Equity markets have been enjoying a strong year so far. Performance was primarily driven by valuations as investors were anticipating a rebound in earnings. In 2014, earnings will have to deliver and take over as key market driver. INg IM expects this to happen and foresee returns in line with earnings growth.
The biggest risk resides in emerging markets (EM). Since the taper-talk some adverse dynamics have started to develop in EM.
Earnings growth estimates and index targets
Strong year for equities
Barring a nasty unexpected event, 2013 will be a banner year for developed market equities. Year-to-date developed market equities rose by almost 20%. Despite many event risks (Cyprus, Syria, debt ceiling, US government shutdown, political scandals, German elections…) we had only one meaningful correction this year, caused by the ‘taper-talk’ of Fed Chairman Bernanke in May. However, the reversal was swift and all other hurdles represented merely wrinkles in market performance. In fact, the hurdles represented an excellent buying opportunity.
An interesting observation is that the performance was primarily driven by higher valuations. Global earnings rose a mere 2.5%. This pattern is not strange in turning points of the business cycle as investors anticipate a rebound in earnings even when trailing earnings still decline.
As the equity cycle progresses, earnings will have to deliver and eventually take over as the main driver of market performance. We have good hopes this will happen in 2014.
You can read the full report on the attached document.
Foto: Dori. Multi-asset views: Five Income Investment Themes for 2014
John Stopford, portfolio manager of the Investec Diversified Income Fund and across the Investec Managed Solutions Range, gives five themes on investing for income in 2014.
· The consensus looks wrong on the pricing of US growth and Federal Reserve policy
To us, the consensus looks most wrong on the pricing of US growth and Federal Reserve policy. The FOMC are certainly dovish, but they are also data dependent. Markets do not currently appear to believe in the scope for a significant acceleration in US growth. Economists have forecast this before, but growth has disappointed, and so they are once bitten, twice shy. We think this ignores the impact of fiscal policy which has been substantial. In some ways growth in 2013 of between 1.5-2% is quite impressive given the severe impact of sequestration on government spending.
In 2014 the swing away from fiscal tightening will be bigger than the tightening seen in 2013. This alongside improving capital expenditure and consumer spending helped by lower gasoline prices should allow the US economy to grow much more strongly than for a number of years. This should cause markets to rethink the speed of policy normalisation pursued by the Fed. It will still be very gradual, but perhaps not quite as gradual as suggested by forward market pricing. The dollar, which has been held back by QE, should receive a strong shot in the arm as a result.
We also expect JGB yields to rise sharply at some point, with yields increasingly out of line with rising inflation expectations and aggressive reflation by the BoJ. Clearly, the BoJ buying is suppressing yields, but ultimately fair value is much higher.
· Developed market government bond yields are still too low
Yields on 10 year government bonds in the US and the UK rose to almost 3% and in Germany rose to nearly 2% but have since backed off. Real yields are close to zero, assuming that inflation remains low. This remains unattractive; as economic growth picks up, we expect real yields to rise at the longer end of the yield curve, even if inflation remains subdued. The time to return to a full weighting in government bonds will be when central banks are tightening monetary policy, which is unlikely anywhere before the end of 2014. Bond yields in Japan remain well below 1%, suggesting that domestic investors do not expect the government’s strategyof raising inflation to a sustained 2% to succeed.
With the yen likely to remain weak, we are avoiding this market also. For investors, we would look at this as a time to avoid strategic positions in government bonds in developed markets, but consider buying into weakness.
· Steady commodity prices and rising employment could lead to some inflation disappointment
Consensus opinion about commodity prices has been a lot more volatile than actual prices. With demand for energy and metals growing steadily but supply also, we expect them to continue to trade sideways. This means that commodity prices will cease to put downward pressure on inflation.
Employment growth continues to be strong in developed and most emerging markets; before long, this will feed through into higher earnings. This should sustain economic growth but limit the potential for higher profit margins and may result in moderately negative inflation surprises.
The suggested implication for bond investors is not to take current low inflation rates for granted.
