THE INVESTMENT YEAR - Old Mutual · 2016 THE INVESTMENT YEAR 20 26 28 22 24 18 05 06 14 08 10 12 16...

201

6THE

INVESTMENT YEAR

Building better solutions.

2

OLD MUTUAL GLOBAL INVESTORS

3

2016 THE INVESTMENT YEAR

20

26

28

22

24

18

05

06

14

08

10

12

16

Warren Tonkinson, managing director

CURIOUSER AND CURIOUSERUK – Richard Buxton INFLATION STEALING AND

UBER-PRODUCTIVITYGovernment bonds – Christine Johnson

THE ART OF EXECUTIONLee Freeman-Shor

SIX FOR 2016Anthony Gillham

WHY CHINA’S SLOWDOWN WON’T WRECK THE WESTERN RECOVERYAbsolute return government bonds – Adam Purzitsky

EMD: THINGS CAN ONLY GET BETTEREmerging market debt – John Peta

WHEN YOU COME TO A FORK IN THE ROAD, TAKE IT

UK long/short – Simon Murphy

GO SMALL AND STAY AY HOMEUK and European small and mid cap – Ian Ormiston,

Dan Nichols and Richard Watts

GIVE ME FEVEREuropean large cap – Kevin Lilley

POWER TO THE PEOPLEAsia – Josh Crabb

MOMENTUM MAY HAVE HAD ITS TIME IN THE SUNGlobal – Ian Heslop

FOREWORD

EQUITIESFIXED INCOME

GET IN TOUCH

MULTI-ASSET

4


5


WELCOME

2015 has been, by virtually any measure, another extraordinary and unpredictable year, characterised by volatility in both sentiment and markets. Inevitably, it has been a difficult environment for investors to navigate.

Over the course of this year, we have stuck enthusiastically to what we believe is a proven and effective formula to support our clients. In essence, this is a simple approach: we aim to recruit and retain some of the top talent in investment management, and to give them the necessary support and freedom to perform to the best of their ability. Our commitment to remaining a ‘CIO-free zone’ is as resolute as our commitment to providing excellent support and service.

Independence of thought, therefore, is at the heart of what we set out to do on behalf of our diverse client base. This, our annual compilation of investment outlooks, continues to demonstrate how independent thinking works at Old Mutual Global Investors.

We do not profess to have all the answers, but we will always aim to communicate our thinking succinctly and clearly. The articles in this collection have been compiled without reference to each other, and as such contradictions between the views articulated are not just ‘allowed’, they are seen as a healthy sign.

It has been a busy and fulfilling year for our business, with an early highlight being the launch of our Hong Kong-based Asian and Chinese equity offerings, headed by Josh Crabb. To truly understand Asia, we believe, requires a dedicated presence on the ground. In common with those in much of the rest of the world, investors in the region have not been without their challenges this year; nevertheless, we remain as excited as ever for Asia’s long-term prospects.

A further important development was the launch of our rates capability in the autumn. The strategies from Russ Oxley’s team have already enjoyed significant interest from clients, validating our own belief that investors will increasingly look to genuinely alternative, uncorrelated sources of return in a rising interest rate environment where some more ‘traditional’ approaches may no longer be optimal. We will continue to invest in our absolute return franchise, which already features liquid macro, fundamental UK equities (including long/short strategies in both mid and small-cap and large-cap markets), and global equity market neutral capabilities.

We hope you enjoy reading the latest thinking from some of our brightest investment minds. As ever, please don’t hesitate to contact us – we’d be delighted to hear from you.

Warren Tonkinson, Managing director

6


CURIOUSER AND CURIOUSER

In our crazy QE-distorted world, where buyers of short-dated European bonds are guaranteed to lose money if holding until redemption, we are faced daily with anomalies and distortions at odds with rational analysis and investment behaviour.

So, in the year which marks the 150th anniversary since Alice fell down the rabbit hole in Lewis Carroll’s children’s book Alice in Wonderland, let’s look at some of the ‘nonsenses’ out there.

