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Dangers of the 'dash for duration'

P3-4HALLOWEEN: WHAT

HAUNTS INVESTORS?

P5CENTRAL BANKS CAN

SILENCE THE CYNICS

P7SEVEN CHALLENGES

OF EM CREDIT

Antipodes Partners' Jacob Mitchell explains why the continual chase for duration is the single greatest risk in portfolios today (page 2)

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Jacob MitchellAntipodes

quity investors today are undoubtedly giddy for structural growth and

quality, with the price dispersion between growth and value stocks now at the widest levels ever.

However, rather than framing today’s market through the lens of value versus growth, we prefer to examine why stocks on a high P/E have benefitted most from the recent decline in rates.

We often hear about the mad scramble for yield, but if this was truly the case, investors would be buying high dividend paying banks and other cyclicals. We contend equities are increasingly behaving like bonds, with a stark contrast between the valuations of long and short duration stocks.

Growth stocks, by definition, are a claim on distant cash flows. This means this segment of the market does well when long-term rates fall and the yield curve flattens. As the economic environment has deteriorated and rates have fallen – which has had a negative impact on cyclical and low P/E stocks – demand for high P/E stocks has accelerated.

The continual chase for duration is the single greatest risk in portfolios today, with many

investors simply disregarding the underlying quality of many highly valued businesses.

The growth-at-any-price investor has constantly argued the value style is dead because the world is likely to experience an environment like Japan. The Fed has stated it does not want the US economy to go the way of Japan, but we would argue the reason the equity risk premium stayed high in Japan for so long was because rates were kept very low. The worst Japanese companies never went broke.

Back to today, we are living through one of the most disruptive and innovative periods in history, but the borrowing landscape means companies are not going under. Nevertheless, the success of the FAANGs is undoubtedly putting pressure on many incumbents, which have borrowed money and prioritised buying back stock rather than focusing on innovation.

What does this mean? We believe half of the US market is on the cusp of a severe earnings recession. When capital markets become more discerning, many businesses will not be able to stand the test of time.

Dangers of the 'dash for duration'

izwe Nxedlana has been appointed CEO of

Ashburton Investments, the asset management arm of FirstRand Group.

Nxedlana has been with FirstRand Group for more than a decade, previously as First National Bank's chief economist and most recently as CEO of FNB’s wealth and investment activities. Nxedlana remains CEO of this business.

"Asset management is an important component of FirstRand’s portfolio diversification, particularly the building out of its invest-and-save strategies. Sizwe is a very experienced professional and, given his track record, is well placed to drive Ashburton's next growth phase," FirstRand COO Mary Vilakazi says.

Nxedlana says his focus will be on working with the existing teams to leverage more of FirstRand Group’s capabilities.

"Integrating our investment capabilities through a single investment process and unified digital platform will be an important focus for both FNB Wealth and Investments and Ashburton," he adds.

"We will continue to streamline the investment processes through both businesses by managing existing and new portfolios to achieve promised client outcomes, winning new mandates and ensuring continued growth in AUM."

Ashburton names Sizwe Nxedland as new CEO

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WWW.KL-COMMUNICATIONS.COM OCT 19

"The continual chase for duration is the single greatest risk in portfolios today"

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Thomas SørensenNordea

Brad TankNeuberger Berman

Jeremy Lang Ardevora

e recently watched in disbelief as parts

of the Amazonian rainforest burned out of control, largely due to a dramatic increase in deforestation.

About 17% of the rainforest has been destroyed over the past 50 years and losses are rising. If society wants to ensure our planet’s forests and rainforests will be here for future generations, we must get serious

e still believe most people are too relaxed about

the degree of negative impact a prolonged trade war will have, but at least they have come around to the idea that a trade war is here to stay. This is good for stock markets since, as the cliché goes, more is now in the price.

In addition, and of greater impact, central bankers appear to have changed their view on

lobal growth downside risks are centred on the US

consumer.The US remains the largest

swing factor in the global economy. We see little that should disturb the current trend. Unemployment remains low, wage gains are stable to accelerating and businesses report increasing interest in hiring.

However, consumer

— and investors can play an important role.

While these forests may seem distant from our everyday lives, consumers and corporates have the ability to effect meaningful change. Consumer demands, expectations and buying decisions are powerful and drive increasing business momentum towards more sustainable and less environmentally harmful solutions.

the trade war. There has been a remarkable flip, especially in the US, on the likely path of interest rates. The Fed has moved from strongly signalling an intention to raise interest rates earlier in the year, to a position of clearly signalling multiple rate cuts.

This reflects a clear acceptance the trade war is here to stay and will have a dampening impact on growth, which requires a policy response.

spending is not formulaic but tied to households' desire for precautionary savings and expectations for future earnings.

We may not exactly be able to talk ourselves into a recession, but we will be focused on the interaction between actual consumer spending and US consumer expectations, as a change in household spending patterns in the US is the most significant risk to global growth.

"17% of the rainforest has been destroyed over the past 50 years and losses are rising"

"The trade war is here to stay and will have a dampening impact on growth"

"A change in household spending in the US is the most significant risk to global growth"

Halloween: What is 'haunting' investors?

