Foto: Katie Mollon
. Las pymes estadounidenses presentan una oportunidad en renta variable
In today’s landscape, where the economies and markets are more linked together, and the “new normal is going to hit investment” with “very modest returns,” investing in smaller companies can give an added edge.
According to Chris D. Wallis, CEO, CIO and Senior Portfolio Manager – Equity Investments at Vaughan Nelson Investment Management (part of Natixis Global Asset Management), when looking to invest in small and mid sized companies, “you get better information than from large caps, since the structure of larger ones is so vast that it is hard to realize exactly how they are making money” The investment professional also mentions that in the “small and mid cap space it is easier to pick up the phone and have access to the CEO or CFO.”
Another point Wallis makes is that large cap companies can be over diversified, so many times you are gaining exposure to different areas you don’t necessarily are interested in. The same comes to avoiding the pitfall of a strong dollar affecting the company’s balance sheet. Today’s large caps often have sales abroad and thus the higher dollar hurts their numbers.
According to Wallis, sectors are not going to work; “We don’t see anything that stands out in asset classes or sectors, it is no longer about buying energy or healthcare, but on a specific company.” In order to do that, the expert recommends screening for minimum levels of profitability and maximum levels of valuation but then “you need to turn to your database and understand subtle changes and how they are going to impact companies,” which requires specialized industry and market knowledge.
In general terms, and given that companies are highly exposed to tightening credit, he recommends checking “what does the balance sheet look like and when do they have to refinance debt; do they have the sufficient cash flow to refinance the debt? and, are their customers able to get funds to keep up the sales?”
One thing to note, is that Wallis believes that globally, the next five years will look completely different than any period we have seen in the last 50 -100 years. For the very first time, we have seen liquidity tighten; high yield spreads have increased, and access to credit has declined without the economy or personal income accelerating or inflation picking up. “The economies and markets are more linked together, the US was the first to fall and come out of the crisis then Europe followed, and now China. The policy choices that we made have exhausted the limits, we have gone to zero interest rates and I wouldn’t be surprised if we needed negative interest rates.” So, with mid single-digit returns in equity, low single-digit returns in fixed income and zero returns from cash, which translate into very modest returns, saving rates need to go up and as an investor, you need to differentiate yourself from the market.
Photo: Taner Peets. Six Lessons We Learned About Bonds in 2015
In 2015, bond investors faced slower nominal global growth, less liquid markets and a looming US rate hikes. But with challenges come lessons: here are some takeaways from 2015 that should remain important in 2016.
1) The Fed tightened without raising official rates. It pulled this off mostly by winding down asset purchases. That means that when a quarter-point hike in the federal funds rate comes, it won’t be the first time the Fed will have tightened policy. The market spent the past 12–18 months adjusting to tighter conditions through a stronger US dollar and periodic sell-offs across bonds, stocks and commodities.
Things could get trickier in 2016 as the Fed’s balance sheet starts to shrink and rates creep higher. That will drain dollars from the global financial system—call it a decline in dollar liquidity—and it could pressure those who need dollars most, such as emerging-market borrowers. It could also be tough on asset prices and trading liquidity, which brings us to our second lesson.
2) Low liquidity is the new reality for bond investors. Fixed-income trading liquidity issues have been around since the global financial crisis. But most investors didn’t start paying much attention to them until this year. Expect these issues to stay front and center in 2016. And if Fed tightening keeps draining US dollar liquidity, trading liquidity may dry up further, making it even harder to trade bonds without having a big effect on their prices. Of course, investors who manage liquidity risk well may be able to profit. Having a manager who understands this will be critical.
3) The US economy has turned a corner. But will markets stay on track? After the global financial crisis, US banks spent years licking their wounds and refusing to lend. That’s changed recently, and the economy has shifted into a higher gear, paving the way for Fed rate hikes. But will global financial markets run into a rough patch if the Fed keeps tightening policy throughout 2016? Hard to say, but it’s definitely worth keeping an eye on.
4) China is successfully rebalancing. Sure, the Chinese economy is slowing, but it’s also evolving from an export-oriented economy to one in which consumption and services play a bigger role. A lot of observers have overlooked this, possibly because many Western companies are exposed to China’s heavy industry sector, which has struggled. Meanwhile, the renminbi’s new status as an IMF-designated elite reserve currency will augment China’s growing presence in global bond indices and draw a lot of investment dollars into China. We think there’s a good chance that China will experience a cyclical upswing next year.
