Brazil’s economy rises above the political storm

In our view, the extraordinary thing about Latin America’s largest economy is not the political turmoil that has more or less been par for the course in recent years – but rather the country’s resilience in the face of such upheavals. Far from hitting the buffers, the economy continues to make headway, while capital inflows have remained steady. Year-to-date, for example, Brazilian equities returned 21.1%, while over 12 months the return has been 24.6%. This compares well with both developed market equities (the UK, for instance, returned 11.8% year-to-date and over 12 months) and many other emerging market countries (Colombia, for example, with 14.4% year-to-date and 11.0% over 12 months)[1].

Two things have helped steady the ship. First, timely action from the Central Bank of Brazil brought inflation under control. Second, a reform programme under the auspices of Henrique Meirelles, finance minister, has done enough to give investors confidence in Brazil’s forward trajectory. Here, a key step is a plan to overhaul the country’s generous pensions system. Should Congress approve the plan, this should help address Brazil’s budget deficit and provide a boost to the economy.

Rogério Poppe – ARX, a BNY Mellon company

[1] FTSE All World Index, US$ as at 31 August 2017

In our view, the extraordinary thing about Latin America’s largest economy is not the political turmoil that has more or less been par for the course in recent years – but rather the country’s resilience in the face of such upheavals. Far from hitting the buffers, the economy continues to make headway, while capital inflows have remained steady. Year-to-date, for … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
How many man hours to turn on a lightbulb and why should investors care?

Technological progress can have surprising consequences. Take the cost of producing light, for example.

The environmental economists Roger Fouquet and Peter Pearson have retraced this development in England. One hour of light (referred to as the quantity of light shed by a 100-watt bulb in one hour) cost 3,200 times as much in 1800 in England as it does today, amounting to just over 150 of today’s US dollars. In 1900, it still cost around 5 dollars. By 2000 the cost was 5 US cents.

This technological advance can also be thought of in terms of the amount of time an average worker needed to labour in order to earn enough for the 100-watt bulb to glow for an hour. In 1750 BC, the people of Babylon used sesame oil to light the lamps, and had to work for 400 hours to produce the said amount of light. In around 1800, using tallow  candles, 50 hours of work was required. Using a gas lamp in the late 19th century, three hours were necessary. Using an energy-saving bulb today, you will have to work for the blink of an eye – a second. This amounts to a phenomenal advance in productivity and thus prosperity.

Over recent decades, the combination of a larger pool of global labour, transformative technologies and the expansion of global value chains has led to a massive supply shock that has generated a wave of ‘good’ disinflation which advances prosperity for the world’s population as a whole.

Brendan Mulhern – Newton, a BNY Mellon company

Technological progress can have surprising consequences. Take the cost of producing light, for example. The environmental economists Roger Fouquet and Peter Pearson have retraced this development in England. One hour of light (referred to as the quantity of light shed by a 100-watt bulb in one hour) cost 3,200 times as much in 1800 in England as it does today, … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Total Recall: the memory chip supply/demand sweet spot

Over the past 20 years, overcapacity has created wildly cyclical pricing for both DRAM and NAND devices[1], which in turn has led to fewer manufacturers. For DRAM devices, just three global players now account for 95% of supply[2]; for NAND devices there are just five companies producing 92% of global supply.[3]

In consequence, supply discipline has improved – even as demand has surged thanks to developments in artificial intelligence and ‘cloud’ computing. Pricing has soared as a result – with spot prices for NAND chips up 50% and DRAM spot prices up 115% over the past year.[4]

While we recognise that the industry is a cyclical one, we believe the current/supply dynamic is good news for companies involved in the sector, particularly those that have committed to shareholder rights.

Caroline Keen – Newton, a BNY Mellon company

[1] Dynamic Random Access Memory (DRAM) and NAND Flash memory chips are commonly used to store data in computers, smartphones and digital cameras.

[2] The Register: ‘Guess who’s getting fat off DRAM shortages? Yep, the DRAM makers’, 18 May 2017

[3] IHS Markit: ‘NAND Memory Market Tracker’, Q2 2017

[4] Dow Jones: ‘Samsung Topples Intel as World’s Biggest Chip Maker’, 30 July 2017. Data from DRAMeXchange, a publication that tracks memory chip sales and prices.

