CC-BY-SA-2.0, FlickrLanzamiento de drones BQM-74E desde USS Lassen. Página oficial de la U.S. Navy. Para reducir el coste de viajar en avión… ¿Eliminamos al piloto?
There has been much talk of the future of flight, with drones one day delivering packages to your house the latest example to generate headlines.
Now I don’t know about you, but I’m OK if the drone fails to deliver a package. However, I’m not so sure I want the drone failing to deliver me to my intended destination.
I prefer to have a pilot up front who has the same interest as me in having our plane arrive safely. As fabulous as technology is, I like the comfort of a professional being in control, just in case the technology does not work as planned. A malfunction or technical problem has never happened to any of us, right? So why worry? Wink-wink, nudge-nudge.
So, call me Mr. Belt and Suspenders. I like the security. And so do most investors who own passive funds. According to our survey, they buy for security, thinking passive funds are less risky.
Unfortunately, the pilotless passive portfolio is not less risky. Sure it costs a little less because it is entirely dependent on technology. But, contrary to popular opinion, a passive investment attempts to have the same risk as the index it is tracking. It can be just as vulnerable to risk as all technology can be.
For example, in the two most recent market crises, as with most bubbles, the index became overweight with the highest demanded securities, in this case, technology and financial services stocks. So passive funds tracking the S&P 500 Index also experienced the bubble. They were, on average, no safer than active funds. In fact, the average actively managed large-cap blend fund does a better job protecting clients than the passive large-cap blend fund when analyzing rolling 10-year periods.
Why? Because a pilot can make adjustments that a computer may not always be programmed to understand.
So when you get that chance to fly for a little less, make sure the flight is equally safe. Take the piloted portfolio.
Article by William Finnegan, Senior Managing Director, Global Retail Marketing, MFS
Diego Besga, partner at Team Real Estate Development. Courtesy photo. Cities North and West of Miami Are Attractive Real Estate Alternatives
The real estate industry in South Florida is experiencing a very sweet moment which is evident by the numerous projects approved and under development in the area, where cities like Hollywood and Fort Lauderdale are attracting prospective buyers looking for prices cheaper than what is currently available in Miami, said Diego Besga, COO and Business Development Director at Team Real Estate Development (TRED).
Markets emerging around Miami, such as in Hollywood, represent an opportunity for Team Real Estate, Besga pointed out. That is why they have leapt into investing in land in the heart of Hollywood, near the city’s main commercial area of shops and restaurants, and in close proximity to where the H3 Hollywood complex, a 15 storey building with 247 units, including studios and one, two, and three bedroom apartments, is being built.
“There is a group of buyers who don’t have access to the Miami market due to the prices that are being generated in the city.” Besga explained that these are buyers with budgets of less than $ 400,000 but who are looking for similar alternatives, and there are other cities in the south of the state where such properties are available.
Almost 50% of H3 Hollywood is already sold and buyers include mainly Argentines, Colombians, Russians, and Venezuelans, followed by locals and Canadians. To Besga, the price is very attractive at under $300 per square foot, while, according to data from Zillow Web which specializes in United States real estate, the average price in Miami currently stands at $379.
According to Zillow, the real estate prices in Miami rose by 10.6% last year, and are expected to rise this year by another 2.1%. Compare the $379 per square foot average price in Miami to the $159 per square foot average price in the metropolitan area of Miami-Fort Lauderdale. An average home in Miami is priced around $388,350, although the average selling price is $323,500, while the average rent is $2,200 per month in Miami and $ 1,800 in Fort Lauderdale.
For Besga, everything emerging north of Miami and west of downtown, as well as Miami’s Brickell area, is starting to become an attractive product, especially if the price is right.
As to whether Miami could be incubating a new real estate bubble, such as that suffered in the 2008 crisis, Besga emphasized that the situation is not the same. “I see a very strong market, for many years ahead. I do not think a new bubble is being created, amongst other things, because of the deposits required,” he pointed out.
Currently, most presale operations require deposits of 50% for closing, while a few years ago they were 10%.
Although Besga does believe that there will be a small price adjustment downward, he is convinced that nothing like 2008 will happen, because Miami is considered, especially by Latin Americans, as a safe place for protecting their wealth, and where it will continue generating value. “Prices are a little high, but not for a situation like that of 2008 to occur,” he said.