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David Katimbo-MugwanyaEdenTree

Rogier QuirijnsCohen & Steers

Ben McEwan Sarasin

ith yields having collapsed on the back of heightened

global geopolitical uncertainty, gilts have arguably crossed the Rubicon in regard to use as income-generating assets.

It is imperative for active managers to navigate this lower-income environment with care, steering clear of undue risks to investors' capital.

While monetary policy has been the instrument of choice

he World Economic Forum highlighted environmental

risks are both the most probable and most material risks facing the global economy.

The 'failure of climate-change mitigation and adaptation' was recognised as the second most impactful and likely risk facing the world. The results of climate inaction are becoming increasingly clear, with the physical manifestations of climate

he impact on the UK property market from a

Labour Party administration led by Jeremy Corbyn could even be more damaging than the fallout from a UK exit from the European Union.

Corbyn's long-held agenda is not business friendly, which could increase the risk within the office real estate space. In addition to this, higher taxes would also hit consumers hard and, by

post-financial crisis, doubts are beginning to surface about the sustainability of this strategy in tackling the next downturn.

It is therefore crucial investors also take stock of the available policy toolkit, particularly as the universe of negative-yielding instruments expands. Going forward, it is more likely fiscal measures will bear a greater burden of the policy efforts required to boost growth.

change already increasing. Accordingly, imminent action to drive emissions lower is required from governments, corporates and civil society.

Mitigation involves identifying industries and companies exposed to the reduction of fossil fuel usage. Meanwhile, adaptation requires reducing the vulnerability of exposed industries and companies to the impacts of climate change.

extension, the retail property market.

One of Corbyn's first targets would likely be high-end London houses. In a bid to try increase availability of affordable homes in the capital, a Corbyn-led Labour government would likely look to introduce curbs on foreign property ownership – which would undoubtedly have a detrimental impact on prices across the board.

"Gilts have arguably crossed the Rubicon for use as income-generating assets"

"The physical manifestations of climate change are already increasing"

"Corbyn could even be more damaging than the fallout from a UK exit from the EU"

Halloween: What is 'haunting' investors?

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Nikolaj SchmidtT. Rowe Price

here currently seems to be a lot of cynicism about the power of central banks to

influence global growth.A growing number of people

believe rate cuts are no longer as effective as they once were, and central banks are therefore effectively impotent. I disagree.

Faced with powerful headwinds, such as deleveraging and uncertainty shocks, it is hardly surprising rate cuts have had less of an impact on growth than we would usually expect. However, this does not mean cuts have become inherently less effective – rather, they have not appeared as potent as in the past because of the context in which they have been administered.

Central bank rate cuts can still be effective, and the current phase of easing has the potential to offer much stronger support to the global economy than the cynics believe. Consensus opinion underestimates the amount of global accommodation

administered: US 10yr yields have fallen by ~180bps, German 10yr yields have dropped by ~130bps and the 30yr Japanese rate has fallen by ~55bps.

This shows we are living through a phase of a substantial and synchronised – though uncoordinated – easing of global conditions. In addition, according to our internal models, we are at the precipice of a positive response from the interest rate-sensitive components of demand – such as in autos and housing.

Easing works with a lag. The absence of a response to date does not mean policy has stopped working, though it may seem this way. In the absence of any new shocks, I believe we are close to an inflection point in growth at which the transmission of easy financial conditions will kick in and spending on durable goods and capex will follow.

This should help to keep a recession at bay for a while yet – possibly for up to three years.

Central banks can silence cynics

wiss Life Asset Managers has launched a new

open-ended diversified pan-European property portfolio, the European Thematic Income & Growth Fund.

The strategy aims to exploit opportunities in pan-European property markets resulting from evolving technologies and demographics, as well as new infrastructure and continued urbanisation.

Swiss Life provides alignment with investors via a €150m long-term co-investment. Management is led by the London team of Swiss Life at Mayfair Capital, under the guidance of senior fund manager Maureen Mahr von Staszewski.

Mahr von Staszewski comments: "The strategy focuses primarily on well-located city assets benefiting from a strong urbanisation trend, or in key regional hubs with exposure to increased connectivity. It incorporates the flexibility to consider more specific sub-markets supported by strong evolving themes, as well as medium-sized cities evidencing long-term economic momentum.

"Demographic shifts, the extension and revitalisation of urban infrastructure, improved connectivity, digitalisation, as well as evolving lifestyle and environmental expectations are among the themes profoundly impacting society's requirements for leased physical space."

Swiss Life unveils thematic property strategy

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"It is hardly surprising cuts have had less of an impact on growth"

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Gregory MariaschPembroke

Luc FilipSYZ

oing into the Argentina election, we lacked clarity on what an

Alberto Fernandez government would look like or do.

Fernandez's campaign continued to affirm that too much austerity could not be imposed on the people, leading some to believe a very tense situation would arise between his potential government and external private creditors, as well as with the International Monetary Fund.

Argentina's financial and economic situation deteriorated early in the year, as the central bank continued to lose foreign exchange reserves and inflation shot up again.

