Brazil – The Comeback Kid?

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An economy set to rebound. A president committed to implementing reform. A government of competent technocrats. A crackdown on corruption. A set of new CEOs to oversee inefficient state-owned companies. A central bank embarking on a rate cutting cycle. A country with deep, liquid capital markets.

Would anyone believe us if we said this is Brazil?

According to Yacov Arnopolin and Lupin Rahman, emerging market portfolio managers at PIMCO, «before tagging on the requisite caveats, we tip our hat to the country’s impressive turnaround in policymaking. As always, much will ride on the ability to push through fiscal reforms and improve the supply side of the economy. But with confidence in the government returning, Brazil could be set for a comeback ‒ one that could restore nominal interest rates to single digits and put credit rating upgrades back on the table.»

Not politics as usual

On their recent trip to Brazil they witnessed a stark change in what the International Monetary Fund (IMF) called the “counterproductive” politics and policymaking of the previous administration. «Impeachment has paved the way for a centrist, business-friendly government under President Michel Temer, who has a team that can get things done. This coincides with Brazil starting to exit the worst recession in its history and a turn in inflation from double-digit figures earlier in the year.»

They believe the change in sentiment has sparked a strong rally in Brazilian assets, but as the new administration’s honeymoon draws to a close, the country’s prospects ride on reform. Will the government’s proposals be enough to bring about the necessary changes?

Brazil’s challenges ahead

The positive sentiment for Brazil notwithstanding, they see three main risks to President Temer’s plans.

  • Brazil’s debt-to-GDP is set to reach 90% of GDP by the end of this decade. While the vast majority of the debt is in local currency, that level still ranks among the highest in the emerging markets. Reforms cannot change the near-term fiscal and debt path; they can merely seek to avoid an even more dire scenario. And they will take more than one political cycle to be effective.
  • Disinflation could be lower than expected. Years of indexation and supply-side bottlenecks could limit the disinflationary pressures from high unemployment and a large output gap and keep inflation “stuck” at high levels. Moreover, the multiple levels of subsidized lending that de-fanged monetary policy may take years to unwind or simplify.
  • Public opinion may prove to be more sensitive to increasing unemployment and the realities of lower social security and pension benefits. In fact, Brazilian voters still generally favor large governments and a strong social safety net. In addition, Lava Jato (“Operation Car Wash”) corruption investigations could spill over to the government. The risk is that Temer’s popularity fades and political noise around the 2018 election race increases.

The positive scenario

If Temer’s reforms are successful, PIMCO believes they could trigger a virtuous circle of deeper reforms after the 2018 elections. A sustained return of confidence would likely increase foreign direct investment and portfolio flows; and a return of “animal spirits” would lift consumption and prompt faster lift-off for the economy. All of this bodes well for the currency. And while the real is unlikely to have the same uninterrupted climb as in recent months, its high carry of nearly 13% offers a decent cushion against potential weakness.

«The Brazilian Central Bank has recently initiated what we anticipate will be an extended cutting cycle, lowering the overnight rate by 25 bps to 14%. Although the local yield curve is pricing in cuts of just over 320 basis points (bps) to January 2018, we believe the total cycle – subject to meeting the requisite fiscal milestones – could total about 500 bps or more, bringing nominal rates back to single digits. Thus, while local rates are less attractive than they were at the height of the political crisis, they offer potential to rally further, particularly given their starting point which is by far the highest in the G-20! An even bigger prize would be to reduce the high real rate burden the country is facing – nearly 6%. Just as poor fiscal management took Brazilian securities into a downward spiral, reform could improve valuations on Brazilian sovereign and corporate credit versus those of higher-rated EM peers. As a result, we believe the country’s fixed income assets continue to present compelling opportunities.» They conclude.

 

Don’t Let a Busy Fall Calendar Distract You from Longer-Term Fundamentals

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Regular readers of the CIO Weekly Perspectives know that we try to relate our observations on topical news to our medium-term investment outlook. Yet a “weekly” commentary inevitably gets a little caught up in current headlines.

So this week we try to dig beneath the surface of the headlines that are dominating current markets. There are already plenty of deeper indicators of what the world might look like in 2017-18.

An Eventful and Uncertain Fall Ahead

For sure, there’s a lot to dig through between now and the end of the year: quarterly earnings, GDP growth, employment figures, and, of course, central bank policy decisions. After 20 weeks of corporate bond purchases, last Thursday Mario Draghi’s pronouncements left markets looking to December 8 for more hints about whether QE would be extended or “tapered”. Six days later we will have a Federal Reserve announcement likely to increase short-term rates. And, if you haven’t heard, the U.S. has a big vote on November 8, Italy has a tricky referendum to get through on December 4 and Spain may be forced into yet another general election before the end of the year.

