The long-running guessing game over the tapering of the Fed’s asset purchases, that has dominated markets since May, has come to an end. Tapering will start in January. ING IM thinks that the lasting impact on markets will be subdued and that the ongoing global recovery continues to support investor risk appetite.
“With less of a lasting impact expected of Fed tapering, a sustainable recovery in sight and a gradual increase in equity allocations anticipated, we are heading into 2014 with a clear preference for equities in our overall asset allocation stance”.
US short-term yields now more stable than earlier 2013
Fed starts tapering in January 2014
Last Wednesday, the Federal Reserve announced that it will start tapering the size of its asset purchases as from January. It will lower its monthly purchases to USD 75 billion from USD 85 billion currently – USD 35 billion in mortgage backed securities (from USD 40 billion) and USD 40 billion in Treasury debt (from USD 45 billion).
Forward guidance likely to be tested by markets in 2014
ING IM’s base case for the Fed is now additional tapering of USD 10 billion at each of the following meetings, while we maintain our view that the first rate hike will come in the fourth quarter of 2015. “Furthermore, we do not expect a further enhancement of the forward guidance language beyond the qualification that rates will be on hold “well past” the time that the unemployment rate drops below 6.5%”.
However, the risks to this view are tilted towards hiking at a later date. “Also, we see a distinct possibility that the forward guidance will be enhanced further, possibly with something that contains more of a commitment than the December innovation which was mostly qualitative. The reason for the latter is that the above-potential growth rates that we expect in 2014 may well cause the market to start pricing a more aggressive hiking path for the Fed Funds rate than currently”. If that happens, the Fed will need to take action to re-anchor these expectations.
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In February of last year, Henderson announced that six credit specialists had joined the firm in Philadelphia to broaden their US and global credit capabilities. As 2014 begins, Stephen Thariyan, Global Head of Credit updates investors on the integration of the team and his plans for next year.
One of the major attractions of the hires in the US has been their similar investment philosophy and approach to adding value in the asset class based around bottom up fundamental credit research. “In some respects we have made some very straightforward adjustments to incorporate the US resource into our weekly credit meeting and Kevin Loome into our monthly top down asset allocation review for credit portfolios. In addition, we have now created a dedicated fortnightly high yield strategy meeting, which focuses on the high yield strategies across fixed income and includes the high yield portfolio managers, the Head of Credit Research and representatives from loans (David Milward), retail credit (Nick Ware) and secured credit (Colin Fleury)”, highlights Stephen. Analyst research notes are shared globally across fixed income and equities on Henderson’s Sharepoint system, an online internal research portal.
All members of the new team in Philadelphia have spent time in London enabling them to understand Henderson’s broader fund range, build relationships and day to day contact with the London portfolio managers and analysts, and understand the systems and processes hands on. One of the key action points agreed for 2014 is an exchange program in which credit analysts and dealers will rotate through London and Philadelphia over the course of the year. “This is important in my mind so that analysts, dealers and portfolio managers cement strong relationships, familiarity with each other and can communicate effectively”, adds Stephen.
In April, Henderson launched theUS High Yield Opportunities strategy managed by Kevin Loome. While it has only been running for seven months, performance has been excellent and is top decile to date, continuing the strong performance and reputation that Kevin and the US analysts have built up over the years. Last month, Henderson launched the Global High Yield Bond strategy which is managed by Kevin Loome and Chris Bullock. “I am very excited at this prospect to broaden our high yield capabilities for our clients”, states Thariyan.
“While the Global High Yield strategy will naturally be the highest conviction expression of the views of our Global Credit Team, a broad range of fixed income strategies are beginning to see the benefit of this capability reflecting our unconstrained approach to building portfolios”. For example, Henderson’s Absolute Return and Total Return Bond strategies managed by the Investment Strategy Group are directly drawing on the bottom up credit ideas in US high yield. “Our Multi-Asset Credit strategy has participated in US loan deals such as Dell and BMC software and the team has provided valuable input on US loans underlying CLO transactions”.
Stephen Thariyan concludes : “It has been an extremely encouraging start in the US with the integration of the credit teams across the Atlantic having gone to plan”.
