Shielding from inflation

If you are looking to invest for the long term, we believe you should look to protect your assets against the potential ravages of inflation. Unlike cash and most conventional bonds, assets with inflation-linked contracts, such as renewables and infrastructure, are very attractive for long-term investors/savers because they offer a degree of in-built inflation protection. A large proportion of the revenue streams of these assets are backed by government subsidies making them a generally robust and stable proposition.

Renewables can provide stable long-term cash flows, with a good line of sight. Yet it is an asset class that tends to get overlooked despite being less affected by quantitative easing and zero interest-rate policies compared to other financial assets.

As long as the sun comes up every day, you’re going to sell power for something. In some senses, investing in renewables is like investing in bonds, except with some sensitivity to the price for generating power.

Paul Flood – Newton, a BNY Mellon company

If you are looking to invest for the long term, we believe you should look to protect your assets against the potential ravages of inflation. Unlike cash and most conventional bonds, assets with inflation-linked contracts, such as renewables and infrastructure, are very attractive for long-term investors/savers because they offer a degree of in-built inflation protection. A large proportion of the … read more

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Is this a sure sign of a Chinese slowdown?

Infrastructure investment has been a great source of interest for investors in the wake of Donald Trump’s election as US president, with his campaign pledge to spend US$1 trillion on US infrastructure projects clearly playing on their minds. Away from President Trump’s Twitter feed and speeches, China is a more pressing concern.

While the country is trying to rebalance to become a more consumption-driven economy, overcapacity in the construction industry remains a big issue. The country is considerably overbuilt in relation to GDP. Worryingly, if a slowdown in GDP growth occurs, we expect the Chinese government to try to plug the gap with further building. As such, with overcapacity remaining a problem and rebalancing of the economy continuing, we believe it is best to avoid businesses related to Chinese construction, including materials and building companies.

Nick Moss – Newton, a BNY Mellon company

Infrastructure investment has been a great source of interest for investors in the wake of Donald Trump’s election as US president, with his campaign pledge to spend US$1 trillion on US infrastructure projects clearly playing on their minds. Away from President Trump’s Twitter feed and speeches, China is a more pressing concern. While the country is trying to rebalance to … read more

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Why rate hikes in the US won’t kill high yield

While a rate hiking cycle in the US might affect other areas of the fixed income universe, the high yield market basically ignores rate hikes unless they are sharp and steep, which would cause a recession and therefore increased defaults. There is no historic correlation. Meanwhile, investment grade corporate bonds have a greater potential to be affected by duration and have historically been more correlated to interest rates. Another factor to take into consideration is leverage, which has been on a downward trajectory for high yield since the end of 2015. Investment grade firms, in general, have been increasing leverage in order to finance acquisitions or expand in a bid to appease shareholders.

April La Russe, Insight

While a rate hiking cycle in the US might affect other areas of the fixed income universe, the high yield market basically ignores rate hikes unless they are sharp and steep, which would cause a recession and therefore increased defaults. There is no historic correlation. Meanwhile, investment grade corporate bonds have a greater potential to be affected by duration and … read more

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The chart that tells the truth about US growth and its importance

The three largest economic areas in the world are growing: China, the US and Europe. They are growing at different rates but compared with last year when people were really concerned about Chinese growth disintegrating and the lack of growth in Europe the trends are improving.

While the US still contributes the largest amount to global GDP growth, the phrase “when the US sneezes the rest of the world catches a cold” is nowhere near as relevant as it was a few years ago.

The emergence of China and some other emerging economies is significantly more important in terms of global trade and global growth, particularly for investors interested in emerging markets (EM). Elsewhere in EM, India certainly doesn’t have the economic heft or weight of China but it is growing at a rapid rate and other countries are also showing an improved rate of growth compared with the past couple of years.

Colm McDonagh- Insight, a BNY Mellon Company

The three largest economic areas in the world are growing: China, the US and Europe. They are growing at different rates but compared with last year when people were really concerned about Chinese growth disintegrating and the lack of growth in Europe the trends are improving. While the US still contributes the largest amount to global GDP growth, the phrase … read more

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UK elections: then and now

There is a strong consensus in the market, despite recent variations in polling data, that the current Conservative government and policies are very likely to remain in place after the election on 8 June. We believe the market consensus is correct, and so we do not expect a significant market impact as a result of the election – this would probably only occur if there was a shock result.