2015 was another year overshadowed by the ‘will they, won’t they’ debate over higher US interest rates. 2016 will continue to be dominated by interest rate policy, even if the question now becomes ‘how high, how quickly’. The concern about the strength of the global economy is not going away any time soon.

Thanks to the impact of slower growth in China and other emerging markets, plunging commodity prices and massive retrenchment by oil and mining

The ever-widening valuation gap between

companies offering a reasonable certainty of growth and ‘the rest’ – be it cyclical, recovery,

value or mega-cap – is becoming untenable,

argues Richard Buxton, head of UK equities.

EQUITIES

7


companies and all those touched even tangentially by their behaviour, industrial activity is weakening. Profit warnings and earnings downgrades from industrial companies worldwide abound, with manufacturing surveys pointing sharply south.

By contrast, most service sector surveys are still pointing firmly upwards. Developed world consumers are benefiting from robust labour markets, modest income growth and lower fuel and energy costs. A key question for 2016 is whether the industrial weakness infects broader corporate sector confidence, undermines the strength in job creation and saps consumer appetites.

If so, US rates are hardly going up at all – but then neither are corporate profits or, probably, equity markets. If, on the other hand, the industrial weakness turns out to be a one-off adjustment to a lower level of demand from China and resource companies – exacerbated as ever by an inventory cycle – then the surprise for next year could be that the resilience of the consumer and services sides of Western economies more than offsets manufacturing weakness and growth is steady if unspectacular.

The degree to which investors are split into two camps of ‘growth’ versus ‘no growth’ is evidenced in the ever-widening gap between the valuations of those companies offering a reasonable certainty of growth and any company where there is uncertainty about the outlook. Investors are so scared they will pay higher and higher valuations for ‘growth’

and refuse to abandon that which is working for anything which

currently isn’t.

Value stocks, recovery stocks, commodity stocks, mega-cap stocks – if it doesn’t have positive earnings momentum, investors just do not want to know. Mean

reversion? Relative value? There is no appetite

whatsoever to ‘catch a falling knife’. It is like the scene in Alice where

the Queen instructs the royal gardeners to paint all remaining white rose trees in her garden red, simply because she despises the colour white. No one wants any white stocks in their portfolio when red is the only colour which works today.

Whilst mindful that trends can go on for longer than anyone anticipates, if growth does muddle along in 2016 rather than anything more sinister, then surely at some point investors will become a little less fearful. In a more normal economic cycle, as central banks begin to raise interest rates from recovery levels, cyclical

and value shares tend to perform well as beneficiaries of economic growth. Premiums for defensive stocks unwind. In this long drawn-out post-crisis healing cycle, the same should be true eventually.

And whilst I fully expect any journey towards higher levels of interest rates and bond yields is going to be an equally protracted multi-year process, this will over time be helpful to financial stocks. For years now they have faced the headwind of rock-bottom interest rates and ever-declining bond yields. Slowly, this should turn into a modest tailwind.Meanwhile, the Bank of England’s recent pronouncements on bank capital really do indicate that we have reached a turning point. The regulator has flagged that UK banks have sufficient capital or will have through planned capital generation over the next few years. No more worries over equity capital-raising. The move towards higher dividend payments to shareholders can now begin in earnest.

Bank shares, shunned by investors for so long, can really start to appeal once more. And again, the premiums paid for growth stocks with commensurately modest dividend yields must surely come into question if yields offered by banks are set to rise sharply.

Or is the grinning Cheshire cat in the book right when he concludes ‘we’re all mad here’…

2016 will continue to be

dominated by interest rate policy, even if the question now

becomes ‘how high, how quickly’

Richard Buxton joined Old Mutual Global Investors as head of UK equities in June 2013, and was appointed as chief executive officer in August 2015. He was previously at Schroders, where he managed the Schroder UK Alpha Plus Fund for over 10 years. Prior to Schroders he spent over decade at Baring Asset Management, having commenced his investment career in 1985 at Brown Shipley Asset Management. Richard was awarded the Outstanding Contribution to the Industry Honour at the Morningstar OBSR Awards in 2012 and has a degree in English Language and Literature from the University of Oxford.