Photo: Ralf Roletschek - Fahrradtechnik und Fotografie. Skill Versus Luck in Investing
What roles do skill and luck play in our successes and failures? How much does pure luck contribute to investment success? Luck plays a much greater role in short-term investment results than many investors may think. Michael Mauboussin, Head of Global Financial Strategies at Credit Suisse, explains how investors can learn to avoid mistakes, and the ‘dumb money effect’.
Click on the image below to watch the video interview.
Photo: GFDL. Andbank Acquires Swiss Asset Advisors in Miami
Andbank has acquired Swiss Asset Advisors, an American advisory firm founded in 2008, currently headed by Michael Blank. Following this operation, which is part of the group’s growth strategy, Andbank will integrate Blank and the rest of the Swiss Asset Advisors’ team into its Miami office. Swiss Asset Advisors will provide the Andbank group with a portfolio of U.S. customers, as confirmed to Funds Society by both companies.
Blank, with 17 years of experience as an international private banker, was responsible for establishing Julius Baer in Palm Beach (Florida) and Credit Suisse Private Advisors in Miami before venturing to create his own consulting firm in 2008 with Giuseppe Mazzeo, from Switzerland, in charge of investments. With 25 years of investment experience, Mazzeo developed his career at Credit Suisse, where he led the Investment Strategy global team, with over 40,000 million Swiss francs in assets.
Blank, who is aware of the increasingly important role Miami plays as a business and finance hub for Latin America, declared to Funds Society that “the individual approach offered to each client with tailor made solutions, and the office staff with over 100 years of combined experience in international banking,” were definitely some of the reasons which drove him to integrate his personal project with Andbank.
The executive also stated that he was attracted by “its open architecture plan, and the Andbank roots, a bank from Andorra operating as a family office, owned by two families with over 80 years of tradition.”
“Miami is a special place, with tax experience in trusts, wealth planning, and real estate for non-residential, cross border, and U.S. clients. Miami is a unique melting pot of cultures for families and their interests, and Andbank is focused on positioning itself as a reference,” said Blank.
The acquisition of Swiss Asset Advisors by Andbank is waiting for the approval from the regulatory authorities in Andorra.
For Javier Rodríguez Amblés, managing director of Andbank Wealth Management, the incorporation of Michael Blank and the rest of the Swiss Asset Advisors’ team, is due to the fact that Andbank “aspires to continue growing; a growth which continues to combine the firm’s own organic growth with acquisitions in strategic moments.”
Likewise, the executive said that without yet including Inversis, whose private banking was acquired by Andbank in Spain last July, the company would now have over 17 billion dollars under management, which has doubled the size of the bank in the past five years, one of the objectives which was set in its day by the bank’s senior staff when they made a commitment to international expansion.
Foto: DelhiiteRock. Innovaciones perturbadoras en la política de la India
“A man may die, nations may rise and fall, but an idea lives on. Ideas have endurance without death.” –John F. Kennedy
The sweeping victories for India’s pro-business opposition party, the Bharatiya Janata Party (BJP), in recent state elections were largely expected. But more stunning, to say the least, were unexpectedly strong gains in Delhi by a nascent, novice and underfunded political party known as the Aam Aadmi Party, or Common Man’s Party. The party ran a grassroots campaign, taking a page from U.S. President Barack Obama’s “get out the vote” efforts. With a narrow political agenda of providing clean governance, the party won a near majority in the polls, beating candidates with far more financial backing and organizational strength. One wonders how that happened and what that implies for Indian politics.
The party is relatively inexperienced, but on the other hand, has been able to sustain a clean image, which appeared to be more important to today’s Delhi electorate than a long track record or religious affinity. In fact, this party fielded candidates with religious identities or castes not necessarily aligned with the electorate. Furthermore, the party made no effort to appeal to such affiliations. Perhaps India’s largely young population was less concerned with these issues.
The Aam Aadmi Party’s funding strategy was also unconventional. It raised funds from local citizens, who gave large volumes of small amounts, and Indian nationals living overseas, who gave larger amounts in the hope of seeing some change back home. Typically parties have fundraised primarily from self-interested corporations. But to reinforce its transparency, the Aam Aadmi Party posted donations received and their usage on its website—something most other parties did not do. The party also encouraged a more direct and participatory form of democracy in the devising and execution of their agenda. In contrast, most parties have a more hierarchical and dynastic style. Aam Aadmi’s success suggests that there has been a vast unmet need for good grassroots governance in Indian politics, and the party’s credible promise of this swayed many voters.
