Goldilocks stocks?

Mid-sized companies are mature enough to have successfully overcome the growing pains that upend many small- and micro-cap equities. But as established players with proven track records, they also benefit from better access to capital markets. The ability to redeploy lower cost capital often allows mid-caps to move into new markets, expand product lines and otherwise execute their strategies.

At the same time, these mid-sized businesses do not typically suffer from the growth challenges that plague many of the largest, most recognizable global brands. Mid-caps do not necessarily need to deliver results through financial engineering, cost cutting, or risky acquisitive strategies as many of the largest companies may do. To the contrary, mid-caps are just hitting their stride.

In our view, this combination of stability, attractive growth potential, and relatively strong liquidity makes mid-sized companies compelling.

Syed Zamil – Mellon Capital, BNY Mellon company

Mid-sized companies are mature enough to have successfully overcome the growing pains that upend many small- and micro-cap equities. But as established players with proven track records, they also benefit from better access to capital markets. The ability to redeploy lower cost capital often allows mid-caps to move into new markets, expand product lines and otherwise execute their strategies. At … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Revving up for Fed action

Domestic economic momentum has been re-established, the UK shock has been distributed through global financial markets with little apparent consequence for the US, resource margins have mostly been eliminated, and inflation is on a modest incline. A 25 basis point higher nominal funds rate, even a 50 basis point higher one, by year end keeps the real federal funds rate negative and monetary policy accommodative even as it reassures investors that the Fed has not mislaid the keys to the monetary-policy-tightening machine.

We think that Chairwoman Yellen accedes to tightening this year because she recognizes that a one-quarter-point hike reminds the world that the Fed is on duty and reassures her colleagues that they are all on the same page. As for timing, Fed planners probably gravitate to December. For the dovish Fed leadership, an action postponed might never happen. Waiting until December gets a free look at the election results, which are surely material to understanding the other sources of policy impetus in 2017 and beyond. Any committee hurt about delaying in September can be salved by reporting in the Summary of Economic Projections that the preponderance of the FOMC prefers a one-quarter point higher policy rate at the end of the year, making the dots matter. After all, if they are willing to publish that, they are virtually contracting on a December move.

Vincent Reinhart – Standish, a BNY Mellon company

Domestic economic momentum has been re-established, the UK shock has been distributed through global financial markets with little apparent consequence for the US, resource margins have mostly been eliminated, and inflation is on a modest incline. A 25 basis point higher nominal funds rate, even a 50 basis point higher one, by year end keeps the real federal funds rate … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
The march of Millennials: What investors need to know

The Millennial generation is now transitioning from the 15-24 age cohort, which has little discretionary spending power, into the 25-35 age cohort associated with household formations and rising discretionary spending. This confluence of Millennials reaching ‘spending age’ and Baby Boomers ageing out of their spending years is expected to significantly affect consumption over the next decade. We believe this demographic transition will pressure consumer spending dollars by roughly 1% a year until 2019, at which point spending should then accelerate. The composition of spending dollars will likely be affected even more dramatically.

The Millennial consumer will represent the highest percentage of peak earners by 2020, and by 2025 will represent 50% of peak earners in the US. No wonder consumer companies have begun to focus on the Millennial customer in such a big way. Addressing the Millennial customer requires a change in strategic direction for many companies, which, combined with the digitalisation of the economy, creates both opportunities and challenges. This is a major focus for our analysts during our management interviews. How do you compete with online retailing giants? How do you acquire a new customer? How is your marketing budget changing? Does your brand have authenticity? How do you retain Millennial employees? These are the questions companies need to answer, which are critical for investment decisions related to this demographic theme.

The Boston Company US Small Cap Growth Team

The Millennial generation is now transitioning from the 15-24 age cohort, which has little discretionary spending power, into the 25-35 age cohort associated with household formations and rising discretionary spending. This confluence of Millennials reaching ‘spending age’ and Baby Boomers ageing out of their spending years is expected to significantly affect consumption over the next decade. We believe this demographic … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Venezuela’s sink-or-swim moment

Determining just when Venezuela might run out of money is complicated by several factors, one of which is the poor quality of official economic data, which makes it difficult to gauge precisely how dire the country’s fortunes are. While many energy-producing emerging markets are struggling due to low oil prices, Venezuela’s unique political culture and fiscal policies leave the country with fewer options than other countries have in order to address a balance of payments crisis of this nature.

Venezuela’s relationship with the IMF and other international institutions has been so strained by the anti-free market policies of former president Hugo Chavez and his successor that getting assistance from multinational institutions is not an option. Any sort of international financial assistance would likely come with conditions that would require a massive revamping of an economy that has diverged sharply from international norms over the past 14 years. While a similar package of reforms imposed by international donors kept Greece from defaulting last year, Venezuela is not politically capable of doing what Greece did in accepting an international bailout, which was the introduction of painful cuts to government programs.

