CC-BY-SA-2.0, FlickrPhoto: Kevin Dooley. Risk-On Sentiment Trumps Brexit Fallout Fears
The feedback loop between financial markets and the real economy has been positive this summer, relegating the status of the June 23 Brexit vote from a global scare to a domestic UK political matter. The current environment remains supportive for risky assets.
The positive feedback loop that has developed between markets and economies may be the best evidence yet that the fallout from the Brexit vote is far less dire than many feared in June. With market and sentiment channels transmitting little or no Brexit-shock into the real economy in the rest of the world, the UK political drama has swiftly morphed into a local problem rather than a global scare. Recent economic data also suggest that mainland Europe, the region most at risk of contagion, has been remarkably resilient post-Brexit.
Economic and earnings data have been a support factor globally. Positive macro data surprises in developed markets reached a 2.5-year high this month. Second-quarter corporate earnings in the US and Europe came in better than expected. The global policy mix is shifting to an easier stance again, with the Bank of England and the Bank of Japan both easing further and remaining biased to do more. The fiscal gears are also starting to turn. Japan’s government announced a large stimulus package and the US and UK governments are hinting at fiscal stimulus measures in the 2017-18 period.
With investor sentiment turning positive for the first time this year and cash levels reaching 15-year highs, the right conditions for some of that money coming into the market are emerging. The flow momentum seems likely to remain a support factor for risky asset classes like equities, real estate and fixed income spread products, at least until technically overbought levels are reached, or until new macro or political shocks occur. With neither of those on the radar at this stage, we keep our risk-on stance tilted to these asset classes.
Jacco de Winter is Senior Financial Editor at NN Investments Partners.
CC-BY-SA-2.0, FlickrCourtesy photo. Paul de Leusse Appointed as CEO of Indosuez Wealth Management
Paul de Leusse has been appointed Chief Executive Officer of Indosuez Wealth Management. Paul has also joined Crédit Agricole S.A.’s Extended Executive Committee.
Paul de Leusse, aged 44, started his career in management consulting, first as a consultant (1997-2004) then as Managing Partner of Mercer Oliver Wyman (2004-2006). He subsequently joined the consultancy firm Bain & Company as Partner (2006-2009).
In 2009, he joined Crédit Agricole Group as Director of Group Strategy. In 2011, he was appointed Chief Financial Officer of Crédit Agricole CIB. He became Deputy Chief Executive Officer of Crédit Agricole CIB in August 2013. His knowledge of the Corporate and Investment Banking businesses, combined with his strategic vision, for the Major Clients business line in particular, will be a key asset for Crédit Agricole Group’s Wealth Management business.
Paul de Leusse is a graduate of École Polytechnique and a civil engineer trained at École Nationale des Ponts et Chaussées.
CC-BY-SA-2.0, FlickrPhoto: zoonyzoozoodazoo
. The Wait Is Over: The Shenzhen-Hong Kong Stock Connect
The Shenzhen-Hong Kong Stock Connect was approved in principle on Monday by the China Securities Regulatory Commission and Hong Kong’s Securities and Futures Commission. Global markets have been widely anticipating the Connect because it will allow global investors to trade stocks listed on the two exchanges. In an unexpected move, aggregate quotas for both Shanghai and Shenzhen Connect schemes also were abolished, although daily quotas remain.
Eligible shares will include Shenzhen Stock Exchange (SZSE) Component Index, SZSE Small/Mid Cap Innovation Index (which has a market cap of more than RMB6 billion/ US$900 million), Hang Seng Composite Large-Cap/Mid-Cap and Small-Cap index (over HK$5 billion/US$600 million market cap), and Shenzhen/Hong Kong dual-listed stocks. About 880 Shenzhen stocks and 417 Hong Kong stocks are qualified under Shenzhen- Hong Kong Stock Connect. Implementation should begin by late in fourth-quarter 2016.
Why the anticipation?