Shortly after the election, negotiations over the UK’s departure from the European Union will begin, and these could have a significant impact over the longer term. While the market will refocus on these negotiations after the election, we expect there to be little impact for some time – while there will be jostling by politicians over different proposals and potential deals, no firm conclusions are expected early on in the process, and so we expect this to be a slow burn.

Paul Lambert – Insight, a BNY Mellon company

There is a strong consensus in the market, despite recent variations in polling data, that the current Conservative government and policies are very likely to remain in place after the election on 8 June. We believe the market consensus is correct, and so we do not expect a significant market impact as a result of the election – this would … read more

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European elections: where moderation wins?

With over 66% of the vote, Emmanuel Macron’s recent election win in France was a decisive result. Clearly it was a case of the electorate wanting the country to avoid the extremism we’ve seen with Marine Le Pen. The next step is for Macron to name a prime minister ahead of the legislative elections in June.

We think the French presidential election should be seen against a broader move away from populism across Europe. We witnessed this in the Austrian elections in December 2016 and in Bulgaria in February this year. The same thing was apparent in the Dutch elections in March and in the Finnish municipal elections in April. All of these elections had the potential to bring populist politicians into power but instead resulted in more orthodox centre-ground candidates winning the vote – often, as in the Netherlands, with a large, and largely unexpected, majority. The same trend is now apparent in Germany where Chancellor Angela Merkel gained ground in the German state elections, which boosts the prospects for her Christian Democratic Union (CDU) party in the all-important Federal election in September.

Suzanne Hutchins – Newton, a BNY Mellon company

With over 66% of the vote, Emmanuel Macron’s recent election win in France was a decisive result. Clearly it was a case of the electorate wanting the country to avoid the extremism we’ve seen with Marine Le Pen. The next step is for Macron to name a prime minister ahead of the legislative elections in June. We think the French … read more

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How to avoid FOMO through dividend investing

Returns have been eroded by the ongoing spate of asset support conducted by central banks since the financial crisis. The idea of the global economy weaning itself off measures such as quantitative easing looks ridiculous, with central bankers willing to step in the moment something goes wrong. Investors also expect it. The result of these actions has been to push up valuations of assets. There is a cost to that support and that is lower returns and increased volatility.

One thing you can do is to try and trade that volatility – but good luck. These days unexpected events, like snap elections, make it difficult to build a repeatable process around such an approach. Instead, the nature of sustainable income over time, the power of compounding dividends, could provide a resilient and significant impact to one’s total return, which in the long run, leads to greater asymmetry in returns.  Stability of returns is important to clients and in a world of risk and high valuations, it is ever more important.

However, many growth-oriented managers are still seeking the big story – the next Amazon or Apple. They have a fear of missing out (FOMO). But the ability to pick one particular fish out of the sea is difficult.

I see investing more like Michelangelo who famously, when asked about his art, said it’s what you take away that matters. We take a similar view: take away the statistically unattractive stocks. That’s what the discipline of income does – it narrows down the bucket and forces us to be patient.

Nick Clay – Newton, a BNY Mellon company

Returns have been eroded by the ongoing spate of asset support conducted by central banks since the financial crisis. The idea of the global economy weaning itself off measures such as quantitative easing looks ridiculous, with central bankers willing to step in the moment something goes wrong. Investors also expect it. The result of these actions has been to push … read more

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AI and a brave new world of investing

The development of AI—computer systems that can think intelligently and learn as humans do—continues to generate global excitement and controversy, while dividing public opinion. Some fear the development of intelligent machines poses a greater threat to humanity than climate change and could even presage the end of the world. Others remain optimistic AI can bring huge benefits to humankind, including the scope to boost productivity, revolutionise the workplace and unleash a new wave of global economic growth.

We have identified an AI investment universe of about US$13.5 trillion, including 750 stocks, mainly comprised of US companies. We point to the potential for increased AI application in areas, such as retail, transportation, healthcare, manufacturing and agriculture. The development and adoption of so-called natural language processing and its inclusion in everyday items such as smartphones will likely drive future market growth.

