Photo: David Illif. A Shift From Liquidity to Fundamentals May Put Risk Assets Under Pressure
As 2013 draws to a close, investors’ thoughts inevitably turn towards 2014 and the knowledge that risk assets will have to learn to begin to live without the seemingly unending flow of central bank liquidity. This presents some concerns as the earnings growth that many companies had banked on for the second half of this year has failed to materialise. If this trend continues, and the market’s focus shifts gradually from liquidity to fundamentals, risk assets may well come under pressure.
Excluding high yield, fixed income markets have had a lackluster year and we expect to see a similar trend in 2014
Excluding high yield, fixed income markets have had a lackluster year and we expect to see a similar trend in 2014. The continuing scramble for income has supported the high yield sector, which offers the highest level of income (relatively at least, although yields are low in historical terms) and the shortest duration exposure in the fixed income asset class. We regard corporate credit as a suitable asset class for a low-growth world and it is clear that coupon flows and maturities continue to easily absorb new issuance. Sectorally, financials remain in credit-friendly mode (and we expect them to remain so) but corporates appear to be increasingly equity-friendly, and thus leverage is rising. In core sovereign markets, yields will rise next year, particularly if the Federal Reserve delivers an earlier-than-expected taper (I still anticpate such a development at the end of March). However, we do not expect a rout in core markets and would anticipate 10-year US treasures to yield around 3.5% by end-2014. Sovereign markets such as the US and the UK are offering positive real yields, which will provide some valuation support in what is still a low-growth/income-hungry world.
We would anticipate 10-year US treasures to yield around 3.5% by end-2014
In terms of our recent activity, we have been taking some risk off the table in our multi-asset portfolios, primarily through reductions in emerging market equity and emerging market debt. The sell-off experienced by these asset classes in the summer, caused by concern over tapering fears, has provided a portent of events next year. Indeed, emerging market assets are likely to face a number of headwinds in 2014, namely rising treasury yields, a stronger dollar and a less benign liquidity environment.
We do not anticipate a re-run of 2013’s stellar returns but remain positive on the outlook for risk assets
Looking forward to next year, we do not anticipate a re-run of 2013’s stellar returns but remain positive on the outlook for risk assets. There are some developing tail risks (European deflation, Chinese/Japanese regional political tensions) that are not part of our core scenario, but which nonetheless provide potential uncertainty for markets should we see a continuing deterioration in the recent trends in these areas. China has thrown another wildcard into the mix with its recent announcements on domestic policy following the Third Plenum, which outlined a shift towards more market-friendly policies. However, as one would expect the timing, detail and implementation of these moves remains suitably vague.
The last six years have witnessed the most severe financial crisis since the end of World War II, with household earning capacity and saving ability experiencing significant changes due to the downturn in the real economies. This challenging economic situation definitely affected household saving behavior, although the impact has been different in various countries – for some, the impact on household earning capacity was more intense than others.
European households endured a sizeable reduction in their per capita real gross disposable income (GDI), with the exception of Germany
Recently, members of Pioneer Investments investment team in Europe gathered research on Savings & Wealth Trends in 2007-2013. Their findings were very interesting and I wanted to share some highlights.
Holding Steady, Despite Challenges
European households endured a sizeable reduction in their per capita real gross disposable income (GDI), with the exception of Germany, which exhibited an increase. Saving rates for Germany and France, two countries historically characterized by high and stable levels of saving, did not show significant fluctuations in the last few years and are also expected to remain well above the 15% threshold in 2013. Japan is another country that has shown a stable saving rate (8.3% of income in 2012), although at lower levels compared to the two core euro area countries.
A “Change of Habit”, but Still Lagging Behind
The US and UK, typically considered among the highest “spenders” in the early 2000s, have shown a significant increase in the tendency to save, a sign of a “change of habit” after 2008. More restrictive credit market conditions, following the burst of the sub-prime crisis, are probably one of the main causes of this attitudinal shift. Despite the increase in saving, these two countries continue to be marked by relatively lower saving rates compared to the rest of the countries we analyzed.
