Marco Pirondini is Head of Equities, US and Portfolio Manager of global equity strategies.
Energy investors are focused on OPEC’s recent pledge to curb oil production, which triggered wide swings in oil prices and expectations of higher prices ahead. But we’re wary of the oil outlook. The market is oversupplied, with inventories close to all-time highs for both oil and refined products. OPEC recently surprised the market with an announcement that it has brokered a deal to cut about 800,000 barrels a day. For context, production has risen from under 30 million barrels a day at the end of 2013 to almost 34 million barrels a day as of 9/30/16. Will 800,000 barrels a day make a difference?
1. Chinese PPI – A Warning Sign?
With plenty of headlines during the week devoted to the U.S. elections, Sterling’s fall (of which more below) and a potential shortage of Marmite (don’t ask), it would be easy to have missed the news that the Chinese Producer Price Index (PPI) turned positive in September for the first time since early 2012. The index is a measure of factory-gate prices and economists suggested the pick-up was driven by gains in coal and copper prices amid a government push to scale back overcapacity. The slow but continual weakening of the Chinese Renminbi has also been a factor, with the exchange rate recently having broken the 6.70 level against the U.S. Dollar. The release of the PPI number coincided with the announcement that headline Chinese consumer price inflation accelerated from an annualised rate of 1.6% in August to 1.9% in September. Given the close link between producer prices and export prices, it raised hopes that China might soon stop exporting deflation to the rest of the global economy. It’s also a potential sign that global deflationary fears are fading, which would be welcome news for most of the world’s major central bankers. Feedback we received from the recent International Monetary Fund (IMF) meetings in Washington suggested that policy makers were watching Chinese PPI with interest, noting its recent improvement. Some in Washington believe that this improvement could spill over into global inflation numbers, and potentially alter many policy and rates assumptions. In a number of previous blogs, we have expressed our view that headline inflation rates could soon start to pick up, as last year’s fall in oil prices drops out of the calculations. Over the coming months, the inflation figures should see a rising oil price compared to this time last year, and this effect may push inflation higher. We also believe that the inflation protected securities offer good value at present levels. We are beginning to build positions in inflation markets that should benefit from this anticipated pick-up in headline inflation rates.
Party Season for Politics
Market Complacency over the last number of months has surprised the European Equity desk. This complacency was likely predicated on two factors – investor sentiment around global growth improving somewhat and a view that central banks would provide greater support given the uncertainty following Brexit. Neither of these arguments are particularly convincing and recent narrative from central banks appears to support our interpretation. With valuations fuller – the market is vulnerable to any event-driven risk. Political risk, in particular, is not priced into equity at this point. With the forthcoming political calendar event-heavy – this dynamic is unlikely to last for long.
(Part two of two) In my previous blog, The Era of Investment Solutions, we envisaged an evolution of the role of active managers from product to solution providers. Here, I will continue with that idea. If we look at flow data in the period 2011-2015, we see that the “era of solutions” has already begun with most of the flows (more than 1 trillion euro) going to multi-asset, fund of funds and liquid alternatives. The growing appetite for income products we have seen in the last five years is also part of this trend towards solutions.
Global Mutual Funds and ETFs (ex-Money Market) Net Flows in 2011-2015 (Mln)
Source: Pioneer Investments on Strategic Insights data. All long-term mutual funds including index and ETFs sold in the world excluding Australia and Canada. Data as at 31 December 2015. Liquid Alternatives include absolute return and liquid alternative products. Other (commodities, real estate and other not classified) not included.
Posted in Economy, Emerging Markets, Equity, Fixed Income, Industry Insights, Markets
Tagged active investing, asset management, Giordano Lombardo, investing, passive investing, risk management
(Part one of two) Investors are increasingly of a view that the future will be tough and they will face a long period of unprecedented challenges. This evolving environment will likely have profound consequences not only for how investors make investment decisions, but also for the future of the asset management industry. I believe this is the time to rethink our business as an asset manager and build new partnerships with clients.
From an investment point of view, we foresee long-term expected returns for all asset classes (on a 10-year horizon) continuing the downward trend that characterized the last decade.