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.
CC-BY-SA-2.0, FlickrStephan Kuhnke, CEO at Bantleon Bank. "Our Objective is Absolute Return, Our Purpose is Capital Preservation”
Founded in 1991 by Jörg Bantleon, it’s not until the year 2000 that this firm, focused on the management of high quality bond portfolios, starts to manage assets. Their strategy and focus towards “secure” investments took them in 2012 to surpass EUR10 bn in assets under management. The premises are clear “first preserve the capital, and then maximize concentration in order to achieve attractive returns” as matter of fact almost 60% of the company’s capital is invested in Bantleon funds.
With offices in Switzerland and Germany, Bantleon counts with a team of 32 people, of which 13 of them are asset managers or investment professionals, stable and with little rotation. Their offer includes investment grade bond funds, absolute return and multi strategy funds, fundamentally directed toward institutional clients.
In 2008 they launched the Bantleon Opportunities L strategy that benefits from the joint economic development of both the bond and equity markets. The returns come from the intense duration management together with the flexible investment in equities that can be of either 0% or 40%.
“Our fundamental focus is on predicting the estate of the economic cycle” comments Stephan Kuhnke, CEO of Bantleon Bank and responsible for portfolio management and trading, in an exclusive interview for funds society.
“On the equity side of the portfolio we invest in the DAX, as it’s the index that best represents the real economy, compared to the MSCI World that underperforms in upswings but falls less in downswings. The companies in the DAX are export oriented and therefore highly correlated to the economic cycle and it’s also the most liquid index”.
According to Kuhnke, their model counts with two components, strategic and tactic. “For the strategic component we analyze the fundamental environment to predict where we are within the economic cycle and determine if we invest or not in equity.” The floor is zero. The tactical side combines trends and momentum.
The results of both components have to be positive in order for the strategy to invest in equity. If either is negative, they do not enter the equity market. “Our objective is absolute return, our purpose is capital preservation”.
The bond portfolio plays with the carry and the duration of the bonds, that ranges from 0 to 9 (0-2-4-9). “We mainly invest in debt with AAA rating”.
Since its launch Bantleon Opportunities has never had a negative year. Even during the most turbulent markets like the 2000-2002 crisis or the collapse of the financial markets in 2008, their management method has been very stable. This good track record has got them various Lipper and Bloomberg prizes and a 5 star Morningstar rating. In 2012 and this year, Bantleon has been awarded with the FeriEuroRatingServices as the best manager in Germany, Austria and Switzerland in the absolute return category.
As for 2014, Kuhnke expects the economic cycle to continue its positive trend until the second quarter that will be followed by some slower growth. “In this scenario we will be long in equities and reduce the duration of our portfolio.”
Nevertheless, towards the third quarter of the year, “things will change towards a low growth environment that will lead us to close our position in equity and increase duration”.
CC-BY-SA-2.0, FlickrFoto: Dave Haygarth. Perspectivas Multi-Activos: cuatro temas de inversión en renta variable para 2014
Philip Saunders, portfolio manager across the Investec Managed Solutions Range, gives four equity themes for 2014
1) Continue to avoid the mega-cap dinosaurs
Market indices around the world are dominated by companies that have seen better days. They look cheap and offer tempting dividend yields but often face serious strategic challenges. Some will prosper and some rejuvenate themselves but most are likely to continue to languish. Small caps, mid-caps and the smaller large caps are likely to go on out-performing. We prefer quality growth stocks, especially in the cyclical sectors, well-judged recovery stocks and small & mid cap stocks around the world. What does this mean for investors? In our view this is positive for actively managed equity funds that are prepared to diverge significantly from the weightings of the major market indices.
2) Increase exposure to emerging market equities and debt on weakness
Emerging markets have been disappointing in 2013 with slower growth and weakening currencies leading to sustained downgrades to forecasts of corporate earnings growth. This in turn has undermined equity valuations. Valuations are now attractive in both absolute terms and relative to developed markets but earnings forecasts continue to be reduced. Bond yields have backed up, partly in tandem with developed market yields, partly due to domestic problems. Some currencies have fallen to attractive levels. An emerging markets crisis, marked by currency collapses, capital flight, much higher interest rates and a recession, is highly unlikely but markets could continue to be dull in the short term. Nevertheless, a strategy of building long term equity exposure during the year is likely to be well-rewarded while further currency weakness could provide an attractive long term opportunity to invest in emerging markets. What does this mean for investors? In our view this is an opportunity to add exposure to emerging market equities and debt into weakness – but be prepared to be patient
3) Quality and ‘contrarian’ stocks should continue to out-perform
Many investors in 2013 made the mistake of assuming that ‘quality’ was synonymous with large-cap defensive sectors. Quality implies consistent business strategies, durable market opportunity, long term growth, well-managed finances and high returns on invested capital. These characteristics are to be found in all sectors, both cyclical and non-cyclical. Typically, quality stocks are not cheap but reassuringly expensive; nevertheless sustained long term growth ensures attractive investor returns. ‘Contrarian’ investing in out-of-favour stocks and sectors can also be highly rewarding but the investment world is full of value traps; stocks that appear cheap and pay generous dividends but whose businesses are in long-term decline.