5) If you’re investing in high yield, avoid passive ETFs. Investors rushed into high-yield exchange-traded funds (ETFs) this year. They may come to regret that haste. High-yield ETFs have a terrible track record and have underperformed most actively managed funds over the long run.
High yield has offered equity-like returns, with less volatility over time, and it isn’t highly correlated with interest rates. But the market is complex, relatively illiquid and hard to navigate, which gives skilled asset managers an advantage over index-tracking ETFs. Sure, ETFs can be useful for short-term tactical trades. But if you want to invest in high yield, ETFs are the wrong way to go.
6) When building a bond portfolio, go beyond your backyard. Investors tend to prefer home-country bonds. But global bonds—provided they’re hedged to the investor’s home currency—have delivered returns comparable to domestic bonds, with lower volatility. And global bonds help diversify interest-rate and economic risk, which is important now because monetary and economic policies are diverging. The Fed is on the verge of tightening policy, while Japan is holding steady and the euro zone is in highly stimulatory mode.
Navigating the bond market won’t be easy in 2016. That doesn’t mean investors should turn their backs on bonds. Instead, make sure your bonds are global, diversified and with a manager that has the flexibility to reduce risk without sacrificing opportunity.
Opinion column by Douglas J. Peebles, Chief Investment Officer and Head—AllianceBernstein Fixed Income.
Photo: Alex Crooke heads Henderson’s Global Equity Income team. QE in Europe and Japan Set to Benefit Higher Dividend Yielding Stocks
Alex Crooke heads Henderson’s Global Equity Income team, which consists of twelve professionals with an average industry experience of 16 years. In his case, he has been managing income generating strategies since 1997. In an interview with Funds Society, Crooke explains: “high dividend yielding stocks are not a fad, they have played an important role in the market for decades. Dividends are a very powerful strategy when investing in equities.”
In fact, over time, dividends are responsible for a highly significant proportion of the total returns on global stock markets. In 2014, listed companies worldwide paid more than $1 trillion in dividends. They are also a good indicator of corporate health. In recent years, payouts of listed companies have continued to grow. The Henderson Global Equity Income team believes that this trend will continue as fundamentals in markets lagging the economic cycle, such as Europe, improve.
“Our strategy is truly global,” says Crooke. The universe includes Asia and emerging markets, and stocks of all market capitalizations. “Right now we find better yield in Europe and Asia than in the United States, as well as better dividends among large-cap companies, compared to small and mid caps. Essentially, we have a yield of 3.4%.”
In a world where interest rates are at historically low levels, a dividend culture is warranted, especially in those areas of the world where aging populations lead to increased demand for income-generating assets.
High and Rising Dividends
“Ours is a bottom-up investment process. The portfolio is constructed from a global universe of companies, which generate good dividend yields. In addition, we have found that companies that raise their dividend tend to perform better overall.”
Crooke’s team looks closely at companies that deliver good dividends, with a focus on analyzing whether they are able to increase cash flows over the next two or three years. “At the end of the day, a dividend is cash leaving the company, therefore, in order to have a dividend, there must be good cash generation.”
During the investment process, the Global Equity Income team examines several factors, including balance sheet strength, capex needs, and cash generation, but without losing sight of the macroeconomic framework. An example of this is what’s happened with oil companies over the past year, “the macro environment suggested that the price per barrel could not be maintained above US$100 for a long period of time, but even at that price, we saw that many companies within the industry were financing dividend distributions with debt, instead of cash flow; they were handing out the results of future projects. For us, that was a warning sign indicating that it was best to steer clear of these companies, even though their dividend was high. “
A UCITS Strategy for a Three-Year Old UK Domiciled Fund
Alongside Andrew Jones and Ben Lofthouse, Alex Crooke manages the Luxembourg-domiciled SICAV strategy, which launched a year and a half ago as a mirror version of the existing Global Equity Income Strategy, domiciled in the UK. The launch of the UCITS Luxembourg version was driven by the low interest rate environment, which has seen increasing demand in Europe and Asia, as well as interest for such products in the US Offshore and Latin America market.
Overall, Henderson manages approximately US$15 billion in both regional and global Equity Income Strategies. Henderson began investing in income at the global level in 2006, and manages US$3.5 billion in its global dividend strategy domiciled in the United States, and about US$1 billion in the strategy domiciled in the UK.