These events are likely to move markets—understandably. Some will undoubtedly feature in forthcoming CIO Perspectives. But, as investors become consumed with these current events, storm clouds seem to be gathering and recession risks rising.

Recession Risks Are Rising

Near term economic data looks decent enough. U.S. GDP for the second half of the year will likely show an improvement on the first half and, while it’s early days in the Q3 earnings season, it looks like S&P 500 earnings, while nothing to write home about, will have modestly improved.

Nonetheless, that only brings us to flat earnings growth, year-on-year, and it marks six straight quarters of weak reports. Moreover, the Bureau of Economic Analysis’s National Economic Accounts reveals this to be a problem across U.S. businesses, not just among the S&P 500 elite group of companies.

Housing starts have slowed, retail sales and consumer confidence are softening and employment growth seems to be peaking. The inflation we are experiencing is not benign: non-discretionary costs such as energy, housing and healthcare are rising, but not discretionary costs—a characteristic of recessions, historically. Wages are rising, which will put pressure on companies’ margins. And of greatest concern, credit conditions appear to be tightening: recent editions of the Federal Reserve Board’s Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) report tightening lending standards for all companies, but especially smaller firms.

We Are Late Into an Elongated Cycle

These are all late-cycle indicators. We should not turn a blind eye to them just because GDP and earnings have ticked up slightly on a weak first half of the year.

Let’s be clear: I’m not calling for a recession to start on January 1, or for investors to sell all their risk assets. Indeed, this has been an elongated business cycle and there is a good chance that it can be elongated still further. Even casual observers of this economic cycle will conclude it has been quite unique. What might lead us to get more optimistic in our outlook? Political leadership doing their job: corporate tax reform, infrastructure investment, and a more sensible regulatory environment.

We have written a lot over recent weeks about the growing probability of extra fiscal stimulus around the world, for example. Central banks have been keeping things afloat for years and will continue to try to do so.

But it’s also true that central banks are conceding the limits of their influence and that politics can easily get in the way of fiscal plans and structural reforms. Even in the best-case scenario, no central bank or government has ever been able to legislate the business cycle out of existence.

So this is just a timely reminder that the cycle will turn at some point, and that a couple of quarters’ headlines can obscure late-cycle dynamics that are appearing in the data. Digging down to these underlying dynamics keeps us relatively cautious on risky assets.

Neuberger Berman’s CIO insight by Joseph V. Amato
 

Cash Allocations are Close to 15-Year Highs

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The BofA Merrill Lynch October Fund Manager Survey shows global investor risk-aversion is growing as cash allocations increase to near-15-year highs. “This month’s cash levels indicate that investors are bearish, with fears of an EU breakup, a bond crash and Republicans winning the White House jangling nerves,” said Michael Hartnett, chief investment strategist at BofA.

Manish Kabra, European equity quantitative strategist, added that, “Although investors see an EU-disintegration as a big tail risk, European fund managers surveyed are more optimistic about the economic growth outlook for the Eurozone and expect stronger inflation.”

Other highlights include:

  • Cash levels jumped from 5.5% in September to 5.8% this month. Investors’ average cash balance was last this high in July 2016 (post-Brexit vote) and in Fall 2001.
  • Investors identify fears of an EU breakup, a bond crash and a Republican winning the White House as the most commonly-cited tail risks.
  • With inflation expectations at a 16-month high and perceptions of developed market equity and bond valuations at record highs, investors are no longer underweight in commodities for the first time since December 2012.
  • Rotation out of healthcare/pharma, REITs and bonds, into banks, insurance, equities, commodities and EM.
  • Investors cite Long high-quality stocks, Long US/EU IG corporate bonds and minimum volatility strategies as the most crowded trades.
  • Allocation to EM equities rises to the highest overweight in 3.5 years, from 24% last month to 31% in October.
  • Allocation to U.S. and Eurozone equities is unchanged from last month, while allocation to UK equities falls to net 27% underweight from net 24%.
  • Allocation to Japanese equities improves modestly to net 3% underweight from net 8% underweight last month.

You can download the report attached.
   

