Get smart: the $60 trend catapulting emerging markets

The advent of low cost smartphones is a game changer in emerging markets (EMs). Whereas in developed markets we already had a fairly extensive network of PCs and laptops, in EMs this was not the case. With low cost smartphones – for as little as $60 – a whole group of EM consumers now have their own personal access point to the internet for the first time. In 2014, the market size for emerging market smartphones outstripped developed markets; and this is feeding through to huge investment opportunities. With mobile affordability as the key enabler, the number of internet users in these markets starts to grow exponentially. Whereas EM consumers previously may have battled with limited retail infrastructure to buy something, they can now purchase with a click of their fingers. This causes us to think about the internet’s potentially disruptive effects upon traditional bricks-and-mortar retailers, and highlights the attractiveness of certain e-commerce companies able to capture the retail and consumption potential.

Naomi Waistell, Newton

 

The advent of low cost smartphones is a game changer in emerging markets (EMs). Whereas in developed markets we already had a fairly extensive network of PCs and laptops, in EMs this was not the case. With low cost smartphones – for as little as $60 – a whole group of EM consumers now have their own personal access point … read more

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Will Japan’s snap election cost it dear?

Prime Minister Shinzo Abe has postponed a consumption tax rise originally planned for October 2015, instead opting to call a snap election, but can Japan’s highly indebted government actually afford such a delay? The fiscal hawks worry about the implications for Japan’s public debt, which will amount to almost 230% of GDP by the end of this year, according to the OECD’s May projections. Such worries, however, seem premature. While the debt numbers may seem intimidating, Japan still finances these liabilities with surprising ease. This is partly because the government also owns substantial financial assets. So Japan’s net public debt will be a more manageable 143% of GDP by the end of this year, reckons the OECD. The debt burden is also surprisingly light because interest rates are remarkably low. Japan’s net interest payments will amount to only about 1% of GDP this year, the OECD calculates, which is lower than all but one of the other G7 countries.

 

Simon Cox, BNY Mellon Investment Management Asia Pacific

Prime Minister Shinzo Abe has postponed a consumption tax rise originally planned for October 2015, instead opting to call a snap election, but can Japan’s highly indebted government actually afford such a delay? The fiscal hawks worry about the implications for Japan’s public debt, which will amount to almost 230% of GDP by the end of this year, according to … read more

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Surprise victors of a falling oil price

There is a general misperception the fall in oil price is negative for all emerging markets. In fact many of these countries are net importers which helps improve their balance of payments. For net oil importers a high oil price is a potential headwind regarding the credit worthiness of the country. So when the cost of importing oil drops it is ultimately supportive of growth and acts as a positive in terms of trade shock.

Colm McDonagh, Insight Investment

There is a general misperception the fall in oil price is negative for all emerging markets. In fact many of these countries are net importers which helps improve their balance of payments. For net oil importers a high oil price is a potential headwind regarding the credit worthiness of the country. So when the cost of importing oil drops it … read more

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Why UK companies’ payout potential is still strong

Dividend payout ratios

The traditional UK equity income space is better placed to satiate yield-hungry investors going forward as dividend payout ratios become more consistent with their 15-year average.  In a world with muted economic growth, projects with acceptable investment returns, or attractively priced  acquisitions are harder for companies to come by. This means they can grow their dividend even in the absence of earnings growth. Against this backdrop income-orientated companies will continue to be rewarding for investors

Emma Mogford, Newton

 

The traditional UK equity income space is better placed to satiate yield-hungry investors going forward as dividend payout ratios become more consistent with their 15-year average.  In a world with muted economic growth, projects with acceptable investment returns, or attractively priced  acquisitions are harder for companies to come by. This means they can grow their dividend even in the absence of … read more

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Germany is no superman for eurozone plight

Right now, Germany is much better off than it was ten years ago. Unemployment is very low and earnings are rising, but there is little inflation. Public finances are in good shape. The trouble in my view is that expectations about what Germany can contribute to the global economy have become unrealistic. Germany used to be viewed as the sick man of Europe, then people began to call it the locomotive of Europe, so the perception went from unrealistically negative to unrealistically optimistic. I don’t see a political willingness to work against its national interest. There may be further infrastructure spending announced, but it won’t be a big programme.

Holger Fahrinkrug, Meriten Investment Management

Right now, Germany is much better off than it was ten years ago. Unemployment is very low and earnings are rising, but there is little inflation. Public finances are in good shape. The trouble in my view is that expectations about what Germany can contribute to the global economy have become unrealistic. Germany used to be viewed as the sick … read more

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Is the dollar strength positive or negative for consumer staples?

