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. La noche es más oscura justo antes del amanecer
The victory of Donald Trump in the U.S. presidential election has led to widespread market movements. After initial adverse movements, equities rallied and bond yields jumped as Trump’s initial statements reassured markets, calling for unity and pledging that he will be the “president of all Americans”.
In Lyxor AM‘s weekly commentary, the team notes that cyclical sectors have done better than defensive sectors (except health care stocks which have done well) as looser fiscal policy is expected to support economic activity. Coupled with the possibility that the Trump administration will implement protectionist trade policies, expectations of fiscal stimulus are leading to a sharp repricing of bond yields.
Philippe Ferreira, Director, Senior Cross-Asset Strategist at Lyxor Asset Management, points out that although they do not yet have comprehensive data on hedge fund performance covering the period since the U.S. election, their initial estimates suggest that:
Long term CTAs were down as losses on their long fixed income positions were only partially offset by gains on long equities, long USD and long energy in commodities.
Global Macro experienced a wide dispersion in returns. Some strategies that were long EM currencies (MXN in particular) experienced losses in the range of 2-3% over the recent days. Meanwhile, managers that were short duration in fixed income were up and some managers investing in equities were flat as gains on longs on European and Japanese indices were offset by losses on shorts on U.S. indices.
Within the L/S equity space the long biased managers benefitted from the market rally as well as from positions on health care stocks. EM L/S specialists are down in the order of 2% on the day of the election and are deleveraging quite aggressively.
Event Driven strategies marginally benefitted from their exposure to health care stocks but overall their lower net exposure ahead of the election prevented them from joining the market rally. Implications for the strategy are rather long term and could be positive to the extent that the march towards tougher regulations might be stopped.
L/S Credit and Fixed Income Arbitrage were resilient in front of higher bond yields. We estimate L/S Credit funds were down 8 to 15 bps on the day of the election.
CC-BY-SA-2.0, FlickrPhoto: Carlos ZGZ
. Why Brexit Offers Opportunities for Private Equity
According to Christopher Moxon, Antoon Schneider, and Philippe Morel from BCG, the UK’s vote to exit the European Union is already leaving a mark on the country’s economic landscape. They believe that while the full timing and extent of the break are uncertain and may not be known for several months, many British companies are starting to reassess aspects of their business. Therefore, private equity firms will have to step up their due diligence and accept additional risk in UK investments. But the breakup also offers an opportunity for PE firms that have honed their capabilities in helping companies deal with change.
The company is certain PE firms have notable advantages over corporate acquirers and IPOs during periods of change since they combine abundant capital with a sense of urgency, yet their longer investment horizons allow them to acquire companies in uncertain times. “Whether the goal is operational efficiency, investment for growth, bolt-on acquisitions, or spinoffs, companies can generally move more aggressively under private equity than under corporate or independent ownership.”
Among sectors likely to be hit by Brexit, they identified four of particular interest to PE firms, as well as several secondary sectors. They chose them mostly because they think they present the greatest opportunities, but also because they illustrate the advantages that PE firms have in competing for these assets, especially in the short term. Most promising are companies that depend heavily on EU trade, workforces, or regulations.
For the BCG team Industrial Distribution, Private Medical Clinics and Laboratories, Aerospace Manufacturing, and Employment and Recruitment Services, will face substantial risks at this time of uncertainty and volatility. But PE firms, especially those focused on adding value to opera- tions, are well placed to help them succeed.
Other sectors of interest include Nonfood Retail, Agricultural Suppliers, Specialty Chemicals and Asset Management.
Regarding AM they mention that like other areas of financial services, “this sector could be hit hard by companies shifting activity from London to elsewhere in Europe. It was already slowing down before Brexit, and now many banks are withdrawing from the market. But with the Bank of England keeping interest rates around zero, investors will continue to seek asset managers that can offer higher returns. PE’s best opportunity here may be with niche asset management companies.”
You can read their complete article following this link.
