Weeding out new opportunities

Prior to the recent US election, I believed that the significant grassroots support for legalisation of marijuana meant that its legalisation at a federal level was only a matter of time.  And in fact, the recent voter approvals in eight states reaffirm that the population as a whole would likely support such a move.  However, the recent announcement of Jeff Sessions as President-elect Trump’s candidate for Attorney General means Federal legalisation is no longer just around the corner.  As recently as April 2016, Mr Sessions was quoted as saying that “Good people don’t smoke marijuana”, so it is unlikely to be legalised under his watch.

I think that the tobacco industry is likely to be the most interested in marijuana as a source of future growth, with many companies already giving serious consideration to the crossover potential with vaping. But until it is legalised at a federal level, nothing can be done. Nevertheless, support among the general population is growing, and like gay marriage, we think it may be a case that over time overwhelming public support could sweep away previous social norms.

As for other international markets, moves are afoot to legalise marijuana for medical or recreational use in a variety of countries, including Canada, Germany, Israel, Mexico and Italy.

Watch this space.

Rosie Bichard – Newton, a BNY Mellon company

For a longer (pre-US election) article on this topic, head to Newton’s blog

Prior to the recent US election, I believed that the significant grassroots support for legalisation of marijuana meant that its legalisation at a federal level was only a matter of time.  And in fact, the recent voter approvals in eight states reaffirm that the population as a whole would likely support such a move.  However, the recent announcement of Jeff … read more

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Is the outlook for US financials brighter?

The vote for Brexit markedly lowered global growth and interest-rate expectations. As a result, company managements for US financials focused on cost-cutting and strengthening their balance sheets. We believe US financials are the cheapest sector and growing the fastest. During the third-quarter earnings season, some 76% of S&P 500 companies beat earnings estimates by around 5.6%, Financials beat estimates by 8%. Additionally, the third quarter was the first in over a year to show year-over-year EPS growth for the S&P 500, largely due the impressive 13% growth in financials.

President-elect Donald Trump could add additional fuel to the fire. If he deregulates the financials sector, it could remove a massive growth overhang. Expansionary policies, like increased fiscal spending, could also encourage rate increases. Financials are largely domestic and could benefit most from corporate tax reform, with estimates that a 20% federal corporate tax rate would drive earnings higher by approximately 18% on average. After undue punishment since the financial crisis, headwinds are turning to tailwinds, and we believe US financials are fundamentally stronger, undervalued and poised for a comeback.

John Bailer – The Boston Company, a BNY Mellon company

The vote for Brexit markedly lowered global growth and interest-rate expectations. As a result, company managements for US financials focused on cost-cutting and strengthening their balance sheets. We believe US financials are the cheapest sector and growing the fastest. During the third-quarter earnings season, some 76% of S&P 500 companies beat earnings estimates by around 5.6%, Financials beat estimates by … read more

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Supersized EM sovereign debt

The market for issuance of EM debt in 2017 will be cautious in our view. If you drew up a winners and losers list from likely Trump foreign policy, Saudi Arabia would likely be on the losers list. For the moment, the Saudis are able to spend money they already have to plug any gaps and won’t want to issue into weak demand.

Issuers will be in a wait-and-see mode and probably only the very desperate will issue early in 2017. Should things prove to be not as bad as anticipated then there may be a rush for issuance later in the year.

From what we can estimate from economic policy it will likely be inflationary, we can see this from the sell-off in US Treasuries. That is only going to push yields higher in EM debt, thus increasing the cost of borrowing and issuance.

 Carl Shepherd – Newton, a BNY Mellon company

To read more about expectations for 2017 read our market outlook

The market for issuance of EM debt in 2017 will be cautious in our view. If you drew up a winners and losers list from likely Trump foreign policy, Saudi Arabia would likely be on the losers list. For the moment, the Saudis are able to spend money they already have to plug any gaps and won’t want to issue … read more

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Power to the people: What Italy’s referendum means for markets

Italy will hold a much-anticipated referendum on constitutional change on the 4 December. While the passing of the referendum would bring greater electoral stability in the future, there is an increasing risk that the referendum will result in a ‘No’ vote as the populace use it to declare their dissatisfaction with Prime Minister Renzi and his Partito Democratico (Democratic Party) led government.

Our base case scenario is for a narrow ‘No’ vote and rejection of the electoral and constitutional changes, and while Renzi has said he will resign, we will likely see the President seek to install a caretaker prime minister to lead a technocrat government until scheduled elections in May 2018. We believe this is currently priced into Italian spreads, although we would likely see a widening in spreads if a significant defeat for Renzi leads to increased speculation regarding early elections (particularly given the significant gains recently of the populist Five Star Movement).