8


UK equity markets stand at something of a crossroads as 2016 approaches: one path involves an essentially bullish outlook for global growth, the other, a much more bearish view.

With our optimistic hat on, we would argue that Western economies such as the US and UK will remain in reasonable shape, whilst the Chinese authorities will continue to take measures to stimulate their economy and history suggests they will ultimately be successful. Should

China’s growth rate increase, we would expect a better global trade environment and an acceleration in global industrial production. We should also expect inflationary pressures to build and bond yields to rise.

Against this backdrop, early interest rate increases in the US, and elsewhere, will be taken as positive signs of a long overdue return to ‘normality,’ volatility will subside and markets will quickly shrug off the weakness of summer 2015.

WHEN YOU COME TO A FORK IN THE ROAD, TAKE IT!

Yawning performance and valuation gaps in UK equities are likely

to narrow next year regardless of your view

on the global economic outlook, according to

Simon Murphy, head of UK large-cap equities.

EQUITIES

9


With our pessimistic hat on, we would argue that the Chinese ‘economic miracle’ has been living on borrowed time (and money) for years, and is only now starting to deflate. We could well see a genuine emerging-market crisis, with deflation exported to the West. After years of near zero interest rates seemingly unable to revive growth or inflation, the credibility of central bankers could start to come under serious question.

In this environment, economic activity will weaken further and corporate earnings – already high by historic standards – will decline. Optically ‘cheap’ looking equity market valuations will look much less attractive as a result and investors could face an extended period of difficulty.

The equity market in our bullish scenario will make further advances and most likely be led by many of the stocks that have been out of favour of late – most importantly resources and emerging market-related companies. These companies are generally speaking under-owned, a significant part of the UK market and as cheap relatively as they have been in many, many years.

Meanwhile, all those stocks that have been investors’ darlings – high growth, defensive and domestic economy related – would likely generate subpar returns, pressured by their over owned nature, expensive valuations and rising bond yields which will tend to disproportionately impact the valuation multiples applied to these businesses.

Stock markets in our pessimistic scenario would almost certainly decline,

possibly significantly. Those sectors that have been beaten up this year would undoubtedly suffer more pain. That said, because they have already dropped by so much, further weakness would likely be less pronounced. But a disproportionate amount of pressure would probably be applied to those stocks that have risen

significantly, where there are lots of profits to take, valuations are

extremely high relatively and earnings may well

start to disappoint.

At this stage, it remains unclear which of these very different scenarios will pan out next year. What is clear to us though is that whichever scenario

does play out, the yawning performance and

valuation gaps between those two broad groups of equities are likely

to narrow.

In addition to changes in bond yields, another factor which will have a significant bearing on the relative performance of these two areas is currencies, specifically the US dollar. The greenback has already surged this year on expectations of rate increases by the US Federal Reserve – which has certainly been responsible for some of the weakness seen in emerging markets and resources. There is a plausible school of thought that argues the greenback may well weaken once tightening of US monetary policy begins, as so much is already priced in. This would undoubtedly provide some welcome relief to these areas of the market.

On balance we are leaning towards the bullish outlook, encouraged by some early, tentative signs that economic activity in Asia, and China specifically, is starting to accelerate again. However,

the probability of an emerging market-induced slowdown across the world – perhaps foreshadowed by this summer’s swoon in equities – is not insignificant. We are a long way through the business cycle, and quite far into a multi-year rally in risk assets. The negative scenario would pose serious problems for central bankers in developed markets, which would find themselves mired in another crisis with their toolkits almost empty.

It is far too early to declare victory and careful monitoring of developments over the coming months may prompt us to change our stance. But taken together, our overriding feeling is that the time has come to take something of a contrarian stance and invest against the grain of prevailing, somewhat extreme, sentiment as we look for those significant gaps to narrow – all the while attuned to the risk that global economic prospects could yet darken further.