The Shenzhen-Hong Kong Connect represents another critical step in China’s capital market reforms. We believe it will further boost the case for the inclusion of A shares in MSCI indices, which could attract large amounts of fund flows to the Chinese stock market. (Although concerns over capital mobility, share suspensions, and restricted availability of A-share products are still being addressed.)
Through the Shenzhen-Hong Kong Connect, the Shenzhen exchange also will provide global investors with more opportunities to gain access to China’s new economy, particularly in sectors such as IT, high-end manufacturing, and new materials. The Shanghai exchange, in contrast, is dominated by state-owned banks and oil companies.
Finally, mainland China investors will also be able to diversify their exposure into the Hong Kong market. Our recent conversations with brokers, however, suggest that many of the mainland investors with a keen interest in Hong Kong are already invested, either through Shanghai-Hong Kong Stock Connect or through a local brokerage account in Hong Kong. It will be interesting to monitor the size of Southbound flows into Hong Kong Small/Mid-Cap names, to see whether or not the A-H share gap will finally narrow.
What next?
At first glance, banks and brokers should benefit initially from the potentially increased trading flows following the implementation of Shenzhen-Hong Kong Connect. However, we expect the incremental trading volume and, thus, revenue impact from Shenzhen-Hong Kong Connect to be minimal in the near term. Apart from the short-lived rally in April 2015, flows from Shanghai-Hong Kong Stock Connect have largely been disappointing, though they have picked up recently.
Although high valuations of many Shenzhen-traded companies – with an average of 40x price/earnings ratio compared with around 16x in the Shanghai Composite Index and 12x in MSCI China Index – may deter initial interest, the strong earnings growth for many Shenzhen-traded companies certainly warrants a closer look from investors.
What about H-shares?
Following Brexit, the MSCI China index rallied by more than 15%, driven by improving global sentiment and speculation on Shenzhen-Hong Kong Connect. Although MSCI China index looks cheap compared to it’s A-share peers, it is currently trading at close to its five-year high in P/E terms, while firsthalf earnings thus far point to softening fundamentals. Meanwhile, recent macro data released showed weakening momentum as recent stimulus measures fade. With Shenzhen-Hong Kong Connect, brokers and asset managers and their investors should be the biggest beneficiaries in the long term, though the potential risk/reward return has been reduced after the recent rally.
Wilfred Son Keng Po is Managing Director and Portfolio Manager of Asia ex-Japan Equities at PineBridge Investments.
This information is for educational purposes only and is not intended to serve as investment advice. This is not an offer to sell or solicitation of an offer to purchase any investment product or security. Any opinions provided should not be relied upon for investment decisions. Any opinions, projections, forecasts and forward-looking statements are speculative in nature; valid only as of the date hereof and are subject to change. PineBridge Investments is not soliciting or recommending any action based on this information.
CC-BY-SA-2.0, FlickrPhoto: hjjanisch
. Kingdon Capital Management Launches a UCITS Fund Using Lyxor AM's Platform
Kingdon Capital Management has launched a UCITS version of its long/short equity fund. According to HFMWeek it has done so using Lyxor AM’s Platform.
The Lyxor/Kingdon Global Long-Short Equity Fund was registered in Ireland on July 22. It is an open-end fund incorporated in Ireland that invests in publicly-traded equity securities and equity derivatives in global Markets. Its objective is to achieve attractive returns, over market cycles with a strong focus on capital preservation through diversification, risk management and stock selection.
Lyxor AM, a subsidiary of Société Générale, has been looking to grow its alternative UCITS offering as Philippe Ferreira told Funds Society (in Spanish piece) some months ago, these type of funds, ” have proved that they are able to offer similar returns as equities with a third of their volatility which explains why investors such as pension funds have grown their interest in them.”
Kingdon Capital Management, founded by Mark Kingdon in 1983, is an employee owned hedge fund sponsor. It invests in the public equity and fixed income markets using long/short strategies to make its investments. It employs fundamental analysis along with combination of bottom-up and top-down approach to create its portfolio and is based in New York, New York.