CC-BY-SA-2.0, FlickrPhoto: Ana Patricia Botín, World Travel & Tourism Council
. Santander Buys Back its AM Unit From Warburg Pincus and General Atlantic
After Santander and Unicredit decided not to merge its Asset Management branch with Pioneer Investments –which would have given them over 400 billion in assets under management, Santander has reached an agreement to buy back the 50% stake Warbug Pincus and General Atlantic bought back in 2013.
The deal, for an undisclosed amount, will give Santander full control of Santander Asset Management, which in 2013 was valued at 2.05 billion.
In a statement to Spain’s financial regulator, the CNMV, the spanish bank mentioned that, as part of the deal, the parties are considering a sale of Allfunds bank, confirming previous rumors. Santander, Warbug Pincus and General Atlantic, currently own 50% of the business, while Italian Intesa Sanpaolo holds the other 50% stake of Allfunds. Santander created Allfunds in 2000 to help financial institutions get access to so-called open architecture funds. Italian lender Intesa acquired a stake in 2004 as part of Allfunds’s international expansion. The company has offices in Spain, Italy, the U.K., Chile, Colombia, Dubai, Luxembourg and Switzerland andcould be valued at about 2 billion euros ($2.2 billion) and attract interest from private equity firms.
Allfunds reported profit of 69 million euros in 2015, up from 46.4 million euros a year earlier, according to the company’s financial report.
Santander Asset Management has over 170 billion euros in AUM and presence in 11 countries. Santander Asset Management has over 755 employees worldwide, of which around 220 are investment professionals. they expect that in 2018 this operation will give them a ROI above 20% and above 25% for 2019.
CC-BY-SA-2.0, FlickrPhoto: Joe Le Merou. Muzinich's New Hires Prepare Two Fund Launches
Corporate debt specialist Muzinich & Co is to launch two new funds to be managed by Torben Ronberg, Stuart Fuller, Sam McGairl and Alex Woolrich, the loans team who recently joined from ECM Asset Management Limited, a Wells Fargo Asset Management company.
Ronberg and his team, who took up their posts this week, will now prioritise the launch of a new European senior secured loans vehicle, the Muzinich European Loans Fund. They are also putting the foundations in place for the launch of a multi-asset vehicle, the Muzinich Senior Secured Fund, which will have a broader investment mandate. This vehicle will primarily invest in senior secured loans and senior secured high yield bonds, combining the core strengths of the joining team with that of the established team at Muzinich.
Both funds will sit under Muzinich’s Irish-domiciled ICAV, which has been established as a Qualified Alternative Investment Fund. They will be aimed primarily at pension funds, insurance companies and other institutional investors.
George Muzinich, founder and Chairman of Muzinich, said: “We’re thrilled to welcome Torben and his team, who have worked together for over a decade and established an outstanding reputation in the industry.”
Ronberg said: “We have built a 10-year benchmark-beating track record, delivering strong single-digit annualised returns through senior secured loan strategies. We’re confident that this asset class can continue to deliver attractive risk-adjusted returns. We believe there’s growing interest in senior secured loans from pension funds and other institutional investors. Senior secured loans offer attractive all-in floating rate returns, so they provide some protection against interest rate rises.”
CC-BY-SA-2.0, FlickrPhoto: Mark Morgan. Frenzied M&A Activity to Support Event Driven
October was a supportive month for Global Macro funds, which almost erased their year to date losses in a single month. According to LyxorAM’s Cross Asset Research team, the top contributors to their stellar performance last month included a short duration stance in fixed income and long positions on the USD vs. EUR and GBP in FX. Meanwhile, for Macro managers investing in equities, their preference for European and Japanese equities vs. US equities also paid off in October.
With regards to Event-Driven, Lyxor noted that the strategy underperformed on the last week of October (-0.3%) and is down almost 1% last month. “It is not surprising to see the strategy in the red when 10-year Treasury yields jump 25 bps in a month, as it has historically been negatively correlated to bond yields. But most managers were fairly resilient despite the adverse market conditions.” They state.