· The dollar is cheap
Last year, our view was that the dollar bull market would continue to be postponed. Although growth in the US economy is picking up, the Federal Reserve is determined that it should not be threatened by tighter monetary policy. Very loose monetary policy means a weak dollar, which has provided support to emerging economies and their markets. However, dollar pessimism is extreme, the currency is cheap and growth is likely to surprise on the upside. This means that the surprise is likely to be in the direction of tighter monetary policy. The dollar may not be ready to rally yet but further weakness looks unlikely and it is likely to strengthen in the year overall. The suggested investment implication for investors is to position with a moderate overweight in dollars initially with the probability of raising exposure during the year.
· Opportunities in credit and emerging market debt
While yields on government bonds remain unattractive, those on investment grade corporate bonds offer a modest pick-up in yield and those on high yield a more significant one. However, the additional yield offered by credit is unlikely to be sufficient to compensate for a rise in government bond yields.
Issuance of both investment grade and high yield bonds has been significant, implying no shortage of supply. The opportunity for credit upgrades is diminishing as companies with the potential to improve balance sheets have mostly done so.
Credit may be a disappointing investment until government bonds have adjusted. The opportunity in EMD looks better, with many currencies having weakened significantly, yield spreads over developed market bonds reasonable and opportunities for adding value more extensive, though emerging market currencies may need to weaken further in the short term.
In our view, 2014 looks like being a difficult year for corporate credit and a modest one for emerging market debt, but there may be an attractive long term buying opportunity later in the year
Foto cedida. Riding the Waves: From Long-Term Trends to Investment Decisions
What can we learn from long-term trends when planning for the future? The next Robeco World Investment Forum focuses on the role played by long-term trends and their effects on investing.
Historically, the main drivers of long-term trends are threefold: demographics, globalization and technology. Take, for example, the growing middle classes in emerging markets. People there are increasingly buying smart phones, driving new cars and wanting IKEA furniture in their homes. Or take the example of a Polish doctor commuting to the UK as a result of cheap flight tickets now available worldwide. And finally, technology can create new industries and destroy others.
These drivers also have problems attached, however: managing demographic expansion, globalization and technological innovation requires a more sustainable approach to production, consumption and waste management. What are the main trends? Where in the economic cycle are we currently? What will be the next fluctuation or wave oscillation? And how will this affect our long-term growth path? These are key questions that demand an answer. And more importantly, how do these trends and cycles influence your asset-allocation questions? We will explore how these long-term trends relate to the shorter term business cycles and to decisions on your investment portfolio.
The Robeco World Investment Forum will bring together the world’s leading thinkers, who will speak on the most pressing economic issues of our times.
Wikimedia CommonsFoto: Abasaa. Año agitado para la sanidad en China
2013 has been an eventful year for China’s health care industry. There were several investigations into allegations of corruption and bribe-taking by doctors. The ensuing government crackdown dampened sales among both domestic and multinational drug firms. While “incentives” such as leisure trips for doctors, billed as conferences, are believed to have long been a common industry practice, the issue has not drawn much attention in recent years. The widespread distrust of doctors and hospital staff in China, along with often poor health care services, have led to a string of recent physical attacks on health care workers. Disgruntled patients and their relatives have resorted to violence. And while violence against doctors is also nothing new, what has been a growing trend is the rising frequency and severity of the attacks. Some doctors have taken to the streets to ask for understanding and justice from their communities and some hospitals have even offered self-defense lessons to hospital staffers.
Corruption in China’s health care industry is believed to be fueled in part by the low base pay of doctors in not-for-profit public hospitals. While most Chinese hospitals are not-for-profit public hospitals, government funds provide only a small portion of a hospital’s needs. As a result, many hospitals rely on drug sales to make ends meet. It’s also typical for a doctor in larger state-run hospitals to see as many as 50 patients a day. Some of these doctors have also turned to other methods, such as collecting commissions from pharmaceutical companies whose drugs they promote, to supplement their income. Many patients are aware of this but feel they have little choice but to follow doctors’ orders.
