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Ligia Torres, head of emerging markets at BNP Paribas Investment Partners, discusses her firm’s core philosophy and investment strategies.
How does BNP Paribas Investment Partners approach emerging markets?
We firmly believe that consistent performance in emerging markets can only be achieved by having investment professionals based in those markets. Because our business model is not only to cover global clients, but most importantly to grow and service our domestic clients based in those jurisdictions, our business philosophy is much more locally focused.
How have emerging markets changed?
Emerging markets in the past had many similarities: poor foreign exchange reserves, large external debt, and some of the currencies were pegged to the dollar. Their debt was in dollars, there were high levels of inflation and their monetary and fiscal policies were poor, all of which translated into multiple crises. However, various countries have implemented reforms, such as de-pegging their currency from the dollar, deleveraging from dollar debt into local currencies and they were benefiting from growth. The search for yield brought international inflows and started to build foreign exchange reserves. Nowadays some emerging economies are stronger than their European counterparts.
What is the most widely held misconception about emerging markets?
That all emerging markets are the same. Nothing could be further from the truth, and this is even more the case these days. The international outflows from emerging markets that took place during recent years is largely attributed to investors treating all emerging markets in the same way. Just as there are emerging markets that should be avoided, there are also emerging markets that offer great value at present. In order to really understand emerging markets, you need to be on the ground
Which emerging market region is the most attractive?
The growth of Asian economies, even with a Chinese slowdown, will still be around 4.5%; you don’t have that level of growth in the Americas or Europe. If you need to invest, our view is Asia offers favourable, risk-adjusted returns.
What separates BNP Paribas Investment Partners from its international competitors?
We are in 16 countries and have the largest investment footprint on the ground of any asset manager covering emerging markets. We believe it is essential to be on the ground to bring value to clients.
At BNP Paribas Investment Partners, we adopt a three-dimensional approach. Selling local products to local clients, that’s the core of our business, and from there we can export products to international clients. The third dimension is to import global products such as European equities, for instance, into local emerging markets. Many global players only offer one of these dimensions, which makes them very vulnerable to short-term flows. Our asset base has been steadily growing over the past years as a result of the diversity of the business.
What’s the strategy going forward?
We will continue our strategy of building a strong domestic client base relying on high-quality local investment teams. This will enable us to be in an excellent position to capture the double-digit growth of local ‘investment savings’ through the distribution of our global products when some of these markets will open up. In addition, we will continue to offer our on-the-ground emerging markets expertise to global investors. After the past years of international investors withdrawing money from the developing world, we see them increasingly acknowledging the current opportunities in emerging markets.
Adeline Ng, head of Asia fixed income at BNP Paribas Investment Partners, sees positive fundamentals in the region’s bond markets.
Why should European investors consider Asia Fixed Income for their portfolio allocation?
The low interest rate environment is impacting the attractiveness of European fixed income instruments. This environment has prevailed since the Global Financial Crisis (GFC). The current backdrop has the European Central Bank (ECB) committed to Quantitative Easing (QE) measures and various countries are cutting interest rates, so easy monetary conditions and low yields look likely to continue. The quest for yield has meant that European investors have had to explore outside the European fixed income universe. In the past, they would have done so in emerging markets but for two or three years, news flows have been negative. If an investor goes by fundamentals, they find that Asia ex-Japan’s growth is around the 6% level and Asia has been a beneficiary of the decline in oil prices, policies flexibility and stronger growth.
How about credit quality and default rate?
In the past 18 months, Asia enjoyed a stable to positive rating outcome, compared to developed economies and other emerging economies that were subject to downgrades. Currently, in the Asia universe, almost 80% of issuers have investment grade status. According to Fitch’s study on corporates from 1990 to 2014, Asia is the only regional block that had a zero default rate in its investment grade universe. In the high-yield space, we will close the year a touch below 3%. Historically Asia has a lower default rate in high-yield than other emerging markets: in 2003-05, 2007 and 2011, it was zero.
Given broad emerging market volatility, what differentiates Asia from its peers?
Its better growth rate, despite the global growth moderation. Also, its growth contribution is around 50% of global emerging market GDP. The defining line is in policy flexibility. This year, you’ve had rate cuts in Thailand, China, Korea, India and Taiwan, but real interest rates is still around the 5% level, adjusting for inflationary pressure, which means you still have room to cut.
Fiscal policy is also important: government debt and fiscal deficits are lower compared to both developed and broad emerging markets. This gives governments room to spend. There has been some spending in China and South Korea but by and large, you don’t have significant government spending across Asia.
Are you worried about the slowdown in China?