QE in Europe and Japan should Act as Catalyst for Higher Dividend Yielding Stocks
This strategy, which has the MSCI World Total Return Index as its benchmark, typically has between 50 and 80 companies in the portfolio. “The United States represent 30% of the portfolio, an underweight position,” explains Crooke. This positioning is more the result of valuation rather than one of dividend growth. “Since the United States launched its QE program, the popularity of stocks offering a good dividend yield increased, raising the price of securities in both equities and fixed income.” Henderson’s Global Equity Income team, however, does see some interesting American companies, such as mature technology names like Microsoft and Cisco, which have “a good payout combined with strong cash flow generation.” Another sector in which they are beginning to focus is that of US banks “which we think will be in a position to start paying better dividends.”
But it is in Japan and Europe where Crooke sees the greatest opportunities. “The QE program is in its infancy, thus, the same rationale which pushed money in the US towards dividend stocks should also operate in Europe and Japan.”
The average forecast yield of the companies which form the strategy is 3.8%, with an estimated dividend growth of 5 to 10%. “In the UK, for example, we see interest rates at levels below the average yield of the equity market; this is the situation throughout most developed world markets, except the United States. Now is the time to reconcile this difference.”
The team’s outlook for emerging markets is very cautious. The strategy’s allocation is less than 5%, although exposure is also gained through certain developed market companies with emerging market business streams.
Restructuring Companies, a Recurring Theme in the Strategy
Around a third of the stocks included in the portfolio are undergoing some form of restructuring. “Companies that have gone through a process of change to improve their fundamentals tend to behave well regardless of the economic cycle. Since we are not very positive about the global macroeconomic outlook, we focus on these types of businesses as well as companies in sectors uncorrelated with the economic cycle, such as pharmaceuticals or insurance.”
A recurring concern when investing in dividends is to avoid “value traps”. Some high-yielding equities can be more risky than their lower-yielding counterparts, particularly after a period of strong market performance when equity price rises push yields down. The high-yielding companies that are left can be structurally-challenged businesses or companies with high payout ratios that may not be sustainable. Crooke says that it is essential to analyse the sustainability of a company’s ability to pay income.”We avoid investing in companies whose dividend policy is vulnerable to regulatory changes, the interest rate environment, declines in commodity prices, etc”.
Does High Yield Debt Investment Compete with Dividends?
Crooke points out that investing in high yield bonds is currently not as attractive an option. “If you want high yields from fixed income, you have to look to heavily indebted companies. Those with a good credit rating don’t offer such attractive yields. In Europe, for example, 55% of companies offer better yields through dividends than through debt issues.”
Furthermore, if inflation returns, the risk of rising rates is still there, and it may damage the performance of a fixed-income portfolio. “If you’re counting on a gradual reflation of the economy, we believe that it’s much better to be in equities than in fixed income,” says Crooke.
CC-BY-SA-2.0, FlickrPhoto: Simon Pielow
. Membership of the Reserve Currency Club is But Part of China’s Master Plan
Until recently, by maintaining a watertight capital account, China deliberately postponed its membership of the reserve currency club. A few years ago, China had grown to be a giant in the world of trade, yet remained a dwarf in the world of capital. More recently, the People’s Republic reached a point where – given its rapidly increasing economic size and trade footprint – this contradiction was no longer sustainable or sensible.
The next phase in China’s economic renaissance is now well underway. It is actively pursuing its twenty-first century manifest destiny to regain the mantle it lost in the 1830s: being the world’s largest economy. This means it must expand its role in global capital markets to match those it has already achieved in global trade. This will balance the two windows through which China looks at the world – and just as importantly through which the world looks at China. Being a member of the reserve currency club is but a stepping stone on the renminbi’s path to achieving that worldwide acceptance, and especially in China’s efforts to master the world of capital. Expect a new Shanghai-Hong Kong-Shenzhen triptych to become one of the world’s three main fountainheads of capital and the next pit-stop on China’s road to global economic pre-eminence.
For this to happen sustainably however, China will need to move from being an exporter of capital – born of running a current account surplus – to being an importer of capital – which follows on from running a current account deficit. This answers the Triffin Dilemma which says that to have a truly acceptable reserve currency, one needs to produce a surplus of that currency so that third parties can hold it. Only when the appetite of China’s consumers for foreign goods exceeds that of foreigners for China’s goods – when China runs a current account deficit – can this be truly achieved.
