite and therefore heavily depends on investors’ appetite for risk, we think this countercyclical approach makes great sense” he concludes.
The Association for Financial Markets in Europe (AFME), the European Fund and Asset Management Association (EFAMA), the International Capital Market Association (ICMA) and Insurance Europe have issued a joint paper backing efforts by EU policymakers to develop a robust and successful framework for simple, transparent and standardised (STS) securitisation.
In line with the Commission’s flagship Capital Markets Union initiative, the associations believe that a new framework for securitisation could play a pivotal role between banks’ financing and capital markets, enabling much-needed non-bank funding alternatives and providing investors with high-quality fixed income securities and attractive yields.
In the joint paper, the organisations affirm that securitisation is an important element of well-functioning financial markets and call for securitisation to be treated on a level playing field with other forms of investment. They highlight their shared views on the key points for EU policymakers to consider in their development of the new framework.
Simon Lewis, Chief Executive of AFME, said: “The development of a high-quality securitisation market in Europe is an integral part of the Capital Markets Union and contributes to the Commission’s objectives to revive the real economy through increased financing and prudent risk transfer. For the European securitisation market to be safely and successfully rebuilt, the new framework must be attractive for both issuers and investors whilst operating under a strong but fair and rational regulatory regime. We are delighted to unite with investors and other market participants on this important policy initiative.”
Peter De Proft, Director General of EFAMA, commented: “EFAMA is acutely aware of the generational opportunity offered by the Capital Markets Union in restoring economic growth in Europe. The Commission’s securitisation package, as an essential component of a successful CMU, could potentially generate billions in additional funding for the economy and could act as a key driver in encouraging investor participation in European capital markets. This joint initiative of the buy-side and sell-side is testament to the sheer emphasis we believe should be placed on achieving a balanced securitisation framework which will work for our markets, our investors and Europe as a whole.”
Martin Scheck, Chief Executive of ICMA, said: “Securitisation represents a crucial asset class for investors and borrowers in Europe. As an association with both buy- and sell-side members we have strongly welcomed efforts to revive securitisation as a key element in financing the drive to restore jobs and growth in Europe. This joint paper underlines our commitment to supporting an appropriately designed framework to achieve this.”
Michaela Koller, Director General of Insurance Europe, said: “Insurers must have access to a wide range of assets in order to diversify their portfolios, and this includes a need for high quality securitisations. Steps to identify good securitisations have already been made under Solvency II and the Commission’s proposal is a continuation of this, with some important improvements. However, further improvements are needed, some of which this paper outlines. From an insurer’s perspective, we are calling for a much needed revision of the capital treatment of securitisations under Solvency II.”
“Compliance rules have dramatically changed in the last few years, and the next two ones will be even more complicated or challenging for most wealthy families,” says Martin Litwak, from law firm Litwak & Partners who discusses how the new compliance rules are impacting private wealth management in Latin America.
According to the Lawyer, “there is a lot of information online about FATCA and CRS coming from banks and financial providers, but some families are not getting the best advice, from independent lawyers, on what to do or not do, how to manage the risks and the practical impact of these changes. It is not about filling out a new questionnaire. Families must make sure that the set of structures in place are in compliant with the new scenario. It is not just one piece of law that has changed; the whole system is now different.”
Nowadays countries are cooperating for tax purposes, and the information on a family’s assets is available to authorities as well as to third parties. “Which is a bigger issue in a region like Latin America, where kidnappings take place and many governments are corrupt. The fact that information could exchange hands for very little money is very dangerous” he says.
In his opinion, families must have the right structures in place before all these new rules take effect. They also should report whatever they have or own. “If they do not like the consequences this reporting may have, they can move to a different country with a better tax system. If they are not prepared to do this, they may be able to save or differ some taxes and/or to reach some level of confidentiality at least vis a vis third parties other than governments by setting up trusts and/or private family funds.”
