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

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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

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Shielding from inflation

If you are looking to invest for the long term, we believe you should look to protect your assets against the potential ravages of inflation. Unlike cash and most conventional bonds, assets with inflation-linked contracts, such as renewables and infrastructure, are very attractive for long-term investors/savers because they offer a degree of in-built inflation protection. A large proportion of the revenue streams of these assets are backed by government subsidies making them a generally robust and stable proposition.

Renewables can provide stable long-term cash flows, with a good line of sight. Yet it is an asset class that tends to get overlooked despite being less affected by quantitative easing and zero interest-rate policies compared to other financial assets.

As long as the sun comes up every day, you’re going to sell power for something. In some senses, investing in renewables is like investing in bonds, except with some sensitivity to the price for generating power.

Paul Flood – Newton, a BNY Mellon company

If you are looking to invest for the long term, we believe you should look to protect your assets against the potential ravages of inflation. Unlike cash and most conventional bonds, assets with inflation-linked contracts, such as renewables and infrastructure, are very attractive for long-term investors/savers because they offer a degree of in-built inflation protection. A large proportion of the … read more

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Is this a sure sign of a Chinese slowdown?

Infrastructure investment has been a great source of interest for investors in the wake of Donald Trump’s election as US president, with his campaign pledge to spend US$1 trillion on US infrastructure projects clearly playing on their minds. Away from President Trump’s Twitter feed and speeches, China is a more pressing concern.

While the country is trying to rebalance to become a more consumption-driven economy, overcapacity in the construction industry remains a big issue. The country is considerably overbuilt in relation to GDP. Worryingly, if a slowdown in GDP growth occurs, we expect the Chinese government to try to plug the gap with further building. As such, with overcapacity remaining a problem and rebalancing of the economy continuing, we believe it is best to avoid businesses related to Chinese construction, including materials and building companies.

Nick Moss – Newton, a BNY Mellon company

Infrastructure investment has been a great source of interest for investors in the wake of Donald Trump’s election as US president, with his campaign pledge to spend US$1 trillion on US infrastructure projects clearly playing on their minds. Away from President Trump’s Twitter feed and speeches, China is a more pressing concern. While the country is trying to rebalance to … read more

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Why rate hikes in the US won’t kill high yield

While a rate hiking cycle in the US might affect other areas of the fixed income universe, the high yield market basically ignores rate hikes unless they are sharp and steep, which would cause a recession and therefore increased defaults. There is no historic correlation. Meanwhile, investment grade corporate bonds have a greater potential to be affected by duration and have historically been more correlated to interest rates. Another factor to take into consideration is leverage, which has been on a downward trajectory for high yield since the end of 2015. Investment grade firms, in general, have been increasing leverage in order to finance acquisitions or expand in a bid to appease shareholders.

April La Russe, Insight

While a rate hiking cycle in the US might affect other areas of the fixed income universe, the high yield market basically ignores rate hikes unless they are sharp and steep, which would cause a recession and therefore increased defaults. There is no historic correlation. Meanwhile, investment grade corporate bonds have a greater potential to be affected by duration and … read more

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The chart that tells the truth about US growth and its importance

The three largest economic areas in the world are growing: China, the US and Europe. They are growing at different rates but compared with last year when people were really concerned about Chinese growth disintegrating and the lack of growth in Europe the trends are improving.

While the US still contributes the largest amount to global GDP growth, the phrase “when the US sneezes the rest of the world catches a cold” is nowhere near as relevant as it was a few years ago.

The emergence of China and some other emerging economies is significantly more important in terms of global trade and global growth, particularly for investors interested in emerging markets (EM). Elsewhere in EM, India certainly doesn’t have the economic heft or weight of China but it is growing at a rapid rate and other countries are also showing an improved rate of growth compared with the past couple of years.

Colm McDonagh- Insight, a BNY Mellon Company

The three largest economic areas in the world are growing: China, the US and Europe. They are growing at different rates but compared with last year when people were really concerned about Chinese growth disintegrating and the lack of growth in Europe the trends are improving. While the US still contributes the largest amount to global GDP growth, the phrase … read more

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UK elections: then and now

There is a strong consensus in the market, despite recent variations in polling data, that the current Conservative government and policies are very likely to remain in place after the election on 8 June. We believe the market consensus is correct, and so we do not expect a significant market impact as a result of the election – this would probably only occur if there was a shock result.

Shortly after the election, negotiations over the UK’s departure from the European Union will begin, and these could have a significant impact over the longer term. While the market will refocus on these negotiations after the election, we expect there to be little impact for some time – while there will be jostling by politicians over different proposals and potential deals, no firm conclusions are expected early on in the process, and so we expect this to be a slow burn.