Going forward, the team maintains their slight overweight stance on Event-Driven, with a continued preference for merger arbitrage players. “We believe that the strategy can cope with higher bond yields as its net exposure to both equities and bonds has continued to decrease lately. Managers have thus ample room to deploy capital as opportunities arise. And in that regard, Bloomberg data suggests that October was one of busiest months ever for global M&A activity.”
Announced M&A deals represented more than USD 470bn (applies to deals with a transaction value above USD 400m). US M&A activity represented 60% of the total, and the media sector has been the most active thanks to deals such as the USD 107bn proposed merger between AT&T and Time Warner. Yet, ahead of US elections most Event Driven managers stayed cautious and waiting for greater political clarity before deploying their capital. “The strategy is thus likely to be resilient if equity volatility continues to rise, which would lead to wider deal spreads and open the door for cash deployment.” They conclude.
Vanguard has cross-listed three U.S.-domiciled funds on the Global Market of the Mexican Stock Exchange.
The U.S. domiciled ETFs are:
The Vanguard Mortgage-Backed Securities ETF (VMBS)
The Vanguard International Dividend Appreciation ETF (VIGI)
The Vanguard International High Dividend Yield ETF (VYMI)
The cross-listing of U.S. domiciled ETFs in Mexico provides a strong product foundation for Vanguard, and a cost-efficient method of serving the Mexican market. The addition of these three products brings the total number of Vanguard ETFs registered on the Mexican Stock Exchange to 65, which you can see in the attached document.
Vanguard’s Heinz Volquarts noted that the three funds they cross-listed are not registered with the Comisión Nacional del Sistema de Ahorro para el Retiro (CONSAR). therefore the Mexican Pension Funds (afores) are not yet allowed to invest in them.
SEC Chair Mary Jo White, after nearly four years as the agency’s head, today announced that she intends to leave at the end of the Obama Administration. Under Chair White’s leadership, the Commission strengthened protections for investors and the markets through transformative rulemakings that addressed major issues highlighted by the financial crisis. The Commission also instituted a new approach to enforcement that has resulted in greater accountability and record actions through, among other things, the use of admissions of wrongdoing and enhanced data analytics and technology.
Chair White, who became the 31st Chair of the SEC in April 2013, will be one of the SEC’s longest serving Chairs.
“It has been a tremendous honor to work alongside the incredibly talented and dedicated SEC staff members who do so much every day to protect investors and our markets,” said Chair White. “I am very proud of our three consecutive years of record enforcement actions, dozens of fundamental reforms through our rulemakings that have strengthened investor protections and market stability, and that the job satisfaction of our phenomenal staff has climbed in each of the last three years. I also want to express my appreciation for the engagement and dedication of my fellow Commissioners and my financial regulator colleagues, past and present.”
In addition to completing the vast majority of the agency’s mandates under the Dodd-Frank Act and all of its mandates under the JOBS Act, Chair White’s leadership has advanced the agency’s mission through other critical rulemakings and built robust and effective frameworks for the SEC’s regulatory regimes going forward.
“My duty has been to ensure that the Commission implemented strong investor and market protections, and to establish an enduring foundation for future progress in the most critical areas – asset management regulation, equity market structure and disclosure effectiveness,” said Chair White. “Thanks to the hard work and dedication of the SEC’s staff, we have accomplished both.”
Chair White drove many important rules and other policy measures to completion. Under her leadership, the Commission advanced more than 50 significant rulemaking initiatives, including:
Fundamental reforms to the money market fund industry and unprecedented new disclosures and protections for mutual fund investors in a major initiative to strengthen regulation of the $67 trillion asset management industry
Enhanced equity market structure oversight, including wide-ranging new controls on how key market participants handle technology and systems issues
A comprehensive framework for enhancing the effectiveness of corporate disclosure for investors
Extensive new safeguards for the financial system and for investors in the more than $7 trillion security-based swap market
New ways for smaller companies to raise capital needed to grow their businesses
New post-crisis restrictions on proprietary trading and investments by broker-dealers and other financial institutions through the Volcker rule
Major enhancements to transparency and risk management for asset-backed securities, which were a significant contributor to the financial crisis
Strong operating standards for the clearing agencies that stand at the center of our financial system
Extensive reforms to the regulation of credit rating agencies and how they address conflicts of interest that can harm investors
First-ever regulatory framework for municipal advisors who are critical to the capital raising activities of thousands of local governments
Modernized rules of practice for conducting administrative proceedings, including providing expanded rights of discovery
To enhance accountability of those who violate the securities laws, Chair White implemented the Commission’s first-ever policy to require admissions of wrongdoing in certain cases where heightened accountability and acceptance of responsibility is appropriate. Thus far, the Commission has required admissions from more than 70 defendants, including 44 entities and 29 individuals.