CC-BY-SA-2.0, FlickrPhoto: 401kcalculator.org. Optimizing Cash Management in a Fragmented and Restrictive Environment
Cash management has been a hot topic for financial institutions across LatAm due to the regulatory, political and infrastructure changes over the last few years. Thanks to the digitalization in the banking system, local and international banks see a lot of potential in expanding their banking services for retail and commercial clients in LatAm. Moreover, they are looking for strategies and innovative solutions to offer better cash management products and services to their customers.
With this in mind, marcus evans will gather specialists in Miami between September 7-9 in order to help banks overcome the challenges they experience when dealing with cash management, both locally and regionally. It will help them optimize their cash management strategies by providing them with a greater insight into examples that have worked well in different parts of the region. The disparity between international and domestic transactions will also be discussed, looking to achieve their integration into a single stream. There will also be a strong focus on AML and KYC policies and innovations in technology, to help banks move towards a fully secure digital era. Finally, we will explore strategies banks are implementing to reach unbanked regions in LatAm.
Attendants should expect to:
• Discover how to take advantage of new business opportunities that arise from regulatory changes
• Gain insight into the successful implementation of technologies, such as mobile and tablet banking, within cash management services
• Learn about the future of payments and collections
• Enhance your cash management infrastructure
• Discuss the regional standardization of payments
The speakers include Marco A. Almada of BBVA, Vitor Balao of Deutsche Bank, Liba Saiovici of Bank of America, Jorge Ruiz of Citibank, Alejandro Arauzo of Banorte, Claudia Macias García of Scotiabank, Luis M. Cifuentes of Banco Bradesco, Enrique Villarroel of Banco BICE, Felipe de Paula Pinto of Banco Itau, Adolfo E. Mora Vargas of BAC San José, Josie Forde of BNY Mellon, and Ruben Farias Sasia of Banco de Chile.
CC-BY-SA-2.0, FlickrPhoto: Elanaspantry, Flickr, Creative Commons. Morgan Stanley IM Launches Global Balanced and Global Balanced Defensive Funds
Morgan Stanley Investment Management has announced the launch of two new multi-asset funds, the Morgan Stanley Investment Funds (MS INVF) Global Balanced Fund and the MS INVF Global Balanced Defensive Fund.
The underlying investment process for the two funds mirrors that of the existing Global Balanced Risk Control (GBaR) strategy, which is designed to maintain a stable risk profile. The funds are the first in the GBaR suite to incorporate environmental, social and governance (ESG) factors into the process.
The chief difference between the funds is their targeted volatility. The Global Balanced Fund targets a volatility range of 4 to 10%. The Global Balanced Defensive Fund has a lower target volatility range of 2 to 6%.
Both funds will be managed by Andrew Harmstone and Manfred Hui in London. “The new funds will be based on our established GBaR process, which in our view is the most effective way for investors to participate in rising markets whilst providing strong downside protection,” said Mr. Harmstone, managing director and lead portfolio manager. “We expect the integration of ESG considerations into the process to further improve potential returns and enhance risk management.”
“Morgan Stanley Investment Management’s extensive multi-asset capabilities are reinforced by the addition of these two new funds,” said Paul Price, global head of Client Coverage, Morgan Stanley Investment Management. “Clients now have greater choice in the implementation of GBaR’s risk-controlled approach and their preferred level of volatility.”
The MS INVF Global Balanced Fund and the MS INVF Global Balanced Defensive Fund, registered in Luxembourg, are not yet widely available for sale and are awaiting registration in various markets. They are intended for sophisticated and diversified investors or those who take investment advice.
CC-BY-SA-2.0, FlickrPhoto: peasap
. Samuel Nunez joins Bolton´s San Diego Office
Bolton Global Capital announced this week that Samuel Nunezhas joined the firm. Nunez has spent the last 23 years as a financial advisor with Merrill Lynch, compiling a client book of $125 million with annual revenues of $1 million. His clients are primarily located in Mexico and the US.