Team Real Estate Development (TRED) is a firm consisting of four Argentine partners, and which operates mainly in Argentina, and in the states of Florida and Georgia. Apart from the H3 Hollywood project, they have a wide portfolio of properties in both states, including rental properties, offices, hotels, and off-plan developments. In Fort Lauderdale they have a new residential development on the drawing board, which they hope to start building in early 2015.
Wim-Hein Pals, head of Robeco's emerging markets team since 2004. The Unsuspecting Power of Quant in Emerging Markets
Emerging markets equities can produce handsome rewards for investors – but they carry risks that are not seen in the developed West. Political turmoil and generally more volatile markets require a more cautious approach to capitalize on a fast-growing area for investors.
That is where Robeco’s pioneering use of sophisticated quantitative models can help cut the risks and pick the winners. The unsuspecting power of quant has been proven in its ability to identify risks that standard models either cannot see or overlook.
This is backed by decades of experience; Robeco was looking at emerging markets long before most other asset managers, investing in Peru as early as 1930, and was the first European firm to set up a bespoke emerging equities fund in 1994.
And the ability to procure superior risk-adjusted returns has been further enhanced by Robeco’s equally pioneering use of sustainability investing techniques. These methods are particularly suited for finding – and even predicting – systematic risks such as political change and social unrest in emerging markets.
“We were the first in Europe to start a dedicated emerging markets strategy 20 years ago, so we were the pioneer on the continent,” says Wim-Hein Pals, co-founder and portfolio manager of the Robeco Emerging Markets Equities fund since its inception and head of the emerging markets team since 2004.
“From the start we had a country allocation framework which is still in place and gave us the caution; we didn’t just jump in blindly and buy everything left right and center. We started cautiously with a top-down structure and thoroughly analyzed everything we wanted to invest in.”
Pioneering quant capabilities
Using sophisticated quant techniques can enhance opportunities while minimizing risks, and Robeco also has a long history with this, due partly to excellent links with Dutch universities at which many staff members have earned PhDs on quant modelling and economics.
“We started to develop our first quant models in the early 1990s,” says Wilma de Groot, portfolio manager for quantitative emerging markets equity, and a quant researcher at Robeco since 2001. “We firstly did this with developed markets using stock selection models and then in 1999 we tested these proven variables, such as valuation and momentum, in emerging markets and found they also worked well.”
“Since 2001 the stock selection model has been used across the investment process and since 2006 our quant capabilities have used the emerging markets model as their sole performance driver.”
“So we were one of the first to use the quant techniques in emerging markets. The cautious element comes in by running a well-diversified portfolio with a large number of names, and by using our integrated risk management techniques. These enhance traditional variables by eliminating risks which are not rewarded with returns. We are therefore less sensitive to turning points in the market.”
Sustainability as standard
Quant is combined with sustainability investing techniques, particularly investigating environmental, social and governance (ESG) factors, to minimize risks further. “In 2001 we started to use sustainability analysis with our proprietary survey,” says Pals.
“We had a good feeling about the outcomes, particularly for the governance angle; the social and environmental angles of ESG came later. Not every emerging markets investor is active on ESG to put it mildly, and so this is still quite pioneering as we do a lot more than the competition does.”
Emerging markets are by their very nature volatile, and are sometimes exposed to geopolitical shocks. But this doesn’t necessarily affect investment performance, providing you know what you are doing. Country allocation is backed by the expertise of a large team, including investment specialists on the ground in up-and-coming countries such as India and China.
Managing risks and rewards
“The political angle is deeply incorporated in the country allocation framework; we include also the currency angle, which is related to the local political or economic situation,” says Pals. “The military coup in Thailand for example means more political risk in the country than was there a year ago, but isn’t always translated into financial markets or prospects, because the Thai equity market has been one of the strongest in 2014.”
“Not putting all your eggs in one basket is the starting point for being cautious, and we have a well-diversified portfolio in emerging markets. We spread the political risks; there are sometimes problem countries, but there are also good situations such as India, where the country elected a new government in May 2014. We have been overweight on India since 2013 and so enjoyed a pre-election and a post-election rally, getting the best of both worlds without buying overvalued stocks.”