Visible Declines
On the other hand, Italy, Austria, Spain and Greece have experienced a visible decline in saving over the last few years. We believe in these regions, the steep fall in incomes combined with higher taxes are key elements that have driven down the ability to save. In other words, the erosion of revenue, along with consumption levels that have not declined as rapidly, had a direct impact on household ability to accumulate resources for the future.
For 2013, with the market normalizing and some signals of a turnaround on the economic front, we believe saving rates will increase (compared to 2012) in Italy and Spain (11.9% and 8.5% respectively), while Austria should remain stable at 12%. We anticipate a further saving decrease in Greece (7.4%) and some reduction for Portugal, which is expected to revert to its historical average.
Household Wealth on the Rise?
Much of the volatility observed in household total net worth is a direct consequence of changes in financial asset prices. From 2009, most of the countries we observed underwent a period of uninterrupted growth in financial assets, thanks to both market appreciation and new money flowing into financial investments. Now, many of these financial assets have largely closed the gap in valuations with respect to 2008 (with the exception of Spain and Greece). In six year’s time, the strongest appreciation was reported by France and the UK, where household assets are now up 19% compared to 2007 values, followed by Austria (+17%) , Germany (+15%) and the US (+13%). More subdued asset growth was recorded for peripheral European countries, where the sovereign debt crisis weighed on both household confidence as well as asset valuations.
Between 2007 and 2013, German households, on the back of a buoyant economy, experienced the most significant progress in total net wealth (+23%). German and Italian households were least affected by the collapse of financial markets in 2008. Italy, however, was unable to recover and ended up with just a 2% increase in wealth over the six-year period. Japanese household results were worse as their net wealth is expected to be 5% lower in 2013 compared to 2007.
Source: OECD, National Statistics Institutes and Central Banks, as of September 30, 2013. 2013 estimates: Pioneer Investments.
With higher exposure of portfolios to equity markets, U.S. and UK households shouldered the most significant drop in wealth in 2008. However, following the upsurge in market prices after 2009, these countries were characterized by a much quicker upturn in wealth in the following years and are expected to end 2013 with a level of total resources equal to 10% and 16%, respectively, above pre-crisis levels.
In conclusion, the evolution of household incomes is a reflection of the crises that have repeatedly shaken the world’s economies, with particularly negative consequences in Europe, which reflected an almost generalized decline in real GDP in 2008-09 and again in 2011-13.
Note: For calendar years 2007 – 2012, measurements are as of December 31. For 2013, measurements are forecasted for year-end.
Article by Giordano Lombardo, Global CIO, Pioneer Investments. This article was originally posted on followPioneer on December 11th, 2013.
The views expressed here regarding market and economic trends are those of Investment Professionals, and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading intent on behalf of Pioneer. There is no guarantee that these trends will continue.
This material is not intended to replace the advice of a qualified attorney, tax advisor, investment professional or insurance agent. Before making any financial commitment regarding any issue discussed here, consult with the appropriate professional advisor.
Sovereign creditworthiness in Latin America is expected to remain broadly stable in 2014, although some negative bias can be observed in the region’s ratings, with six sovereigns on Negative and none on Positive Outlook, said Fitch Ratings in its 2014 Latin American Sovereign Outlook Report.
“Regional GDP growth is expected to recover moderately to 3.1% in 2014 from an estimated 2.6% in 2013, led primarily by a rebound in Mexico,” said Shelly Shetty, Head of Fitch’s Latin America Sovereign Group. “However, weaker growth in China, softer terms of trade, tighter financial conditions and lagging productivity improvements will constrain growth rates to levels below those seen in the past.”
“Potential external shocks continue to represent the region’s main downside risks, though strong international reserves, combined with flexible exchange rate regimes and steady foreign direct investment should mitigate these risks,” added Shetty.
Growth rates are expected to vary significantly throughout the region. Brazil, Argentina, El Salvador, Jamaica and Venezuela are anticipated to underperform the regional average. Investment-grade Andean countries as well as Bolivia and Paraguay are expected to record above-average growth rates in 2014. Panama, while decelerating, should be the fastest-growing economy in the region.
Below-potential economic growth, easing of commodity price pressures and credible monetary regimes should lead inflation to remain well contained in most countries. On the other hand, moderate growth rates and less favorable terms of trade, combined with continued spending pressures and a busy election cycle could pressure fiscal accounts in some countries. Chile and Peru have the maximum fiscal buffers and among the lowest debt burdens in the region which places them in the best position to implement fiscal stimulus, if needed.