Jurisdictions traditionally considered as offshore international financial centers have stronger protections of secrecy and privacy. “With offshore assets, it is better to structure them offshore too. Our clients usually pursue three objectives: privacy, tax optimization and succession planning. If they value secrecy the most, regulated investment funds (perhaps with their shares being publicly traded) are better than trusts. If succession planning is more important, a trust structure might be the best solution. We try to identify what matters to them the most, but they must also understand what can and cannot be achieved in this new transparent world.”
CC-BY-SA-2.0, FlickrFoto: AedoPulltrone, Flickr, Creative Commons. MiFID II y lecciones de Reino Unido para Europa
Europe has been given some breathing space with the MiFID implementation being put back a year, but this is not an excuse to sit still and doing nothing. As RDR was the precursor for MiFID II, distributors in Continental Europe have turned to the UK to understand how it might affect the distribution landscape and what lessons if any can be learned.
First of all, it’s important to understand one of the fundamental differences between RDR and MiFID. In the UK, advice has to be paid for whether it is provided by an independent financial adviser, a tied adviser or a bank adviser. All advice must be paid for. This had the unwanted effect of creating an advice gap because modest investors were no longer able to afford advice. In addition, banks pulled out of advice provision because they could not offer a cost-effective service and because they were concerned of future poor advice scandals.
In Europe the situation is different. Under MiFID II, only independent advice has to be paid for, meaning that tied advisers can continue to benefit from retrocessions as long as these are declared to the investor. This will not create an advice gap as it has done in the UK, but it is likely to drive investors towards solutions where they do not have to pay for advice (although in reality they will pay much more over the years in rebates). For countries with nascent advice industries, such a move could spell trouble but there are plenty of ways that independent advisers and wealth managers can fight back and ensure they have a long-term future in financial services.
Lesson one: It is important to remember that this is a supply-side reform. Investors will always need advice, but how they access it will change. People will still need advice on their savings and investments and long-term plans. The industry is not going to end just because of this new legislation.
Lesson two: work closely with the regulator to ensure that you get the best out of this legislation in Spain. Don’t protest and be difficult, make sure your voice and opinions are heard and taken into account.
Lesson three: Don’t wait until it’s too late. The most successful advice and wealth businesses in the UK started working on their post RDR model straightaway. You can gain a competitive advantage by working out your proposition now. Review your costs, your client base and understand how you add value. Promote that message consistently.
Lesson four: Don’t try to do things the old way. You need to adapt and change to the new environment. Make the use of technology and the internet to deliver a streamlined and cost-effective service. Make your proposition as attractive as possible to your clients.
Lesson five: Do not wait for the regulator or the press to promote your business. Do it yourself and do it now. Push your trade associations to work with you to promote the value of independent advice and superior investment skills. Be proactive. Advertise. Place articles in the press. Do everything you can to persuade consumers that tied advice is not the best advice.
And if all else fails, there is one last thing you can do… define yourself as non-independent!
Opinion column by Bella Caridade-Ferreira, CEO at Fundscape
Jérémie Fastnacht has joined BLI – Banque de Luxembourg Investments as a portfolio manager. His main responsibility in this role will be to support Guy Wagner in managing the BL-Equities Dividend fund.
The 30-year-old Frenchman comes from Banque de Luxembourg, where he served for one and a half years as an analyst and equity portfolio manager in the Private Banking Investments department.
“Quality research is even more important in today’s market environment. We are therefore staying on our chosen path and – as we have done successfully with our BL-Equities Europe and BL-Equities America funds – have provided our fund manager with a co-manager,” said Guy Wagner. “With Jérémie we have selected an in-house candidate, especially as he knows the Bank, our investment philosophy, and shares our values.”
Jérémie Fastnacht added: “I am pleased to take on this new role on the equity fund team of BLI – Banque de Luxembourg Investments. Alongside Guy I will share responsibility for the Bank’s flagship funds, which is highly motivating.” Jérémie holds a master’s degree in Finance from Université Paris-Dauphine and completed a post-graduate program in Financial markets from SKEMA Business School / North Carolina State University. Jérémie began his career as an equity fund manager at BCEE Asset Management in Luxembourg in August 2012.