During Chair White’s tenure, the Commission brought more than 2,850 enforcement actions, more than any other three-year period in the Commission’s history, and obtained judgments and orders totaling more than $13.4 billion in monetary sanctions. The Commission charged over 3,300 companies and over 2,700 individuals, including CEOs, CFOs, and other senior corporate officers.
The record number of enforcement actions over the last three fiscal years against companies and senior executives involved many “first of their kind” cases in asset management, market structure and public finance. Other major cases involved insider and abusive trading, violations of anti-corruption rules and misconduct in accounting and financial reporting. In the last year alone, the Commission brought a record 868 enforcement actions. And for the first time, the Commission devoted significant resources and emphasis on using cutting edge data analytics to uncover and investigate misconduct resulting in numerous enforcement actions involving insider trading, asset management and complex financial instruments.
As a result of the successful whistleblower program, the Commission has awarded more than $100 million, since inception — virtually all during Chair White’s tenure — to whistleblowers who provided key original information that led to successful enforcement actions.
Under Chair White’s leadership, the Commission made significant enhancements to its examination program, including increasing staff by about 20 percent by hiring new examiners where funding permitted and redeploying staff from other program areas to heighten focus on the fast-growing investment management industry.
The exam program also increased its use of advanced quantitative techniques to enable examiners to detect misconduct by more quickly analyzing large amounts of data. Over the past year, the examination program conducted more than 2,400 formal examinations of registrants, an increase over each of the prior seven fiscal years. The Commission also enhanced technology in its examination program through the National Exam Analytics Tool (NEAT), which enables examiners to analyze large volumes of trading data much more efficiently.
Chair White serves as a member of the Financial Stability Oversight Council and on several other domestic and international organizations, including the International Organization of Securities Commissions, the Financial Stability Board, the International Financial Reporting Standards Foundation Monitoring Board, the Financial and Banking Information Infrastructure Committee, and the Federal Housing Finance Oversight Board.
Chair White added, “It has been and will always be critical for this agency and the public that the SEC remain truly independent. That independence is crucial to our ability to protect investors, safeguard our markets and facilitate the capital formation that fosters innovation and the growth that is essential to our national economy.”
Prior to her arrival at the Commission, Chair White spent decades as a federal prosecutor and securities lawyer. As the U.S. Attorney for the Southern District of New York from 1993 to 2002, she prosecuted cases involving complex securities and financial institution frauds, other white collar crime and international terrorists. She also served as an Assistant U.S. Attorney and was Chief Appellate Attorney of that office’s Criminal Division. She served as Acting U.S. Attorney for the Eastern District of New York as well as the First Assistant U.S. Attorney. In private practice, she was a litigation partner and chair of the litigation department of Debevoise & Plimpton LLP, overseeing more than 200 lawyers. Chair White is also a member of the Council on Foreign Relations and the American College of Trial Lawyers.
CC-BY-SA-2.0, FlickrPhoto: Antonio de la Mano, Flickr, Crative Commons.. The European Commission Wants to Align the Application of PRIIPs and MiFID II
The European Commission announced on November 9th that it will take the necessary legal steps to postpone the PRIIPs Regulation for 12 months. The announcement aligns the dates of application of PRIIPs with MiFID II.
The European Fund and Asset Management Association (EFAMA) stated in a press release that they very much welcome the proposal by the Commission to delay the application date of the PRIIPs Regulation by 12 months.