GAM completa la adquisición de Cantab Capital Partners y lanza dos nuevas estrategias cuantitativas bajo el nombre GAM Systematic

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New Quantitative Strategies Launching Under GAM Systematic Name
Foto: waferboard . GAM completa la adquisición de Cantab Capital Partners y lanza dos nuevas estrategias cuantitativas bajo el nombre GAM Systematic

GAM ha completado la adquisición de Cantab Capital Partners, anunciada el pasado 29 de junio. Cantab, un gestor sistemático de multiestrategias con sede en Cambridge, Reino Unido, gestiona 4.100 millones de dólares en activos para clientes institucionales en todo el mundo (a 1 de octubre de 2016). La tecnología de Cantab y su equipo de más de 30 científicos, dirigidos por el Dr. Ewan Kirk, forman la piedra angular de GAM Systematic.

Esta nueva plataforma de inversión será codirigida por Adam Glinsman, CEO de Cantab, y Anthony Lawler, director de Gestión de Carteras en el grupo de Soluciones de Inversiones Alternativas (AIS) de GAM.

Precisamente bajo el nombre de GAM Systematic se lanzarán dos nuevos fondos UCITS -sujeto a aprobación regulatoria- que, basados en las estrategias de inversión y metodología de Cantab, ofrecerán liquidez diaria y se estructurarán para ser efectivos en costes.

La estrategia sistemática neutra de mercado global de renta variable contendrá los modelos centrados en renta variable de Cantab. Invertirá en acciones líquidas a nivel mundial utilizando análisis y sistemas de contratación propios, sin tomar beta del mercado de renta variable. Durante un ciclo de tres años, la estrategia tendrá como objetivo ofrecer atractivos rendimientos con una volatilidad anual del 6-8%.

La estrategia sistemática macro diversificada será un producto multiestrategia, multiactivo, en función del fondo macro base establecido por Cantab, lanzado en 2013. Tratará de generar rendimientos no correlacionados a las clases de activos tradicionales mediante la identificación de las fuentes persistentes y recurrentes de retornos en más de 100 mercados de divisas, renta fija, índices de renta variable y materias primas. Durante el ciclo, se espera que produzca rendimientos atractivos con una correlación insignificante a los mercados tradicionales y la volatilidad anualizada de 10-12%.

 

Despite Positive Asset Flows, Negative Market Impacts Lowered AUM in the European ETF Industry in September

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The latest European ETF Market Review from Thomson Reuters Lipper shows that negative market impacts led—in spite of net inflows—to lower assets under management in the European ETF industry in September (€480.1 bn for September, down from €480.4 bn at the end of August). 

According to Detlef Glow, Head of EMEA research at Thomson Reuters Lipper and author of the report, the decrease of €0.3 bn for September was mainly driven by negative market impacts (-€2.4 bn), while net sales contributed a positive €2.1 bn to the assets under management in the ETF segment.

Other highlights include:

  • Bond ETFs (+€1.3 bn) posted the highest net inflows for September.
  • The best selling Lipper global classification for September was Bond Emerging Markets Global in Local Currencies (+€0.8 bn), followed by Equity Emerging Markets Global (+€0.5 bn) and Equity Global (+€0.5 bn).
  • iShares, with net sales of €1.0 bn, maintained its position as the best selling ETF promoter in Europe, followed by Vanguard (+€0.8 bn) and UBS ETF (+€0.4 bn).
  • The ten best selling funds gathered total net inflows of €3.1 bn for September.
  • Vanguard S&P 500 UCITS ETF USD (+ €0.7 bn), was the best selling individual ETF for September.

You can read the report in the following link.

Lennar cierrra el Lennar Multifamily Venture en 2.200 millones de dólares

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Lennar Announces Final Close of $2.2 Billion Lennar Multifamily Venture
Foto: Bradley Davis. Lennar cierrra el Lennar Multifamily Venture en 2.200 millones de dólares

Lennar Corporation ha anunciado que su filial LMC ha recibido 250 millones de dólares adicionales para su Lennar Multifamily Venture («LMV»), completando así los fondos para este vehículo de inversión en promociones multifamiliares a largo plazo. Con un total de 2.200 millones de dólares, la firma de Miami  está bien capitalizada para promover y poseer comunidades multifamiliares clase A en 25 diferentes mercados clave de Estados Unidos.

Lennar lanzó LMC en 2011, y desde entonces la compañía ha sido uno de los promotores más activos de la nación. La firma tiene actualmente alrededor de 13.300 apartamentos en 45 comunidades -ya funcionando o en construcción-, y contando con estas, sus previsiones de promociones superan los 7.000 millones y más de 23.000 apartamentos. La compañía construye edificios de gran altura, de altura media, y comunidades de apartamentos con jardín.