Venezuela is an idiosyncratic case. It is not the same as any other oil producer. Most other oil producers are suffering just as much, but they have flexible exchange rates and better managed economies. The fact that the foreign exchange in most cases is floating has helped those countries to alleviate the pressures of a low oil price. While the oil price has fallen, the government in Venezuela has kept spending just the same, so the country has a huge fiscal debt. This is a self-imposed crisis, and I cannot think of many countries in the world that have managed to destroy their economy in such a short period of time.

Javier Murcio – Standish, a BNY Mellon company

Determining just when Venezuela might run out of money is complicated by several factors, one of which is the poor quality of official economic data, which makes it difficult to gauge precisely how dire the country’s fortunes are. While many energy-producing emerging markets are struggling due to low oil prices, Venezuela’s unique political culture and fiscal policies leave the country … read more

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

Year to date, the price of gold has climbed over 16% in US dollar terms – and our view on the use of it within an investment portfolio has not significantly changed. Much of the polemic surrounding gold involves a comparison with other assets such as equities. The inference is that if you are pro-gold, you are anti-stocks, anti-innovation and anti-prosperity.

We see gold as a non-yielding real asset that should act like a ‘safe-haven’ currency to paper-based ‘fiat’ money. We do not think gold should be grouped with other commodities that are consumed to create economic activity. It’s the very fact gold is not used like other commodities but accumulates gradually over time without degrading (it has a high stock-to-flow ratio), that lends it the ability to be a monetary unit. This relatively low and stable production growth when compared to paper money confers gold some ability to appreciate over time.

In an environment of increasing paper currency devaluation denominating a portion of a portfolio in a monetary asset outside the current credit driven financial system can aid diversification. Indeed, with cash rates below zero across many major economies storing gold in vaults ‘costs’ relatively less. It is worth remembering that although gold is no longer used to back currencies, nation states continue to hold it as part of their reserves as long-term financial insurance. As such it doesn’t seem unreasonable to us  to do the same.

Suzanne Hutchins, Newton – a BNY Mellon company

Year to date, the price of gold has climbed over 16% in US dollar terms – and our view on the use of it within an investment portfolio has not significantly changed. Much of the polemic surrounding gold involves a comparison with other assets such as equities. The inference is that if you are pro-gold, you are anti-stocks, anti-innovation and … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
EM dividends: Olympian returns?

The Czech Republic takes an unlikely first place as the emerging market with the highest average dividend pay-out ratio for equities, with podium finishes for Brazil and Qatar.

At around 40%, Mexico’s average pay-out ratio is below that of these medal winners’ – but it is broadly in line with emerging markets as a whole. In our view, the quantum of pay-out is not necessarily the best indicator of successful equity income investment. Far more important are the sustainability of the pay-out ratio, and the potential for future dividend growth (clearly influenced by level of debt penetration too).

On this basis, we view Mexico as one to watch for the future and a worthwhile scouting ground for winners in the long-term equity income space.

Sophia Whitbread – Newton, a BNY Mellon company

The Czech Republic takes an unlikely first place as the emerging market with the highest average dividend pay-out ratio for equities, with podium finishes for Brazil and Qatar. At around 40%, Mexico’s average pay-out ratio is below that of these medal winners’ – but it is broadly in line with emerging markets as a whole. In our view, the quantum … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Have emerging markets hit peak value?

Over the past five years, emerging markets have gone from being universally loved to the target of broad scepticism. Over that period, the commodity super-cycle has collapsed, domestic growth has deteriorated and currency pressures have grown. As a result, EM equities have underperformed versus their developed-market counterparts.

However, we believe the long-term investment case for emerging markets could remain compelling, underpinned by favourable demographics, greater development upside, and the potential for continued GDP per capita catch-up vs. developed markets. This demographic dividend, coupled with ongoing infrastructure development, efficiency and productivity gains, and a growing middle class, remains an attractive structural growth story that can withstand periodic cyclical downturns.

Historically, investors have been rewarded for allocating to the asset class after long periods of poor performance coupled with attractive valuations. With a lot of bad news priced in, even a stabilised US dollar environment and modestly higher commodity prices could spark a meaningful improvement in emerging markets’ corporate earnings profile.

As the recovery unfolds, we view the value-oriented areas of the market as the key beneficiaries. Improvements in export competitiveness, capex discipline, M&A and political reform serve as an appealing complement to the valuation opportunity we see in the asset class today.