Despite a heavy election schedule for 2014, a significant departure from current policies is unlikely. As a result, elections should be largely credit-neutral, although they could detract from progress on competitiveness-boosting reforms.
Fitch’s special report 2014 Outlook: Latin American Sovereigns – Stable Credit Outlook with Negative Bias is available here.
The business of hedge funds is caught between rising costs and falling management fees, holding little profit for managers who don’t perform. That’s one key finding from the second annual global survey of the economics of hedge funds in the just-released Citi Prime Finance 2013 Business Expense Benchmark Survey.
“Today, a hedge fund needs at least $300 million in assets just to break even. The survey also uncovers dramatic regional differences in business and regulatory expenses.”
According to the survey, the traditional “2 and 20” model of investment manager compensation – 2% management fee and 20% of the profits — has declined to fee levels as low as 1.58% of assets under management for all but the largest managers. As a result, hedge fund managers, unlike their counterparts in traditional, long-only funds, barely break even simply collecting fees. For example, after paying expenses, funds with $500 million in AUM realize operating margins of 69 basis points, rising to 82 basis points for a manager overseeing $900 million, survey data show.
“Fee compression continues to reshape the business of hedge funds, lowering fees even as expenses rise, all but eliminating fee-only operating margins, and raising the level of assets needed for a hedge fund business to succeed,” said Alan Pace, Global Head of Prime Brokerage and Client Experience. “And while it’s clear that there is little room for additional downward pressure on management fees, at current average fee levels, investor-manager interests are well aligned – both parties are focused on performance.”
“Our latest survey takes a deep dive into the business challenges of running a hedge fund,” said Sandy Kaul, Global Head of Business Advisory Services for Citi Prime Finance. “Today, a hedge fund needs at least $300 million in assets just to break even. The survey also uncovers dramatic regional differences in business and regulatory expenses.”
In this latest survey, Citi Prime Finance surveyed 124 hedge fund firms in North America, Europe and Asia representing $465 billion, more than 18% of total industry assets. Select findings of the new survey:
Expenses, Fees & Margins
“Emerging” hedge funds — those with assets of less than $1 billion — struggle to cover expenses based solely on management fee collections and do not realize comfortable operating margins.
Pressure to offer founders’ share classes or accept seed capital to launch with sufficient AUM has helped push management fees down from the industry standard “2.0%” benchmark. The Citi survey shows average fees for managers with less than $1.0 billion AUM ranging from 1.58%-1.63%.
“Institutional” size hedge funds, with assets between $1 billion to $10 billion, begin to realize higher operating margins as they surpass $1.5 billion and can see appreciable profits as they approach and move beyond the $5.0 billion threshold.
Average management fees for institutional size managers are well below the historical 2.0% level, ranging from 1.58% to highs of only 1.76% for the largest firms in this band.
The largest “franchise” firms, those with more than $10 billion in total assets, become more profitable due to a broadening set of product offerings that expand beyond hedge funds.
On average, management fees for franchise size firms were 1.53%. For the largest firms, operating margins based solely on management fees were slightly above the 1.0% level noted for institutional managers, rising to 1.2%.
This illustrates that adding lower-fee products actually helps expand operating margins.
Regional Differences
The majority of European hedge funds responding to the survey had higher management company expenses than similarly sized U.S. funds. Across several different firm sizes, European management company expenses were at least 20% percent higher than at U.S. firms.
Marketing was the single largest category of expense variance between the U.S. and Europe. For smaller hedge funds with between $100 million and $500 million, European marketing expenses were 150% to 200% higher than in the U.S., due mostly to compensation differentials. European funds surveyed hired more senior marketing personnel early in their development cycle.
Survey respondents from Asia were confined to lower AUM thresholds — $100 million, $500 million and $1.5 billion. At each of these levels, average management company expenses were lower than in both the U.S. and Europe.
$100 million Asia-Pacific hedge funds had average management company expenses 20% lower than the mean costs noted in the U.S. and Europe for similarly sized firms. This differential expanded at $500 million AUM with APAC funds registering expenses 42% below the mean and staying quite discounted at 39% under the mean for firms at $1.5 billion AUM.