In order to do so, the European Commission will publish its proposals in an amending draft Regulation, which must be quickly passed by Parliament and Council if the existing 31 December 2016 application date is to be successfully pushed back by one year.
“There is only one reason why we considered a delay absolutely essential, and this is because it is materially impossible and simply unrealistic for product manufacturers and distributors to meet the original 31 December 2016 deadline.”
A postponement therefore proved necessary and will now materialise in a more realistic timetable to comply with the Regulation.
They believe that this delay will allow companies to appropriately implement the new rules.
“Equally important is the fact that this postponement will also ensure more time is available for solutions to be found on the revised RTSs. Allowing past performance, and fixing the misleading methodology of transaction costs must absolutely be addressed. This remains a crucial part of ensuring the KIDs’ success.” EFAMA concluded.
CC-BY-SA-2.0, FlickrPhoto: Yann Gar. Can Capital Spending Pick Up the Slack From a Weakening Consumer?
I often think of consumer spending and industrial production as the yin and yang of the U.S. economy. In the years since the financial crisis, I am struck by the juxtaposition of the resilience of the consumer against the weakness on the industrial and manufacturing side of the economy.
Now, however, there are troubling signs that the consumer is coming under pressure. “Something bad is going on that we can’t explain.” This quote about the U.S. consumer was spoken to us recently by the management of a home-goods retailer. Dramatic? Yes, but not atypical of what we are hearing from other consumer companies. For example, Starbucks CEO Howard Schultz said the company has never in one quarter seen a convergence of social and political turmoil at home, weakening consumer confidence and increasing global uncertainty.
Digging into the numbers a bit, recent data don’t tell an upbeat story either. For example, half of retailers reported negative year-over-year same-store sales growth in the second quarter of 2016 .
Of course, traditional retail is facing structural challenges from e-commerce and the continuing rise of Amazon. But there’s something else going on here.
Does a flagging consumer mean the stock market can’t continue to move higher? Of course not. In fact, there are some reasons to hope that the industrial sector and a rebound in capital expenditure (CapEx) might pick up the slack from the U.S. consumer.
It is widely mentioned that consumer spending accounts for about two-thirds of the U.S. economy. However, consumer spending has contributed only 20% of the variation in GDP growth over the past five years. Meanwhile, private investment, which accounts for less than 20% of output, has contributed 52% of the variation in growth.
Yes, consumer spending is a huge part of the economy, but it might be the wrong place to focus right now. Productive capital, or spending on plant and equipment, may be a small part of the economy, but it is much more volatile than consumer spending. This makes sense intuitively. To take a simple example, consumers at the grocery store might spend slightly more on higher-priced items if they feel confident. But they won’t double their consumption of food.
CapEx is different. Companies can fairly quickly change their capital spending if their outlook changes. Because business spending is more volatile, a pickup can meaningfully swing the economy’s trajectory.
In other words, CapEx is where the real action is for the economy, and it’s been missing during the muted recovery.
There are several reasons for this.
First, in the wake of the financial crisis, investors have rewarded companies that generated free cash flow, dividends and buybacks. Investors have wanted yield and haven’t been enthusiastic about companies making expensive, long-term investments. We’ve also seen more industries with a relatively small number of large companies that have kept supply and capacity constrained, avoiding market share fights. Finally, in many industries, regulation has become a much more significant factor in recent years. That has forced companies to divert resources inwardly and raised uncertainty about the long-term outlook for their businesses.
Overall, it’s been a tough slog for the manufacturing sector. A rising U.S. dollar has hurt exports, falling oil prices have hit energy companies and auto sales have pulled back, albeit from record 2015 levels. The Institute for Supply Management’s (ISM) Purchasing Managers’ Index (PMI) has been hovering around 50, indicating flattish growth.
Overall, companies have cut back on spending and didn’t invest in new plant and equipment. Looking at the macro data such as ISM and shipping, things are soft.
But there may be reasons to hope. The November election will bring clarity and potentially policies that support growth in the industrial economy. These policies may include repatriation of a significant portion of the $2 trillion of overseas cash, reductions in the U.S. federal corporate tax rate from 35%, infrastructure spending and reduced regulation. The best-case scenario would be a virtuous circle of increased capital spending, which would boost productivity and lead to stronger economic growth.