Nunez will be joining Bolton’s San Diego office, which was opened recently under the name TransAtlantic Investment Partners. James Jiao, a former Merrill Lynch complex manager and FA who left the firm last year after working 18 years, established this office. Jiao began his career in 1990 with Deutsche Bank in Germany as a portfolio manager and then transferred to Deutsche Morgan Grenfell in New York as a Private Bank Manager in 1994.
Over the last year, Bolton has recruited 8 teams from Merrill Lynch with client assets totaling approximately $1.5 billion. Typically, advisors who join Bolton operate under their own brand name using Bolton to provide compliance, back office, trading and technology support with client assets held by BNY Mellon-Pershing and other custodians.
CC-BY-SA-2.0, FlickrPhoto: Lain. China: How Serious is the Debt Issue?
Emerging Markets (EMs) continue to drive global growth, with China still accounting for the lion’s share. However, China’s increasing debt remains a significant concern for global investors. Pioneer Investments’ Economist Qinwei Wang, takes a closer look at China’s debt situation.
After reviewing the recent developments around the debt issue, Pioneer has not changed their view that China can still avoid a systematic crisis in the near term, “as the issue remains largely a domestic problem and in the state sector.”
“Looking into the composition, China’s debt issues are largely within the country, unlike typical cases in EMs. Its external balance sheet still looks relatively resilient as China continues to run current account surpluses. China has also been building up net foreign assets over the last decade, and is one of the largest net lenders in the world and domestic savings remains high enough to fund investments.”
In addition, looking at domestic markets, Pioneer believes the situation still looks manageable. In fact, the borrowers have been largely in the state sector, directly or indirectly, through various government entities or SOEs. The lenders are also mainly state-linked, with banks (state dominant) making loans, holding bonds or channelling a big part of shadow activities.
The People’s Bank of China has prepared plenty of tools to avoid a liquidity squeeze, with capital controls still relatively effective, at least with respect to short-term flows. Ultimately, the government has enough resources to bail out the banking sector or major SOEs if necessary to prevent systemic risks.
The private sector does not appear to present big concerns, at least for now. In particular, on the property side, following the major correction since 2013, the health of the sector looks to be improving, although there is still a long way to go in smaller cities. Households have been leveraging up, but their debt levels are still relatively low with saving rates remaining high.
“We are not too concerned about existing troubled debt, as there are possible solutions to clean it up while avoiding a systemic crisis, and the implementation process has already started. The more challenging issue is how to prevent the generation of new bad debt.” Says Wang.
He believes that a first step in this direction is to improve the efficiency of resource allocation. Ongoing financial reforms, including the liberalization of interest rates, bond markets, IPOs, private banking, a more flexible FX regime as well as the opening of onshore interbank markets over the last couple of years are positive attempts in his view.
Continued efforts to shift towards a more market-driven monetary policy transmission mechanism is also helping. In addition, the anti-corruption campaign has also effectively added relatively better supervision of the state sector. That said, SOE reforms have been relatively slow, with mixed signals, although we see certain positive developments, such as individual defaults allowed and a pledge to remove their public functions.
Preventing new problematic debt levels from rising again in the future will also require strengthened financial regulations. We think a large part of the new forms of finance, or so-called shadow banking activities, are the result of financial liberalization. The current segmented regulation system is unlikely to keep pace with the rapid financial innovation across sectors and products. This will be an issue to monitor going forward.
“From an investment perspective we keep our preference for China’s “new economy” sectors, which could benefit from the move towards a more service-driven economy.” Wang concludes.
CC-BY-SA-2.0, FlickrFoto: Gideon Benari. Los precavidos inversores de renta fija europea podrían estar sacrificando el rendimiento
Tom Ross, Co-Manager of the Henderson Horizon Euro Corporate Bond Fund, and Vicky Browne, Fixed Income Analyst, look at the impact of the European Central Bank’s corporate sector purchase programme (CSPP).