Impact of Regulation
Total compliance spend by firms with $100 million AUM is 18 basis points — half of which covers internal compensation for compliance related personnel and the other half of which relates to third-party outsourcing and software charges.
More institutional size hedge funds, from $500 million to $10 billion, spend between 3-4 basis points on compliance, with at least 70% of these costs going toward compensation for internal headcount.
Franchise firms spend about 1 basis point on compliance, but increase their use of software and third-party services as their product mix includes more regulated and long-only offerings.
Regionally, European-based managers had the highest levels of concern about the impact of regulations, citing both SEC/CFTC and AIFMD registration, compliance and reporting as likely to have a severe impact on their organizations and Dodd-Frank/EMIR OTC derivative rules and FATCA likely to have a moderate to significant impact.
Glennmont Partners, one of the largest infrastructure vehicles dedicated to clean energy across Europe, has secured a €50 million investment in its second fund by the European Investment Bank. The investment is the single largest clean energy equity investment made by EIB this year.
Clean energy investment is a key focus for the EIB as it works to support the European Union’s stated policy objective to cut greenhouse-gas emissions across Europe by 20% over the next six years. In recent years the EIB’s annual lending in this sector has increased substantially reaching €3.3bn in 2012. As well as lending, the EIB makes equity investments and provides finance and expertise to projects across Europe. The EIB has a rigorous review process for all the projects that it chooses to invest in including considering their financial, technical and social long-term performance.
Commenting on the EIB investment, Joost Bergsma, CEO of Glennmont, said: “We are delighted that the EIB has chosen to invest in our second fund. It has developed a first class reputation for its work in clean energy and this investment further demonstrates that our independent, specialist approach is attractive to top-level investors. We share a common goal with the EIB to promote sustainable and secure sources of energy for the UK while also delivering consistent yield and long-term capital appreciation for investors.”
“Glennmont has an established track record and proven readiness to support renewable energy projects across Europe. The European Investment Bank is pleased to back projects that tackle a changing climate.” said Jonathan Taylor, European Investment Bank Vice President responsible for environment and climate lending.
The EIB’s investment will be directly injected into Glennmont’s second clean energy infrastructure fund which now has commitments of €250 million from both new and existing investors from its first fund.
Martine Menko, Investment Officer at the Dutch pension fund for the transport sector,. “Nobody is Considering the Risks Associated With the Unsustainable”
Roderick: How does your fund formulate a policy with respect to sustainability?
Martine: The origins of our sustainability policy go back to the much-discussed Zembla broadcast about cluster bombs in March 2007. This made the board aware that we had to take action. In the beginning, it was just exclusion. By 2008, there was a need to do more than simply exclude. In an ideal world you would not want to exclude companies, you would engage with them. At that time we also looked at the role that institutional investors played in the financial crisis from this perspective.
One of the things missing in the run-up to the crisis was the exercise of voting rights at shareholder meetings. If corrective action is never taken at these meetings, it is no surprise that the management starts to behave like an owner. It is a sort of free put option. They enjoy the profits but not the losses.
Roderick: So your attitude was then: you people need to look in the mirror?
“Our industry only considers its fiduciary duty. In other words, achieving the highest possible return at an acceptable risk.”
Martine: That is right. Many funds took the attitude that ‘there is nothing we can do’. But with hindsight, they could have cast their votes. From then on, there was an interesting shift from not voting to voting yes. But it was based on the assumption that management is in command of all the facts. What you are seeing slowly develop now – in any case at the larger funds – is the introduction of individual voting guidelines. Whether they vote themselves or use a proxy adviser, their votes are cast according to their own voting policy. The question now is what the majority will do, including index investors. We formulated phase one of our sustainable investment policy in 2008. We have now moved on to the next stage. This time, the board is more involved. It is a process.
Roderick:So your first step was actually a more defensive reaction to an external event. Now you have moved to a proactive stance.
Martine: That is right. I presented a draft multi-year plan in which one of the goals was to get a reaction from the board and to increase their involvement. That worked.
Roderick: What led the board to take a more active stance?
There is still a perception that sustainability is at the expense of return. Nobody considers the risks associated with the unsustainable.
