CC-BY-SA-2.0, FlickrPhoto: Aristipo Crónica Popular. Oil: Up, Up And...?
The New Year began in disastrous fashion for the oil market with Brent crude touching 12 year lows in January, which followed a year to forget in 2015. Confidence in the prospects for the oil price seemed irreversibly low when the decision to lift Iranian sanctions was announced and Chinese economic growth statistics continued to paint a rather bleak picture for global growth. However, oil has undergone a swift and material recovery since bottoming out on 18 January. The bounce in sentiment has not been exclusive to oil, with iron ore, copper and coal also experiencing a surge in their respective prices. The key question from here remains: is the rise in oil sustainable, or is it little more than a short squeeze which lacks any fundamental basis?
As outlined in our ‘Multi-Asset Brief’ in January, we believed the tide was beginning to turn in oil and that Brent crude touching a low of US$27.88 per barrel in January was not justified. Since that paper’s release we have witnessed a few interesting developments, not least of which has been a tentative agreement between Saudi Arabia and Russia over a planned production cap. While the deal itself was viewed as having little impact on supply over the short term, as it was predicated on other key producers (including Iran) also capping production, it was symbolic that a deal by a Saudi-led Opec is still possible in the current environment. The oil cartel had previously refrained from limiting supply, despite the weak market conditions, preferring to keep the market oversupplied to implicitly drive out incumbent shale producers.
The much publicised end to Iranian sanctions finally came on 16 January when a nuclear deal was struck between Iran and six of the world’s western powers. There was little doubt within the market that the easing of Iranian sanctions would cause a significant uptick in oil supply, although the jury is still out on how much and how quickly Iran can increase its production to anything that resembled its pre-sanction high. Since the sanctions were lifted, the increase in Iranian output has significantly undershot consensus market expectations, driven by ageing infrastructure and lack of investment, which has reduced its capacity to increase production for the time being. The oil market has also benefited from a drop in oil production in Iraq and Nigeria, with the former experiencing the largest decline due to a stoppage in flow along a pipeline carrying oil across the Kurdish border.
In a phenomenon which began in October 2014, the US oil rig count has continued to transition lower, falling approximately 72% from its peak. At the same time, global oil capital expenditure (capex) has also decreased, with Simmons forecasting it to fall approximately 50% in 2016 which followed a similar reduction in 2015. While the fall in rig count and capex has been swift and material, the drop in US oil production has been modest in comparison, although we began to see consistent declines being recorded in February. We believe the market over anticipated the speed at which production would decline in response to the falling capex, which exacerbated the downward pressure on oil prices, as production remained stubbornly high. Nonetheless, our view is for US production to follow a similar path to the fall in rig counts for the remainder of the year and into 2017, as we believe shale producers will be reluctant to increase drilling spending with prices below their respective marginal costs of production.
A looming factor that has the potential to jeopardise the recent rally in the oil market is the historically high level of oil inventories. The above-trend level of inventories has been caused by two main factors:
Oil supply strongly exceeding oil demand
A steep forward curve which acts as a strong incentive to build inventories. However, recently we have seen the forward curve flatten, thus minimising the incentive to build inventories as the premium received from doing so is comparatively less. A flattening forward curve, as oil inventories are high, in the short term should see new supply come online, which theoretically threatens an already oversupplied market. While we are obviously cognisant of this risk, we believe consistently falling inventories will be supportive of a more stable oil market.
We held the view earlier in the year that an oil price at sub US$28 per barrel was not sustainable over the longer term and not in line with fundamentals. The recent recovery has been swifter than even our expectations. In light of the current uncertainty in the market, we believe the path over the short term for oil will be volatile, particularly as the threat of inventories swamping the market is very real. However, over the longer term, we are more constructive on both the stability of the market and its eventual price, as falling capital expenditure and rig counts begin to have a more pronounced impact. Similarly, the tentative agreement by Opec members to freeze production, while complex and contingent on a number of factors, is still a potential positive for controlling supply over the longer term. As for the positioning of our portfolios, we are conscious of the short-term risks that lie ahead, although we do believe there are genuine factors which are now supportive of a higher oil price.