In the interim, China has to find a way of recycling its trade surpluses so that foreigners get easy access to its currency. Here Xi Jinping’s signature foreign policy doctrine – the One Belt One Road programme – achieves this aim. By forcing Chinese surplus capital abroad to revive the terrestrial Silk Road of Central Asia and its maritime equivalent through the Indian Ocean, China is repeating what Britain did in the late nineteenth century: establishing its reserve currency status first by investing its trade surplus abroad before, one suspects, the eventual rise of the import-hungry Chinese consumer spreads the renminbi worldwide ‘naturally’, after China’s current account stops being a surplus and instead becomes a deficit.
Michael Power is Strategist at Investec Asset Management.
CC-BY-SA-2.0, FlickrPhoto: Gabriel Villena. Robeco Builds Presence in the UK
Robeco announces the opening of its new London office in the City of London. The office will focus on serving UK institutional investors, global distribution partners and global consultants.
As previously announced Mark Barry has been appointed Head of UK and Institutional Business for Robeco UK. Robeco’s Global Financial Institutions team, headed by Nick Shaw, and Global Consultant Relations team, headed by Peter Walsh, are also run out of the London office. They are currently supported by a team of 6 FTE and Robeco is planning to expand this to around 20 FTE within the next two years. Robeco has a long track record with the UK institutional market and currently has approximately GPB 5bn in assets under management (as at 30 September 2015) from UK client mandates.
As in many other regions across the globe, Robeco will provide its client base in the UK market with access to high level expertise, amongst others within the field of Sustainability and Quantitative Investing. Robeco has been integrating ESG criteria in its mainstream products for many years, and has been at the forefront of active ownership by engaging with companies in which we invest to improve their sustainability practices since 2005. Robeco is also a pioneer in the field of quantitative stock selection since the early ‘90s. In 1994 the first stock selection models were used in Robeco equity strategies. Following the success of these models in practice, Robeco launched a 100% quantitative equity product line in 2002. This expanded over the years, currently spanning a wide range of investment strategies, with different regional exposures and risk-return characteristic and has over the last years developed a number of innovative factor investing strategies.
Mark Barry said: “Robeco coming to the UK is about bringing a suite of capabilities and skill sets to help clients build more sustainable, long-term portfolios to achieve their objectives. There is definitely a space in the UK for Robeco’s ‘cautiously pioneering’ mentality of using long-term, highly innovative sustainable investment strategies. These have been built on the bedrock that founded Robeco in 1929 and still stands today: using research-based, tried and tested strategies to deliver long-term results.”
Hester Borrie, Head of Global Distribution & Marketing and a Member of the Management Board of Robeco Group, said: “Building on our track record with clients in the UK, we are ready to be going to the next stage. We are delighted that our commitment to the UK market is now set in stone, with the opening of our new London office and the appointment of Mark Barry as Head of our UK business. Mark is supported by a strong team within Robeco that has had a solid focus on London in recent years. London is a key hub for the institutional and wholesale investment business globally. With the opening of our new London office, Robeco is now well established in all of the world’s major financial centres.”
CC-BY-SA-2.0, FlickrPhoto: Naroh. Dentons Combines With Luxembourg's OPF Partners
Global law firm Dentons today announced that it will further its leading presence in the world’s top financial centers with a combination between Dentons Europe LLP and Luxembourg’s OPF Partners. OPF Partners’ is a leading Luxembourg firm, rated by Chambers and The Legal 500 for banking and finance, corporate, investment funds, tax, real estate and dispute resolution. The firm’s 34 lawyers, including nine partners, will join Dentons Europe LLP on January 1st, 2016.
In 2015, Dentons has entered or expanded in six of the world’s leading financial centers, and this combination means that the Firm now has a presence in the following cities out of the 25 top financial centers in the world: London, New York, Hong Kong, Singapore, Seoul, Toronto, San Francisco, Washington, DC, Chicago, Boston, Frankfurt, Sydney, Dubai, Montreal, Vancouver, Shanghai, Doha and Shenzhen.