What is the CSPP?
The corporate sector purchase programme (or CSPP as it is commonly known) was established by the European Central Bank (ECB) and began purchasing bonds on 8 June 2016. The CSPP is a form of monetary policy, which aims to help inflation rates return to levels below, but close to, 2% in the medium term and improve the financing conditions of economies within the Eurozone.
Purchases can be made in both the primary and secondary market. By the end of July 2016 – eight weeks into the programme – secondary market purchases formed 94% of purchases with only 6% being made in the primary market according to data from the ECB.
Which bonds are eligible for purchase?
Bonds purchasable under the scheme must be investment-grade euro-denominated bonds issued by non-bank corporations established (or incorporated) in the euro area. In assessing the eligibility of an issuer, the ECB will consider where the issuer is established rather than the ultimate parent. Thus an issuer incorporated in the Euro area, but whose ultimate parent company is not established in the Euro area, such as Unilever, is deemed eligible for purchase.
How have markets responded to CSPP so far?
To date the ECB has bought 478 bonds totalling approximately €11.85bn from 165 issuers (UniCredit as of 27 July 2016). The list of these bonds (but not the quantities purchased) is available on the websites of the national central banks performing the buying. Analysing these holdings would suggest that, on an industry sector basis, considerable CSPP purchasing has occurred in utilities and consumer non-cyclicals.
In June non-financial credit spreads initially responded positively to the CSPP purchases. However, excess credit returns over the month (returns over equivalent government bonds) detracted from total returns as market volatility increased as a result of the UK voting to leave the EU. Concerns surrounding the vote led to a temporary pull-back in demand for credit and this negative headwind overpowered the positive technical effect from CSPP.
July proved to be a stronger month for credit market performance. The European investment grade market – as measured by the BofA Merrill Lynch Euro Corporate Index – delivered a total return of +1.68% in July in euro terms and excess credit returns of +1.61% (source: Bloomberg at 31 July 2016). Undoubtedly, these positive movements have been partly driven by CSPP purchases as illustrated by the graph below. It reveals how spread performance – a declining spread indicates stronger returns – of the iBoxx Euro Corporate Index has been more pronounced in eligible bonds than non-eligible or senior bank assets.
However July’s returns are not just attributable to the technical support provided by the CSPP. An improvement in market sentiment driven by reduced fears about Brexit, together with a rise in flows into bond funds, has helped to increase demand for the asset class at a time when there is a lack of European investment grade supply.
How has the fund benefited from CSPP?
The Henderson Horizon Euro Corporate Bond Fund was positioned long credit and duration risk versus the index throughout June. Although the fund still trades with a long beta bias we have lowered risk levels over the past few weeks by reducing exposure to positions that have benefited from the recent rally in credit markets. Examples of these are euro-denominated bonds from utility companies Centrica and Redexis Gas, and US real estate investment trust WP Carey.
In July, the fund added to positions from CSPP-eligible issuers on a name-specific basis such as Aroundtown Property, Telenor and RELX Group. Exposure has not just been increased in CSPP-eligible issues but also in companies we favour that are not incorporated in the euro area, such as US names AT&T (in EUR) and Comcast and CVS Health (in USD). The CSPP technical has also been apparent in the primary market. The fund benefited in July from participating in a euro- denominated new issue from Deutsche Bahn, which has performed strongly post issuance. Positive fund performance has also come from a new issue from Teva Pharmaceuticals, which has seen solid demand since coming to the market.
While CSPP should help to provide technical support to European investment grade corporates, there exist several uncertainties in the market – such as the October referendum in Italy and instability in commodity prices – that could cause weakness to arise. We therefore continue to look to reduce risk into further strength while seeking to take advantage of any attractive opportunities presented by volatility or weakness.