William H. Gross. Courtesy of Janus Capital . Bill Gross Leaves PIMCO to Join Janus Capital Group
Bill Gross, who helped found Pimco is joining competitor Janus Capital, according to a statement released by the manager.
Gross is listed on Pimco’s website as founder, managing director and CIO of Pimco, where he has been since co-founding the firm in 1971. He “oversees the management of more than $1.9 trillion of securities”.
According to Janus’ statement, Gross will manage its recently launched Janus Global Unconstrained Bond fund “and related strategies”
“Gross’ employment will be effective September 29, 2014 and he will begin managing the Janus Global Unconstrained Bond Fund and related strategies effective October 6, 2014.”
“Gross will be based in a new Janus office to be established in Newport Beach, California and will be responsible for building-out the firm’s efforts in global macro fixed income strategies. His concentration on such strategies will be separate and complementary to Janus’ existing and highly successful credit-based fixed income platform, built under the leadership of Janus’ Fixed Income chief investment officer, Gibson Smith.”
Richard Weil, CEO of Janus Capital Group, said: “Bill Gross has an exemplary track record with decades of success and he will offer an exceptional approach to navigating today’s increasingly risky markets with a focus on macro, unconstrained strategies. His involvement provides Janus a unique opportunity to offer strategies and products that are highly complementary to those already managed by our credit-based fixed income team. With Bill leading our global macro efforts and Gibson our credit-based fixed income team, I am confident Janus will be able to meet the needs of virtually any client.”
Gross said: “I look forward to returning my full focus to the fixed income markets and investing, giving up many of the complexities that go with managing a large, complicated organization. I chose Janus as my next home because of my long standing relationship with and respect for CEO Dick Weil and my desire to get back to spending the bulk of my day managing client assets. I look forward to a mutually supportive partnership with Fixed Income CIO Gibson Smith and his team; they have delivered excellent results across their strategies, which deserve more attention.”
Data from Pimco shows that the Total Return fund, managed by Gross, has assets of close to $222bn. Year to date it has returned 3.59%, and over five years it has returned 5.15% on an annualised basis. Returns have averaged 7.91% annually since inception.
A statement from Pimco declared that Gross would leave the manager “immediately”, and that it would “confirm shortly the election of a new CIO. Relevant portfolio management assignments will also be announced at that time.”
Pimco CEO Douglas Hodge added: “While we are grateful for everything Bill contributed to building our firm and delivering value to Pimco’s clients, over the course of this year it became increasingly clear that the firm’s leadership and Bill have fundamental differences about how to take Pimco forward.”
Pimco owner Allianz stated that succession planning meant it was confident that Gross’ departure would not cause problems.
Michael Diekmann, CEO of Allianz Group, said: “The management and investment structure put in place in January as well as the thorough succession planning gives us complete confidence in Pimco’s investment and executive leadership team.”
Photo: Eckhard Peche. Global Adpoption of RMB Grows by 35% in Two Years
SWIFT’s latest RMB Tracker shows that over the past two years, RMB payments worldwide have nearly tripled in value. In addition, the RMB is now supported by a much broader base with 35% more financial institutions using the RMB for payments with China and Hong Kong.
Today, more than one third of financial institutions around the world are now using the RMB for payments to China and Hong Kong. Asia leads the way at nearly 40% adoption, with an increase of +22% since 2012. The Americas follows at 32% adoption with an increase of +44%. Europe falls closely behind the Americas at 31% adoption with an increase of +47%, and the Middle East and Africa is at 26% adoption, with an increase of +83% during the same two-year period.
“It is encouraging to see that RMB usage by financial institutions and corporates is steadily growing”, says Stephen Gilderdale, Head of New Business Development at SWIFT. “More financial institutions using the RMB will improve the utility of the currency in Hong Kong, China and other offshore centres. As the currency continues to grow, opportunities will arise leading to the development of new products and services denominated in RMB. These new products and services will help drive greater use of the RMB globally while making it a more efficient currency to manage.”
Overall, the RMB strengthened its position as the seventh-ranked global payments currency and accounted for 1.64% of global payments, an increase from 1.57% in July 2014. In August 2014, the value of RMB global payments decreased by 6%, whilst all currencies dropped by 10%, which is a trend most likely attributable to lower seasonal payments activity.
