Sailesh Lad, Senior Portfolio Manager within AXA Investment Managers’ (AXA IM) global emerging markets fixed income team and Olga Fedotova, Head of Emerging Market Credit at AXA IM, discuss their outlook for emerging markets, including the main triggers that could create buying opportunities next year and where the opportunities currently lie for the asset class.
On the future for emerging markets (EMs) Sailesh Lad comments: “While emerging market growth is unquestionably slowing, EMs are still growing at a faster pace than developed markets (DMs). Arguably investors had come to expect growth closer to 5% over the past 20 years, and will in time acclimatise to levels of 3-4% growth. So I think that EM growth will pick up, and will continue to be stronger than DM. Similarly, EM currencies have depreciated a lot in the past year or two, but having appreciated too quickly in the past, we may now see appreciation reoccurring albeit at a slower pace. The fundamental background growth story is still there for EM, and these countries will continue to develop.
“People tend to talk about EMs as a group of very basic countries with little infrastructure, but what is now classed as emerging markets are actually very developed economies in absolute terms, that happen to retain the label.”
Olga Fedotova added: “We are also seeing broad investors become more familiar with EM corporate names now. Investors have moved from a top-down approach to more bottom-up, fundamental analysis, and will increasingly distinguish strong companies that perform well, even in the current currency climate. Ultimately, the strong names will become stronger and therefore more expensive – and weaker companies will continue to struggle.”
Looking ahead to 2016, Saliesh Lad highlighted: “Current market conditions suggest there will be three main triggers that could create buying opportunities and lure investors back to the EM market next year. This includes:
The Federal Reserve will have to provide some clarity on the rate cycle. We think this will start gradually, but with cash levels at four-year highs, ultimately the cycle just needs to start. Investors can identify potential opportunities, but lack the conviction to invest right now because of the persistent uncertainty for interest rates.
China will remain a burning issue, but investors should start to acclimatise to the reality of the economy making a structural shift from an industrial economy to a consumer led one and growth being closer to 6% than 7%. Clarity from China’s authorities on future central bank policy will also be welcomed by investors.
Commodity prices need to stabilise. Ideally we would like to see 3-6 months of stability, particularly in oil and metals, to settle the dynamics for countries with high export dependencies.”
Looking to the more immediate future, Sailesh Lad continues to see solid opportunities in EMs: “While it might be quite a consensus view, I still think that India is a strong growth story. The closed nature of its economy means it is relatively insulated from China’s growth worries. It’s an EM that is still growing, and this insulation provides safe-haven qualities while also promising the potential of attractive returns.”
Olga Fedotova added: “I like Russian and selective Brazilian credits for completely different reasons. The Russian credit story is very robust over a longer time horizon, and technical conditions for Russian corporates remain supportive because of local investors. Russian corporates are also low leveraged, natural exporters, and can comfortably serve their debt, thanks in part to sharp rouble depreciation, prudent cost cutting and more conservative financial policies. Some Brazilian companies are also attractive, but you have to be very careful, as they have underperformed DM and EM alike at the overall level. Stronger names, that are not exposed to oil and gas, with relatively low debt levels and a high proportion of export revenues (for example food, paper and pulp producers) will benefit from cheaper valuations as investor sentiment towards EM is improving.”
According to Detlef Glow, Head of EMEA research at Lipper, assets under management in the European exchange-traded fund (ETF) industry increased from €427.97 billion to €464.15 billion during October.
After performance drove down European ETF’s AUM in September, this increase of €36.18 billion in October has much to thank to it. The underlying markets’ performance accounted for €30.36 billion, while net sales contributed €5.8 billion to the overall growth of assets under management in the ETF segment.
In terms of asset classes, bond funds (+€3.7 billion) enjoyed by far the highest net inflows for the month, followed by equity funds (+€2.8 billion), and alternative UCITS products (+€0.1 billion).
The best selling Lipper Global Classifications in October where:
Equity US with €62.8 billion
Equity EuroZone with €47.2 billion
Equity Japan with €38.3 billion
Amongst ETF promoters, iShares with €4.1 billion (iShares accounts for 49.45% of the overall AUM with €229.5 bn), db x-trackerswith €0.5 billion and Amundi ETF €0.4 billion, were the best selling ones.
The best selling ETF for October was the iShares Core EURO STOXX 50 UCITS ETF, which accounted for net inflows of €460 m or 7.90% of the overall inflows
Foto: jacinta lluch valero
. Para el 80% de los inversores los beneficios de sus co inversiones superan a los de sus inversiones en fondos
Preqin’s latest survey of fund managers and investors examines the increasing appetite for co-investments among both parties. It finds that 80% of limited partners (LPs) have seen their co-investments outperforming private equity funds, with 46% seeing their co-investments outperform by a margin of over 5%. This level of performance is the biggest draw for investors, with two-thirds of LPs citing better returns as the biggest benefit of co-investing alongside GPs.