We are going to places we haven’t gone before, and in doing so, there are some unanswered questions that may come into play on ethical dimensions and how much free will AI embodies in machines and what this is used for. These are topics that will come up more and more as AI becomes a part of our daily lives. The hope is we can exploit the potential benefits of AI and harness them for humankind in a way that fosters not only greater prosperity but also helps us to enjoy a better quality of life

Robert J. Kluchko – The Boston company, a BNY Mellon company

The development of AI—computer systems that can think intelligently and learn as humans do—continues to generate global excitement and controversy, while dividing public opinion. Some fear the development of intelligent machines poses a greater threat to humanity than climate change and could even presage the end of the world. Others remain optimistic AI can bring huge benefits to humankind, including … read more

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The key to unlocking value in high yield bonds

The market value of the US and European high yield markets has doubled and tripled respectively over the last decade. This is partly because, since the global financial crisis, fewer corporates have been able to receive financing from banks and have turned to non-bank alternatives (such as bonds) instead.

While we believe a nuanced approach to investing in high yield bonds can be beneficial we also view it as a specialist investment area and demanding substantial skill and resource.

Understanding a company’s business profile is one way of mitigating some of the risks associated with investing in the asset class – but to do so requires extensive SWOT analysis and competitor reviews. Free cash flow is one way of determining the issuer’s financial viability. Most companies, both IG and HY do not generate sufficient cash to repay bond debt. HY companies have a greater emphasis on generating free cash flow and this provides a path to refinancing and overall credit quality improvement. The ability for the company to call (redeem early) or not call its bond can also directly impact its value.

At the same time, the terms and conditions regarding a high yield bond can be complicated and term sheets are frequently several hundreds of pages long. They include details regarding structural protections such as seniority (the bond’s priority in the capital structure), security against company assets and debt covenants. The latter can help ensure a bond’s credit quality is not compromised by company management.

A company’s liquidity is another crucial determinant of its ability to repay. When investment grade companies have no cash available to repay the bond’s principal, they can usually draw on a revolving credit facility. However, high yield companies will not typically have a facility that is large enough. Furthermore, for high yield companies the facility is typically secured against inventories, further blocking available sources of liquidity.

Uli Gerhard – Insight, a BNY Mellon company

The market value of the US and European high yield markets has doubled and tripled respectively over the last decade. This is partly because, since the global financial crisis, fewer corporates have been able to receive financing from banks and have turned to non-bank alternatives (such as bonds) instead. While we believe a nuanced approach to investing in high yield … read more

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The Pearl River Delta: the Achilles Heel of US protectionism

The Pearl River Delta region in China’s Guangdong province remains the manufacturing hub of the world; even if low-end labour-intensive processes are outsourced to Vietnam and Bangladesh, the goods often come through the area for logistical reasons. The densely urbanised region is a vast and highly efficient ecosystem for designing, prototyping, customising, manufacturing and shipping almost anything at dramatically lower cost and faster speed than anywhere else: it is cheaper to ship to Los Angeles from the city of Shenzhen than from San Francisco!

In our view, President Trump would need to introduce very stiff tariffs for any of this production to shift to the US, but the majority would probably still remain in China, leading to a rise in the end price instead.
Interestingly, end-assembly is the most labour-intensive part of the production process, so bringing this part back to the US is where the labour cost differential would be most apparent. There is also the question of whether the US really wants manufacturing – it is a messy business, as can be seen from the smog and the waste-management trucks on Guangdong’s highways.

While 3D printing has reduced dramatically in cost, it is far from threatening mass production, which has also seen big falls in cost, particularly for items such as printed circuit boards and computer chips. Chinese companies are increasingly investing in innovation, and while one leading white goods factory that I recently visited was 20% automated some pilot lines now have 60-70% automation and this is clearly the direction of travel.

Rob Marshall-Lee, Newton, a BNY Mellon Company

The Pearl River Delta region in China’s Guangdong province remains the manufacturing hub of the world; even if low-end labour-intensive processes are outsourced to Vietnam and Bangladesh, the goods often come through the area for logistical reasons. The densely urbanised region is a vast and highly efficient ecosystem for designing, prototyping, customising, manufacturing and shipping almost anything at dramatically lower … read more

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