Green thinking: A future growth market for bonds?

Green bonds offer investors looking for exposure to sustainable investments a chance to invest in the ‘E’ (environmental element) of their environmental, social and governance (ESG) remit. They allow investors to help aid the transition to a low-carbon world by lending money that will be used for specific green projects.

Historically, exposure to these types of projects was through higher-risk and less-liquid project-finance debt. Standard ‘use-of-proceeds’ green bonds benefit from being backed by the underlying credit rating of the issuer, thereby lowering the specific project risk and thus overall credit risk. The cash flows funding the coupons and principal can originate from non-green operations, and the bond can still be considered ‘green’.

Evidence suggests that green bonds price at a similar spread to non-green bonds, thereby encouraging investors who do not have specific green mandates to consider investing in them, but the market remains relatively niche.

The real boost that the asset class needs will come when companies from a wider range of industries and geographies are encouraged to enter the market, which will increase liquidity. Countries issuing green bonds may help lead by example.

The fact that green bonds are becoming higher profile leads us to expect that the market structure will continue to improve over time. However, if the market is to continue to grow strongly, it will need greater diversification across credit rating, sector and geography in order to improve liquidity, and a globally agreed means of assessing and evaluating individual bonds.

Scott Freedman – analyst and portfolio manager fixed income team. Newton Investment, a BNY Mellon company.

Green bonds offer investors looking for exposure to sustainable investments a chance to invest in the ‘E’ (environmental element) of their environmental, social and governance (ESG) remit. They allow investors to help aid the transition to a low-carbon world by lending money that will be used for specific green projects. Historically, exposure to these types of projects was through higher-risk … read more

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Trouble ahead? Tensions rise in US/China trade dispute

This month saw the imposition of 25% US tariffs on $34bn of imports from China, with US duties on another $16bn of Chinese goods to be added following a consultation period. As yet, initial direct economic impact from these tariffs appears minimal. Metal exports to the US are less than 3% of total exports even for Canada and Mexico, while for China, the latest levies are expected to knock only c.0.1-0.2% off GDP growth. However, Trump’s threat of tariffs on an additional $200bn of Chinese imports could have more material consequences for growth and ‘risk’ appetite.

The US and China are predominantly domestically driven economies (exports are only 10% of GDP in the US and 20% of GDP in China), but for China, this exogenous headwind compounds the policy induced economic slowdown attributable to Beijing’s deleveraging focus. Moreover, while China’s manufacturing PMIs continue to reflect growth, new export PMIs pointed to weaker trade momentum even before the latest round of tariffs. Beijing’s policymakers have begun to respond, with the People’s Bank of China (PBoC) offering rhetorical support to the renminbi, and recent targeted reserve requirement ratio cuts for major banks indicating a more nuanced approach to deleveraging.

US-China tensions (both economic and geopolitical) are likely to become a more permanent feature of the investment backdrop, as the market is now beginning to price. Despite last month reducing its sectoral “negative list”, China remains particularly restrictive and selective when it comes to foreign direct investment and President Xi’s flagship “Made in China 2025” policy appears to have piqued both sides of the US political establishment to the limitations of “constructive engagement” and the challenge China poses.

Trevor Holder – portfolio manager. Newton, a BNY Mellon company

This month saw the imposition of 25% US tariffs on $34bn of imports from China, with US duties on another $16bn of Chinese goods to be added following a consultation period. As yet, initial direct economic impact from these tariffs appears minimal. Metal exports to the US are less than 3% of total exports even for Canada and Mexico, while … read more

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A healthier future? How current spending patterns could point the way

Are we headed for a more health conscious future? Current spending patterns – and especially those of ‘generation Z’ consumers – appear to suggest so.

According to Morgan Stanley, spending on sports apparel rose from US$199.1m in 2009 to US$314.1m in 2017 and is projected to reach US$365.2m by 2020. However, this is just a small segment of the wellness and fitness industry, which in the UK alone is estimated to reach a value of £22.8bn by 2020, according to Statisa. Gym membership is also on the rise. Figures from The Leisure Database Company suggest one in seven of people in the UK now regularly work out.

We believe food consumption habits are another leading indicator for future health spend. Fresh foods such as salads and juices are taking the place of canned and refrigerated goods in the shopping baskets of young consumers. Data from Barclay’s suggests Generation Z consumers are buying 57% more tofu and 550% more dairy-free milk than older cohorts.

Meanwhile, pharmaceutical companies are also beginning to get in on the game: over-the-counter medication and health supplements continue to gain traction as consumers demonstrate a preference for preventative healthcare over traditional prescriptions.

Amy Chamberlain and Stephen Rowntree – global analysts. Newton, a BNY Mellon company

Are we headed for a more health conscious future? Current spending patterns – and especially those of ‘generation Z’ consumers – appear to suggest so. According to Morgan Stanley, spending on sports apparel rose from US$199.1m in 2009 to US$314.1m in 2017 and is projected to reach US$365.2m by 2020. However, this is just a small segment of the wellness … read more

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Feeling the squeeze: is it crunch time for Generation X?