Co-investment opportunities from fund managers (GPs) are also becoming more common, with 87% of them either currently offering, or considering offering, co-investment rights to their investors. Furthermore, 30% of managers included co-investment rights in 81-100% of limited partnership agreements in their most recent fund. For fund managers, Co-investments are seen as a way to improve relationships with LPs, gain access to more capital for deals, and improve the chance of a successful fundraise.
“The most common motivation among LPs for co-investing beyond their typical fund commitments is the prospect of better returns, with many anticipating notably higher returns compared to their traditional private equity fund commitments. The majority of LPs surveyed have seen significant outperformance from their co-investments, although many say that it is too early to tell how their stakes will ultimately perform.
Direct investments, including co-investments, have increasingly become part of private equity discourse. Significant interest arising from LPs has been matched by increased co-investment opportunities provided by GPs. Provided LPs have sufficient resources available, co-investment opportunities should remain attractive due to their lower fees and greater potential returns.” Says Christopher Elvin – Head of Private Equity Products, Preqin.
KKR announced the appointment of Marcus Ralling as a director in KKR’s Real Estate team. In his role, Mr. Ralling will be responsible for the asset management of KKR’s European real estate portfolio.
Prior to KKR, Mr. Ralling was at Pramerica, as managing director and head of U.K. and European asset management, and joint head of asset management at Threadneedle Property Investments.
Guillaume Cassou, head of European real estate at KKR, said: “I am delighted that Marcus is joining the team based in London. As we continue to build our real estate effort in Europe and scale our real estate portfolio, Marcus’s knowledge and experience in asset management will be of great value.”
Marcus Ralling commented on his appointment: “I am excited to join an investment firm with such an outstanding global reputation. KKR’s growing presence and ambitions in real estate across Western Europe are particularly attractive.”
Since launching a dedicated real estate platform in 2011, KKR has committed over US$ 2.5 billion to 50 real estate transactions in the U.S., Europe and Asia as of September 30, 2015. The global real estate team consists of over 30 dedicated investment professionals.
Mirova, the Responsible Investment division of Natixis Asset Management, has published “Investing in a low-carbon economy”, a guide for investors to become COP21 compliant. Mirova’s study provides an in-depth analysis highlighting the challenges of climate change and presents methods for investors to effectively measure their carbon footprint. Mirova offers a unique range of investment solutions promoting energy transition across all asset classes.
COP21: mobilising private investors is a necessity
To maintain the economy in a “2 degree” trajectory, it is vital to redirect savings towards companies and projects promoting energy transition.
Philippe Zaouati, Head of Mirova explains: “The energy transition can only succeed if we manage to mobilise private investors’ savings. The success of COP21 therefore also depends on the ability of asset management firms to propose solutions in response to the climate challenge, whilst delivering the returns expected by investors”.
Accurately measuring your carbon footprint
In response to growing demands on investors to make greener investments, Mirova, in partnership with the leading carbon strategy specialist consultant Carbone 4, has developed an innovative methodology to measure the carbon footprint of an investment portfolio. This decision-making tool assesses a company’s contribution to the reduction of global greenhouse gas emissions (GGE).
Hervé Guez, Head of Mirova Responsible Investing, comments: “Measuring the overall impact of a business on the environment is an essential step towards acting against global warming. Assessing the carbon footprint is therefore a indispensable stage in the construction of portfolios contributing to energy transition”.
Low-carbon investments across all asset classes
In order to redirect capital towards investments promoting energy transition, Mirova is proposing solutions involving all asset classes:
Renewable energy infrastructures: 100% low carbon allocation. For more than 10 years now, Mirova has provided European institutions with access to investments in project companies based on renewable energy assets in France and Europe. Mirova’s renewable energies funds have generated 730 MW of new production capacity and contributed to avoiding 1.4 million of CO2 emissions.
Green bonds: a direct link between financing and projects: Mirova was one of the first asset management firms in the world to launch a green bond product. By financing tangible assets and ensuring transparency regarding the deployment of the capital raised, green bonds enable issuers to diversify their investor bases, while enabling investors to actively participate in financing the energy transition.
Listed equities: committed theme-based asset management: Mirova proposes fundamental conviction-based asset management covering European and global equities, focusing on companies providing sustainable development solutions.
Foto de Ron Frazier. ¿Dónde están las oportunidades en los Commodities?