In my view, unless public hospitals are allowed to increase their fees, and unless doctors at state-run facilities are paid as well as those from private hospitals, industry corruption seems likely to persist. The government seems aware of this. During its recent Third Plenary meeting, China’s leadership pledged to reform the performance evaluation and incentive system in hospitals, encourage the development of more private hospitals and allow doctors to practice at multiple sites. These measures are good news, although easier said than done. In my opinion, these reforms are necessary, especially as China continues to struggle with a rapidly aging population. The industry will need to adapt to tackle the country’s long-term health care challenges, however, it is demonstrating an encouraging willingness to do so.
Hardy Zhu, Research Analyst at Matthews Asia
The views and information discussed represent opinion and an assessment of market conditions at a specific point in time that are subject to change. It should not be relied upon as a recommendation to buy and sell particular securities or markets in general. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews International Capital Management, LLC does not accept any liability for losses either direct or consequential caused by the use of this information. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. In addition, single-country funds may be subject to a higher degree of market risk than diversified funds because of concentration in a specific geographic location. Investing in small- and mid-size companies is more risky than investing in large companies, as they may be more volatile and less liquid than large companies. This document has not been reviewed or approved by any regulatory body.
Photo: Guisepitt. Aberdeen Asset Management Names New Head of Americas
Aberdeen Asset Management announced that, after four successful years of running and developing Aberdeen’s business in the Americas, Gary Marshall will return to the United Kingdom, where he will continue to play a key role in the development of the business of the Group. David Steyn will join Aberdeen in January as Head of Americas to lead the business on to the next level.
David has more than 30 years of experience in the investment industry, based in both the UK and U.S. He served as Global Head of Distribution at AllianceBernstein Holding L.P., which he joined in 1999, from April 2007, and served as its Chief Operating Officer from July 31, 2009 to 2012. He ran both fixed income and equity investment teams in the UK and the U.S. with organizations like Quaestor (from 1989 to 1999), Lazard (from 1986 to 1989) and Montagu (from 1979 to 1986). He spent his formative years as a Fixed Income Portfolio Manager at Montagu. David is the author of “Market Neutral: Engineering Return and Risk,” which was published in 1998 by the C.F.A. Institute and has been part of the C.F.A. syllabus ever since. He earned a law degree from the University of Aberdeen in 1979.
Over the next few months, Gary will transfer his current responsibilities to David to ensure a smooth transition.
CC-BY-SA-2.0, FlickrMarco Ruijer, portfolio manager líder de portafolios de deuda de mercados frontera hard currency, ING IM. ING IM lanza un fondo de deuda de mercados frontera que completa su gama de deuda emergente
ING Investment Management launched the Frontier Markets Debt Hard Currency fund on December 9. This fund will invest in the Frontier Markets universe and will target outperformance of the JP Morgan Next Generation Markets (NEXGEM) Index by active management.
The firm highlights that “the fund is an attractive addition to the current offering from the Emerging Markets Debt (EMD) boutique enabling clients to receive broader EMD strategy selection and experienced EMD investors to implement their EMD views more specifically. This fund further strengthens ING Investment Management’s reputation as a pioneer EMD manager”.
The fund was launched with a USD 100 million contribution in kind from the Emerging Markets Debt Hard Currency fund, partially replacing its direct existing frontier markets debt exposure.
ING is a pioneer in the EMD strategies with one of the longest track records in the industry dating back to 1993 (for EMD Hard Currency) and 1998 (for EMD Local Currency). The firm has been investing in Frontier Markets since 1993. Jeremy Brewin, head of the team, has relevant investment experience since 1974. Jeremy has also been named as a ‘’Top Performing EMD Manager’’ by Citiwire. Both Marco Ruijer and Daniel Eustaquio; Portfolio Managers have 15 years’ experience respectively. Furthermore, many of the team members have deep roots in emerging/frontier countries, providing valuable perspective and understanding of the dynamics of these economies.
ING IM has a historically strong commitment to emerging markets. Its key strength in Frontier Markets is ING IM’s global multi-site team, organized to correspond with the three core time zones that span Asia, Europe, the Middle East, Africa and the Americas. EMEA region is covered from The Hague, Latin America is covered from Atlanta and Asia is covered from Singapore. According to the firm, the multi-site approach is also instrumental to trade the portfolios around the clock maximizing regional information access and better liquidity conditions found in major markets such as Hong Kong and Singapore, London and New York during local peak hours.