Philip Saunders is co-Head of Multi-Asset at Investec.
CC-BY-SA-2.0, FlickrPhoto: Matthew Grange. Standard Life Wealth Strengthens Investment Team
Standard Life Wealth, the discretionary fund manager, has announced the recent appointment of Matthew Grange and Matthew Burrows as Senior Portfolio Managers based in London. Both are working with UK and International clients and report to Charles Insley, Head of International for Standard Life Wealth.
“We are delighted that Matthew Grange and Matthew Burrows have joined Standard Life Wealth. They both have very strong investment backgrounds and have joined us to work with UK and International clients. As long term investors we offer clients investment strategies across the full risk spectrum and have an investment process that focuses on gaining exposure to secular growth drivers, which we believe will out-perform the broader market over the long term. Both Matthew Grange and Matthew Burrows are excellent additions to the team and bring valuable insight and institutional expertise to our investment process,” said Charles Insley, Head of International, Standard Life Wealth.
Matthew Grange has over 18 years of private client and institutional investment management experience. He spent over twelve years managing institutional UK equity portfolios for ABN Amro Asset Management and the corporate pension schemes for Lafarge and Reed Elsevier. In addition to his experience managing substantial UK equity portfolios, Matthew has experience of many other asset classes, particularly commercial property and private equity.
Matthew Burrows has five years of experience in the management of discretionary portfolios for charities, trusts, pensions and both institutional and private clients’ portfolios. He has managed portfolios for both UK and international clients at Falcon Private Wealth and Sarasin & Partners LLP, covering the full spectrum of traditional asset classes, as well alternatives and derivatives.
Standard Life Wealth, with offices in London, Edinburgh, Birmingham, Bristol and Leeds, and an offshore presence in the Channel Islands, provides both target return and conventional investment strategies private clients, trust companies and charities.
CC-BY-SA-2.0, FlickrPhoto: Jáder Reis
. Will the DOL Conflict of Interest Rule Lead to Product and Platform Innovation in the U.S.?
The latest research from Cerulli Associates finds that the Department of Labor’s (DOL’s) proposed “Conflict of Interest” Rule will force a period of product and platform innovation in the United States.
“The requirements of the DOL‘s proposed Conflict of Interest Rule will ultimately lead to evolution of products and platforms,” states Bing Waldert, managing director at Cerulli. “Large broker/dealers (B/Ds) will use developing technology to serve smaller accounts on a flat-fee basis. Insurance companies will be forced to lower variable annuity expenses and commissions to be in line with other financial products.”
“The true impact of the DOL’s proposed Conflict of Interest Rule may not be immediately felt, but will lead to a period of product and platform innovation at B/Ds and manufacturers,” Waldert adds. “The primary concern of the DOL’s proposal is to expand the definition of fiduciary to cover more instances of providing advice. This expansion, in turn, is designed to protect consumers from sales practices that may be tainted by a conflict of interest.”
“Cerulli expects there will be unexpected changes to the retirement and wealth management industries, and, to a degree, this cultural evolution is what the proposed rule is hoping to effect,” Waldert explains.
“The DOL’s April 2015 proposal creates a new type of prohibited transaction exemption (PTE), referred to as the Best Interest Contract Exemption (BICE), which is a contract that the investment advice provider must present to a potential client,” Waldert continues. “Specifically, the financial institution must disclose any variable compensation that the advisor receives for the advice and resultant product sale, and comparative examples of compensation they would have received for other products.”
CC-BY-SA-2.0, FlickrPhoto: Glyn Lowe. Nikko Asset Management Receives Two Awards from Asia Asset Management
Nikko Asset Management has been recognized for excellence in two categories by the Hong-Kong based publication Asia Asset Management. The firm won the Best of the Best Award for both the Japan: Most Innovative Product and the Singapore: Best RQFII House categories for 2015. This is the second consecutive year for Nikko Asset Management to win the Singapore: Best RQFII House Award.