Photo: Rupert Ganzer. Further Euro Weakness Should Help Europe's Exporters and Many of the Stocks That We Invest In
Global equities performed strongly in August, aided by the S&P 500 index which passed the 2,000 mark for the first time. In the US, sentiment was boosted by upwardly-revised GDP data, with the economy growing at an annualized rate of 4.2% in the second quarter of 2014. The US macroeconomic data contrasted with the data released in Europe, where preliminary Italian Q2 GDP was reported at -0.2% quarter on quarter and sentiment surveys also disappointed. In this environment, and perhaps counter- intuitively given the strength in equity markets, core government bonds also performed robustly as speculation grew that weaker economic news could encourage the European Central Bank to launch its own bond-buying program. In the event, the ECB cut its main interest rate by 10 basis points in early September and made a firm commitment to purchases of asset-backed securities (ABS), but stopped short of announcing purchases of government bonds.
In the US, benchmark 10-year bond yields rallied from 2.56% on 31 July to just 2.34% at the end of August. UK, French and German benchmark 10-year bond yields also declined during the month. Emerging market debt, as measured by the JP Morgan EMBI+, also registered gains, although the asset class could not keep pace with the rally in core debt markets as the geopolitical crisis in Ukraine continued, with Russia retaliating to Western sanctions by banning the import of a range of Western products. In commodity markets, the Bloomberg Commodity index registered a total return of -1.1% in US dollar terms in August.
Looking forward, investor attention is likely to remain focused on Europe and the macroeconomic challenges there. We certainly believe that the low bond yields seen in markets such as the US and UK reflect concerns of deflation and potential full-blown quantitative easing in Europe, rather than the generally positive US and UK domestic economic data. While we are encouraged that the ECB has committed to ABS purchases, we would question the potency of interest rate reductions. Interest rates have been low in Europe for a prolonged period but this has not stimulated the economy or inflation. What needs to be addressed is whether the transmission mechanism is in place to move the liquidity from the ECB to the real economy. Given that some action from the ECB had already been flagged, we do not expect the impact of the ECB’s measures to be revolutionary. Nonetheless, the policy moves should give investors more confidence in the ability of the ECB to meet its mandate, and the possibility of outright QE still remains. The immediate impact of the ECB’s moves has been to weaken the euro further, which should help Europe’s exporters and many of the stocks that we invest in.
In terms of our multi-asset portfolios, we have made one small change to our asset allocation in recent weeks, by moving US equities from neutral to overweight. Valuations for US stocks are broadly comparable to those observed before the Global Financial Crisis. If the Global Financial Crisis had occurred due to the overvaluation of equities rather than the faulty foundations upon which the global financial architecture was by then built, this measure of valuation would be of significant concern. As it is, the relative valuation of US equities compared to other regions appears somewhat unremarkable as the outperformance of US equities has moved more or less in step with the outperformance of US earnings – keeping the ratio of forward price/ earnings ratios relatively stable over recent years. Moreover, the US remains free of the macroeconomic concerns that continue to dog Europe, and a stronger dollar should help to keep inflation in check given that the consumer accounts for the bulk of the economy. We remain positive on the outlook for equities overall, with US companies alone having implemented $159 billion of buybacks in Q1 2014.
In fixed income, we remain cautious on core government bonds and continue to see better opportunities in corporate credit, including high yield. Against expectations, core government yields have remained very low this year and therefore high yield continues to stand out as offering relatively attractive levels of income in what is still a near-zero-interest-rate world. We are constructive on UK commercial property as capital values continue to improve, supply is constrained in a number of areas and the asset class continues to offer an attractive real yield.
Monthly economic and market commentary by Mark Burgess, CIO at Threadneedle
Andy Rothman, Investment Strategist, Matthews Asia. Why Invest in China, Now that Growth is Slowing Down?
Andy Rothman, Investment Strategist and author of the blog, Sinology, published by Matthews Asia, addressed the main misconceptions which the Western investor usually holds about the Asian giant, during the investor forum which the company held recently in San Francisco.
The role of private enterprise in China: In 1984, the only private “businessmen” the country had were farmers who sold their produce at the roadside. Today, over 80% of jobs are private, 70% of investment is private, and 100% of new job creation is private. In fact, currently the engine of the economy is private and, notes Rothman, public policies will also end up being private.
