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

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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

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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

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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

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