Sharing our convictions

European bond markets can breathe a sigh of relief this morning as Christine Lagarde is poised to be the new president of the European Central Bank, succeeding Mario Draghi in October.

As we approach the end of Q2, a time when the price of currency hedging can typically spike, we have been reviewing the likely changes in the so-called ‘costs’ of currency hedging. I use the term so-called as these are not really costs, merely a differential in short term interest rates, which for some investors can be a gain and for others it will be a reduction in the yield or return of an asset.

Dominant technology companies protected by awesome ‘network effects’ can benefit society and investors. But monopoly control of communications or private information can have unexpected consequences for users. How bad it can get depends on who’s running the company and who runs the regulators. What is ‘network effect’ and how can it be controlled?

This week Jerome Powell and his fellow FOMC members sit down to determine the Fed Funds rate, and despite the expectation of no move, this meeting is going to be very closely monitored with market participants analysing every word of the subsequent comment.

As we wrote on Friday, one of our biggest takeaways from last week’s Global ABS conference was the growing number of prospective new issuers in the market.

This week Asset-Backed Securities (ABS) market participants from across the globe gathered for the 23rd annual three-day Global ABS conference in Barcelona. And this year it proved more popular than ever with over 4,000 attendees (a post-crisis record) made up of issuers, arrangers, service providers, traders, analysts, market regulators, the industry press, and of course investors like ourselves. In particular, we felt the number of issuers represented was noticeably higher than we have seen in recent years.

Brexit deliberations are currently at a standstill in the UK parliament, as are negotiations with EU representatives. The next steps in the exit process are clouded in uncertainty, with numerous options on the table. In this environment, it’s no surprise that investors are still demanding a spread premium for sterling denominated credit, over and above comparable euro denominated issues.

Despite boasting some of the lowest default rates across the global fixed income market, as well as higher yields and greater investor protections than vanilla corporate bonds of the same rating, Asset-Backed Securities (ABS) remains an under-utilised market for many pension funds. TwentyFour partner Ben Hayward outlines five things every investor should keep in mind when looking at this compelling asset class.

With markets now pricing in two cuts in the Fed Funds rate this year, and a 97% chance of at least one cut, once again the FOMC members are at odds with the financial markets.

China’s ambitions being challenged is creating significant uncertainty. Alongside this, MSCI and FTSE appear to be stumbling over each other to add China weight to their indices. The potential to reshape the benchmarks has significance – for both active and passive investors. Is the herd being led down a dark alley?

One of the main drivers of global markets at the moment is the exact status of the economic cycle in the United States, and on a related note, what the Federal Reserve’s next moves are likely to be. One question we are being asked more and more often by investors is whether we think a recession is coming in the US, and if so, when?

Since the result of the UK referendum in June 2016 there has been a noticeable ‘Brexit-premium’ associated with most sterling denominated assets.

While a big payday for a CEO is not headline material anymore, it still makes most people queasy. When a CEO earns $20 million in one year, it would take someone making $100,000 a year more than four lifetimes to earn the same amount. Balance matters.

Last Friday’s strong US GDP reading for the first quarter has sparked several days of debate between TwentyFour portfolio managers. The 3.2% reading was 100bp ahead of consensus, so a strong beat at the headline level, but the components accounting for it, such as inventory building, suggested the figure was an aberration and likely to reverse in Q2.

Emerging Market (EM) bonds have had a good year so far. While they are not at the very top of the performance table, the hard currency CEMBI (Corporate Emerging Markets Bond Index) is up 5.69% in $ since the start of the year, and the EMBI (Sovereigns) is up 6.32%; not bad at all.

The cycle of banks calling outstanding capital bonds continued this week and we’ll soon be bidding fond farewells to two of our long held and favourite positions; Nationwide’s 6.875% Additional Tier 1 (CoCo) and Barclays’ 14% hybrid Tier 1.

Since the start of the year credit markets have been very well supported, reversing much of the sharp period of spread widening we experienced in the final quarter of 2018.

The ECB published the result of its Supervisory Review and Evaluation Process (SREP) yesterday, which increased the average capital requirements for European banks, and overall, increased the average SREP requirement by approx. 100bps.

For fixed income investors, it has been impossible to ignore the proliferation of press coverage about the growth of the triple-B rated corporate bond market, and a coming wave of downgrades for companies rated BBB to high yield, with these ‘fallen angels’ exposing investors to mark-to-market losses at best, and defaults at worst.

A growing emerging markets middle class and increased domestic demand may reduce poverty across the planet, and also provide fertile ground for investors. Companies that can consistently deliver to increasingly wealthy EM consumers stand to profit.

In this Viewpoints paper, Gary Thompson, Head of Trading, explains how overseas investors can get exposure to Chinese A-shares and Chinese Depositary Receipts (CDR).

In this Viewpoints paper, Igor Krutov, Director of Research, explains why most European banks suffer from structurally poor profitability. Even “average” U.S. regional banks are earning ROTEs (returns on tangible equity) in the mid-teens, something most European banks can only dream of.

As bottom-up quality growth investors, our choices are not generally driven by macro factors such as inflation. But it is important to test the strength of our portfolio against macro challenges.

Brazil has sold off as the market fears the country is in trouble. If the huge pension program is not reformed, it will add expense to a budget already in deficit – and reform has proven extremely difficult. On top of this, there will be a new President elected in October. The race is so open and full of new and anti-establishment candidates, there is a fear that reform may languish along with the country’s finances.