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Daily Agenda: Doubts on China Data Roil Markets
IG to IPO its mortgage insurance division; Bund yields reach all-time lows; Procter & Gamble reports decline in revenues.
Concerns over the Chinese financial system continue to reverberate through global markets. The benchmark Shanghai Composite Index declined by more than 6 percent during Tuesdays trading session, bringing the benchmarks slide from the high in June to nearly 50 percent. The marked discrepancy between trade data recorded by China and that of Hong Kong has raised fears that false invoices are once again being deployed by private-sector managers seeking to move capital out of the yuan. Estimates for outflows in 2015 top $1 trillion despite attempts by the Peoples Bank of China to quell volatility in debt and currency markets attempts that led to a decline in central bank foreign reserves for the first time since 1992.
AIG to IPO mortgage insurer. In an announcement today, New York-based American International Group revealed plans for an initial public offering of the companys mortgage insurance division and the sale of an advisory unit as the insurer seeks to offset a reserve shortfall of nearly $3.6 billion. The moves come after months of demands by activist shareholder Carl Icahn, who advocates that the firm be split into three stand-alone entities to maximize shareholder value.
German Bund yields test lows. The yield for German government securities maturing in two and five years reached historic lows in trading today as concerns over emerging markets and recent comments by European Central Bank president Mario Draghi reiterating his commitment to easing spurred a flight to safety among investors. The implied yield for German two-year Bunds approached an annualized negative 0.5 percent in trading Tuesday.
Procter & Gamble reports revenue decline. Bellwether consumer-staples giant Procter & Gamble Co. announced fiscal second-quarter results with a decline of 8.5 percent in sales versus the same period during the prior year. While sales by volume rose modestly the negative impact of currency fluctuations drove revenues lower for the Cincinnatibased company during the final three months of 2015.
DuPont warns on currency impact. In a statement today, Delawareheadquartered chemical titan DuPont, which is currently consummating a merger with Midland, Michigans Dow Chemical, lowered full-year guidance to a range of $2.95 to $3.10 per share significantly below consensus analyst estimates. Officials at DuPont cited the effect of a strong dollar on sales as a primary cause of the revised guidance.Portfolio Perspective: Why Global Equity Strategies are Increasingly Popular Ricardo Bekin, Ativo Capital Management
Obviously there has been quite a bit of volatility to start the year across all markets, and global equities havent been immune as evident in the MSCI World index these first few weeks of 2016. Still, were seeing a lot of interest from institutional investors that want exposure to global equities and this is being driven by a number of factors.
Chief among those is that increasing the breadth of a portfolios investable universe generally has a positive influence on risk-adjusted portfolio returns. Beyond operating in a more expansive investment universe, the increased market volatility available across regions also improves the opportunity set for active managers. In a market like were seeing today, this is particularly true and can help moderate risk.
There are other factors. For instance, institutional investors like the fact that they can hire one experienced global equity manager. To take advantage of the size of the investment universe there is usually a bias for an active unconstrained investment strategy. This allows the fund manager to opportunistically tilt between developed and emerging markets; move into different sectors, market caps and countries; or even vacillate between varying investment styles depending on the opportunity set, be it growth, value or momentum stocks.
From the perspective of the plan sponsor, this is far more efficient than paying for and monitoring a number of separate managers to piece together exposures to the same areas of the market. The piecemeal approach to asset allocation also makes it difficult to capitalize on short-term opportunities at the plan level, at least not quickly enough to access all of the upside potential. Its also not lost on plan sponsors that a separate tactical asset-allocation manager, or TAA, can be quite costly and most smaller or mid-sized plans dont have a large enough staff to successfully implement and monitor a TAA overlay.
Even though investor flows into active global equity mandates have more than tripled over the last decade, the number of managers offering global mandates is still dwarfed by those overseeing U.S. equity mandates. This is largely due to the added layer of complexity that comes with a global scope. With over 40,000 stocks worldwide, for instance, we have to consider country-specific costs of capital, forecasted regional growth rates and indirect economic revenue exposures. Another concern for plan sponsors is the potential for overexposure when investing through multiple fund managers, and these can be hard to detect. For example, owning Apple, a U.S. stock, may create a high indirect exposure to China. Your typical emerging-markets fund manager wont be taking this into account as part of their stock-selection process.
Ricardo Bekin is founder, CEO and CIO of Ativo Capital Management in Chicago.