Bottom line: A pickup of investment in productive capital is what’s needed more than debt-fueled consumer spending.
Column by Edward J. Perkin CIO at Capital Eaton Vance Management.
CC-BY-SA-2.0, FlickrPhoto: Sam Valadi. Trump Vote Wrong- Foots Forecasters
The result of the US presidential election, like that of the UK referendum on the EU, went against the predictions of most opinion pollsters, who had put Hilary Clinton, the Democratic candidate, slightly ahead prior to the actual vote. What currently seems the likely victory of Donald Trump, the Republican candidate, was in defiance not only of the pollsters, but also of many investors’ expectations.
Overturning predictions, Trump won key swing states of Florida, Ohio and North Carolina on his path to the White House. Forecasters have been wrong-footed, and there could be increased volatility in markets while investors digest this new information, and wrestle to understand the implications of a Trump presidency.
Trump is in many ways an unknown quantity, and his presidency could spell a period of uncertainty for investors. We shall be monitoring markets closely, but it would be reasonable to expect, in the short term at least, a sell-off in equities, not only in the US but also internationally. The immediate reaction of equity markets was negative, with Asian indices falling. The US dollar also fell, down 3.4% against the Yen as at 5:20am London time.
The dollar has come under pressure, both because a hike in interest rates by the US Federal Reserve now seems less likely, and also because investors may place a higher risk premium on US investments. Volatility across many asset classes could increase in the short-term.
Looking further ahead, several of Trump’s policies, for example his protectionism, his desire to scrap existing international trade deals, and to deport illegal immigrants, have the potential to contribute to longer-term market volatility; but others, for example his plans to slash taxes, including reducing the business rate from 35% to 15%, his plans to encourage repatriation of corporate profits held offshore, and to embark on massive infrastructure spending, could stimulate the US economy, lifting equities. Much is uncertain, not least because his campaign promises have been long on rhetoric and short on policy detail.
Given the intense degree of attention on the election, and its undoubted political importance, it may seem surprising that within the global equities team at OMGI we made no attempt to predict its result. We are not in the business of trying to predict events that are very hard to predict. Striving to forecast a binary (either/ or) event such as a close-run election is, in our view, not a good way to invest. We have built our investment process on other –we believe sounder– principles.
Macro events and geopolitical events, like the US election, affect our investment process implicitly rather than explicitly. They impact the market, and this is the key for us. We are much more interested in how the market is behaving because that gives us the clues as to how we should position our portfolios.
A Stable Process
Our investment process involves developing a view of how the stock market is behaving. We have to be very aware of the direction of the market, the volatility of the market, and of the ways in which individual stocks’ returns differ from each other. How, and to what degree, do stock returns vary from each other? How great is investors’ appetite for taking risk? Are investors comfortable exposing themselves to higher degrees of risk, in the hope of achieving higher returns, or are they much more risk averse, shunning risk and seeking the safety of stocks of higher quality? Those kinds of questions are being asked all the time within our portfolio investment process. That leads us to the stocks that we will want to buy.
US Equities Not Cheap
Recently, US equities have generally not been cheap in valuation terms, though many of the companies in this market are high quality, so one might expect to pay a higher price. Parts of the US market are particularly expensive relative to the average. For example, large caps (shares in larger companies) tend to be more expensive than small- and mid-caps (shares in small and medium-sized companies): this is partly because large caps are international, but also because they receive large inflows from investment funds that track indices (the largest of which track baskets of large caps). Other areas of the market that have become more expensive are dividend payers (shares which pay out high levels of dividends to shareholders), and low volatility (shares which move up and down less than the overall stock market).
In my view, active managers have a great opportunity at the moment because there is a lot of mispricing in North America. Although North America as a whole is not cheap, there are cheap areas of North America that can be exploited by investors who are nimble enough.
Ian Heslop is Head Of Global Equities at Old Mutual Global Investors and Manager of the Old Mutual North American Equity Fund.