The Tokyo-headquartered asset manager was recognized with the Japan: Most Innovative Product Award for one of its most innovative products in 2015, the Global Robotics Equity Fund. Launched in August, the fund attracted over 300 billion yen of inflows within three months, driven by Japanese investors’ demand for greater exposure to robotics-related equities. The firm’s research uncovered that fast-growing robotics companies were not well captured with a traditional sector-focused approach to investing. The Global Robotics Equity Fund was the first in Japan to focus on cross-sectoral robotics companies.1
“It’s an honor to be recognized for our excellence in product development and innovation. I believe it’s a strong testament to our firm’s ability to not only recognize global investment trends but to provide our clients with the ability to benefit from them,” said Hideo Abe, director and executive vice chairman at Nikko Asset Management.
The firm was also awarded the Singapore: Best RQFII House Award for its leadership in RQFII solutions. Nikko Asset Management launched Singapore’s first retail China Onshore Bond Fund in July 2014. The fund opened up a highly regulated market with limited foreign investor access to Singaporean investors. Following the launch of the fund, investors were able to participate in the potential growth prospects of China’s onshore bond market. The firm has been a pioneer in the offshore RMB bond fund market in Singapore since 2010.
In September 2015, the firm launched the Nikko AM China Equity fund in Singapore, offering retail investors the opportunity to benefit from the growth potential of the China A-shares market.
“This recognition as Singapore’s best RQFII house validates our position as the industry leader in providing our clients with direct access to China, which is expected to account for 20 percent of global GDP by 2020 and become the world’s largest economy within the next 15 years,” said Eleanor Seet, President of Nikko Asset Management Asia, a subsidiary based in Singapore of Nikko Asset Management.
Photo: Tristan Hanson . M&G Investments Appoints Tristan Hanson To Its Multi-Asset Team
M&G Investments, a leading international asset manager, today announces the appointment of Tristan Hanson as Fund Manager to its Multi-Asset team, starting on 21st March. Tristan will be responsible for developing the team’s absolute return proposition and will report to Dave Fishwick, Head of Multi-Asset.
Tristan has 15 years’ experience in asset management and joins M&G from Ashburton Investments, where he was Head of Asset Allocation with responsibility for global multi-asset funds. Prior to this, Tristan worked as a Strategist at JP Morgan Cazenove covering equities, fixed income and currencies.
Graham Mason, Chief Investment Officer at M&G Investments, says: “We are very pleased to welcome Tristan to our team. He has extensive experience across multi-asset strategies and will play a key role in broadening our capabilities around absolute return products. This will strengthen our Multi-Asset team and meet increasing demand from our clients.”
Over the past 15 years, M&G’s 16-strong Multi-Asset team has successfully developed a robust investment approach by combining valuation analysis and behavioural finance.
CC-BY-SA-2.0, FlickrPhoto: Matthieu Duncan, new CEO of Natixis Asset Management. Matthieu Duncan Becomes Natixis Asset Management CEO
The Natixis Asset Management Board of Directors met today, chaired by Pierre Servant, to appoint Matthieu Duncan as Chief Executive Officer (CEO) of Natixis Asset Management following the resignation of Pascal Voisin. This new appointment will take effect on April 4, 2016. Until that date, Jean François Baralon, Natixis Asset Management’s Deputy CEO, will serve as interim CEO of Natixis Asset Management.
Matthieu Duncan will be looking to accelerate the international growth of Natixis Asset Management and to continue to integrate Natixis Asset Management within Natixis Global Asset Management’s global multi-affiliate business model.