Photo: Averette. Olivier Livenais Appointed CEO of Crédit Agricole Private Banking in Miami
Olivier Livenais replaces Mathieu Ferragut, who has been appointed Head of Americas Region, Crédit Agricole Private Banking.
Olivier Livenais began his career with Société Générale in 1998 as Organizational Project Manager. He joined the Crédit Agricole Group in 2000 at the General Inspectorate, where he held the positions of Inspector then Head of Mission. In 2007, he moved to Crédit Agricole Private Banking as Finance, Risk and Strategy Manager. Since the holding company was set up in November 2011, he has been Finance and Supervision Director.
Olivier Livenais is a graduate of Ecole Supérieure de Commerce business school, Grenoble (1998).
Last July, Mathieu Ferragut was appointed new Head of the Americas Region at Crédit Agricole Private Banking, based in Miami. Mathieu Ferragut is in charge of managing and coordinating the Crédit Agricole Private Banking business in South America and developing customer and service synergies across the countries in the region.
Mathieu Ferragut began his career with Crédit Lyonnais Singapore in 1996 as Information Systems Project Leader. In 1998, he was appointed Chief Operating Officer of Crédit Lyonnais Private Banking Asia. In 2000, he joined the Miami branch of Crédit Lyonnais, where he held the positions of Chief Operating Officer and Chief Compliance Officer for seven years. He was appointed Deputy CEO of Crédit Agricole Miami Private Banking in 2007, then CEO in 2008.
Mathieu Ferragut graduated from Institut Supérieur de Commerce business school in 1993. He holds a Bachelor’s degree in Accounting and Finance (1994) and a Master’s degree in Finance (1995).
Matthew Beesley, Head of Global Equity, Henderson Global Investors. The Weather is Set Fair for 2014
There was a British weather forecaster, Michael Fish, who gained notoriety in 1987 on the eve of what was to become one of the largest storms ever to hit the UK, when he opened his bulletin by saying: “Earlier on today, apparently, a woman rang the BBC and said she heard there was a hurricane on the way … well, if you’re watching, don’t worry, there isn’t…”
It wasn’t quite career suicide, but it was certainly a lesson in being emphatic in the face of uncertainty. And there is an overwhelming temptation when making predictions about equity markets to avoid the emphatic. Furthermore, the very nature of looking forward to a new year implicitly suggests that what lies ahead will be different to what we are leaving behind. For equity investors in 2014, this may not be the case: we are currently in the midst of a synchronized global economic expansion, albeit a rather tepid one, and in our opinion all the evidence suggests this is likely to continue. In the eurozone, 2013 became the year when conditions moved decisively from ongoing deterioration to at the very least becoming ‘less worse’, while a recovering housing market has been key to the return of UK consumer confidence. In the US, forced reductions in government expenditure have certainly impacted growth rates, but on balance the US economic recovery is increasingly broad-based.
For equity markets to rise meaningfully, however, we would argue that the expectation of growth in corporate profits needs to become a reality. Profit margins are at all-time highs in the US, but there is room for a meaningful recovery in Europe and Japan. It would be our expectation that after five years of aggressive cost-cutting in Europe – and longer in Japan – that any top-line recovery leverages into some more impressive bottom-line growth. This could positively surprise not just investors, but in some cases management teams too, given their much needed aggressive focus on costs during recent tough economic times. However, with valuations having already increased in anticipation of this, any disappointments here mean negative consequences.
Forecasting the weather is a challenging occupation. From what we see, however, largely informed by the hundreds of company management meetings that we conduct globally, we think the weather is set fair. There are those who are warning there is a storm called deflation coming our way. But for now, don’t worry, there isn’t…
Opinion column by Matthew Beesley, Head of Global Equity, Henderson Global Investors
Kommer van Trigt, head of the Robeco Rates team. Fed’s Dovish Policy Set to Continue
The US Federal Reserve (Fed) is likely to continue signaling its ‘dovish’ policy after finally beginning its tapering program, Robeco’s Rates team believes.