Contrary to what most people believe, China is not an exporting country, currently, China’s net exports are even negative. The Chinese economy is driven by private consumption and by investment, not by exports. In fact, China is already the world’s most powerful consumer, with a 9.1% growth in private consumption, fuelled by growth in the disposable income of the richest families, but also of the poorest.
Role of the housing “bubble”: in recent years, the price of housing has increased generally, but has done so at a lower rate than urban disposable income. Therefore, Rothman claims that it is questionable that a housing bubble has been created. However, with a decrease in the sale of new homes and a halt to their price growth, there is no doubt that the market has calmed down, but there is no collapse as there is no massive indebtedness and no ABS market to multiply the risk of collapse.
Shadow Banking: there are many risks within the Chinese financial sector, but they are not the same as those the Western World has suffered. Basically, the problem is that the party owns almost all the banks in China, so their transparency is questionable, yet shadow banking is not the problem, as Rothman points out.
Rothman concluded his presentation at the Matthews Asia Investment Forum with the next question. Why invest in China, now that growth slows down? The investment strategist recommended putting this growth in perspective. In 2003 the economy grew by 10%, while now it is growing at around 7.5%, yet the current GDP is three times higher than in 2003, so in absolute terms the economy grows more each year now than when it was growing at 10%.
For Rothman, the main problem in China in 10-20 years time is the lack of confidence in the Communist Party and in public institutions. When a situation of widespread discontent is reached due to an economic recession, which will occur in the distant future, there could be a situation of social revolution if the institutions have not reinvented themselves for that moment. However, within a reasonable time horizon of a long-term investor, the risk of this social revolution occurring within the next decade is very low.
Robert M. Hall, Institutional Fixed Income Portfolio Manager. Los “Tres Terribles”: revisitando la situación de los focos más problemáticos para los mercados de deuda emergente
The performance of emerging market (EM) debt has exceeded investor expectations so far this year, thanks to falling US Treasury yields and the persistence of broadly accommodative global monetary policies and low volatility in the capital markets. While these benign conditions could continue for some time, MFS’ experts Robert M. Hall, Institutional Fixed Income Portfolio Manager, and Matthew W. Ryan, CFA, Fixed Income Portfolio Manager, review the primary systemic, global risks for EM debt, along with the idiosyncratic, country-level events that have dominated the headlines. As valuations stretch and liquidity recedes, the portfolio managers anticipate that the market will increasingly differentiate among EM credits based on the issuers’ fundamental strength.
Global rates and monetary policy
Central banks of major developed markets (DM) have tried to suppress rate volatility and keep rates artificially low, and they have largely succeeded. According to MFS, intervention by the US Federal Reserve has contributed to Treasury yields that are too low given underlying growth trends. If US economic activity continues to improve, and the Fed’s forward guidance takes a more hawkish tone as a result, Treasury yields are likely to rise, creating a headwind for EM debt and other bond sectors.
How EM debt fares in this scenario would depend on the speed and size of the rate movement. MFS is inclined to expect a more muted and gradual move in Treasury yields this year than last year, when the magnitude of the rate spike prompted a wave of selling that pushed EM spreads wider.
Country-level events
Earlier this year, MFS singled out Venezuela, Argentina and Ukraine, which they called the Terrible Three because these markets all hit crisis points at the same time. How does MFS view these situations now?
Venezuela. MFS remains concerned about the ineffectual policy responses to the challenges facing Venezuela. While the devaluation of the bolivar earlier this year could have been a step in the right direction, it needed to be accompanied by fiscal and monetary restraint. Instead, increased fiscal spending and further monetary growth has fed surging inflation.
By nearly every metric, the economic and financial situation in Venezuela continues to show signs of stress and deterioration. Foreign exchange reserves are low, potentially straining the country’s ability to honor its debt obligations. Yet with the risk-on carry trade still in play, the market appears to be willing to accept the government’s market-friendly rhetoricat face value. In the absence of any policy improvements, MFS continues to believe that Venezuelan debt dynamics are ultimately unsustainable.
Argentina. Argentina has defaulted on coupon payments to investors in its foreign-law, restructured sovereign bonds. Though the technical default will likely have adverse implications for the country’s economic and financial conditions, Argentina has indicated a commitment to service its US dollar- denominated debt governed by local law. MFS believes the yields on those bonds offer reasonable compensation given current risks.