Rowena Geraghty – Standish, a BNY Mellon company

Italy will hold a much-anticipated referendum on constitutional change on the 4 December. While the passing of the referendum would bring greater electoral stability in the future, there is an increasing risk that the referendum will result in a ‘No’ vote as the populace use it to declare their dissatisfaction with Prime Minister Renzi and his Partito Democratico (Democratic Party) … read more

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Why not all inflation measures are created the same

Central banks have long adopted inflation targeting on the premise that low and stable inflation will promote long-term economic growth. But in our view there are inherent problems associated with inflation targets, particularly when it comes to deciding which inflation measure to use.

The Federal Reserve (Fed), for example, targets the price inflation measure for personal consumption expenditures (PCE) at 2%. Like most central banks, the Fed targets the core inflation measure, arguing that volatile factors such as food and energy prices should be stripped out.

But, what if core PCE is giving a misleading picture of inflationary pressures in the US economy? Each measure of price inflation has components that are weighted differently and the sensitivity of each to the business cycle can vary. Some sectors may also be more prone to experiencing large idiosyncratic shocks compared to others. Other forms of aggregation can be used, further complicating the picture.

The suggestion that the inflation target itself may be flawed is interesting, given the effort investors pour into dissecting every line of monetary policy communication from central banks for clues as to the next move in interest rates or, as the case has been more recently, unconventional policy settings. The issue reminds this fund manager of Goodharts law, named after Charles Goodhart a former advisor to the Bank of England who first opined in 1975 that “when a measure becomes a target, it ceases to be a good measure”.

David Hooker – Insight, a BNY Mellon company

Central banks have long adopted inflation targeting on the premise that low and stable inflation will promote long-term economic growth. But in our view there are inherent problems associated with inflation targets, particularly when it comes to deciding which inflation measure to use. The Federal Reserve (Fed), for example, targets the price inflation measure for personal consumption expenditures (PCE) at … read more

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Factoring in US growth expectations

In the US, economic growth rebounded in the third quarter however the sources of this growth appear transitory. GDP grew at 2.9% annualized in the third  quarter of 2016, following sub-2% growth the three previous quarters. Weakness in inventory accumulation and export growth had been a major drag on growth before the third quarter. A jump in both series this quarter may reflect a rebalancing effect rather than a sustainable change in GDP trend growth. Nevertheless, we revised up our US GDP forecast over the next year to 1.9% from 1.7% which is below many commercial forecasters. We currently assign a probability of about 61% of below 2% growth, a 39% probability of 2-4% growth and essentially zero weight on above 4% growth.

At the November Federal Open Market Committee (FOMC) meeting, the US Federal Reserve decided not to raise its target federal funds rate. In its press release the FOMC stated that “some evidence” was already apparent towards its objectives implying that some current data already points to a rate rise. Also the revised dot chart forecasts one rate rise in 2016 and at least two in 2017. We believe the FOMC came close to “broadcasting” a strong desire to increase rates in December 2016. We thus maintain our forecast of a rate hike at the December meeting.

Karsten Jeske – Mellon Capital, a BNY Mellon company

In the US, economic growth rebounded in the third quarter however the sources of this growth, inventories and exports, appear transitory. GDP grew at 2.9% annualized in the third  quarter of 2016, following sub-2% growth the three previous quarters. Weakness in inventory accumulation and export growth had been a major drag on growth before the third quarter. A jump in … read more

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US election: Winner takes all?

Elections matter, especially when the choice offers distinct and unpredictable governing outcomes. Here, we consider four election outcomes following 8 November and how they might affect the US political, regulatory and economic landscape.

(1) President Clinton and a Democratic House and Senate

A uniformly Democratic Congress will probably reveal how quickly the gears of the government can mesh. The last time this happened, President Obama signed the American Recovery and Reinvestment Act the month after his inauguration in February 2009. Capitol Hill most likely tugs the White House left of the president’s more centrist leanings, a process that already began during the nomination contest.

(2) President Clinton and a split Capitol Hill

Given the advantage of incumbency, the most likely outcome is a divided government, where President Clinton has to work with a Republican House. An advantage is that she will have leverage that comes from a Senate run by a Democratic majority. Control of the Senate provides the president with some freedom in nominating appointees to her liking, but the voting margin there seems likely to be sufficiently slim that procedural manoeuvring will make some of those nomination battles dramatic. Expect progress on corporate tax reform, some spending on infrastructure, and a preservation of the regulatory infrastructure erected over the past eight years.

(3) President Clinton and a solidly Republican Capitol Hill

With Capitol Hill run by the opposition party, President Clinton will have to curb her party’s ambitions on appointees and compromise on legislation. Look to key appointees, whenever they are finally confirmed, to be well right of the Clinton campaign’s talking points. The major legislative initiatives of the White House may well be the exercise of veto power. Tighter gridlock than we have known before makes it likely that there will be no meaningful progress on tax reform nor an increase in infrastructure spending.

(4) President Trump and a Republican House and Senate

Under an all-Republican outcome, the same party controls the White House, the House of Representatives, and the Senate, but the president, speaker, and majority leader are not really on the same page about policy. The need to show progress will drive them to some compromises, picking the low-hanging fruit common to all involved.