Martine: Partly due to increased publicity, the awareness grew that SI could play an important role. What I still find to be lacking is any pressure from the participants. It is all quiet on that front. And personally, I also think there should be more pressure from the regulator and the government. The thinking in these quarters is still focusing only on return in my opinion.
The strange thing is that corporates are already dealing with all kinds of rules with regard to sustainability, but our industry only considers its fiduciary duty. In other words, achieving the highest possible return at an acceptable risk. In the past, this was interpreted exclusively in terms of financial return and risk. But the interesting point is that non-financial risks can have huge financial consequences.
Roderick: You are saying that there is still scant attention to the issue from the regulator and the politicians.
Martine: It is very quiet in The Hague and in Amsterdam. Not only that, if you deviate from conventional benchmarks as a result of a pioneering sustainability policy, you have a problem.
Roderick: Then you have to retain higher reserves because you are seen as taking increased risk.
Martine: We are talking about the definition of risk as used by the regulator. Market risk is considered to be a risk, but not a risk that the regulator can influence. Everything that deviates from this is considered to be a risk that can be influenced. This will only change if public opinion changes. The interesting thing about public opinion is that policy is generally seen as very important. But as soon as it gets personal, there is a tendency to make short- sighted and opportunistic choices. There is still a perception that sustainability is at the expense of return. Nobody considers the risks associated with the unsustainable. ‘Do you want to invest sustainably?’ is actually not the right question. The question that should be asked is: ‘Do you want to continue to invest unsustainably?’ It needs to be turned around!
Roderick: Do you find there is resistance to sustainable investing as a result of the fund’s financial position?
Martine: The board is aware that it is potentially important, but there are so many other issues that are more urgent at the moment. It will take time.
Roderick: Lower funding ratios, missed opportunities: these are the issues, I think.
Martine: Absolutely. The smaller company pension funds mostly have very limited support. The correct focus is missing. In many cases, the board has no support and the pension board members have numerous other duties. The day-to-day issues prevail.
We have seen enough examples of a company’s value being affected by non-financial factors in recent years. And the majority of companies are keen to enter into dialogue.
Roderick: Are you also approached by the participants?
Martine: Very rarely. Recently I held a workshop for our pension consultants. They said that they receive questions on this issue perhaps once or twice a year. Awareness of sustainability is not that strong in the Netherlands. As far as I know, there is no discussion of what our society should look like 50 years from now.
Roderick: You would like to see a principled debate on our future direction?
Martine: I have the feeling that society is run in the benefit of the big companies. Shouldn’t this be the other way around? Take the banks, which should serve industry and business. And clients. But the bailout means the reverse is true. And what has changed? Absolutely nothing! But as long as there is no discussion of this in our society, we will not make any progress.
Roderick: What needs to happen to change things?
Martine: I fear that something serious has to happen. The nuclear disaster in Japan is an obvious example. After Fukushima, the debate on nuclear energy was more or less over. People simply rejected it. Our ‘Fukushima’ might be 50% unemployment among young people, as has already happened in Spain. Ultimately there will be a price to pay. But I do not think we will let it get to that point.
Roderick: Despite the lack of interest, how do you communicate with your participants on this subject?
Martine: First of all via the website. But we also have a newsletter and a magazine. The level of interest is really very low. I do not think that this is really related to the make-up of the transport industry. Drivers are just as aware, or unaware, of sustainability as the rest of the Netherlands. There are many sustainable initiatives in the transport sector such as economical driving, reducing C02 and things like Truck-run. Drivers have their hearts in the right place. But they do not see the connection with their pensions.
Roderick: What do you think about the ‘competition’ to raise more assets so that costs can be reduced as far as possible? After all, index investors are now looking for their own benchmark so that they have to pay less. And I wonder whether an index investor would have any interest in investing in an ESG policy, in the implementation of that policy and the reporting of it.
If you squeeze everything to the last drop, do not expect to get quality. You will not find the best meat at the discount store.
Martine: I think the general rule is that you get what you pay for. If you squeeze everything to the last drop, do not expect to get quality. You will not find the best meat at the discount store. I understand the focus on costs, but there is a difference between paying costs for hedge funds, GTAA, and private equity mandates (of 2% fixed fee + 20% performance fee, or 3% fixed fee + 30% performance fee) and whether you pay 4, 5, 6 or 20 basis points for an index mandate.