Paul Lambert – Insight, a BNY Mellon company

There is a strong consensus in the market, despite recent variations in polling data, that the current Conservative government and policies are very likely to remain in place after the election on 8 June. We believe the market consensus is correct, and so we do not expect a significant market impact as a result of the election – this would … read more

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European elections: where moderation wins?

With over 66% of the vote, Emmanuel Macron’s recent election win in France was a decisive result. Clearly it was a case of the electorate wanting the country to avoid the extremism we’ve seen with Marine Le Pen. The next step is for Macron to name a prime minister ahead of the legislative elections in June.

We think the French presidential election should be seen against a broader move away from populism across Europe. We witnessed this in the Austrian elections in December 2016 and in Bulgaria in February this year. The same thing was apparent in the Dutch elections in March and in the Finnish municipal elections in April. All of these elections had the potential to bring populist politicians into power but instead resulted in more orthodox centre-ground candidates winning the vote – often, as in the Netherlands, with a large, and largely unexpected, majority. The same trend is now apparent in Germany where Chancellor Angela Merkel gained ground in the German state elections, which boosts the prospects for her Christian Democratic Union (CDU) party in the all-important Federal election in September.

Suzanne Hutchins – Newton, a BNY Mellon company

With over 66% of the vote, Emmanuel Macron’s recent election win in France was a decisive result. Clearly it was a case of the electorate wanting the country to avoid the extremism we’ve seen with Marine Le Pen. The next step is for Macron to name a prime minister ahead of the legislative elections in June. We think the French … read more

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How to avoid FOMO through dividend investing

Returns have been eroded by the ongoing spate of asset support conducted by central banks since the financial crisis. The idea of the global economy weaning itself off measures such as quantitative easing looks ridiculous, with central bankers willing to step in the moment something goes wrong. Investors also expect it. The result of these actions has been to push up valuations of assets. There is a cost to that support and that is lower returns and increased volatility.

One thing you can do is to try and trade that volatility – but good luck. These days unexpected events, like snap elections, make it difficult to build a repeatable process around such an approach. Instead, the nature of sustainable income over time, the power of compounding dividends, could provide a resilient and significant impact to one’s total return, which in the long run, leads to greater asymmetry in returns.  Stability of returns is important to clients and in a world of risk and high valuations, it is ever more important.

However, many growth-oriented managers are still seeking the big story – the next Amazon or Apple. They have a fear of missing out (FOMO). But the ability to pick one particular fish out of the sea is difficult.

I see investing more like Michelangelo who famously, when asked about his art, said it’s what you take away that matters. We take a similar view: take away the statistically unattractive stocks. That’s what the discipline of income does – it narrows down the bucket and forces us to be patient.

Nick Clay – Newton, a BNY Mellon company

Returns have been eroded by the ongoing spate of asset support conducted by central banks since the financial crisis. The idea of the global economy weaning itself off measures such as quantitative easing looks ridiculous, with central bankers willing to step in the moment something goes wrong. Investors also expect it. The result of these actions has been to push … read more

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AI and a brave new world of investing

The development of AI—computer systems that can think intelligently and learn as humans do—continues to generate global excitement and controversy, while dividing public opinion. Some fear the development of intelligent machines poses a greater threat to humanity than climate change and could even presage the end of the world. Others remain optimistic AI can bring huge benefits to humankind, including the scope to boost productivity, revolutionise the workplace and unleash a new wave of global economic growth.

We have identified an AI investment universe of about US$13.5 trillion, including 750 stocks, mainly comprised of US companies. We point to the potential for increased AI application in areas, such as retail, transportation, healthcare, manufacturing and agriculture. The development and adoption of so-called natural language processing and its inclusion in everyday items such as smartphones will likely drive future market growth.

We are going to places we haven’t gone before, and in doing so, there are some unanswered questions that may come into play on ethical dimensions and how much free will AI embodies in machines and what this is used for. These are topics that will come up more and more as AI becomes a part of our daily lives. The hope is we can exploit the potential benefits of AI and harness them for humankind in a way that fosters not only greater prosperity but also helps us to enjoy a better quality of life

Robert J. Kluchko – The Boston company, a BNY Mellon company

The development of AI—computer systems that can think intelligently and learn as humans do—continues to generate global excitement and controversy, while dividing public opinion. Some fear the development of intelligent machines poses a greater threat to humanity than climate change and could even presage the end of the world. Others remain optimistic AI can bring huge benefits to humankind, including … read more

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