Fiscal stimulus kicks in quickly, with more spending on defence and infrastructure and a restructuring of corporate taxes. After that, expect the slow crawl of tax reform, designed by the speaker to be acceptable to the president. Meanwhile, the White House will be using its executive authority to scale back the nation’s position in international trade.

By Vincent Reinhart – Standish, a BNY Mellon company

Elections matter, especially when the choice offers distinct and unpredictable governing outcomes. Here, we consider four election outcomes following 8 November and how they might affect the US political, regulatory and economic landscape. (1) President Clinton and a Democratic House and Senate A uniformly Democratic Congress will probably reveal how quickly the gears of the government can mesh. The last … read more

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The will they/won’t they moment for US populism

The populism that appears to have underpinned the UK’s Brexit result is a global phenomenon and one that Donald Trump has successfully exploited, by presenting himself as the anti-politician. But when analysing the US election in terms of its investment implications, the only certainty about the outcome is uncertainty.

Despite Hilary Clinton maintaining a narrow lead in the polls, the lesson of Brexit is that this is by no means a foregone conclusion. From a policy perspective the debate is markedly different from those of recent US elections. In listening and responding to the populists Trump, along with Bernie Sanders before he dropped out of the democratic nomination contest, has shifted the policy landscape to the left.  Clinton has responded to the growing populism by publically attacking pricing strategies of drug companies, weighing on the share price of pharm companies.

Volatility leading into the election is to be expected given the uncertain outcome and some of the extreme views being proposed by the two leading candidates. Enforcing any sort of haircut on Treasuries would be negative for the asset class should Trump win. The healthcare service sector could be a key beneficiary of a Clinton victory given her focus on drug pricing. Should Trump win then pharmaceuticals and drug devices would rally. Infrastructure-related stocks, construction and house builders could be beneficiaries of either candidate winning, given the huge financial pledges behind a drive to upgrade the US’s creaking infrastructure.

Suzanne Hutchins – Newton, a BNY Mellon company

The populism that appears to have underpinned the UK’s Brexit result is a global phenomenon and one that Donald Trump has successfully exploited, by presenting himself as the anti-politician. But when analysing the US election in terms of its investment implications, the only certainty about the outcome is uncertainty. Despite Hilary Clinton maintaining a narrow lead in the polls, the … read more

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Are you aware of this correlations shocker?

Since 2008 there has been a succession of ‘risk-on, risk-off’ (RoRo) periods: when risk is ‘on’, bond investors have seen fit to buy emerging markets and high-yield corporates; when risk is ‘off’, they have run for the proverbial hills with their pockets full of government bonds.

In ‘normal’ markets, government bonds and risk assets are negatively correlated, making them happy bedfellows in a portfolio.

During periods that central bank action (or investor expectations of action) was the dominant factor, correlations are much lower, so owning government bonds or risk assets wouldn’t always have compensated investors for losses in the other.

The latest period is the most extreme: since the UK’s EU referendum, prices of bonds and equities have been moving in the same direction – a positive correlation.

It seems that RoRo has been replaced by QEoQEo (or ‘quantitative easing on, quantitative easing off’) as the new way for markets to behave, with investors fixated upon the monetary easing activities of central bankers.

For a longer article on this topic, head to Newton’s blog.

Jon Day – Newton, a BNY Mellon company

Since 2008 there has been a succession of ‘risk-on, risk-off’ (RoRo) periods: when risk is ‘on’, bond investors have seen fit to buy emerging markets and high-yield corporates; when risk is ‘off’, they have run for the proverbial hills with their pockets full of government bonds. In ‘normal’ markets, government bonds and risk assets are negatively correlated, making them happy … read more

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Dispelling EMD preconceptions

We believe EM corporate debt is supported by falling yields in the developed world as they turn negative out to ever increasing maturities. Investors, concerned by global risks, are accepting losses on their capital but are, in our view, overlooking the risks embedded in developed markets at current levels, underscoring the pervasiveness of the current negative yield environment.

Furthermore, we believe growth in EM is on course to reach an economic inflection point this year as fundamentals continue to improve. In our view, investing in EM corporates is about capturing the structural premium offered over their developed market counterparts as EM countries gain an increasing share of global GDP.

Put differently, the active management of EM corporate debt can give investors the optionality to scale into different risk and return drivers according to their objectives. These credits tend to be under-researched, under-owned and unloved by mainstream investors, which can create mispricing and opportunity in spite of its status as a rapidly maturing asset class.

By Robert Simpson – Insight Investment, a BNY Mellon company

We believe EM corporate debt is supported by falling yields in the developed world as they turn negative out to ever increasing maturities. Investors, concerned by global risks, are accepting losses on their capital but are, in our view, overlooking the risks embedded in developed markets at current levels, underscoring the pervasiveness of the current negative yield environment. Furthermore, we … read more

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