“In our 10th transformative initiative in 2015, Dentons has done more for its clients this year than any global firm,” said Dentons Global Chairman, Joe Andrew. “By listening to our clients and planning our strategy around their business goals, we are creating the law firm of the future—one that anticipates client needs and delivers the specific practice expertise and business experience required, in communities around the world.”
Global Chief Executive Officer Elliott Portnoy added, “OPF Partners is recognized as one of Luxembourg’s leading firms and its lawyers will be able to offer our clients elite counsel in this important European market, consistent with our polycentric approach of offering the best legal talent in communities around the world. We are very pleased to welcome this high quality team to the Firm.”
Evan Lazar, Chairman of the Europe Board said, “Luxembourg plays a key role in the global and European investment fund and private equity sector, which is one of our core areas of focus and strategy. We are delighted to welcome our new colleagues from OPF Partners, with whom we have been working jointly for clients over recent years, and who share our commitment to excellence and building a leading pan-European practice.”
“We have already achieved a lot this year with our Milan launch, the hire of a substantial team in Hungary and the significant growth of our German practice with nine new partner appointments,” said Chief Executive Officer for Europe Tomasz Dąbrowski. “This transaction implements another top priority under our strategic plan for Europe which we will continue to focus on in 2016 and the coming years.”
Frédéric Feyten, Managing Partner of OPF Partners, commented, “We have always been committed to innovatively supporting local and international clients on the full spectrum of their Luxembourg projects. This combination will strengthen our capabilities in delivering pinpointed legal advice on a global scale. Luxembourg has achieved its status as a leading financial center, the largest European investment fund center, and a major private equity hub through its excellent services, international open-mindedness and stability. In this context, our teams are well positioned to solve the most challenging global client demands.”
The news builds on Dentons’ recent growth in Europe with the launch of a Milan office last month; the hire of 50 lawyers in Budapest earlier this year; and significant lateral partner hires in Germany, Russia and France. It also follows transformative combinations in China and the United States; the recent announcement of combinations with Australia’s Gadens and Singapore’s Rodyk; the Firm’s February establishment of its Johannesburg office in Africa, where it is the first global law firm to achieve Level 1 Broad-Based Black Economic Empowerment status; and the creation of its innovation platform, NextLaw Labs, which is focused on developing, deploying, and investing in new technologies and processes to transform the practice of law around the world.
Photo: Cheezepie. Equity and High Yield: the Assets in Which to Find Absolute Returns in 2016
In an environment which is more uncertain than in the past, investors are wondering where to find absolute returns in 2016. Schroders experts are clear: in assets such as high yield bonds, or equities. “Given the adjustments that occurred in the credit market, the yields are attractive and we can now get real positive returns, even in an environment of rising interest rates by the Fed,” explains Karl Dasher, Head of Schroders in the US, and Co-Head of the management company’s Fixed Income.
As part of the Annual International Media Conference held recently in London, he said he sees opportunities in the high yield segment, “a very interesting asset in which to be now.” Despite the caution by the energy component in asset, he deems that opportunities may be found in different industries, such as consumer or industrial sectors, and also in the financial sector, with differentials of 6% -7% – avoiding the energy risk, and predicts total returns of between 5% and 10% next year. “The important thing is the selection of securities and investing in a widely diversified manner; we have about 150 names in the portfolio, “he adds.
For Alex Tedder, CIO and Head for and global and US equities, there are always opportunities in equities, despite the uncertain environment in which the market moves. “This year’s returns have been almost flat, disappointing, but in geographical and sectoral terms, there is much divergence”, demonstrating that there are always opportunities. The manager sees a situation with several equilibrating factors: on the positive side, profits, liquidity and its condition as preferred asset and flow capturer; and in the negative side, profit revisions, except in Japan, valuations (most markets, with the exception of Japan are relatively expensive), and geopolitical risk.
But “there are reasons to remain positive: the yields on equities are attractive versus bonds and, if we go back to previous crises, we see that valuations are not so bad,” he adds. In addition, there are always opportunities in those areas where the market is often wrong: the manager mentioned securities which benefit from disruptive technologies, secular growth, innovation, niche players, or those who have purchasing power. For example, those industries which benefit from the growth in online transactions and commerce, such as Tencent, Alibaba, Uber, LinkedIn, Netflix, Google, Trip Advisor, Expedia or Airbnb. “We have no sectoral or country bias: We have no sectoral or country bias: we seek global growth and opportunities and with this viewpoint, the set of opportunities is substantial.