Many skeptics think that over time, the Aam Aadmi Party may become just like any other. Nonetheless, the implications for the party’s debut electoral performance are enormous for Indian democracy. First of all, the party has demonstrated a viable way of winning an election using transparent means without resorting to short cuts. No matter how this party evolves over time, this disruptive idea will hopefully prevail and continue to bring fresh doses of clean politics into the system. Secondly, the party has brought to forefront the issues truly important to constituents, something other political parties are still struggling with. Additionally, in my opinion, the fear that unless they improve, they will perish, will alone bring a huge change in the mindset of politicians. Hopefully, the Aam Aadmi Party’s success in this election will change the ways in which all Indian politicians conduct their business.
Notwithstanding the success of this kind of politics, one has to bear in mind that Delhi is largely urban and this party’s movement had strong backing of middle class voters that are dominant in this region. Whether this will be replicable to largely rural and poor Indian constituents outside Delhi is something worth watching.
Sunil Asnani, Portfolio Manager 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.
Growth prospects for 2014 are more positive for the Euro zone. GDP should increase by about 1%, according to Philippe Waechter, chief economist in the fund manager company Natixis Asset Management. “After 2 years of low or negative growth, this is a welcome change. This could stop the long under-performance seen since 2007 in most Euro Area countries”.
However, “even if 2014 brings color back to Europe, the road is still very long before considering that a new equilibrium has been reached”. The reason? The situations are very heterogeneous within the Euro area. Countries have very different profiles of activity and very different dynamics.
To illustrate this point he has taken the GDP per capita (at constant prices) for the Euro Area, for Germany, for France, for Italy, for Spain, for Ireland, for Portugal and for the United Kingdom. And heconsiders the time that will be required for each of these countries to be back to 2007 GDP per capita level.
Besides Germany, which has already reached the pre-crisis level of GDP per capita, there are three categories of countries. The Euro zone, France and the UK, using the growth rate of pre-crisis GDP per head, would converge to 2007 level in a little over two years. French growth is slower but the decline of its activity was lower than in the euro zone. In the UK the pre-crisis growth was very strong. This is what allows the rapid return to 2007 level. In Spain and Ireland, the period is a little over 4 years. Strong pre-crisis growth is the major support of this rapid convergence. For Portugal and Italy it is more than 10 years and is even close to 13 years for Italy. The low pre-crisis growth is responsible for the slow convergence.
However, these figures are misleading and probably too optimistic. Are France, the Euro Area and the UK able to find a growth pattern as fast as before the crisis? Can we also bet on the back of rapid growth in Spain and Ireland?, he wonders. “Spontaneously it seems difficult”, says the economist. “Discussions in Europe on the lower potential growth after the crisis reinforce this skepticism. Return to the GDP per capita level of 2007 will be much longer to implement than what is shown in these simulations. Consequently, the dynamics of the labor market will remain long fragile and balanced public finance will be longer to establish. For Italy and Portugal the question is simple: these countries before the crisis knew very little growth. Will they have rapidly the ability to return to these pre-crisis growth rates of GDP per capita?”
The slow convergence to the pre-crisis level of GDP per capita is a representation of the heterogeneity that exists today, notably in the Euro Area, says. “Before the crisis there was a kind of common trend within the Euro Area. This led to a kind of homogeneity of countries’ momentum. Spontaneously it seems difficult today to make this bet without creating more cooperation and coordination between member countries of the Euro zone”.
The heterogeneity of the situation in Euro zone shows that, and this is the target of this little exercise, must not lead to situations of opposition from one country to another as this may cause greater social and political instability. “This is what must prevail. Mario Draghi July 26, 2012 in London indicated that the construction of Europe was primarily a political construction reflecting the will of Europeans to live together. This is the time to demonstrate this will, by developing a more integrated institutional framework”.