The Board of Directors would like to thank Pascal Voisin for his role over the past eleven years leading Natixis Asset Management’s operational management. He brought new life to the company internationally and successfully contributed to the development of Natixis Global Asset Management’s multi-affiliate model by taking majority equity interests in H2O Asset Management and Dorval Asset Management and by using Natixis Asset Management’s expertise to create Seeyond and Mirova.
A dual French and US citizen, Matthieu Duncan completed his studies at the University of Texas (Austin) and the University of California (Santa Barbara). He began his career in the financial industry at Goldman Sachs, where he held various positions in the capital markets sector in Paris and London between 1990 and 2003. Since 2004, he has held various positions in the asset management area in London: Chief Investment Officer (CIO) Equities at Cambridge Place IM, Head of Business Strategy and member of the Board of Directors of Newton IM (a Bank of New York Mellon company), and Chief Operating Officer (COO) and member of the Board of Directors of Quilter Cheviot IM.
CC-BY-SA-2.0, FlickrFoto: Thomas Leth-Olsen. Claves para entender el ciclo de crédito
Consistent dividend growth is generally a sign that a business is doing well and should provide investors with a degree of confidence. If dividends are rising steadily over time, said Alex Crooke, Head of Global Equity Income at Henderson, then a firm’s earnings, cashflow and capital should also be growing.
An indicator of sustainability
Payout ratios identify the percentage of corporate earnings that are paid as dividends and can be an indicator as to whether a company has the scope to maintain or increase dividends. The payout ratio, explains Crooke, can be influenced by a number of factors, such as the sector the company operates in and where the company is within its growth cycle. As the chart below shows, the level of current payout ratios varies considerably between countries and regions both at an absolute level and when compared to historical averages.
“Although the payout ratio chart shows that opportunities exist for dividend increases in the emerging markets, the outlook for earnings and dividends remains uncertain and at present we are finding the most attractive stock opportunities for both capital and income growth in developed markets. Within the developed world, Japan and the US have the greatest potential to increase payout ratios, although from a relatively low base with both markets currently yielding just over 2%” points out the Head of Global Equity Income at Henderson.
An active approach is important
Conversely, payout ratios from certain markets, such as Australia and the UK, are above their long-term median. “Companies from these countries are distributing a greater percentage of corporate earnings to shareholders in the form of dividends than they have done historically. This leaves the potential for dividend cuts if a company is struggling to grow its earnings. One area of concern for income investors with exposure to UK and Australia is the number of large resource-related companies listed within these market indices”, said Crooke. Henderson believes that earnings, cashflow and ultimately dividends from these types of firms are likely to be impacted by recent commodity price falls.
Nevertheless, explains Crooke, the UK in particular has a deep-rooted dividend culture and outside of the challenging environment for the energy and resources sectors is home to a number of businesses that are delivering sustainable dividend growth. Our approach is to invest on a company-by-company basis using an actively-managed process that considers risks to both capital and income.
Seeking dividend growth
Recent market volatility has affected share prices globally. Despite this, Henderson believes attractive businesses with strong fundamentals and the potential for capital and dividend growth over the long term can be found across nearly all regions and countries.
“Within our 12-strong Global Equity Income Team we continue to seek companies with good dividend growth, and payout ratios that are moderate or low, which provides the potential for dividend increases. Typically, we avoid the highest-yielding stocks and focus on a diversified list of global companies that offer a sustainable dividend policy with yields between 2% and 6%”, concludes.
CC-BY-SA-2.0, FlickrPhoto: Steven Damron
. America´s 10 Most Expensive Streets
Every two years, JLL takes a look at the priciest addresses across the United States, along with the factors that have shaped these record-setting rents. In 2015, location, industry and competition are contributing to office rents that are 1.7 times higher than CBD rent growth, and 2.9 percent higher than overall rent growth.
According to the firm, rents on these 10 streets cost the most on a per-square-foot basis:
Sand Hill Road, San Francisco Peninsula: Dubbed “the Wall Street of the West,” due to the presence of venture capital firms, Sand Hill Road remains at the top of the rankings for the third time in a row. Its 2015, average rent is $141.60 p.s.f., up more than 27 percent in just two years.