China’s slowdown was well guided in advance. The government had already hinted the new normal was 7%. The IMF’s forecast was for 6.5% -7%. The People’s Bank of China has been proactive in using various means of boosting liquidity via cutting lending benchmark rates, reserve requirement ratio and standing lending facility to cushion the growth moderation. China is also adopting a ‘pro-active’ stance in its fiscal policy: given its low government debt and high FX reserves, it has significant room on spending. Volatility in equities and currency may dampen sentiment but does not remove this flexibility.
What is the outlook for Asia credit bond markets?
Asia has positive fundamentals. Asian bonds give you 60-80 bps above their US and European investment grade counterparts, which are trading below their long-term average; Asian bond valuation are slightly higher than their long-term average. On the valuation angle, Asian bonds look reasonable. In terms of risk factors, oil spikes are unlikely to derail the situation. We also monitor currency, but finance ministers at the Asia-Pacific Economic Co-operation meeting re-affirmed their commitment to refrain from competitive devaluation and resist protectionism.
As we move towards 2016, firms across the financial industry will be setting out their budgets and plans for the year ahead – and it seems clear that market infrastructure, new regulations and tax changes will play a bigger role than ever in influencing and shaping that planning process.
BNY Mellon’s current regulatory timeline includes no fewer than 20 changes between 2015 and 2019, with an increased concentration in activity during 2016 and 2017. Our own annual EMEA Tax and Regulatory Forums are an opportunity not only to share our understanding of these changes but also to take a pulse check on the impacts, challenges and priorities that lie ahead.
Based on a survey of delegates attending our recent 2015 Forum in London, many firms are indeed gearing up for a period of increased activity in 2016: 53% of respondents believe they will spend more on managing regulatory change in 2016 than they did in 2015, up from 41% this time last year.
It is clear from the survey that some regulations are deemed to be more of a priority than others, the most important being FATCA/CRS, MiFID II and UCITS V.
FATCA/CRS and UCITS V are perhaps no surprise, given the proximity of their respective compliance deadlines early in 2016. However, MiFID II has raced up the priority order in the past six months though this could again change as the deadline has recently been moved out to 2018.
The second ‘tranche’ of priority regulations include T2S, EMIR, Solvency II, the Financial Transaction Tax, and Money Market Fund regulation. Though viewed as a lower priority, the scale of the associated impact on specific firms should not be understated.
The current lower prioritisation on these regulations may also reflect the fact that some of them are still at the proposal stage, and hence resource and investment are yet to be allocated in 2016.
The third, seemingly lowest-priority tranche includes BEPS, PRIPS, Volcker, CRD4, CSDR, the Shareholders Rights Directive, IORP II and Capital Markets Union.
It is not surprising to see some of these deemed low priorities. In the case of Volcker, for example, the impacts have been largely addressed.
However, others – such as PRIPS and BEPS – are not dissimilar to other changes such as CRS and MiFID II, both in terms of their potential impact and their timing; accordingly, they can be expected to become higher priorities as we move through 2016.
When asked if these regulations would have a material impact on their firm, 85% of delegates polled agreed that this would be the case over the next 12 to 36 months. Immediate impacts are expected to be felt around resourcing, projects and IT, with 42% of respondents delaying product development in favour of other investments due to regulatory related work.
The survey did suggest firms see benefits and potential opportunities arising from regulations, but these are at once ill-defined and some way off, probably beyond 2017, by which time the hope is that the volume of regulatory work will have begun to decline. However, 2016 and 2017 look to be very busy and challenging years.
The views expressed herein are those of the author only and may not reflect the views of BNY Mellon. This does not constitute investment advice, or any other business, tax or legal advice, and should not be relied upon as such.
In a recent webinar, Funds Europe spoke to Chris Hart, portfolio manager of the Robeco Boston Partners Global Premium Equities Fund, about how he seeks to tap into global opportunities from a value and growth perspective.
‘Buy low, sell high’ is a universally accepted and understood investment doctrine. However, a failure to properly comprehend value means investors can lose out.
Since launch in December 2004, the Global Premium Equities Fund has cemented a reputation for identifying both unacknowledged value and unrecognised overpricing.
This success is reflected in the fund’s consistent outperformance of the MSCI World Index, and its universally high ratings among research firms. Last year, it was the only equity fund to win nine Morningstar awards in Europe.
Fundamental to the fund’s success is its ‘three circles’ philosophy; the three circles being valuation, business fundamentals and business momentum. When Chris Hart took over management of the fund in 2008, he removed constraints that the previous portfolio manager had abided by and shifted the emphasis to finding stocks that fit the three circles philosophy, no matter the region, market capitalisation or sector.
He states the blending of these three characteristics results in a consistent return profile.
“When we assess a company, we ask three questions: does it offer an inexpensive valuation, does it exhibit strong earnings momentum, and does it achieve high levels of return on employed assets?” he says.