La propiedad de LMV incluye seis relevantes inversores institucionales: fondos de pensiones extranjeros, fondos soberanos, y compañías de seguros. Lennar también tiene un compromiso de 504 millones en el vehículo.

When Politics and Policy Collide

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Political risk has significant implications for economic growth and market sentiment. While such risk has traditionally been more associated with emerging markets, it has become increasingly apparent in developed markets in the aftermath of the global financial crisis.

Consequently, Standard Life Investments has established an in-house process for examining political risk. The aim is to identify how these risks contribute to policy uncertainty and the subsequent potential for reduced economic growth.

The system categorises risks as either institutional or cyclical, before identifying the precise factors that create a risk to investments. Developed markets most commonly exhibit cyclical risk in the form of elections, and we have isolated three factors that amplify the risk that these cyclical events carry.

  • Populism – the increased popularity of anti-establishment parties and policies
  • Fragmentation – the move of political systems from two party to multi-party regimes, as seen in Spain
  • Polarisation – a hardening of ideological divisions across parties and electorates, as seen in the US

These factors bring added policy uncertainty and the potential for aftershocks following political events in developed markets. By understanding how politics and policy measures are intertwined, we can test the likely effects of political events on investments.

Stephanie Kelly, Political Economist at Standard Life Investments commented “Our approach to political analysis is based on the view that one of the key mechanisms through which political risk is transferred to the investment outlook is through policy uncertainty. The theory suggests that policy uncertainty can reduce growth prospects for an economy because corporate investment slows and consumers delay spending on big ticket items.

“During our analysis of political risk, we assessed the impact of policy uncertainty on a number of major economic and market factors; the results indicate that such an uncertainty shock is usually associated with lower GDP growth, as well as downward pressure on national equity markets and the outlook for interest rates.

“Given that policy uncertainty has a tangible effect on economic and market indicators in developed markets, understanding the political dynamics and structures that drive this uncertainty is crucial.”

Asset Managers Must Increase Their Commitment to Digital and Social Media

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Clients across all demographic groups are increasingly interested in using digital media to interact with their asset manager. It is ever more important for managers to provide up-to-date and relevant information via digital channels, Cerulli Associates‘ European Marketing and Sales Organizations 2016: How to Thrive in an Evolving Landscape report finds. However, fewer than two-thirds of managers update their website daily and more than 7% believe that updating their site just once a month is satisfactory.

Four in five of the managers surveyed by Cerulli assign responsibility for digital and social media to their marketing departments and few managers currently have dedicated, stand-alone teams for managing these channels. In addition, 80% of the asset managers Cerulli surveyed employ just one dedicated person to manage their social media communications.

«Asset managers have traditionally been reluctant to devote significant manpower to digital and social media,» says Barbara Wall, managing director of Cerulli Europe. «However, their clients’ increasing use of these channels will put pressure on managers to devote greater resources to this aspect of their business. The vast majority still hand responsibility for digital and social media management to their marketing department rather than to distribution specialists. This needs to change if they are to provide the level of service today’s clients demand.»

Cerulli’s research shows that the typical asset manager’s social media budget is less than €100,000 (US$110,825). Given that clients increasingly wish to communicate with their asset managers digitally, it is surprising that the majority of managers’ outlay on social media is relatively modest.

The good news is that slightly more than half (54.5%) of asset managers expect to increase their overall digital and social media headcount over the next 12 months. This suggests that they are coming to realize the value of this form of dialogue. However, it remains to be seen whether managers’ current commitments to increase headcount will be sufficient.

Cerulli’s research also found that only 6.7% of European asset managers have a dedicated compliance specialist for digital and social media. «Given the sensitivity with which asset managers must handle their communication with clients, it is surprising that so few firms employ a dedicated compliance specialist for their digital and social media output,» says Laura D’Ippolito, an associate director in Cerulli’s European retail team. «If a controversy were to arise, it would inevitably lead to questions about why compliance appears to be low on most managers’ list of priorities.»

This and several other new findings make up Cerulli Associates’ European Marketing and Sales Organizations 2016 report.
 

Man Group adquiere Aalto y lanza Man Global Private Markets

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Man Group Acquires Aalto and Launches Man Global Private Markets
Foto: yoshika azuma . Man Group adquiere Aalto y lanza Man Global Private Markets

Man Group ha anunciado un acuerdo para adquirir la totalidad del capital social de Aalto Invest Holding y la creación de Man Global Private Markets (“Man GPM”), como oferta de la firma en mercados privados, para dotar a los clientes de acceso a inversiones a más largo plazo con un perfil de riesgo-retorno complementario a la gama actual de productos.