In some ways Generation X is caught between a rock and a hard place, facing a squeeze from a range of shifting social and demographic factors and financial pressures. From a financial perspective, rising longevity is just one factor, with improvements in technology, science and health provision meaning people are living longer and requiring more and more capital. More specifically, the issue of wealth transfer from the Baby Boomer generation is also becoming increasingly important. In future, Baby Boomers who are already pondering whether to transfer assets to their own children or the next generation of Millennial grandchildren could well opt to do the latter.

Against this backdrop, those in generation X will increasingly need to work out what their long-term financial and retirement requirements are and identify solutions to support this while protecting their existing capital. But, while these people need to be invested to grow their wealth and grow their income in the longer term, their investment choices may not be easy. Annuity rates have fallen in recent years and mainstream investment markets have also seen equity prices become extended over time and returns from bonds become low by historic standards. With other pressures such as inflation looming, a range of other more sustainable and long-term alternative investment options may increasingly come into focus.

Freeman Le Page – investment specialist and SRI client director and Nick Moss, portfolio manager multi-asset team. Newton, a BNY Mellon company

In some ways Generation X is caught between a rock and a hard place, facing a squeeze from a range of shifting social and demographic factors and financial pressures. From a financial perspective, rising longevity is just one factor, with improvements in technology, science and health provision meaning people are living longer and requiring more and more capital. More specifically, … read more

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Tobacco: a slow-burn success story?

For all the challenges the industry has faced tobacco has remained attractive for investors. Now, in the face of ongoing litigation, a crack-down on advertising, smoking bans, and even plain packaging, the industry is reinventing itself through new heat-not burn and vaping products.

We continue to believe these could create an inflection point for the industry, offering a route out for smokers looking to quit harmful combustible cigarettes but also allowing tobacco companies to build new revenues with products that are less detrimental to health.

Should they succeed we see tobacco producers continuing at the apex of a market where competition is limited and where profitability consequently remains extremely robust. In our bull-case scenario, smokers will consider the risk/reward dynamics of their habit and decide to migrate en masse to next-generation products. The significantly reduced harm of these new products keeps them in the category – meaning the combined volumes of combustibles and next-generation products stabilise or even rise.

Amy Chamberlain – global analyst. Newton, a BNY Mellon company

For all the challenges the industry has faced tobacco has remained attractive for investors. Now, in the face of ongoing litigation, a crack-down on advertising, smoking bans, and even plain packaging, the industry is reinventing itself through new heat-not burn and vaping products. We continue to believe these could create an inflection point for the industry, offering a route out … read more

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Horror on the high street: ‘Experiences over things’ revs up retail apocalypse

Increasingly we are seeing a trend towards consumers valuing ‘experiences over things’ and this is having an impact on the performance of certain sectors. There have been a string of high street casualties in recent weeks, with a number of household names falling into administration. Other brands have been forced to seek help through Company Voluntary Agreements – arrangements with their creditors usually to try and improve lease terms on stores.

Restaurants are not immune to the squeeze in consumer discretionary spending, so while the growth in the sector may seem counterintuitive compared with headlines seen in recent months, it is in particular mid-market chains that are shrinking. We see greater consumer appetite for healthier eating, informal and experiential dining and an increased focus on food provenance and sustainability.

These trends are not unique to the UK, in the US footwear and apparel sales are also lagging other sectors. We believe these trends will materialise at different paces in different countries but for now the ‘experiences over things’ idea remains very much a developed market phenomenon.

Anna Martinez – fixed income analyst. Newton, a BNY Mellon company

Increasingly we are seeing a trend towards consumers valuing ‘experiences over things’ and this is having an impact on the performance of certain sectors. There have been a string of high street casualties in recent weeks, with a number of household names falling into administration. Other brands have been forced to seek help through Company Voluntary Agreements – arrangements with … read more

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Who wins a trade war?

Trade wars are not won by anyone. Of course, the exporting country loses from a trade war, but so too does the importing one. The reason why there are no winners in a trade war is because it normally leads to the substitution of more expensive goods for cheaper ones. In effect, a trade war denies consumers the efficiency gains that have been realised through the expansion of global supply chains and one only has to go back as recently as 2002, the last time steel tariffs were enacted, to see the potential for damage. Following a spate of mill closures and surging imports, President Bush implemented tariffs on certain steel products. The net effect on employment in the steel industry was minimal, but the businesses that used steel products as inputs shed approximately 200,000 jobs (compared to the 180,000 employed in US steel production at the time).[1]. As a result of these tariffs, US manufacturing firms, in particular smaller companies, were subjected to higher input prices which eroded profitability. Unable to increase prices, once profitable companies were forced to cut production and with it their labour forces, so while the intention of tariffs and trade barriers is to repatriate jobs seen to have been lost overseas, the outcome is often higher prices and jobs losses at home.