“The valuation lens is always the first hurdle for us, and the characteristic we are most sensitive to. We aim to find stocks with share prices which do not reflect the real underlying value of the business.”
Another key consideration is the momentum of the business: simply put, is it getting better, staying the same or getting worse? This piece of the philosophy, Hart comments, helps prevent investments in value traps – good businesses with low valuations and no reason to appreciate. Instead, “we want companies that are performing well quarter to quarter and have an identifiable catalyst to help it reach the target price we set for it,” he says.
“If the price of a stock you hold gets cut in half, you’ll need a 100% return to recoup that lost capital – a company needs to be capable of achieving this, or it doesn’t make it into our portfolio.”
Having a sustainable cash flow is an important element – and also important is what a company does with its cash. Hart favours stocks that use capital in a shareholder-friendly manner – such as buying back shares and increasing dividends – and to positively grow their business, whether organically or through acquisition.
The fund’s portfolio is generally comprised of around 100 stocks to ensure diversification.
Stocks from any sector, industry, region or country can be considered for investment. There are some conditions in respect of capitalisation, but the fund is even malleable in this regard.
“Names $1 billion and upwards are our real sweet spot from a liquidity perspective, but we will look at small-caps down to a few $100 million in size,” Hart explains.
He is keen to stress that no macro overlay of any kind figures in the fund’s analyses. The selection process is resolutely bottom-up and unconstrained – its sole raison d’être is to find and purchase undervalued quality stocks, identify the point at which they reach their full market value, and sell when that time comes.
The truly dispassionate nature of the fund’s selection method is evidenced in its regional weightings over time. Since launch, US exposure has ranged from 40% to 61%, Europe 12% to 40%, the UK 8% to 22%. These weightings have frequently deviated from the MSCI World Index’s own.
Currently, Hart sees little missed value in Europe, contrary to growing investor interest in the continent. Spain and Italy may be slowly recovering, but the fund makes no differentiation between countries, only stocks.
“[Europe’s] largest companies look fully priced, but there are opportunities in the small to mid-cap area. We currently have some exposure to insurance companies there, as they continue to deliver capital.
“There was an expectation the rising tide of QE [quantitative easing] would raise all boats, but this hasn’t happened – and the recent announcement of more is an indication the policy isn’t working as they expected. There have been individual stock-level improvements, but overall little progress.”
Despite this, some areas of the world map are off-limits, at least for the time being – Russian stocks, for instance, are currently “uninvestable” from the ‘three circles’ perspective.
Contrarian, or contrary?
The three circles approach has produced a portfolio some may find surprising. For instance, Apple is the fund’s largest holding, which might seem at odds with Hart’s stated aim of only purchasing inexpensive stocks.
“When we piece the three circles together, Apple really exemplifies an area of mispricing – it exhibits strong underlying fundamentals, with expanding and stable margins, supportive free cash flow levels, and growth rates vary from high single to low double digits,” Hart says.
“Its free cash flows and growth rates are higher than the market, so we see a disconnect between the company’s valuation and its fundamentals.”
When Apple will reach its target price remains to be seen.
An example of a recently jettisoned stock cited by Hart is Japanese commercial kitchen equipment manufacturer Hoshizaki. “We purchased the stock in Q4 of 2014 and it took a sizeable position in our portfolio. It performed extremely well and we sold when it hit full value in Q3 this year,” Hart says.
A look at the fund’s portfolio on a sector basis demonstrates the fund’s ability to deliver significant returns from contrarian plays. Comparing the fund’s returns from sector areas with the MSCI World Index show sizeable disparities. (See table for examples).
“It’s a hallmark of mispriced securities. When a sector’s out of favour, often there are many well-run companies painted in a very broad-brush manner, which produces that valuation disconnect we look for,” Hart says.
The fund had assets under management of €2.2 billion (at the end of November 2015 ) and has consistently outperformed its benchmark over the last five years through a range of market environments.
The Unlocking the potential of global opportunities webinar is available on Funds Europe’s Webinar Channel.
Disclaimer: Important information - This statement is intended for professional investors. Robeco Institutional Asset Management B.V. has a license as manager of UCITS and AIFs from the Netherlands Authority for the Financial Markets in Amsterdam. This document is intended to provide general information on Robeco’s specific capabilities, but does not constitute a recommendation or an advice to buy or sell certain securities or investment products. The prospectus and the Key Investor Information Document for the Robeco Funds can all be obtained free of charge at www.robeco.com.
By Phillip Caldwell, Global Head of Cross-Border Pooling Product, Northern Trust
The funds industry faces intense operational pressure from proposed regulatory and other changes. Euroclear’s Scott Caine says firms must do more to embrace automation if they are to keep their business agenda on track.