Will International Equities Finally Outperform? September 2016

Marco Pirondini is Head of Equities, US and Portfolio Manager of global equity strategies.

Since 2009, US equities have been on a roll compared to international equities. We think this is about to change. The primary reason US equities have outperformed is that earnings growth for US companies has been higher than for international companies. We believe international earnings growth may begin to accelerate, benefitting international stocks.

Why has earnings growth been higher in the US in recent years? In our opinion, more favorable demographics, a greater focus on economic efficiency and returns, a higher level of innovation and well-developed financial markets have all contributed to higher US earnings growth. We believe these factors will continue to drive earnings growth in the US going forward.

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2 Things the European Investment Grade Fixed Income Team Talked About Last Week

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  1. Bank of Japan – Some Further Thoughts

As we have had more time to digest the announcements from the Bank of Japan (BoJ) last Wednesday, there are a number of things that catch our attention. Firstly, my old university economics professor used to teach me that “you can control the price of something, or you can control the quantity of something, but you cannot control both the price and the quantity of something”. Yet that appears to be exactly what the BoJ are trying to do. Announcing a move to Yield Curve Control, the BoJ are targeting a rate of around 0% on the 10-year Japanese Government Bond (JGB), whilst simultaneously maintaining the annual pace of JGB purchases at the current run rate of JY80trn per year. The pledge to keep the 10-year JGB rate around 0% may involve bond purchases being less or more than they have been so far – less if the 10-year JGB continually trades below 0%, more if it continually trades higher than 0%. So there’s an inherent inconsistency in both these targets. Maybe, as ex-U.S. Federal Reserve Chairman Ben Bernanke suggested, the BoJ was concerned that dropping the JY80trn yearly purchase target would lead market participants to think that the BoJ was “tapering” its Quantitative & Qualitative Easing programme.

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Fed Monetary Policy: A Moving Target

United States federal reserveAs expected, the Federal Reserve Board yesterday left interest rates unchanged following the September meeting of the Federal Open Market Committee. In its statement following the meeting, the FOMC said, “The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.”

The Fed appears to be moving its targets. Chair Janet Yellen cited the need to wait for further improvement in the economy, even though there is evidence that the Fed’s goals have been achieved. She indicated that Committee members will continue to assess economic conditions but made no commitment on the timing of a rate increase. According to Bloomberg, the futures market places a 59% probability on a December hike, but the Fed’s shifting views make that uncertain.

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Key Take Aways from Today’s Bank of Japan Meeting

WFL_0941. Following a comprehensive assessment of monetary policy settings, the Bank of Japan (BoJ) this morning announced “tweaks” to their settings rather than radical changes. Prior to the meeting, press reports had suggested that the BoJ were split in terms of the actions that were deemed necessary. That in turn meant there was a wide spread of expectations in the market as to what would be announced today. The first “tweak” is to shift the focus of monetary stimulus from expanding the money supply to controlling the yield curve. The second “tweak” is to commit to “inflation-overshooting” with the monetary base expanding until inflation stabilises above the 2% target.

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3 Things the European Investment Grade Fixed Income Team Talked About Last Week

Finding the solution1. Japanese Government Bonds – Canaries in the Coalmine?

In late January 2016, the Bank of Japan (BoJ) surprisingly cut their deposit rate to -0.10%, despite BoJ Governor Kuroda denying that he had contemplated such an action only a few days previously. That sparked a strong rally in Japanese Government Bonds (JGB’s) that pulled the yield on the 10-year JGB from +0.20% to a low of -0.29% by end-July. Arguably, this move started the global rally in bond yields that also saw 10-year German Bund yields move into negatively yielding territory. One of the other effects of the BoJ’s action was a massive flattening of the JGB yield curve, with the spread between 2-year JGB’s and 30-year JGB’s compressing from a level of 130bps in mid-February to a low of 36bps by the end of June. As with the fall in yield of 10-year JGB’s, this yield curve flattening was mirrored in other global bond markets, as the similar spread in Germany fell from +180bps at end-2015 to a low of 97bps at end-July. Continue reading

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