Which US states have greater GDP than other nations?

Unlike many countries where public infrastructure is planned, financed, construct and maintained by national governments, the majority of US infrastructure is the responsibility of states, cities, counties and public agencies. Each can issue their own bonds, which gives investors opportunities to invest in quasi-sovereign debt from jurisdictions whose economic output rivals that of many countries. This map shows how the individual states’ GDP equals the national GDP of various countries. With sovereign debt yields around the world remaining stubbornly low, higher yielding US municipal bonds can present an attractive, higher yielding, quasi-sovereign option for global investors.

Standish, a BNY Mellon company

Unlike many countries where public infrastructure is planned, financed, construct and maintained by national governments, the majority of US infrastructure is the responsibility of states, cities, counties and public agencies. Each can issue their own bonds, which gives investors opportunities to invest in quasi-sovereign debt from jurisdictions whose economic output rivals that of many countries. This map shows how the … 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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How will commodity prices sway developed market growth in 2016?

More than a year on from the collapse in commodity prices we can see how quickly the global growth prospects of energy exporting countries – in this Australia and Canada – have been affected. We’re not witnessing any restriction in oil and gas supply or any sustained pick-up in demand or pricing – and, given the US’s newfound status as a global non-OPEC producer, nor do we expect to see any concerted action on tackling chronic levels of oversupply. Typically with commodities you see significant overinvestment followed by swift declines in pricing due to overcapacity. It’s a cycle that can last several years to play out and we’re really only at the start.

The reality for 2016 is likely to be a divergent world with different rates of growth and hence a variety of approaches to interest-rate policy. We believe developed economies will continue to expand into 2016 although at different and, on average, moderate rates. It is certainly unlikely to be an environment in which growth picks up to a point where major central banks across the globe will drastically withdraw from their accommodative monetary policy regimes.

Vassilis Dagioglu – Mellon Capital, a BNY Mellon company

More than a year on from the collapse in commodity prices we can see how quickly the global growth prospects of energy exporting countries – in this Australia and Canada – have been affected. We’re not witnessing any restriction in oil and gas supply or any sustained pick-up in demand or pricing – and, given the US’s newfound status as … read more

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Crossing the threshold

The Asian growth story is an enduring multi-decade shift that belies the recent short-term noise around Chinese stockmarket volatility and falling demand for commodities. Even taking into account a slowdown in growth, the populations of Asian countries are still increasing their levels of wealth faster than their Western peers. In China, meanwhile, the transition to a consumption-based economy continues apace – with news that for the first time ever the size of its middle class population exceeds that of the US.

This kind of development supports our view that investors would be well placed to focus on the long term trends and consider adding exposure to Asian economies. This is especially the case at current valuations where the debt of even profitable, blue chip companies enjoying strong government support is trading at attractive yields.

Sarah Percy-Dove – Standish, a BNY Mellon company

The Asian growth story is an enduring multi-decade shift that belies the recent short-term noise around Chinese stockmarket volatility and falling demand for commodities. Even taking into account a slowdown in growth, the populations of Asian countries are still increasing their levels of wealth faster than their Western peers. In China, meanwhile, the transition to a consumption-based economy continues apace … read more

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Are Millennials finally fleeing the nest?

We believe new and existing home sales appear positioned for a sustained, moderate – but jagged – multi-year recovery that should persist for years, supported by a plethora of demographic, cyclical and financial factors.

For the past decade, the percentage of young adults living at home has surged to record highs, but this trend may be about to reverse, placing US household formations at a significant inflection point. As Millennials enter the prime household-forming age range, we could see the release of pent-up housing demand over the next three to five years. This could be spurred by improved job prospects, accumulated savings from living at home — and parents’ growing desire to be home alone.

Michael Arends – The Boston Company Asset Management, a BNY Mellon company

We believe new and existing home sales appear positioned for a sustained, moderate – but jagged – multi-year recovery that should persist for years, supported by a plethora of demographic, cyclical and financial factors. For the past decade, the percentage of young adults living at home has surged to record highs, but this trend may be about to reverse, placing … read more

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Taking a stand against executive excess

Shareholders of US-listed companies were given the right to vote on the compensation arrangements for a company’s named executive officers in 2011. But these voting resolutions are advisory and not binding, unlike in the UK where a binding shareholder vote on pay was introduced in 2014. In the US they act more as a vote of confidence from the shareholders on the remuneration arrangements in place.

During the second quarter, a common theme of concern for us was the lack of linkage between reward and performance, particularly across the pond. In many instances, long-term remuneration awards begin vesting after only 12 months and are not subject to the achievement of performance targets. Irrespective of other concerns, this was the primary reason for Newton voting against the compensation arrangements of the named executive officers and against proposed remuneration plans. Newton also voted against the members of the compensation committee who were seeking re-election to the board.

We will continue to vote actively against executive pay packages that are not aligned with performance and the creation of long-term value for investors no matter where the companies are domiciled.