Brendan Mulhern – Global Strategist. Newton, a BNY Mellon company

[1]Trade Partnership Worldwide study. The Unintended Consequences of U.S. Steel Import Tariffs: A Quantification of the Impact During 2002 07 February 2003.

Trade wars are not won by anyone. Of course, the exporting country loses from a trade war, but so too does the importing one. The reason why there are no winners in a trade war is because it normally leads to the substitution of more expensive goods for cheaper ones. In effect, a trade war denies consumers the efficiency gains … read more

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Tech stocks: Have we returned to ’99?

Over the 12 months to 31 December the FANG[1] stocks rose on average some 50% in US dollar terms, while the broader S&P 500 rose just 23%. Asia too has its own tech leaders, colloquially known as the BAT stocks (Baidu, Alibaba and Tencent) and they, like FANGs, experienced spectacular returns in 2017 (up on average c80% in US dollars over the same time frame).

Without these ‘Dracula’ stocks (the FANGs and BATs combined), markets like the S&P 500 would certainly have been less exuberant over the past year.

The last tech bubble came at the close of the millennium. In our view, investors in the current crop of technology stocks have partied like it’s 1999 all over again. While this is fine in theory we prefer to take a less short-term view. To paraphrase the immortal words of Prince Rogers Nelson: “Life is a party but parties weren’t meant to last”. [2]

Nick Clay – portfolio manager. Newton, a BNY Mellon company

[1] The term FANG stocks refers to Facebook, Amazon, Netflix and Google (subsequently renamed as alphabet)

[2] From the song 1999 by Prince, released 24 September 1982, re-released 3 November 1998

Over the 12 months to 31 December the FANG[1] stocks rose on average some 50% in US dollar terms, while the broader S&P 500 rose just 23%. Asia too has its own tech leaders, colloquially known as the BAT stocks (Baidu, Alibaba and Tencent) and they, like FANGs, experienced spectacular returns in 2017 (up on average c80% in US dollars … read more

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Chinese new year edition: China’s tourists flex their muscles

The Chinese consumer is starting to flex its muscles to spend more of its growing disposable income on travel. China is already the second-largest tourism market in the world, accounting for half of the growth in the global travel industry, but much of that tourism is domestic, and its citizens only make an average of 0.09 overseas trips per annum, compared to 0.3 and 1.2 in the US and UK respectively.

Given the relatively low overseas-trip frequency in China compared to many of its Western peers the rise of global Chinese tourism is a structural growth story with huge long-term potential. Moreover, in 2016, just 6.3% of China’s 1.3 bn population had passports, but that number is expected to double within five years, with growth expected to stay well over 10% on an annualised basis.

It has been estimated Chinese tourism will become a RMB 7.5 trillion (US$ 1.1 trillion) market by 2020,[1] with the sector expected to produce a compound annual growth rate (CAGR) of 13% over the next five years. Given the explosion in online travel booking in the country, Chinese online travel booking will grow could at an even faster rate – an estimated 30% CAGR[2] – over the same time frame.

Nick Moss – portfolio manager. Newton, a BNY Mellon company

[1]CLSA China online travel sector outlook, May 2016.

[2]Ibid.

The Chinese consumer is starting to flex its muscles to spend more of its growing disposable income on travel. China is already the second-largest tourism market in the world, accounting for half of the growth in the global travel industry, but much of that tourism is domestic, and its citizens only make an average of 0.09 overseas trips per annum, … read more

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Against the grain: Which emerging market’s fund industry grew 50% in a year?

Historically, some 30% of Indian GDP has been in savings – typically gold and property – but demonetisation in November 2016 and the Aadhaar scheme are, together, encouraging these savings into the financial system. Moreover, this environment of plentiful liquidity is driving down funding costs for lenders and spurring the fees of businesses related to asset management.

Around 60,000 mutual fund accounts are being opened every day in India, and Indian mutual funds have almost doubled their assets under management (AUM) in just over three years.

The Indian mutual funds market has gone through three distinct phases over the past 13 years, with compound annual growth rates (CAGR) improving markedly over the past three years, on the back of higher market returns and stronger flows following demonetisation last November.

Given that the penetration of mutual funds in India as a proportion of GDP is less than a quarter of the global average, and below that of many other emerging markets, we believe there is a long ‘runway’ for growth in this area.

Sophia Whitbread – portfolio manager on the Newton Emerging and Asian Equities team. Newton, a BNY Mellon company.

Historically, some 30% of Indian GDP has been in savings – typically gold and property – but demonetisation in November 2016 and the Aadhaar scheme are, together, encouraging these savings into the financial system. Moreover, this environment of plentiful liquidity is driving down funding costs for lenders and spurring the fees of businesses related to asset management. Around 60,000 mutual … read more

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