CC-BY-SA-2.0, FlickrFoto: Dafne Cholet. Qué esperar del último trimestre del año en los mercados
The summer, while investors turned their attention to the Democratic National Convention in Philadelphia, the Republican National Convention in Cleveland, the Olympics in Brazil trading has been light.
But what can be expected for the rest of the year? According to Edward J. Perkin, Chief Equity Investment Officer at Eaton Vance Management, “the second half of the year is chock full of likely market catalysts, including potential Brexit fallout, the upcoming presidential election, Fed meetings and more. Against this uncertain backdrop, we continue to believe that equity investors should remain focused and opportunistic.”
For the specialist these are the dates to keep in mind:
September
September is likely to be a busy month. Post-Labor Day is when many voters will begin to pay close attention to the presidential election. Having skipped August, the Fed will meet again on September 21 to make a decision on rates.
There are also a large number of industry conferences, where company management teams will give updates on their businesses. One of these, the “Back to School” conference, held each year in Boston, involves the largest consumer companies.
September is also important in that it is the third month of the quarter. Many companies have “blackout” periods in the final weeks of each quarter and into the early part of the next quarter, when they report earnings. During these blackout periods, companies suspend their share buyback programs in order to avoid accusations of trading on material, nonpublic information. Given how important corporate buybacks have become to the market, this temporary removal of demand for equities has coincided with several of the market’s pullbacks in the past two years.
October
Like July, October is a busy month for corporate earnings releases. With three quarters of the year complete, companies and investors will begin to think about 2017 and the trajectory of earnings into the approaching year. We will likely have a presidential debate in October, perhaps the only debate of this cycle. Television ratings may well set records.
November 8 – Election Day
At the November 2 Fed meeting, Janet Yellen and her colleagues are likely to take no action in order to avoid roiling markets six days prior to Election Day. We expect the market to be focused on the election throughout the summer and into autumn. If the likely result appears clear, Election Day may not produce much of a market reaction. Regardless of who wins the presidency, the equity market may prefer to see the same party capture the House of Representatives and the Senate. The reasoning would be that a new president will be more effective if he/she has the support of Congress.
Under either party, increased fiscal stimulus in 2017 seems likely. This could include corporate tax reform (lowering rates, reducing deductions and encouraging companies to repatriate overseas cash) and an infrastructure spending bill. If modest regulatory relief is also part of the agenda, then the economic outlook for 2017 may be stronger than many currently believe.
November 30 – OPEC meeting in Vienna
OPEC typically meets twice a year, with its next meeting to be held six days after Thanksgiving. At its November 2014 meeting, OPEC surprised global oil markets by maintaining an elevated level of production, which exacerbated the already-falling price of crude. “We expect supply and demand to continue to rebalance between now and the end of 2016. A production cut at the November meeting would be supportive of oil prices, but is unlikely, in our view.” He notes.
December 14 – Final Fed meeting of 2016
In December 2015, the Fed raised the federal funds rate by 0.25%, which led, in part, to market volatility in early 2016. The expectation at the beginning of 2016 was that the Fed had embarked on a path to normalize the level of interest rates. In the first half of the year, however, the Fed failed to follow through with further rate increases. The market has begun to doubt the Fed’s will: At around midyear, the implied probability of a rate increase on or before the December 14 meeting stood at less than 11%.
December is also the month when many investors choose to conduct tax loss harvesting, selling losers in their portfolios to take advantage of the tax benefit that comes from booking the loss before the end of the year. This activity sometimes puts further pressure on stocks that have performed poorly earlier in the year.
Stay focused and opportunistic
The second half of 2016 is full of potential catalysts – including not only the specter of further Brexit turmoil, but also Fed meetings, a presidential election, corporate earnings and incoming economic data. There will likely be a few surprises along the way. “In our equity portfolios at Eaton Vance, we are staying focused on the long-term prospects of our holdings and will look to take advantage of any opportunities thrown our way by the uncertainty of these events.” He concludes.