Ian Burger – Newton, a BNY Mellon company

Shareholders of US-listed companies were given the right to vote on the compensation arrangements for a company’s named executive officers in 2011. But these voting resolutions are advisory and not binding, unlike in the UK where a binding shareholder vote on pay was introduced in 2014. In the US they act more as a vote of confidence from the shareholders … read more

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Is the dollar strength positive or negative for consumer staples?

Overall, third-quarter earnings season for the consumer staples sector has remained largely underwhelming, consistent with its recent past. But several management teams have backed away from their bearish stance and begun to speak constructively about the US for the first time since the financial crisis. The strengthening dollar has been a double-edged sword for many consumer staples companies in the quarter, though. Many of them took a 5-7% haircut to reported earnings because of currency translation, and based on recent spot prices, they may take another 5% hit next year. There is potential upside, however: A stronger US dollar usually means declining commodity prices, which are a positive for the group.

 

David Sealy, The Boston Company

 

 

Overall, third-quarter earnings season for the consumer staples sector has remained largely underwhelming, consistent with its recent past. But several management teams have backed away from their bearish stance and begun to speak constructively about the US for the first time since the financial crisis. The strengthening dollar has been a double-edged sword for many consumer staples companies in the … read more

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Bond yields: together but apart

10-year government bond yields

Bond investors generally like to ride a trend towards convergence, such as when the spread of Spanish and Italian sovereign debt narrowed sharply relative to German bunds following the eurozone crisis subsiding after the summer of 2012. But divergence trades can also be profitable. We believe the relative performance of the US and European economies has presented such an opportunity.

“Though the official policy stance and rhetoric from both central banks remains “lower for longer”, markets are unconvinced. Benchmark yields on a swathe of European government bonds, from German bunds, to French OATs and Spanish bonos, have been falling to new lows. Five-year US Treasury yields, by contrast, have more than doubled since 2012.

Gareth Colesmith, Insight Investment

Bond investors generally like to ride a trend towards convergence, such as when the spread of Spanish and Italian sovereign debt narrowed sharply relative to German bunds following the eurozone crisis subsiding after the summer of 2012. But divergence trades can also be profitable. We believe the relative performance of the US and European economies has presented such an opportunity. … read more

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Acquisitions boost US companies

US continues towards durable recovery

Outlook revisions provide a telling measurement of the health and outlook for US companies. Unsurprisingly, they traditionally occur during earnings season, when companies issue their own report cards. This quarter, it’s been all A’s — acquisitions, activists, America and avoidance of taxes. First, we’ve seen a dramatic surge in acquisition activity, as companies deploy low-cost capital and cash in highly accretive deals. Second, activists are out in full force, with no company immune to their influence, and they are successfully advocating for shareholder-friendly actions like dividends and buybacks. Third, the companies with the greatest exposure to North America had the most positive outlooks, as the US moves along the path of a durable recovery. Finally, one of the biggest stories of the quarter has been the avoidance of taxes, as several US firms employed tax inversions to their advantage. All of these factors are playing a role in driving earnings and shareholder value.

Brian Ferguson, senior portfolio manager, The Boston Company

Outlook revisions provide a telling measurement of the health and outlook for US companies. Unsurprisingly, they traditionally occur during earnings season, when companies issue their own report cards. This quarter, it’s been all A’s — acquisitions, activists, America and avoidance of taxes. First, we’ve seen a dramatic surge in acquisition activity, as companies deploy low-cost capital and cash in highly … read more

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The week that was…

In the week ending 31st July, what stole the financial headlines?

Following the EU’s announcement of further economic sanctions on Russia following its interference in neighbouring Ukraine, company leaders across Europe warned of the impact on their businesses. The sanctions, deemed the toughest taken against Russia since the end of the Cold War, target the country’s energy, financial and defence sectors. Meanwhile, having shrunk by 2.1% in the first three months of the year – owing much to abnormally poor weather conditions – the US economy grew by an annual rate of 4% in the second quarter of the year. The US Federal Reserve continues to ‘taper’ its asset-purchasing programme and is on track to have completed the process by the end of the year. Elsewhere, as Israel’s bombardment of Gaza continued last week, US Secretary of State John Kerry was heavily criticised by officials in Israel as he failed to broker a ceasefire between the Israelis and Palestinians. The nature of Israel’s offensive in Gaza, a reaction to attacks by Hamas, a Palestinian militant Islamist group, has drawn widespread condemnation from international observers.

Headline Hotlist & World/ Asset Returns Source: The BNY Mellon Investment Strategy and Solutions Group (“ISSG”) as at 01/08/14. ISSG is part of The Bank of New York Mellon.

Following the EU’s announcement of further economic sanctions on Russia following its interference in neighbouring Ukraine, company leaders across Europe warned of the impact on their businesses. The sanctions, deemed the toughest taken against Russia since the end of the Cold War, target the country’s energy, financial and defence sectors. Meanwhile, having shrunk by 2.1% in the first three months … read more

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