Turn-around stocks are cheap because they are high risk but value realisation depends on business turn-around if investors are to regain confidence. The world is full of value investors but there are many fewer prepared to pay up for quality or with the courage to identify and back companies with real turn-around potential. What does this mean for investors? In our view, investors should be wary of lowly valued stocks with a high yield which are often cheap for a reason. Paying up for quality and buying true contrarian stocks should continue to be rewarded.
4) Resource equities are about value added, not commodity prices
Commodity prices continue to trade sideways, the performance of the energy sector has improved but mining shares, especially precious metal miners, have languished. The problem for energy companies has been replacing reserves at reasonable cost but for miners it has been scaling back over-ambitious expansion plans.
Reducing costs, improving license terms and returning cash to investors have been key across both sectors. Investors continue to shun mining stocks, despite compelling cashflow valuations. They favour integrated majors, many of which are strategically challenged, rather than the growth companies. This creates great opportunities for active stock-picking. What does this mean for investors? We think the outlook for the resource sector is better than implied by current investor pessimism, especially given the opportunity for adding value through stock selection.
We have witnessed the rise of many successful entrepreneurs in Asia over the past few decades. One criticism of their success, however, has been that their businesses often were developed through “copying” or learning from Western businesses. It is true that their businesses have not been as revolutionary as some Western businesses have been. There is nothing inherently wrong with this, nor should it be surprising at Asia’s current stage of economic development. But we do not believe this model will always be the case.
Many policymakers in Asia have made innovation a national, strategic priority. In the past two decades, they have narrowed the gap in research and development (R&D) with their Western peers through rising R&D spending in academia and increasing technology transfer by attracting knowledge-intensive foreign direct investments (FDI), which taps a pool of more highly educated workers. The effort has given rise to numerous research hubs equipped with good infrastructure and skilled workers. Driven by the explosion in Internet penetration and rising personal income, private sectors have become more active and funding for start-ups is increasing as more angel and venture capital communities develop.
R&D Funding
Since the early 1990s, greater emphasis on science and engineering has significantly improved the overall quality and quantity of such professionals in Asia. This effort increased Asia’s share of global R&D expenditure to 32% in 2009, up from 24% in 1999.
This increase was supported by both growing GDP and increased spending for R&D, with results most evident in China and South Korea. The rising amount of funding going into the sciences, predominantly in China, Taiwan and South Korea, has led to more students pursuing related higher education degrees. The number of science and engineering degrees earned in China and Taiwan more than doubled between 2000 and 2008, and accordingly, the increase in such graduates has raised Asia’s labor supply of scientists.
Industrial Policies Governmental development policy has generally built up good infrastructure and created an educated and knowledgeable labor force. Taiwan, South Korea and Singapore have had success after their respective governments focused on developing specific sectors like semiconductors, automotives and airlines. In the past decade, less mature Asian economies have utilized methods like public procurements and technology funds to implement their industrial policies aimed at boosting local innovation. Increasingly, they are also using FDI to achieve their objective by increasing technology transfer.
However, traditionally, instead of developing a network of local suppliers, foreign companies have sourced from the same suppliers due to a lack of scale or due to trust and quality. As a result, governments have increasingly offered various financial incentives for foreign multinational corporations to conduct R&D in Asia’s science parks. Today, according to UNESCO, there are over 400 science parks worldwide. While the U.S. and Japan top the list with more than 110 centers each, China—which did not start developing science parks until the mid-1980s—already has approximately 100.
As a result, U.S. multinational corporations are increasingly allocating R&D projects to their foreign affiliates in Asia Pacific ex-Japan, whose R&D project value grew more than seven-fold from 1997 to 2010. These activities are driving the rise of hubs equipped with technology infrastructure and well-educated labor pools across Asia, which is a precondition of start-ups‘ creation and expansion.
Through this link you may access the full report “Entrepreneurship in Asia”, by Jerry Shih, CFA, Research Analyst, 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.
Wikimedia CommonsWilliam Finnegan from MFS. The Family Wealth Conversation
William Finnegan, Senior Managing Director of Global Retail Marketing at MFS highlights the challenges investors face when their inheritance gets passed on to their heirs. He provides solutions to this challenge to make this transition a smoother process.
Private equity firms often get a bad rap in the popular media — picture Gordon Gekko in the 1980s movie Wall Street and, more recently, negative characterizations during the last presidential election — but new research by Stanford faculty member Shai Bernstein should dispel some of the myths about this class of investments.
“The public debate about private equity often lacks data upon which to base its arguments,” says Bernstein, who is an assistant professor of finance at Stanford Graduate School of Business. “We wanted to take an in-depth look at the operations of these privately held firms, which are, more often than not, hidden from the public eye.”