Overall, third-quarter earnings season for the consumer staples sector has remained largely underwhelming, consistent with its recent past. But several management teams have backed away from their bearish stance and begun to speak constructively about the US for the first time since the financial crisis. The strengthening dollar has been a double-edged sword for many consumer staples companies in the quarter, though. Many of them took a 5-7% haircut to reported earnings because of currency translation, and based on recent spot prices, they may take another 5% hit next year. There is potential upside, however: A stronger US dollar usually means declining commodity prices, which are a positive for the group.

 

David Sealy, The Boston Company

 

 

Overall, third-quarter earnings season for the consumer staples sector has remained largely underwhelming, consistent with its recent past. But several management teams have backed away from their bearish stance and begun to speak constructively about the US for the first time since the financial crisis. The strengthening dollar has been a double-edged sword for many consumer staples companies in the … read more

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How falling oil prices have muddied monetary policy waters

5 November 2014

Expectations of the timing, and extent, of future Bank of England rate rises have changed significantly since the summer. This has coincided with lower inflation readings and a sharp decline in the oil price.  At Newton, our focus on our debt burden theme has led us to doubt whether a policy of low interest rates and forced asset inflation, which aims to drag spending from the future into the present, could create a sustained upswing in nominal demand. Could further evidence of deflationary pressures see investors begin to consider if the next policy move will, in fact, be greater stimulus?

Peter Hensman, Newton

Expectations of the timing, and extent, of future Bank of England rate rises have changed significantly since the summer. This has coincided with lower inflation readings and a sharp decline in the oil price.  At Newton, our focus on our debt burden theme has led us to doubt whether a policy of low interest rates and forced asset inflation, which … read more

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Pride comes before a fall…

Peaks in UK consumer confidence

Both common sense and history would encourage us towards thinking equity investors have a greater chance of strong returns when confidence is low not high. Likewise, unemployment, car sales and house prices… People are still talking about stocks positioned for the recovery, but we are five years on from the last trough in the market. A lot of investors say it is about feel good factor, but in the UK the feel good factor is driven by house prices. There is very little evidence of a sustainable, non-volatile recovery and the more I hear people saying it is inevitable house prices will go up the more I think they look dangerously high. People have such short memories.

Paul Stephany, Newton 

Both common sense and history would encourage us towards thinking equity investors have a greater chance of strong returns when confidence is low not high. Likewise, unemployment, car sales and house prices… People are still talking about stocks positioned for the recovery, but we are five years on from the last trough in the market. A lot of investors say it … read more

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The week that was…

In the week ending 9th October, what stole the financial headlines?

The battle to slow the land gains of the Islamic State in Iraq and Syria continued. With ongoing air strikes from the West and its allies, Islamic fighters advanced apace as they seized a significant portion of the Syrian border town, Kobani. With the US ruling out a ground operation, both the German and UK governments put pressure on Turkey – which borders Kobani – to help the ailing Kurdish town. In the US, the release of the September minutes from the Federal Open Market Committee meeting showed members expressed concerns over the potential negative impact of weaker foreign growth on the US economy.

Headline Hotlist & World/ Asset Returns Source: The BNY Mellon Investment Strategy and Solutions Group (“ISSG”) as at 10/10/14. ISSG is part of The Bank of New York Mellon.

The battle to slow the land gains of the Islamic State in Iraq and Syria continued. With ongoing air strikes from the West and its allies, Islamic fighters advanced apace as they seized a significant portion of the Syrian border town, Kobani. With the US ruling out a ground operation, both the German and UK governments put pressure on Turkey … read more

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The true cost of shorting

The costs associated with an emerging market long/short strategy can be a constraint on upside capture, which is an added consideration for investors assessing increasing offerings in this space. There is the cost of carry if you short something, the spread in credit default swaps used, the relative interest rates and the cost of carry on shorting FX and even in option volatilities. The thing is, whatever the cost is – and it varies from very small to high – you have to factor it into your total return.

Colm McDonagh, Insight Investment

The costs associated with an emerging market long/short strategy can be a constraint on upside capture, which is an added consideration for investors assessing increasing offerings in this space. There is the cost of carry if you short something, the spread in credit default swaps used, the relative interest rates and the cost of carry on shorting FX and even … read more

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