Hamilton Avenue, Silicon Valley: The rise of tech played a large role in Hamilton Avenue’s catapult to the second most expensive street. Add in restrictive planning ordinances and a transit-friendly, walkable environment and the appeal is apparent. Its 2015 average rent is $124.44 p.s.f., up more than 31 percent in just two years.
Fifth Avenue, New York: Although facing competition from creative space in Midtown South and rising micro-markets like Bryant Park and Columbus Circle, Fifth Avenue still leads the pack in New York, a city synonymous with large price tags. Its 2015 average rent is $119.27 p.s.f.
Greenwich Avenue, Fairfield County: Although one of the least-urbanized streets in the top 10, Greenwich Avenue is known as the hub for hedge funds and also offers proximity to New York. Its 2015 average rent is $90.25 p.s.f., down nearly three percent from 2013.
Mission Street, San Francisco:Mission Street makes its first foray into the top 10, driven largely by the rise of tech developments south of Market Street. Other contributing factors include the Transbay redevelopment and creative space in nearby properties. Its 2015 average rent is $89.58 p.s.f.
Pennsylvania Avenue, Washington, DC:“America’s Main Street” commands international name recognition due to its location near the White House and U.S. Capitol buildings. Redevelopments and renovations of marquee buildings will drive rents and tenant demand. Its 2015 average rent is $72.65 p.s.f., down from $75.83 p.s.f. in 2013.
Boylston Street, Boston: High-profile properties and a broad range of tenants keep Boylston Street solidly among the top 10 Most Expensive Streets. Additional retail and hotel space is on tap to deliver on Boylston, which will keep the street competitive. Its 2015 average rent is $67.44 p.s.f.
Avenue of the Stars, Los Angeles: While there is plenty of star power in Los Angeles, the Century City submarket is a pre-eminent hub for the highest-profile legal, financial and entertainment tenants. Its 2015 average rent is $63.12 p.s.f.
Royal Palm Way, West Palm Beach: Royal Palm Way earned its nickname, “Banker’s Row,” due to the concentration of wealth management and financial services firms. Its 2015 average rent is $58.07 p.s.f., which is actually down from the $58.52 p.s.f. it was two years ago.
Newport Center Drive, Orange County: According to the market’s fundamentals, it may be the perfect storm for investors to check out Orange County’s top retail and office destination: Newport Center Drive is displaying vacancy near 11 percent and rent growth of 3.3 percent since 2013. Its 2015 average rent is $51.72 p.s.f.
CC-BY-SA-2.0, FlickrPhoto: Beijing Patrol. China Will Need To Maintain And Even Lower Its Interest Rates To Avoid A Sharper Downturn
China’s rapid growth over the past decade has been fuelled by cheap credit. According to Investec, this has led to a misallocation of capital, particularly following the global financial crisis when policymakers unleashed a RMB4 trillion stimulus package into infrastructure, construction and heavy industry. According to Oxford Economics, the China’s overall debt load (public, private and financial) rose from 176% of gross domestic product (GDP) in 2007, to 258% by mid-2014, and over 300% by the end of 2015. This has continued to rise as China’s so-called total social financing, or aggregate debt, rose by RMB3.42 trillion ($520 billion) in January alone, according to official data.
Bank lending is in much need of reform. Borrowing is concentrated in sectors where there is major overcapacity – heavy manufacturing, property and infrastructure – which are dominated by often inefficient state-owned enterprises (SOEs). The Emerging Market Fixed Income team at Investec, which has recently conducted a number of research trips to mainland China, thinks that the implicit government guarantee of SOE borrowings remains in place, resulting in debt being rolled over, rather than called in.