Photo: Luis Pabon, Flickr, Creative Commons.. BlackRock's 10 best ideas for 2014
What’s in store for 2014? Russ Koesterich, Jeff Rosenberg and Peter Hayes offer their 10 best ideas for the year ahead, consisting of five ‘what to know’ items and five ‘what to do’ ideas to help the investors navigate the markets.
With economic and market conditions slowly improving, but uncertainty high and income and returns still tough to come by, the fund manager suggest that investors rethink their bonds, generate income without overreaching, and seek growth while managing volatility.
Here’s a look at BlackRock’s 10 best ideas regarding what to know—and do—in the year ahead.
Arnout van Rijn, CIO for Robeco in Hong Kong.. Award for manager Robeco Asia-Pacific Equities
Fund rater Citywire awards Arnout van Rijn for his consistent outperformance with the strategy Robeco Asia-Pacific Equities.
Citywire awarded Arnout van Rijn as “the most consistent fund manager” based on the five year track record of Robeco Asia-Pacific Equities. There are currently 50 Asia Pacific funds, but only two funds have consistently outperformed their average peer each year.
Robeco Asia-Pacific Equities has a concentrated portfolio and its investment strategy is based on bottom up stock selection.
Van Rijn has financials as his top sector exposure, this is while also being overweight consumer staples and real estate.
Elsewhere in the fund, he is underweight commodities and, in his latest investor note, he said it is difficult to find attractive industrials.
Van Rijn, who is CIO for Robeco in Hong Kong, has Japan as his biggest geographic exposure. This currently makes up 41% of his fund, with exposure to China making up 13.3%, South Korea 10.2% and Australia 9.2%.
James Swanson, Chief Investment Strategist at MFS Investment Management. Five questions and five answers about tapering
Chief Investment Strategist at MFS Investment Management, James Swanson, answers five questions about the backdrop for investing after the Federal Reserve’s decision to begin tapering quantitative easing. Click on the video to find out the answers.
CC-BY-SA-2.0, FlickrPhoto: danielfoster437. Three major reforms in China’s Economic Plan
A recent conversation between Giordano Lombardo, Global CIO at Pioneer Investments, and his colleague Mauro Ratto, Head of Emerging Markets, helped boil down China’s recent economic reform plan.
State-Owned Enterprises
The most awaited pro-market reform concerned the role of large state-owned enterprises (SOEs). Xi Jin Ping made clear that the government should refrain from directly affecting the markets, though retaining the ownership of key economic assets. SOE’s should resemble other Asian countries, such as Singapore, where firms operate in a truly competitive environment and try to maximize profits rather than building up a lot of capacity through oft-unproductive capital expenditure. Bottom line: even though SOEs remain, as the name shows, in state hands, increasing access of private enterprises to capital, land and energy markets should prompt SOEs to be more efficient in allocating capital or end up as losers in a new competitive environment.
Financial Sector Reform
The central bank (People’s Bank of China or POBC) is unlikely to speed up this part of the reform program, in spite of the plenum’s full commitment to change. The macroeconomic case for increasing consumers’ purchasing power due to higher interest rates on deposits looks strong, but so is the need to keep bank profit margins from shrinking, if too much sector competition was allowed too soon. Some measures are aimed at helping banks manage the transition to a more competitive market.
The issuance of negotiable certificates of deposit in local currency should enable banks to get large amounts of funds at relatively stable costs, thus containing the risks of a volatile wholesale (inter-bank) market. Another, more structural, change would let them diversify their assets out of loans and make profits less reliant on the spread between deposit and lending rates. Bottom line: top Chinese banks’ balance sheets may eventually resemble their American and European counterparts with the amount of marketable securities invested.
Social Reforms
Rural land and urban residence reform was on top of the plenum’s agenda. The main changes affect rural dwellers, who will be allowed to buy land for building residential housing or infrastructure. Any limitation left to domestic migration, which curbed rural residents’ ability to move to the cities, is to be scrapped and help speed up the transition to consumption-driven growth. Cities are the engine of China’s household-led expansion, as the urban per capita income is about three times as high as the rural one. Bottom line: the rural population will eventually be entitled to the same rights as urban residents, which will benefit overall consumer spending.
