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
Dividend prospects: A global diagnosis

Demographic factors are likely to have an increasing and significant impact on global demand for equity income assets including dividend-paying stocks. Experts from the United Nations population division forecast the number of retirees worldwide will reach two billion by 2050 while average life expectancies will continue to rise. This growing group of investors seeks stable income.

While returns from traditional income-generating assets remain suppressed, investors are more likely to focus on those equities that promise the highest yields. However, simply chasing stocks which promise the highest returns can be dangerous. While higher forecast income levels may initially appear attractive, in many cases they may be indicative of heightened risks. In the longer term this can lead to disappointment through cuts in dividends.

The difference between forecast and realised dividend yields demonstrates that a passive investment approach based on forecast yields is not appropriate. In order for an equity income strategy to be successful, careful analysis of how companies allocate their capital is critical. Entities with a disciplined approach to capital management should be better positioned to provide consistent and sustainable returns in the future.

Nick Clay – Newton, a BNY Mellon company

Demographic factors are likely to have an increasing and significant impact on global demand for equity income assets including dividend-paying stocks. Experts from the United Nations population division forecast the number of retirees worldwide will reach two billion by 2050 while average life expectancies will continue to rise. This growing group of investors seeks stable income. While returns from traditional … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Brazil: A turning point?

The winds of political change are blowing across South America. The process began in Argentina with the election of Mauricio Macri in 2015 as successor to left-leaning president Cristina Fernández de Kirchner. In Venezuela, socialist president Nicolás Maduro is under increasing pressure following a catastrophic slowdown in the country’s oil-dependent economy.

Now, in Brazil we believe the ousting of Dilma Rousseff and the appointment of centrist vice-president Michel Temer as her successor could herald a new dawn.

Markets have already begun to respond favourably, with interest rate futures, the Brazilian real and the benchmark Bovespa stock index all recovering from last year’s nadir.

The situation remains delicate but we are optimistic. We believe Temer’s recent appointment of a credible economic team, coupled with moves towards wider political and economic reforms will help stabilise Brazil within the year and set the scene for sustainable annual GDP growth of 2.5%-3.0% thereafter.

 Alexander Gorra – ARX, a BNY Mellon company

The winds of political change are blowing across South America. The process began in Argentina with the election of Mauricio Macri in 2015 as successor to left-leaning president Cristina Fernández de Kirchner. In Venezuela, socialist president Nicolás Maduro is under increasing pressure following a catastrophic slowdown in the country’s oil-dependent economy. Now, in Brazil we believe the ousting of Dilma … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Central bank clarity fades

The clear blue water of policy divergence that became apparent in the final quarter of 2015 now seems muddied.

The European Central Bank (ECB) suggested that the marginal efficacy of monetary policy is declining when ECB President Mario Draghi stated at the 10 March press conference that its scope to cut interest rates further is limited. Market reaction to comments from the Federal Reserve (Fed) has flip-flopped, with the central bank being viewed as decidedly dovish in April and subsequently hawkish in May.

While the Fed is currently expected to hike rates this summer in response to stronger data, any stumble will produce a strong counter trend and the narrative will change once again. Ultimately, central banks respond to economics. The potential schism in economic paths has created unusual currency reactions over the first half of 2016 and these could well continue.

We would note that the EUR/US$ is at the top of its recent trading range. In addition, investor positioning appears to have switched to short US$. In this environment, we believe a tactical opportunity to short EUR/US$ has been presented. There is also a case to be long the US$ given the more hawkish tone from the Fed.

Paul Lambert – Insight Investment, a BNY Mellon company

The clear blue water of policy divergence that became apparent in the final quarter of 2015 now seems muddied. The European Central Bank (ECB) suggested that the marginal efficacy of monetary policy is declining when ECB President Mario Draghi stated at the 10 March press conference that its scope to cut interest rates further is limited. Market reaction to comments … read more

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