Aalto es un investment manager especializado en activos reales con presencia en Estados Unidos y Europa que al 30 de septiembre de 2016 gestionaba 1.700 millones de dólares, y en cuya base de clientes predominan los grandes inversores institucionales. Aalto será la plataforma de activos reales de Man GPM. Fundada en 2010 por Mikko Syrjänen y Petteri Barman, Aalto se especializa en la gestión de estrategias de renta variable inmobiliaria y deuda, incluyendo inversiones directas en viviendas unifamiliares en los EE.UU. y préstamos a real estate comercial y residencial en Europa y Estados Unidos.

La Compañía, que es 100% propiedad de sus fundadores y miembros del equipo directivo (actual y anterior), ha multiplicado por cuatro su tamaño en los últimos cuatro años. Cuenta con 33 empleados, sede en Londres y oficinas en Estados Unidos y Suiza. Se espera que la adquisición se complete en enero de 2017, ya que está sujeta a aprobaciones regulatorias y otras condiciones habituales.

Man Group cree que la adquisición le proporciona un componente básico para la expansión en estrategias de mercados privados; y dota a los clientes de acceso a una serie de estrategias de activos reales con resultados muy satisfactorios y muy diferenciadas; además de ampliar su presencia en los EE.UU.

Con el tiempo Man GPM desarrollará estrategias en mercados privados, tales como real estate, crédito e infraestructuras. Una vez finalizada la adquisición, Aalto será una pieza central de Man GPM, proporcionando una plataforma sobre la que la empresa podrá desarrollar esta nueva oferta para los clientes.

El equipo de gestión de Aalto continuará bajo la dirección de los fundadores de la compañía. Además, Barman y Syrjänen serán nombrados corresponsables de Activos Reales dentro la nueva sociedad, asumiendo un amplio papel en el desarrollo estratégico de su oferta en activos reales. El proceso de inversión de Aalto no sufrirá ningún cambio como resultado de la adquisición y se mantendrá la independencia de inversión. Barman y Syrjänen reportarán a Jonathan Sorrell, presidente de Man Group, y formarán parte del Comité Ejecutivo de Man Group.

 

La SEC nombra a Melissa Hodgman directora asociada en la división de Enforcement

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Melissa Hodgman Named Associate Director in SEC Enforcement Division
Foto: Scott S . La SEC nombra a Melissa Hodgman directora asociada en la división de Enforcement

La SEC ha anunciado el nombramiento de Melissa Hodgman como directora asociada de la división de Compliance (cumplimiento). Hodgman, que sucede a Stephen L. Cohen -que salió de la SEC en junio-, comenzó a trabajar en la división de Cumplimiento en 2008 como abogado. Se incorporó a la unidad de Abuso del Mercado en 2010 y fue promovida a directora adjunta en 2012.

Hodgman ha investigado o supervisado decenas de recomendaciones de acciones legales, relacionadas con diferentes malas prácticas, incluyendo: la primera acción de la SEC contra de un broker por no presentar SARs en su debido momento; cargos de fraude contra el CEO de una firma de Wall Street, la firma, miembros de su familia y colaboradores profesionales acusados de tomar secretamente el control y manipular las acciones de empresas chinas a las que supuestamente estaban orientando en el  proceso de financiación y salida a bolsa en los Estados Unidos; y cargos contra Charles Schwab Investment Management, Charles Schwab & Co., y dos ejecutivos por hacer declaraciones engañosas relativas al Fondo Schwab YieldPlus y no establecer, mantener y hacer cumplir políticas y procedimientos para prevenir el mal uso de información relevante no pública.

Hodgman ha liderado el Grupo de Trabajo Transfronterizo de la división de Cumplimiento, que proporciona asesoramiento y ayuda sobre actores e implicaciones internacionales. También es cofundadora del Chair’s Attorney Honors Programen el que fue representante de Cumplimiento, y es miembro del comité de contratación de la división de Cumplimiento de la sede central en Washington DC.

Antes de unirse a la Comisión, trabajó como asociada en Milbank, Tweed, Hadley & McCloy en Washington. Cuenta con un máster en derecho especializado en valores y regulación financiera por la Universidad de Georgetown, la misma donde había obtenido su título en derecho previamente.