Following his victory over former president Mauricio Macri, Fernandez is now faced with

he spectre of Japanification has taken its grip and investors

need a mindset change. Japan's zombie decades were

preceded by market euphoria. The period's spectacular indulgence was matched only by eyewatering asset prices. At the apex of property valuations, it was said if you were to drop a ¥10,000 note in Tokyo's Ginza district, it would be worth less than the scrap of ground it graced. The subsequent bust sent Japan drifting toward the economic doldrums.

The parallels between Japan's plunge into the abyss of stagnant growth and elusive inflation and Europe's current predicament are inescapable. Meanwhile, the US economy may have gotten

initial conditions worse than those imagined even after the primary elections.

In the run up to the election, the International Monetary Fund decided to withhold disbursements under the existing stand-by arrangement until the outcome of the election had been made clear.

Meanwhile, MSCI recently opened a formal consultation with investors on whether Argentina should remain classified as an emerging market in its equity indices.

While it was somewhat futile to speculate in the post-primary-to-election period, investor viewpoints on Fernandez's regime will start to solidify once the president-elect begins to articulate his plan.

as good as it gets. It is not only Europe that could feel the cold wind of economic anaemia, but the entire developed world.

Japanification is not just another piece of jargon in the economic lexicon. It has deleterious real-world implications. Post-bust, a lack of faith in the future dried the arteries of Japan's financial system.

For investors, Japanification has equally serious consequences. Low rates are not a fleeting anomaly, but rather a new normal investors must come to terms with. By drawing from lessons of the past and adopting unconstrained and flexible solutions, they can evolve alongside the transforming investment landscape.

New era for Argentina

Japanification takes hold

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Trium continues expansion with COO hire

"Views will solidify once he articulates his plan"

"Japanification has deleterious real-world implications"

rium Capital, the alternative asset manager,

has continued its recent business expansion with the appointment of Patrick Mang to the newly created role of chief operating officer.

The highly experienced Mang joins from HSBC, where he was head of innovation for global markets.

Over the last 12 months, Trium has been expanding its innovative investment offering. In September, Trium brought quantitative investment group Sabre Fund Management – one of Europe's longest-running hedge fund firms – into its multi-boutique structure. Trium also added the ESG Emissions Impact Fund to its suite of strategies last month.

Shenan Dhanani, co-head of Trium Capital, says: "At Trium, we are committed to building out our highly experienced team, which is integral to promoting long-term sustained investment performance. Patrick exemplifies the calibre of talent we look for as we grow our business and look to expand the suite of innovative strategies we offer clients.

"Patrick's deep well of expertise, as well as his proven ability to think outside the box and his intimate knowledge of the investment, regulatory, technological and scientific fields will help Trium become a leading provider of disruptive alternative solutions."

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Cathy HepworthPGIM

he nuances in EM corporate bonds continue to present compelling

opportunities for investors today.However, the characteristics of

many EM companies often make the fundamental analysis process more challenging than in DMs.

While the spread and deleveraging metrics support a relative-value case for EMs, the myriad idiosyncrasies across the asset class also create inefficiencies that managers with local knowledge and extensive experience can exploit. Here are the factors an active credit manager in EMs must consider:

Political considerations of SOEs. A significant difference between the DM and EM corporate sectors is the outsized presence of SOEs in EMs. More than 40% of the benchmark CEMBI Index is comprised of SOEs. There are often cases of weak reporting and infrequent information flows, which means evaluating SOEs requires a careful analysis of politics and policies within the respective country.

Added complexity of inflation. Inflation in some EM countries is high, which injects another layer of complexity. For example, the inflation rate in some countries, such as Argentina, is so high that hyperinflationary accounting measures are needed.

Complex structures. EM organisations tend to be more complex and multi-layered, possibly consisting of tens or even hundreds of subsidiaries.

The complex corporate structures are the result of corporate tax planning strategies or, in certain cases, attempts to obfuscate shareholders.

Differing governance standards. Board independence varies and may depend on whether the company is state owned, privately owned or listed. Another frequent governance issue is that EM corporates tend to transact with related entities more frequently than DM counterparts.

Non-existent track records. The EM corporate sector continues to grow rapidly – more than doubling in recent years. Historical data, performance throughout a credit cycle and general track record can be non-existent or difficult to find for debut issuers, thus adding a challenge to the credit analysis.

Opaque reporting. Although

Seven challenges of EM credit

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accounting standards and transparency have progressed over the last decade, some EM companies still follow local accounting regimes rather than IFRS. For example, Mexican companies often do not report statements of cash flow with results and only do so to the stock exchange. These are frequently only in Spanish. Also, in countries like Russia, some information is released through the media. The reliability and accuracy of such information must be carefully examined.

Difficulties establishing a baseline. Historical information of EM corporates can be difficult to compare and establish a baseline. Indeed, some EM companies frequently change currency, thus necessitating changes in financial statements. Others do not always provide pro-forma statements to reflect M&A activity.

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"EM credit continues to grow rapidly – more than doubling in recent years"