As the outcome remains difficult to predict, MFS is watching the ongoing developments and continually reassessing the risks related to this fluid situation. Longer term, one bright spot is the prospect for a more market-friendly regime following next year’s election.
Ukraine and Russia. Tension between Ukraine and Russia has remained high, and the likelihood of a near-term resolution appears remote. The ongoing conflict has a negative impact on economic activity and, by extension, Ukraine’s ability to meet structural targets established in the reform program backed by the International Monetary Fund (IMF). External funding from the IMF as well as the United States and the European Union has provided a critical fiscal lifeline, yet it will almost certainly become necessary for Ukraine to obtain additional assistance. MFS thinks this could increase the risk of a “bail-in,” with private investors forced to share the burden by having a portion of their debt written off.
Even though the Russian economy could be pushed into recession by the economic sanctions, the Putin government may be willing to endure such an outcome to achieve its broader politicaland security goals.
For now, Russian sovereign credit metrics remain quite strong, with a balanced fiscal account, large foreign exchange reserves and a growing current account balance. Recognizing that valuations could widen to the point where they offer reasonable compensation for heightened risk, MFS continues to monitor the situation closely for possible investment opportunities.
Areas of opportunity
Areas of opportunity still exist within EM debt, yet after solid gains in bond prices, valuations in aggregate appear less attractive now than in early 2014, according to MFS’s team. As US dollar-denominated EM sovereigns and corporates have recovered their losses from2013’s “taper tantrum,” risk/reward relationships have become less compelling, leaving MFS with modest expectations for the performance of EM debt for the rest of the year. Nevertheless, they believe that relative to many other fixed income assets, EM debt valuations are not as stretched.
Although local currency EM debt has yet to fully recover from last year’s selloff, MFS believes that EM currencies may have the highest beta to possible global financial turmoil, given their liquidity and the need for additional macro adjustments in certain EM countries.
In their view, with asymmetric risk to both interest rates and credit spreads, as well as geopolitical and idiosyncratic risk, this is an environment that calls for exercising caution when investing in EM debt.
Léon Cornelissen, Robeco's Chief Economist. Bond Yields Suggest an Unlikely Recession in Europe
Eurozone bond yields are now so low they suggest a recession is imminent, though the European Central Bank’s dramatic action in September along with other more positive macroeconomic factors make that unlikely. Rates were cut again after the Eurozone recovery came to a halt in the second quarter. GDP growth amounted to exactly 0.0% compared to the previous quarter, while gross fixed capital formation dropped 0.3%. The German economy shrank, somewhat surprisingly underperforming France, and the third-largest economy, Italy, fell back into recession. The economic impact of the Ukraine crisis has been much larger than expected, primarily due to its confidence- damaging nature. As a consequence, bond yields have come down to amazingly low levels: German 10-year yields are currently below 1.0%, and Italian yields are currently 2.3%. For the privilege of lending up to three years’ money to governments such as Germany, investors now pay a premium. The continuing relentless bull run on bond markets was the striking development this August. Aside from the weakening of the European economies, the downtrend in actual inflation and the growing fears of Japanese-style stagnation that can all explain these low yields, they are also a reflection of the likelihood of further aggressiveness by the European Central Bank. ‘Don’t fight the ECB’ could be an appropriate motto. Léon Cornelissen, Robeco’s Chief Economist, considers the likelihood of a new European recession to be small. Robeco expects a stronger third quarter for a number of reasons and continue to expect an ongoing recovery of the Eurozone economy. The main risk to this scenario would in our opinion be a severe further escalation of the tensions between the West and Russia.
Ukraine crisis ending in a frozen conflict?
Evidence is mounting that the German economy is being hit by the ongoing jitters over the Ukraine crisis. German businesses are very cautious about making new investments. Gross fixed capital formation declined 2.3% in the second quarter. But the Ukrainian crisis is now showing signs of becoming less heated. Russia has made it clear that it won’t allow a destruction of the pro-Russian separatist region in Eastern Ukraine by sending sufficient troops and weaponry. On the other hand it has demonstrated a cautious attitude because the change in the military balance has not resulted in an offensive to take cities such as Odessa or Kiev. The logic of the situation suggests a stalemate, a so called ‘frozen conflict’. The Eastern Ukrainian provinces including a land bridge to recently annexed Crimea will remain firmly under Russian control, but hostilities will end, paving the way for what will most likely be long-winded negotiations. The current, rather weak sanctions will remain in place, with limited economic impact. Under these circumstances business confidence in Europe could rebound.