The point is: if you pay so little for a mandate, the risks will ultimately be much higher than the couple of basis points you have saved. A typical case of penny wise, pound foolish. But do not misunderstand me, of course we have to do what we can regarding costs. Fees can be reduced. Below a critical level, however, this will be at the expense of quality.
Roderick: How do you see the future? What developments do you expect?
Martine: Mostly limitations as regards implementation. The main obstacle in my opinion is managers who are totally skeptical. Then you have the managers who say that they would like to do something, but ultimately do nothing. And of course the regulator, whose focus seems to be increasingly short term. This, in combination with the fascination for index investing, gives cause for concern. If there is to be no statutory framework for sustainable investing, the outlook is not so positive in my opinion.
CC-BY-SA-2.0, FlickrVideo sobre inversiones sostenibles. Toda la verdad sobre las inversiones sostenibles
Have you invested sustainably lately? The odds are you have, even if you don’t know it. In a little over one minute this video posted in YouTube and produced by RobecoSAM, one of the leader asset managers in Sustainability Investing, explains the truth behind Sustainability Investing and how it can work for the triple bottom line: people, planet, and profit. This long-term investing strategy provides hope for the finance industry and the short-termism that plagues it.
Sustainability Investing is often referred to as Socially Responsible Investing (SRI), Responsible Investing, Impact Investing, Ethical Investing, and Green Investing. It is closely linked to Environmental, Social, and Governance (ESG) topics such as corporate governance, energy and water consumption, greenhouse gas emissions, employee turnover, and waste production.
Wikimedia Commons. Franquicias de calidad: cuatro temáticas de inversión para cerrar el año 2013
Five years on from the onset of the financial crisis and reflecting on the evolution of markets in 2013, there has been general optimism. This has been reflected in fairly buoyant equity markets so far this year. As the world economy recovers, in our view, we expect markets to continue following the path of least resistance – upwards. That being said, there is always the risk that expectations rise too rapidly and stocks rise too quickly. We believe that investors should still be rewarded from holding equities, however, but to avoid shares of businesses like most banks that rely on a continued strengthening of the global environment in the event that these trends prove over-optimistic.
Below, we outline four top themes informing our portfolio construction now as we move to the close of 2013:
Positioning to cater for a broadly positive environment ahead – Whilst our portfolios are constructed on a bottom-up basis, we are mindful of the environment in which we operate. We hold 29 high-conviction ideas in the portfolio, which consist of time tested businesses that are steady compounders of cash flows.
Defensive tilt – Our high quality portfolio with its defensive tilt has limited exposure to industrials, consumer discretionary, financials, telecommunications and materials. These sectors are typically highly capital intensive, and thus names in which we would not have exposure through any market cycle. Informing our investment process is a belief in moving away from highly leveraged and capital intensive industries, preferring industries which are low in leverage and capital intensity, generate high free cashflows, with strong balance sheets and capital independence. We own only one direct Emerging Market share, Samsung Electronics, where the value in the share price is inconsistent with the dominance of the Franchise and the growth the business is producing and the investments it is making to extend its advantage over its peers.
Investing in quality global franchise businesses – Over the year to date, all companies in our portfolio have increased dividend payouts, nine companies have re-purchased shares and five have increased repurchases of shares. In addition, steady compounding of cashflows provides ongoing comfort with a compound growth rate of 11.4%. For example, Microsoft remains one of the best performing shares in the portfolio, up 26% year to date. In our view, Microsoft remains one of the few technology businesses that has managed to evolve and stay relevant in its market, and is in the midst of doing it again. We believe Microsoft remains attractively valued with a free cashflow yield of 10% and dividend yield of 2.9% as the market underestimates the growth prospects.WPP is a further example, as it continues to deliver robust performance. The proposed merger of its two biggest competitors, Omnicom and Publicis, sparked WPP to increase its focus on digital media and faster growing emerging markets, notably increasing its sales target. Capital allocation is also set to improve given the increase in the dividend payout ratio target from 40% to 45% over the next two years.