Over the past 20 years, overcapacity has created wildly cyclical pricing for both DRAM and NAND devices[1], which in turn has led to fewer manufacturers. For DRAM devices, just three global players now account for 95% of supply[2]; for NAND devices there are just five companies producing 92% of global supply.[3] In consequence, supply discipline has improved – even as … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
A parting of ways for the US and Europe?

An uptick in Eurozone economic data as well as relative political stability are among the factors most likely to drive a wedge between the performance of the US and European economic blocs in coming months. Recent PMI readings in Europe were far better than expected, with some modest semblance of inflation coming back into the system. The ECB acknowledged as much when at the end of June its President Mario Draghi said the European economy is on the cusp of transitioning from deflation toward reflation.

Meanwhile, other lead indicators in Europe, including GDP growth and earnings revisions, continue to improve driven by cyclical sectors. Despite the recent pullback in oil and commodity prices, cyclical sectors like consumer discretionary and materials have seen strong year-over-year earnings trends as underlying commodity prices remain higher than 12-18 months ago.

Mark Bogar – The Boston Company, a BNY Mellon company

An uptick in Eurozone economic data as well as relative political stability are among the factors most likely to drive a wedge between the performance of the US and European economic blocs in coming months. Recent PMI readings in Europe were far better than expected, with some modest semblance of inflation coming back into the system. The ECB acknowledged as … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
In rude health?

“Nobody knew that healthcare could be so complicated”. So wrote an exasperated President Donald Trump in February 2017 as he struggled to get to grips with a replacement for the Affordable Care Act, the Obama-era law that expanded affordable medical cover to low-income Americans.

Perhaps without meaning to, Trump stumbled across one of the universal truths about healthcare investing: It can be really, really complex. There are hundreds of healthcare companies we could invest in. At most, we target between 10 and 12 of those. To get from that wider opportunity set to just a handful of investable ideas is where the real hard work comes in.

One strategy is to focus on innovation. Beyond the list of top-ten pharmaceutical companies. there’s a long tail of smaller, incredibly innovative businesses that are creating the drugs and therapies of the future. By focusing on them, we think we can uncover strong, investable ideas which are not only profitable but which could also help shape the future of medicine.

Stephen Rowntree – Newton, a BNY Mellon company

“Nobody knew that healthcare could be so complicated”. So wrote an exasperated President Donald Trump in February 2017 as he struggled to get to grips with a replacement for the Affordable Care Act, the Obama-era law that expanded affordable medical cover to low-income Americans. Perhaps without meaning to, Trump stumbled across one of the universal truths about healthcare investing: It … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
How are European fund selectors allocating to high yield?

Growth in the US and Europe should be sufficiently positive to support earnings momentum this year, keeping defaults in check. However, there remains a risk from increased protectionism, due to President Donald Trump’s policies. Credit fundamentals remain solid, helped by robust economic conditions and decent earnings growth. Despite the significant tightening in yields and credit spreads, the high-yield sector still looks relatively attractive compared to many other asset classes (even in a rising-rate environment). We think the technical picture remains supportive for the European high-yield market. We do not envisage European interest rates moving significantly higher, given continuing political issues, concerns surrounding Greece and ongoing European Central Bank purchases. The US high-yield market, however, could experience some short-term weakness from further interest rate hikes, exchange-traded fund outflows and a weaker oil price.

Uli Gerhard – Insight, a BNY Mellon company

Growth in the US and Europe should be sufficiently positive to support earnings momentum this year, keeping defaults in check. However, there remains a risk from increased protectionism, due to President Donald Trump’s policies. Credit fundamentals remain solid, helped by robust economic conditions and decent earnings growth. Despite the significant tightening in yields and credit spreads, the high-yield sector still … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
A long goodbye to NIRPs and ZIRPs

Thanks largely to central-bank intervention, the list of zero- and negative-yielding eurozone bonds is a long one.