Opportunities in Debt
The bond market has experienced 30 years of gains in fixed income, in a scenario of slowing economic growth, higher saving rate (partly due to demographic reasons) and a lower level of investment than expected, excess savings also in emerging markets, and a fall in public investments. The Bank of England estimates that the overall impact of these factors, among others, explains a fall of 4.5% in real yields.
For Dasher, markets are not looking to the forward looking indicators but at the rearview mirror, and are behaving as if the Fed had already raised rates. “In fixed income markets, many of the fears of a rate hike have already been priced in.” he explains. The proof: Also speaking of credit, the spreads on debt assets are lower than at other times in history. He rules out that the Fed will make a move any time soon: the market has priced it in that it will do so in December, but progress will be very slow, reaching 1.5% -2% within the next 18 months. For its part, the ECB will continue with its QE but will disappoint, while UK rates will rise sometime next year.
In the case of US credit, the expert talks about its dynamics: supply and corporate issues increased, but foreign demand has not been sufficient. However, he sees a trend on the horizon: the appetite of Japanese investors for the asset. “Japanese investors are changing their habits and shifting from investing in domestic assets to international assets, for example, in US debt”; therefore, he explains that issues in corporate debt and the increased supply in this area, can be offset by demand for the asset.
He explained that in emerging debt, adjustments in China will be gradual, and that if the renminbi is not undervalued further, and continues at levels of three years ago, it is because the rest of the world has depreciated more. But he is not worried about the country’s debt levels: “If there is a debt crisis, comparisons with other historical moments would put China in the less severe end of the spectrum,” he adds. In general, he believes that in emerging debt there are interesting opportunities from a viewpoint of selection, of both companies and public debt, building portfolios which are very different from the benchmarks.
Photo: Fut Und Beidl. Groundhog Day for Financial Markets
Financial markets have endured their own version of Groundhog Day in recent months: the three issues that troubled investors earlier in the year – namely the precise timing of the Fed’s first rate rise, the subdued pace of global growth and the ongoing macroeconomic uncertainties in China – are not that much closer to being resolved now than they were back in the summer. So perhaps it is worth considering what has changed in markets, and what hasn’t.
The Fed, for its part, has worked very hard to try and keep the December policy meeting alive (current market pricing suggests that a December hike is now likely, having been less than a 30% probability prior to the October meeting). Nonetheless, it is still impossible to predict with complete certainty whether or not the Fed will move before the year is out, particularly given the seasonal decline in market liquidity that is seen in December. Critics of the Fed would argue that the Federal Open Market Committee (FOMC) has simply been too transparent, and that policymakers have painted themselves into a corner. If the FOMC itself is not sure about what it should do, it is impossible for anyone else to predict what the Fed will do with any accuracy.
While the Fed’s moves (or ‘none moves’) have occupied the lion’s share of the column inches in recent weeks, it is the muted tone of global economic data that is perhaps most vexing. The Lehman crisis took place well over seven years ago, and yet signs of a traditional cyclical recovery remain very hard to find. If anything, the current concern in markets is overcapacity in China and what that will mean not only for commodities and energy producers but also industrial profitability in general. Whilst we do not expect an economic recession, it is clear that life for a number of global industries is very difficult and likely to get worse. Talk of a recession in industrial profits may sound alarmist, but is probably not too wide of the mark if you happen to be a maker of mining equipment or agricultural equipment, areas where there is significant global oversupply. If you produce a commoditised, undifferentiated product – such as steel plate, for example – life is incredibly tough and companies are failing.
Why has global growth been so subdued? One explanation is that while QE has created the conditions (i.e. near-zero interest rates) for companies to invest, it only makes sense for companies to invest if they think that there is demand for what they will then produce. Post crisis, that demand has been notable by its absence, outside of emerging markets. Of course, as has been discussed ad infinitum, emerging markets are now under significant pressure (particularly the ones that have built their economies to feed Chinese demand for commodities) meaning that the global consumption outlook is muted at best. In that context, it is perhaps not surprising that companies have chosen to cut costs and use spare cash to pay dividends (or special dividends) and latterly they have used financial engineering (such as share buybacks) to support their share prices. In a world where organic growth is hard to find, it makes much more sense to buy back shares than committing to expensive, long-term projects involving huge amounts of capital expenditure and uncertain pay-offs – as many mining companies have found to their cost.