During the past year, commodities have been the most challenged asset class. A slower global growth, lower inflation expectations and a strong dollar are some of the factors that have affected their price. Excess supply in many commodities is also contributing to the weakness. Given that most of these factors are likely to remain in place through the remainder of this year, prices may need to move even lower. Alternatively, fundamentals need to start to improve before the asset class becomes a genuine bargain. Many investors are conflicted about what their next move should be.
Amongst commodities, cyclical ones such as oil and industrial metals, have suffered the most. In the energy sector supply has played a key role in these losses. Today, the United States produces roughly 700,000 barrels per day more than one year ago. Meanwhile, following the tentative nuclear accord with Iran, many Gulf States are ramping up their own production. According to the International Energy Agency (IEA), which México has just recently requested to enter, oil inventories in developed countries have expanded to a record of almost 3 billion barrels because of massive supplies from both non-OPEC and OPEC producers. So, without a sharp reduction in production it is hard to imagine a strong rebound in the short run; however, for longer term investors, some bargains are beginning to emerge.
When looking to gain commodity exposure, one has to be very selective. Nowadays most commodity-related sectors look cheap, but in many instances the plunge in valuations merely tracks the drop in earnings and profitability. How can an investor assess if commodity companies are cheap or cheap for a reason?
Historically, valuations track profitability as measured by return-on- equity (ROE). At the energy and materials sector levels, data suggests that the fall in stock prices is generally in line with the drop in profitability. However, digging deeper at the industry level, opportunities might be appearing: while it appears storage and transport companies are still overvalued relative to the drop in equity, drillers and integrated companies look somewhat cheap (see chart below).
Looking next at materials, there are fewer obvious industries where valuations depart significantly from profitability, but metal and mining companies are starting to show more value.
However, one must not forget that the uncertainty surrounding market bottoms, particularly in a sector prone to volatility and abrupt changes in supply and demand, makes it hard to confirm the bottom has been reached. Furthermore, in the current scenario, low inflation expectations also make forecasting returns more difficult as many investors view commodities as a hedge against inflation.
Although the near-term outlook for most commodities remains modest, if the futures curve is correct, at some point, arguably in the next year or so, rising demand will start to bring markets back into balance. Until then, it is still probably too early to call a bottom.
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This material is for educational purposes only and does not constitute investment advice nor an offer or solicitation to sell or a solicitation of an offer to buy any shares of any Fund (nor shall any such shares be offered or sold to any person) in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities law of that jurisdiction. If any funds are mentioned or inferred to in this material, it is possible that some or all of the funds have not been registered with the securities regulator in any Latin American and Iberian country and thus might not be publicly offered within any such country. The securities regulators of such countries have not confirmed the accuracy of any information contained herein.
While the International Monetary Fund will decide later this month if the Renminbi (RMB) joins their Special Drawing Right (SDR) basket this year, Axa Investment Management’s Aidan Yao and Jason Pang think the Chinese currency stands a very high chance (80%) of being included in it, making the RMB the fifth reserve currency.
According to the analysts, “this will trigger a direct rebalancing of the SDR portfolio, but we think the seal of approval by the IMF on the RMB’s reserve currency status will also affect the investment decisions of other investors.” They estimate, subject to significant uncertainties, and contingent on the unfolding of their baseline case of economic soft-landing without large scale financial crisis, that inclusion would trigger an aggregate inflow of up to $600 billion from supranational, official and private investors over the next five years. Averaging $120 billion per year starting from 2016.
Pang and Yao believe that the capital inflows will likely have an important impact on China’s currency, money and bond markets in the coming years. In regards to currency they anticipate that in the short run, the RMB will maintain some degree of stability in normal market conditions and that in the longer run, there is a chance the exchange rate will mutate from the semi-crawling peg to a managed float as the end-game. While when it ocmes to the Bond Market, the analysts’ base-case scenario is a constructive outlook for the bond market, driven by increased demand from the SDR inclusion, and supported by lower GDP growth and policy easing.
The IMF’s executive board will vote on inclusion on November 30.
You can read the full report in the following link.
Foto: Evan Jackson
. Private Equity: suben salarios y bonus, mientras las compañías compiten por el talento
Preqin’s 2016 Private Equity Compensation and Employment Review found that 74% of private equity fund managers have made firm-wide increases in base salary from 2014 to 2015. The average increase in salary was 7%, with 14% of firms increasing base salaries by more than 10%.
Almost half (46%) of firms increased their performance-related cash bonus pay-outs in 2014, up from 26% of firms that increased bonuses in the previous year. The median bonus pay-out increase in 2014 was 20%, while only 16% of firms reported a decrease in the levels of cash bonuses paid to employees.