The central bank on 18 December decided the US economy was strong enough to justify cutting USD 10 billion from its USD 85 billion of monthly asset purchases. It was the last Federal Open Market Committee (FOMC) meeting of outgoing Chairman Ben Bernanke.
The Fed will now only adjust its tapering message “very gradually”, says Kommer van Trigt, head of the Robeco Rates team.
Positive for risk markets
“This should be positive news for risk markets. But as time progresses and the economic recovery continues as expected, it will be more difficult for the Fed to keep market expectations in check,” he says.
For now, Van Trigt is positive: “The Fed has managed to jump over the hurdle of announcing tapering without inflicting much damage to risk appetite.”
The initial market reaction to the announcement was positive. Government bond prices remained more or less stable on the news, while equities and credits rallied.
Two reasons for market thumbs-up
“This reaction is explained by two reasons,” says Van Trigt. “First and foremost, the start of the reduction was communicated well in advance of the actual event. Markets have been anticipating the start of tapering since the possibility was first mentioned in May and expectations and prices have been adjusted accordingly.”
The second reason why yesterday’s initial reaction was positive is the way in which tapering was announced. The Fed successfully communicated that the start of tapering should be seen separately from any intentions to lift official interest rates. This can be seen from its comments and expectations.
The 10-year Treasury bond yield had risen from 1.6% in May to 2.9% this month, as tapering essentially means the end of easy money, and the beginning of rising rates. This raises bond yields and lowers their values.
‘It will take until the end of 2014 to bring purchases down to zero’
A previous attempt to announce potential tapering in the summer took markets by surprise, causing money market interest rates to rise sharply and bond prices to fall.
Gradual pace of tapering
“The gradual pace at which they intend to reduce asset purchases is a signal by itself. If USD 10bn of bond purchases is cut every time the FOMC meets, it will take until the end of 2014 to bring purchases down to zero,” says Van Trigt.
He also welcomed the Fed’s announcement that official rates would remain unchanged “well past the time that the US unemployment rate declines below 6.5%”. It is currently 7.0%.
And emphasis that the central bank placed on using its 2% inflation target when making a future decision on interest rates also shows dovish intentions, he said. US inflation is currently well below that at 1.2%, giving plenty of room for maneuver.
Stronger economic figures
In their adjusted forecasts, the FOMC members expect the 6.5% unemployment level to be reached around mid-2014, while they expect inflation to remain at or below 2% up until the end of 2016. The first rate hikes are expected for mid-2015 and this view has not changed in spite of the decision to start reducing asset purchases.
“All in all, the Fed’s comments and its latest forecasts signal its intention to keep monetary policy very accommodative well into 2015. This explains the positive reaction in markets ranging from credits to equities,” says Van Trigt.
Photo: Mattbuck. Barclays W&IM Sells its Portfolio of Latin American Clients to Santander Private Banking
Santander Private Banking has acquired the business of Latin American and Caribbean clients of Barclays Wealth & Investment Management, a business which the British bank controlled from Miami and New York, as was confirmed to Funds Society by Barclays.
According to other sources familiar with the transaction, the portfolio to be transferred is worth $5 billion, with a team of about twenty bankers divided between New York and Miami. As partof the agreement, the transfer of the accounts to Santander is subject to the client’s approval,saidanothersourceclose to the deal.
In a brief statement to which Funds Society has had access, Barclays declared that “subject to the consent of affected customers and any staff affected by the transfer, we have reached an agreement with Santander Private Banking to transition our business in Latin America and the Caribbean to Santander.”
Santander Private Banking has offices in Geneva, Nassau, Houston, New York, San Diego, Miami and Seattle. Funds Society got in touch with Banco Santander for their comments regarding the operation, but the banking institution declined to comment.
Last September, Barclays issued a new strategy aimed at reducing the complexity of certain areas of their business, and as part of that strategy, the division of Wealth & Investment Management at Barclays has since then been proceeding to limit the number of regions from where they serve their clients, including clients in Latin America and the Caribbean.
At that time Barclays W&IM confirmed the closing down of 100 private banking centers, five booking centers, and the reduction of its workforce worldwide as part of a policy aimed at increasing profitability.