After a rigorous analysis of private equity (PE) buyouts in the restaurant industry in Florida, which looked at 103 separate deals from 2002 to 2012 and 3,700 restaurant locations, Bernstein and Harvard Business School faculty member Albert Sheen found strong evidence that private equity buyouts actually improved management practices and operations, as well as decreased prices, all with a minimal impact on employment.
While the study focuses on a single industry and geography, Bernstein stipulates that the findings are indicative of the broader value created by PE buyouts. As he explains, the restaurant industry has much in common with other sectors that attract private equity firms — they have tangible assets, relatively simple operations, and predictable cash flows. “We believe we can draw broader conclusions from these deals,” he says, although noting that some caution should be used in making generalizations.
The researchers decided to focus their efforts on restaurants because of the industry’s pervasive practice of dual ownership, in which a parent company directly owns and manages some locations and others are franchised. In general, a parent company has much less control over franchisees than locations that are directly owned. According to Bernstein, this provided a uniquely controlled experiment about the value added by PE firms, allowing the researchers to compare the effect of private equity ownership on direct-owned versus franchised locations.
Xi Jinping, presidente de la República Popular China. Tercera Sesión Plenaria
The Chinese government recently released details of the reforms announced at the Third Plenum and the market has reacted positively. The Plenum is a key meeting of top Communist Party leaders to discuss China’s future policy direction. At the center of the policy changes are reforms addressing the government’s role in the economy and business, and the introduction of more market-orientated mechanisms to guide the development of industries.
While the reforms will have varying implications for different industries, the reduction in the role of the state alone could spark a drop in the risk premium applied to the Chinese market where indices are dominated by mega cap state-owned enterprises (SOE) trading at low price-to-earnings and price-to-book value multiples. The Plenum also addressed critical reform agendas that will improve the prospects for social stability and the rise of consumption, such as relaxing the one child policy, increasing rural ownership and land use rights for farmers and those owning agricultural land, and changes to the ‘hukou’ system of urban social welfare entitlements, all of which can help rebalance the Chinese economy over the long term.
We believe that market sentiment will be lifted by the announced reforms as investors witness the improving quality of economic growth and evolution of the financial and real estate sectors as well as fiscal policy and pension systems. A re-rating of Chinese equity markets is also likely, with the Hang Seng China Enterprises H Shares Index currently looking cheap on a forward P/E ratio of less than 9x – see chart 1.
Source: Datastream, Hang Seng China Enterprises H Shares Index, price earnings ratio, monthly data, 31 October 2003 to 31 October 2013.
The Chinese economy has continued its cyclical expansion with rising economic growth and industrial activity. Rising growth appears to be the result of government policy augmented by strengthening recoveries in Japan, Europe and the US. Clearer policy direction has certainly come from the Third Party Plenum. We believe there is sufficient scepticism over the Chinese story to allow ongoing positive surprises for some months. Stock picking should add value in this environment. We see abundant growth and value opportunities at present. Consumption stocks tend to be somewhat more expensive, but continue to offer high growth rates in earnings. Meanwhile, large state-owned enterprises (e.g. CNOOC) appear remarkably good value and valuations imply very negative outcomes, which we do not believe will occur.
Opinion column by Charlie Awdry, Investment Manager, China Opportunities Strategy, Henderson Global Investors.
Wikimedia CommonsPhoto: Rosana Prada. Azimut and Futurainvest Sign a Joint Venture To Provide Financial Advisory Services in Brazil
Azimut, Italy’s leading independent asset manager, and FuturaInvest, have signed an investment and shareholders agreement to set up a partnership to provide financial advisory services in the Brazilian market.
FuturaInvest, founded by 6 partners with proven experience in the financial industry with an average tenure of 12 years and a strong track record, counts 35 people and 11 offices around Brazil, providing advisory and asset allocation services via funds selection, financial education, and asset management services through funds of funds and managed accounts to around 2,500 clients.
Subject to the satisfaction of certain conditions precedent, the transaction will entail the acquisition, through AZ Brasil, of a 50% stake in three entities: (i) a financial advisory company, (ii) an asset management company (dedicated to funds of funds and managed accounts) and, (iii) subject to the approval of the Banco Central do Brasil countersigned by the President of Brazil, in FuturaInvest DTVM (Distribuidora de Titulos de Valores Mobiliarios). FuturaInvest DTVM is a regulated financial institution authorized to distribute financial products to local investors (operative since September 2013).
The overall transaction value is around $5.3 millon (R$ 12.5 million) mainly paid via a capital increase, which will finance the growth envisaged in the business plan. Furthermore, the agreement contemplates the possibility of a maximum adjustment to the subscription price in connection with the business development over the first three years of operations. As at 30th November 2013 FuturaInvest has around $97 million.
Azimut and FuturaInvest management share the same medium-long term commitment and will cooperate to grow the existing business also by hiring new financial advisors, opening new offices to extend the country’s coverage and increasing the funds of funds product offering.