A lack of corporate confidence to invest is only part of the story. When oil prices slumped, we expected the consumer to benefit from a ‘cheap energy’ dividend, but this simply has not emerged in the way that we expected. Why is this? Rather like corporations, which are reluctant to spend on large-scale investment projects, we believe that many consumers are simply thankful to have a job in the post-crisis world and are therefore banking the gains they have made from low energy prices. Perhaps more significantly, and despite tightening labour markets in countries such as the US and UK, wage gains have been very modest. We should also not forget that a generation of people who left school or college in the late ‘noughties’ will have grown up without ever knowing the cheap and abundant finance that was available pre-Lehman. Leveraged consumption is not returning in the US or elsewhere and this will have a material impact on the level of GDP growth we will see next year and in the coming years. To put this another way, the unholy trinity of tighter regulation, higher legal costs and tougher capital requirements will mean that retail banks will increasingly look like utilities in the future.
What does this mean for investors? In our estimation, organic growth will be hard to find and that perhaps explains the recent pick-up in M&A. Companies that have already shrunk their cost bases and used financial engineering to lift their share price have few other options left in the locker. Indeed, increased M&A and the fact that companies have become more creative with their balance sheets has driven the recent deterioration in credit fundamentals in the US.
The fact that growth is likely to be subdued means that interest rates will be lower for longer. Indeed, the terminal fed funds rate for this cycle could be as low as 2%. On paper, this is positive for bonds but it is hard to get excited about government bonds given where yields are and the fact that the Fed will be raising rates. European high yield does however look interesting, given a meaningful yield spread over government bonds and the fact that the asset class is usually a beneficiary of M&A, unlike investment grade.
A low discount rate is in theory a major positive for equities but all the issues discussed above suggest that economic growth – and therefore earnings – are likely to be weaker than they would have been if some of the excess global productive capacity had been burnt off. We think that a selective approach in equities will pay off, particularly as Chinese growth concerns are unlikely to abate any time soon. We also think that investors will focus more on valuations and fundamentals as global liquidity continues to ebb, and in that world investors should be ready for more stock-specific disappointments. In future, the Fed will not be underwriting equity markets and despite the likelihood of further action by the ECB, there will no longer be a rising tide of global QE that lifts all boats.
Mark Burgess is CIO EMEA and Global Head of Equities at Columbia Threadneedle Investments.
Consulting company, EisnerAmper received all the shareholders, principals and professional staff of certified public accounting firm Mallah Furman & Company in their firm last November 15, 2015.
Members of the Mallah Furman shareholder group, Gary Dix, Barry Gould, Joe Berkovits, Curt Rosner, Arthur Unger and David Sloan, together with a team of more than 60 outstanding professionals and staff, will become part of EisnerAmper and maintain their present offices in Miami and Fort Lauderdale.
Christopher Loiacono, EisnerAmper Partner and Executive Committee member said, “Mallah Furman’s reputation for client service is well known throughout Florida where they are recognized as one of the premier accounting firms. We look forward to adding their strengths in audit and assurance, tax, private business, and family office services to EisnerAmper.”
Mallah Furman, with its decades-long reputation for excellence, has deep industry expertise, serving clients in insurance, hospitality, professional services, construction and real estate, retail and telecom, among other industries. Gary Dix, Managing Director of Mallah Furman, said, “When our clients make business decisions, they count on us to be their trusted advisor. We listen to and understand their needs. Now, as part of EisnerAmper, we will be able to bring an amazing array of new resources to them to help them meet their goals.”
Barry Gould, the Mallah Furman Chief Operating Officer, has been named Partner-in-Charge of EisnerAmper’s Florida locations.
In speaking about the addition of Mallah Furman, Charles Weinstein, CEO of EisnerAmper, said, “This next step affirms our growth strategy of striving to add the best people and finest resources to the firm in exciting and vibrant marketplaces. In Mallah Furman we see limitless potential, and we are extraordinarily pleased to welcome their team into the EisnerAmper family.”
From left to right: Bruce Zagaris, a partner at Berliner Corcoran & Rowe; Jon Grouf, partner at Duane Morris; David Schwartz, president of FIBA, and Ernesto Mairhofer, Regional Manager for Latin America at Citco Corporate Services - Photo Funds Society. Where Is Increasingly Complex Regulation Leading Us?