But we think that’s about to change. For one thing, we’re predicting steady economic growth and a consequent uptick in inflation. In response, central banks – the European Central Bank among them – will likely not only raise interest rates but also begin to wind in their quantitative easing programmes.

While we can point to a lot of complacency in the market right now, we do think attitudes are going to shift at some point – and when they do, core European income will begin to face headwinds. We might not be at the end of negative yields just yet – but certainly we think we’re at the end of the beginning.

Brendan Murphy – Standish, a BNY Mellon company

Thanks largely to central-bank intervention, the list of zero- and negative-yielding eurozone bonds is a long one. But we think that’s about to change. For one thing, we’re predicting steady economic growth and a consequent uptick in inflation. In response, central banks – the European Central Bank among them – will likely not only raise interest rates but also begin … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Asset allocation: Why less is sometimes more

The image above shows a grid of horizontal, vertical and diagonal lines with 12 black dots at various intersections. Most people are only able to see one or two of the black dots at any one time. Named Ninio’s Extinction Illusion after Jacques Ninio, the French scientist who first published it in 2000 – it speaks to the weakness of peripheral vision in humans but also to the brain’s tendency to fabricate patterns when confronted with uncertainty.

In our view, this optical illusion serves to illustrate another point. It demonstrates a wider truth in investing: that the more expansive a portfolio is, the harder it is to maintain oversight of all the underlying holdings. Far better, we believe, to define your universe, allocate capital with conviction and zone in on what’s important to you as an investor.

Nick Clay – Newton, a BNY Mellon company

The image above shows a grid of horizontal, vertical and diagonal lines with 12 black dots at various intersections. Most people are only able to see one or two of the black dots at any one time. Named Ninio’s Extinction Illusion after Jacques Ninio, the French scientist who first published it in 2000 – it speaks to the weakness of … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
On the road to an EV future

At Newton, we are predicting the end of the road for the internal combustion engine as electric vehicles gain traction.

First there is the environmental angle. The European Commission has laid out plans not only to tighten emissions testing for automakers but also to leverage far higher penalties on companies that fail to make the grade. As of 2019, this levy will take the form of a €95 fine per CO2 g/km above the limit for each vehicle produced if the average fleet emission breaches targets. For a company like Volkswagen with 3.65 million units sold in Europe in 2016, even just being three grams above the EC’s emissions target would translate into a €1bn fine.

We also think electric vehicles offer numerous benefits over petrol or diesel engine cars. For one thing, they have fewer moving parts which makes them far more reliable and cheaper to maintain. They are also potentially safer and, as anyone who has test driven a Tesla can testify, they can offer a fun driving experience with 100% of torque available at 0rpm.

In our view, it’s not a question of if but when EVs overtake their fossil fuel counterparts.

Mathieu Poitrat Rachmaninoff, Newton

At Newton, we are predicting the end of the road for the internal combustion engine as electric vehicles gain traction. First there is the environmental angle. The European Commission has laid out plans not only to tighten emissions testing for automakers but also to leverage far higher penalties on companies that fail to make the grade. As of 2019, this … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
US banks ‘ace’ Fed stress tests

In our view, this year’s CCAR[1] process – which all 34 systemically important US banks passed – points the way to a brighter future for the financial services sector.

The results support our belief that the market has been under-appreciating the magnitude of capital return both this year and importantly next year when the new administration chooses their pro-business appointees at the Federal Reserve.

As long-term relative price-to-book ratios in the sector suggest, a whole group of undervalued companies in the sector have good prospects even if only part of the reform package of President Donald Trump gets through.

John Bailer – The Boston Company, a BNY Mellon company

[1] The Comprehensive Capital Analysis and Review (CCAR) is an annual exercise by the Federal Reserve to assess whether the largest bank holding companies operating in the United States have sufficient capital to continue operations throughout times of economic and financial stress

In our view, this year’s CCAR[1] process – which all 34 systemically important US banks passed – points the way to a brighter future for the financial services sector. The results support our belief that the market has been under-appreciating the magnitude of capital return both this year and importantly next year when the new administration chooses their pro-business appointees … read more

  • Download
  • Print
0 comments | Join the conversation, comment now