From 2015 to 2016,76% of surveyed firms plan to increase their firm-wide base salary, while 22% predict no change in pay rates. Only 2% of firms anticipate reducing base salaries next year.
Other findings of the survey include that private equity firms in the Asia-Pacific region have the highest median proportion of women, at 40% of total staff. Women represent a median 35% and 33% of staff respectively at Europe- and US-based firms, while at South America-based firms women comprise a median of only 15% of total staff.
“2015 seems to have been a good year for employees of private equity firms, with salaries and cash bonuses both increasing. At more senior levels, the largest firms will vie to attract top talent by offering rates of compensation that smaller firms may struggle to match. Similarly, the location, structure and strategy of a firm can all affect the available pool of talent and the number of opportunities available. With many firms planning to increase their staff numbers and base salaries again in 2016, competition for talent looks set to continue, as firms seek to attract new recruits while retaining current staff.” said Selina Sy, Manager – Premium Publications.
625 new fund managers entered the private equity market with a 2015 vintage fund, the highest number ever. There are now over 7,400 active private equity firms tracked by Preqin, including over 600 private debt firms. Altogether, private equity fund managers employ an estimated 145,000 people worldwide. Buyout, venture capital and real estate firms comprise 68% of that total. Firms with $10bn or more in AUM have an average of 160 staff, while firms with less than $250mn AUM have an average of 14.
Total fundraising for private equity firms in 2015 YTD stood at $362bn at the end of Q3 and seems broadly on track to match the $552bn raised globally in 2014. The record year for private equity fundraising is still 2008, when funds closed raised an aggregate $688bn in capital commitments.
Preqin’s 2016 Private Equity Compensation and Employment Review surveyed almost 200 private equity firms to gather key trends and figures in levels of pay and staffing in the industry.
The Standard Life Investments European Property Growth Fund (“EPGF”) has completed the sale of Torre Zen, an office building in the Parque das Nacoes “Expo” area of Lisbon. The disposal is part of a strategic rebalancing of the fund’s portfolio, and proceeds of the sale will be reinvested in other European real estate markets where the economic recovery is increasing occupier demand and rents.
Torre Zen is a modern 11,400 sq m office building, acquired by the fund in 2003. It has 13 floors of offices plus three retail units on the ground floor. Current tenants include Danone, Upstar Communications, UHU, TNT and A Padaria Portuguesa.
Veronica Gallo-Alvarez, Fund Manager of the Standard Life Investments European Property Growth Fund, said: “This meets our current strategy to dispose of assets in non-core markets in order to invest in prime assets within recovery markets, such as The Netherlands, Spain and Ireland, where we can deliver strong returns for investors.”
Foto: CGIAR Climate, Flickr, Creative Commons. Los inversores vuelven al riesgo: apuestan por bolsa y alternativos, convencidos de una subida de tipos en diciembre
Investors have regained some appetite for risk with a strong consensus over a U.S. rate rise next month, according to the BofA Merrill Lynch Fund Manager Survey for November. With growth and inflation expectations notably higher after new U.S. payroll data, they have cut cash holdings and increased exposure to equities, real estate and alternative investments.
The percentage of asset allocators overweight equities rose significantly by 17 points to a net 43 percent, while lowering cash overweights to their lowest level since July.
Four-fifths of panelists now expect the U.S. Federal Reserve to raise rates during the current quarter.
Confidence in the global economy rebounds, with net expectations of it strengthening in the next 12 months up 22 percentage points from October.
Concerns over a slowdown in China abate: local fund managers turn neutral on the country’s growth outlook–their most positive reading in more than a year.
Eurozone and Japan strengthen as the most favored equity markets globally, reflecting deeper consensus on the U.S. dollar. A net 67 percent now expect the currency to appreciate in the next year.
Real estate and alternative investment overweights rise to their second-highest readings in the survey’s history. In contrast, aggressive underweights on commodities and Global Emerging Markets are maintained.
“With consensus very clustered in QE and strong dollar trades, asset price upside appears limited until an ‘event’ curtails the Fed hiking cycle, as in 1994,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
“While European equities are loved by global investors and the ECB has created some excitement about growth, sector positioning shows local asset managers are lacking conviction and hugging their benchmarks,” said Manish Kabra, head of European quantitative strategy.
An overall total of 201 panelists with US$576 billion of assets under management participated in the survey from 6 November to 12 November 2015. A total of 164 managers, managing US$465 billion, participated in the global survey. A total of 92 managers, managing US$213 billion, participated in the regional surveys. The survey was conducted by BofA Merrill Lynch Global Research with the help of market research company TNS.