Companies with persistent returns, but receiving scepticism from the market – We maintain that quality is just as important as safety and safety just as important as price, making it crucial to consider strong durable franchises at attractive valuations. We have found that a strong franchise is a product or service that is able to resist the incursion of competition and consistently meet the needs of customers for decades. To us, businesses whose competitive advantage or franchise is dominated by intangible assets that will lead to high sustainable returns on capital and strong free cashflow are the definition of ‘quality’ companies. Our investment philosophy remains focused on low volatility, steady compounding of profits and consistent share price returns over time.
Column by Clyde Rossouw, Portfolio Manager, Investec Global Franchise strategy, Investec Asset Management
Wikimedia CommonsPhoto: Daniel Schearf. Vibrant Vietnam
I recently made my first visit to Vietnam and spent several days in Ho Chi Minh City. Considered by the investment community to be a frontier market, Vietnam has a low per capita income (approximately US$1,600), a relatively young population and less mature capital markets. My research trips have taken me to many remote locations so I am generally prepared for poor infrastructure and chaotic environments. However, I found Ho Chi Minh’s Tan Son Nhat International Airport to be surprisingly efficient and modern, and the city’s roads are decent, if not better, than those in many other emerging or frontier Asian economies. The droves of motorcyclists and roadside food vendors, however, were a reminder that Vietnam is still in its early stages of economic development.
While many Asian countries generally do not have a strong coffee-drinking culture until incomes reach higher levels that induce lifestyle and consumption changes, Vietnamese coffee consumption is quite ubiquitous. There you can find a combination of both local coffee shop chains as well as foreign ones on virtually every bustling street. The popularity of coffee in Vietnam likely stems from the country’s French colonial influence, and the fact that Vietnam is a coffee producer sets it apart from the rest of Asia. Vietnam is actually the world’s second largest coffee producer behind Brazil with current annual output of approximately 1.5 million metric tons. Over 90% of coffee produced is exported, which makes coffee one of Vietnam’s most important commodities. I sampled some of the local coffee and I must say, Vietnamese coffee is quite strong and invigorating.
Another observation I made was the proliferation of not only small- to medium-sized, domestic branded coffee shops, but also jewelry and apparel stores, which could be somewhat of an indication of entrepreneurism in the local economy. In the past decade, the economic dominance of state-owned enterprises (SOEs) has shrunk due to ongoing reforms. The contribution to GDP growth from SOEs from 2001 to 2005 was about 33%. It dropped to 19% from 2006 to 2010, while GDP contributions from the private sector increased from about 45% to 54% in the same time period. Not surprisingly, the private sector now accounts for the bulk of Vietnam’s new job creation. However looking beyond these economic data points, I was heartened to see the vibrancy and drive of the local people on the ground. Not dissimilar to China’s pattern of economic development, Vietnam has been carrying out SOE reforms. Local entrepreneurs are now able to enjoy a higher degree of economic freedom, which should be favorable for Vietnam’s long-term economic development.
Lydia So, CFA, 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.
The MIT Sloan School of Management celebrated last Tuesday, December 10th, the opening of its Latin America Office in Santiago, Chile, during an event there that commemorated the 100th anniversary of the founding of Course XV: the beginning of management education at MIT and the precursor to the Sloan School.
The commemoration of Course XV is being marked with a series of events both on campus and in cities around the globe. The events pay tribute to people at MIT Sloan whose ideas and work changed thought, theory, and practice in the world of management.
The MIT Sloan Latin America Office (LSMAO) is made possible by a gift from Andrónico Luksic. He is a member of the MIT Sloan Latin American Executive Board, the MIT Sloan Latin America Office Advisory Council, and the school’s Visiting Committee.
The office promotes the school’s programs to potential students in Latin America, develops channels for faculty and student research, and creates opportunities for action learning through MIT Sloan’s signature experience-based education program where students translate classroom knowledge to solve real-world problems.
MIT Sloan’s new office also expands the scope of its international training programs. This January, for instance, 16 companies based in Brazil, Argentina, Chile, and Colombia will host MBA students in conjunction with the school’s Global Entrepreneurship Program. Additionally, the MIT International Science and Technology Initiatives (MISTI) group runs more than 30 projects in the region.