SOEs rolling over debt presents a challenge for policymakers. “Given high and rising debt service ratios, as credit growth continues to outstrip nominal GDP growth, China will need to maintain and even lower its interest rates to avoid a sharper and more prolonged downturn,” says Mark Evans, an analyst in Emerging Market Fixed Income. “But lowering interest rates on Chinese assets will again put pressure on capital outflows as investors earn less yield on their renminbi assets, hence the difficulties policymakers are facing right now.”
Rising debt loads is likely to lead to a financial cycle whereby the proportion of non-performing loans (NPLs) starts rising. Official data suggest that banks’ NPLs were around RMB1.95 trillion (2% of GDP) in December 2015. But a truer measure of where non-performing loans may actually settle is the sum of NPLs and special-mention loans – those that are overdue but which banks don’t yet consider impaired – which the IMF estimated these constituted about 5.4% of GDP in August 2015.
According to John Holmes, a sector specialist for financials in the 4Factor Equity™ team, “Prior banking crises globally have typically seen a 6-7 percentage point increase in the NPL ratio from trough, which would suggest a 7% or 8% true NPL ratio as a starting point for the Chinese banks in the event of a severe downturn.”
The growth of NPLs in the shadow-banking sector is also concerning. “It is hard to pinpoint exactly who has done the lending”, says Mike Hugman, strategist in Emerging Market Fixed Income, “as there have been several rapidly growing lending channels outside the banking system. But we think that corporate leverage is now around 140-150% of GDP, higher than in any other emerging market.”
The good news is that much of China’s credit growth has been domestically financed. Consequently, we expect that policymakers have a greater ability to manage the cycle than perhaps we would expect in more open economies, as we saw during the global financial crisis.
The State Council is expecting China’s banks to share the burden of cleaning up bad debt. John believes that “Chinese banks have historically enjoyed high levels of profitability, with return on equity averaging in the region of 20% over the last decade, aided by strong loan growth, high pre-provision margins and relatively benign asset quality.” He reckons that “their high pre-provision profit margins means they should have the capacity to charge-off bad assets over a multi-year period and remain profitable even with NPLs north of 10%, as some analysts suggest.”
CC-BY-SA-2.0, FlickrPhoto: Arturo Sánchez
. Investors Want Transparency, Ethics, and Performance, CFA Institute Survey Reveals
Investors are expecting higher levels of transparency than ever before, holding their investment managers to the highest ethical standards, and are laser-focused on returns, according to a newly released study “From Trust to Loyalty: A Global Survey of What Investors Want,” by CFA Institute, the global association of investment professionals, that measures the opinions of both retail and institutional investors globally.
The findings reveal that investors want regular, clear communications about fees and upfront conversations about conflicts of interest. The biggest gaps between investor expectations and what they receive relate to fees and performance. Clients want fees that are structured to align their interests, are well disclosed and fairly reflect the value they are getting from their investment firms.
“The bar for investment management professionals has never been higher. Retail and institutional investors, as always, crave strong performance, however both groups also demand enhanced communication and guidance from their money managers. Building trust requires truly demonstrating your commitment to clients’ well-being, not empty performance promises or tick-the-box compliance exercises. Effectively doing so will help advance the investment management profession at a time when the public questions its worth and relevance.” said Paul Smith, president and CEO of CFA Institute.
“While an increase in overall trust in the financial services industry is a net positive for financial professionals,” continued Smith, “performance is no longer the only ‘deal breaker’ for investors. They are continuing to demand more clarity and service from financial professionals and, with the rise of robo-advisors, they have more alternatives than ever before. Further, if investment professionals don’t provide this clarity, then regulators may force them to, for better or worse.”
The study also shows that investors are anxious about global markets, and do not believe their investment firms are prepared. Investors revealed a growing anxiety about the state of global finance. Almost one-third of investors feel that another financial crisis is likely within the next three years (33 percent of retail investors/29 percent of institutional investors), with significantly more in India (59 percent) and France (46 percent). In addition, only half of all investors believe their investment firms are “very well prepared” or “well prepared” (52 percent retail investors/49 percent institutional investors) to manage their portfolio through a crisis.