The pressure on Wealth Management is increasing at such a rate- due to the dynamism of national and international authorities, and the various agreements between countries which are incessantly enforced- that David Schwartz, President of FIBA (Florida International Bankers Association) states that “the industry is at a crossroads.”
The regulatory scenario is by no means easy for Wealth Management companies, be they large or small. The rising costs of expanding compliance teams are challenging business profitability, and customer privacy seems to have disappeared from the playing field.”Has privacy been lost forever? It could have. We are in a new world,” says Jon Grouf, partner at the New York based company, Duane Morris, which boasts over 700 legal professionals.
Schwartz and Grouf, together with Bruce Zagaris, a partner at law boutique Berliner Corcoran & Rowe of Washington, took part at a round table on the regulation of the industry, which was organized by Citco Corporate Services and in which their Regional Manager for Latin America, Ernesto Mairhofer, acted as moderator.
The situation has become extremely complicated in recent years. On the one hand, the United States introduced FATCA and its “IGA” (intergovernmental agreements), which depending on the model signed, means either a unilateral or a bilateral exchange. Subsequently, GATCA– its equivalent, albeit with some differences- was introduced in the UK. And now, the CRS (Common Reporting Standard) of the OECD will in practice begin to operate in some countries from January 1 st, 2016, although the initial exchange will not take place until 2017.
Since the aforementioned OECD agreement for the automatic exchange of information must be transferred by the different jurisdictions into their local regulations, we’ll no doubt still see the birth of new legislation in many of the participating countries, between which, there are remarkable differences in the level of its enforcement.
But what, in addition to the costs and proper compliance of these rules, is worrying the institutions, according to the Berliner Corcoran & Rowe partner, are reductions in the privacy rights of the asset holders, which in regions such as Latin America, are key -for reasons of the clients’ security and even physical safety-. In addition to the new regulations, these reductions are also the result of the increased activity of whistleblowers (accusers who are not always within the framework of the law), the growing importance of investigation journalism, which has given rise to a consortium of over 190 journalists from 65 countries, or leaks (as the famous case of Wikileaks, which made some people leave their country for security reasons). “We should lobby more for taxpayers´ rights. We should not be afraid to demand more rights,” he says.
“Previously, hardly anyone wondered about ownership of assets under a corporate name, but currently we are seeking out the final owner” says Jon Grouf. The multi jurisdictional structures used so far could change their attributes depending on the countries involved and the agreements between them. “This new regulation will have a big impact in many countries, though perhaps not so in the United States.” Everything will depend on whether the country is considered as “a participant or not,” because regulators are reluctant to join CRS wielding the existence of FATCA as reason.
Large fortunes, and especially their advisors, will have to, like it or not, invest in lawyers and experts to help them comply with international law as well as with their clients’ wishes, and all players within the Wealth Management sector who wish to continue operating, will have to do so in order to avoid legal implications and reputational damage.
All these changes in international rules and regulations are prompting many countries to offer taxpayers who did not meet their tax obligations on time the opportunity to do so now, through regulations or amnesties. In this regard, Grouf reminds us that Chile has a voluntary disclosure program at 8%, United States at 27.5%, Brazil is currently discussing something similar in parliament but with a higher rate of around 30%, and this year Colombia announced 16 % until 2017. We also have Mexico with a voluntary disclosure program, and Argentina, whose program has had little success, is expecting a more attractive one.
Where is this leading us? “There may be entities which are increasingly unwilling to accept foreign funds,” said the Duane Morris partner. The president of the International Bankers Association of Florida does not hesitate to describe the current situation as “over-regulation“, does not harbor hopes of relaxation by the authorities, and encourages the industry to state their opinion, while he points out that “the risk has already influenced the industry. We are already seeing banks which reduce their risk by leaving whole jurisdictions,” and he recognizes that at any given moment, “we did expect the death of Miami as a financial center, but the overall escalation of regulation has eliminated the disadvantage of our place, and money is returning to Miami. Until when? We do not know, but we must seize the moment.”
To which Ernesto Mairhofer of Citco, adds “There is life after FATCA and CRS, it will undoubtedly be different, but high income families will continue to have the same needs which they do today: orderly estate planning, cross border issues (for e.g. children living in different countries), insecurity in their countries of residence, avoiding fictitious profits from the devaluation of their currencies, etc.”