C. Warren Skillman and William J. Adams – The Boston Company Asset Management, a BNY Mellon company

Over the past five years, emerging markets have gone from being universally loved to the target of broad scepticism. Over that period, the commodity super-cycle has collapsed, domestic growth has deteriorated and currency pressures have grown. As a result, EM equities have underperformed versus their developed-market counterparts. However, we believe the long-term investment case for emerging markets could remain compelling, … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
The 1% yield dilemma

In a world where over US$21trn of global sovereign bonds trade below 1%[1], we believe the risks of passively investing in fixed income assets at low yields are twofold.

The first is self-evident: low rates of return are unattractive and negative yields guarantee a loss of capital if the investment is held to maturity. The second risk involves the inverse relationship between bond yields and bond prices. With this in mind, not only do investors have to contend with low rates of return on ‘safe assets’, but risks to their capital are asymmetric – the potential capital losses outweigh the potential gains.

Against this backdrop, we believe it makes sense to adopt a fixed income strategy that can use appropriate derivative tools to protect its portfolio from the effect of rising yields and also make money from changing rates.

In our view, active managers who have the freedom to invest anywhere in the world, anywhere along the yield curve and across a range of duration- and inflation-related opportunities are well placed to mitigate the risks of our sub-1% yield world.

Adam Mossakowski – Insight Investment, a BNY Mellon company

[1] Bloomberg., 5 July 2016

In a world where over US$21trn of global sovereign bonds trade below 1%[1], we believe the risks of passively investing in fixed income assets at low yields are twofold. The first is self-evident: low rates of return are unattractive and negative yields guarantee a loss of capital if the investment is held to maturity. The second risk involves the inverse … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Why go global?

So far in 2016 the investment environment has been volatile: markets started the year with a dramatic sell-off only to rebound significantly from mid-February, with some of the sectors and regions that were most aggressively ditched rallying the most.

Against this backdrop we believe being able to select from a global set of opportunities is crucial. The benefit of such a wide-ranging approach is the ability to adapt if the world changes (as it always does).

In our view, there is lots of unprofitable growth happening at the moment with companies accessing very cheap debt to leverage up, either to buy back shares or make acquisitions that with time we think may prove misguided. Income compounders and growth compounders both have disciplined capital allocation, with the former group favouring external distribution of that capital, while the latter uses it to fund further growth. Investing in companies with strong management teams and a good track record of capital allocation at attractive prices requires patience – but valuation opportunities do inevitably arise.

Another set of opportunities – based more specifically on the valuation – is made up of companies which have fallen out of favour and, we believe, market sentiment towards them is unduly negative. These stocks can sometimes be the most exciting because they have the opportunity to return to fair value and the potential to become growth or income compounders in time. And even if they don’t reach that status, we can still reap good rewards with relatively low risk when the market overreaction corrects.

Raj Shant – Newton, a BNY Mellon company

So far in 2016 the investment environment has been volatile: markets started the year with a dramatic sell-off only to rebound significantly from mid-February, with some of the sectors and regions that were most aggressively ditched rallying the most. Against this backdrop we believe being able to select from a global set of opportunities is crucial. The benefit of such … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
A countdown to the referendum

On 23 June, voters in the United Kingdom will consider a referendum on whether or not the nation stays a member of the European Union.  Opinion polls currently report that decided voters are about evenly split between remaining and leaving, and the undecided share is still in the low double-digits.  Our baseline is predicated on the assumption that the “remain” campaign wins, but we assign only a six-in-ten probability to that outcome.

Our inclination is to trim our 2016 forecast of real GDP growth from 2% to 1% in the event of exit.  This mostly owes to the drag of increased uncertainty on consumption and investment.  The UK avoids recession, we think, because domestic demand, especially from households, provides a floor for growth.  The British pound is the asset most exposed to a vote to leave the EU, but the response is not clear.  The Bank of England will no doubt closely monitor the situation, but there is no reason to expect a knee-jerk reaction.  On balance, the Bank is likely to leave the door open to an easier stance of monetary policy through dovish communication.

Aside from some general market strains and potentially large changes in bilateral exchange rates, the direct global economic consequences of a Brexit are likely to be limited.  The UK’s share in world GDP stood under 4% last year, and its bilateral trading relationships are mostly regionally diversified and limited in scope.  Finance bulks especially large in its economy, and adjustments within banking organizations to the changed trading regime would be still another drag on an already troubled industry.

Vincent Reinhart – Standish, a BNY Mellon company

On 23 June, voters in the United Kingdom will consider a referendum on whether or not the nation stays a member of the European Union.  Opinion polls currently report that decided voters are about evenly split between remaining and leaving, and the undecided share is still in the low double-digits.  Our baseline is predicated on the assumption that the “remain” … read more

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