Of course, the current de-escalation in Ukraine could in the end turn out to be a “judo-inspired trick” by Russian President Vladimir Putin, who has a black belt in the sport. During the winter, when Europe is much more vulnerable to an immediate cut-off of Russian gas, tensions could rise again, though it should be kept in mind that countries such as Germany are already in a position to withstand a five-month boycott. The ultimate aims of the Russian leadership remain unclear. It could easily decide to stir up ethnic tensions in the Baltic region. Possibly we have only seen a couple of moves in what could turn out to be a very long chess game. We cannot be sure. But for the time being, our baseline scenario is a de-escalation of the conflict.
Shale gas revolution helps world economy
Eastern Europe is not the only region in which geopolitical tensions are flaring up. The Islamist insurgency in Iraq is a potential threat to oil supply, although Brent oil prices are trending down from their peak in June. An important factor is the shale oil revolution in the United States. It is currently acting as a ‘supplier of last resort’, a role earlier taken by Saudi Arabia. It is highly uncertain how long the shale oil revolution will last, but the currently well-behaved oil prices are a boon for the world economy, including the Eurozone. The price of oil is an important factor driving down headline inflation. Core inflation in the Eurozone is still 0.9% on a yearly basis, despite all the talk about deflation.
Accommodating monetary policy weakens the euro
The ECB played its part by marginally lowering interest rates to 0.05% and announcing a buying program of Asset Back Securities (ABS), suggesting a possible size of one trillion euros. As the current European ABS market is not well developed, this potential size looks ambitious. It will take time to implement the ABS program and its beneficial effects will be gradual. But in so far as the program helps to weaken the euro it immediately benefits European exporters. Very strong confidence indicators in the US (an ISM manufacturing reading of 59, non-manufacturing 59.6) benefit the US dollar as well. The ECB has still one weapon of last resort – generalized QE of sovereign bonds. But this weapon will only be used if the European economy weakens materially further. This option remains clearly on the table and will help keep down the euro and long-term interest rates.
Macro outlook: Fiscal policy is no longer restrictive
During the Jackson Hole summit, ECB president Mario Draghi sketched the outline of a grand bargain, in which the ECB would do more in exchange for fiscal stimulus (in Germany) and structural reforms (in France and Italy). Chances of meaningful reform packages in France and Italy are low, but there is already a political agreement about a flexible interpretation of existing budgetary rules within the Stability and Growth Pact. Automatic stabilizers in the Eurozone will as a consequence probably get more room to maneuver in the coming months and governments within the Eurozone will start to make a more positive contribution to economic growth.
Remarkably low interest rates and tight sovereign spreads within the euro area will stay with us in the coming months as long as the ECB keeps its easing bias, confirms Robeco’s Chief Economist. The search for yield implies that the Eurozone is currently exporting low interest rates to the US, where 10-year bonds offer a yield of about 2.5%. But as the US economy will continue to strengthen, talk about the timing of the first interest rate hike will get louder, and gravity could be reversed: US long-term interest rates may push up those in Europe. A necessary condition would be a resumption of the European recovery, which partly depends on geopolitical developments. Our baseline scenario is a stronger Q3 GDP which will diminish pessimism about the European recovery. As a consequence Robeco sees little value in European and US government bonds at current yields.
Francisco García Paramés. Bestinver’s Parames Leaves for New Project
Bestinver Asset Management’s fund manager Francisco Garcia Parames will be leaving the company to start a new project, according to a statement released by Efe.
Parames has spent 25 years at Madrid-based Bestinver where he managed above €7.5bn in Spanish and international stocks. The portfolio manager, known as the “European Warren Buffet” because of his pure value style, has achieved one of the highest returns in the market during this period placing his funds amongst the first places of their category.
The fund manager moved to London from Madrid in June 2013, where he worked with two associates, Alvaro Guzman de Lazaro and Fernando Bernad. Parames thanked Bestinver, part of the Spanish construction conglomerate Acciona, as well as all the investors who trusted him with the management of their savings, for “providing him with the opportunity to develop an exciting professional career”.