Simon Murphy has worked in the UK equity market for over 16 years, joining Old Mutual in March 2008 from M&G Investments. He has been managing the Old Mutual UK Equity Fund since his arrival and more recently launched the Old Mutual UK Opportunities Fund in October 2011. Simon is a senior member of the UK equity team at OMGI and in addition to portfolio management responsibilities also chairs the monthly strategy meeting for the UK and European teams. Simon qualified as a chartered account with Price Waterhouse in 1997 and has a BSc in Economics from Loughborough University (1993) and an MSc in Economics & Finance from the University of Warwick (1994).

On balance we are leaning towards

the bullish outlook, encouraged by some early, tentative signs that economic activity

in Asia, and China specifically, is starting to

accelerate again

10


HOW WOULD YOU DESCRIBE THE BACKDROP FOR INVESTING IN YOUR PARTICULAR AREAS OF THE MARKET IN 2016?Ian Ormiston: Dull! While we don’t think the political and macroeconomic backdrop should provide any obvious headaches in 2016, the big question mark over the future of the eurozone continues to loom large. The ‘extend and pretend’ policy of the European leaders means that things will come to a head once again in the future. However, the tipping point could still be some years away. For the time being, Europe is a calm port in the midst of a global storm. It is a dull backdrop and, for once, dull is good.

Dan Nickols: Benign – the UK is in a low growth, low inflation phase. Our top-down view of the world is consistent with this environment, focusing on those areas of the market best suited to these conditions. The past year has seen things changing and moving at a ponderous rate in the UK; we expect a similar situation over the coming 12 months.

HOW SIGNIFICANT IS THE IMPACT OF SLOWING ECONOMIC GROWTH IN EMERGING MARKETS ON THE DEVELOPED WORLD?Richard Watts: Recent economic evidence from China and other emerging markets, which drove the market sell-off in the third quarter of 2015, together with our view that advanced economies have seen the peak of economic activity this cycle, supports the view that global growth has slowed. This is unlikely to change in the short term. Clearly this has profound consequences for the global economy, as developing economies reduce or slow their consumption of commodities and export deflation to the developed world.

Dan Nickols: This suggests that interest rates around the world will stay lower for longer but also that the real living standards of consumers in the developed world will improve, aided by reasonable rates of wage inflation.

Ian Ormiston: The impact is significant in Europe, and on Germany, in particular, which has the most exposure to the emerging markets. Arguably the world’s largest producer of capital goods, it is bearing the brunt of the slowdown in exports. For example, within our investment universe, Duerr, a German paint shop machine manufacturer, has seen orders collapse over the second half of 2015 on the back of weakness in China.

However, the European market as a whole is seeing a pick-up in domestic demand and this is more than offsetting the decline in exports. This rise in demand has been driven by

GO SMALL AND STAY AT HOME

Pictured from left: Dan Nickols (head of

UK mid/small cap), Ian Ormiston

(European smaller companies manager) and Richard Watts (UK mid cap manager) discuss the

opportunities for small- and mid-sized companies

in the year ahead, the challenges that are likely to endure, and how they believe portfolios should

be positioned in this uncertain economic and

market environment.

EQUITIES

11


rising employment, wage growth, increasing money supply and the greater availability of credit – many of which are direct results of the European Central Bank’s quantitative easing (QE) efforts.

CAN CHINA CURE ITSELF OF ITS ECONOMIC ILLS?Dan Nickols: It is difficult to see how China reverses its slowing momentum; its economy was massively boosted by a surge in debt following the global financial crisis, much of this spent on unproductive capacity, and this debt boom has come to an end. The 25-year boom in capital spending and the commodity super-cycle has surely come to an end, certainly for the foreseeable future. Meanwhile, there is no reason why demand for capital goods and commodities cannot fall further, in an environment where commodity production is still forecast to increase; not an optimistic outlook for commodity prices.

Ian Ormiston: We are less concerned about China than we are about the likes of Indonesia, Brazil and Argentina. Unlike China, these three economies are the victims of currency wars and factors beyond their control, such as the collapse in commodities. While China is also affected by these events to some degree, it has the tools at its disposal to remain in control of its own destiny.

HOW ARE YOUR FUNDS POSITIONED IN THIS ENVIRONMENT?Richard Watts: In this view of the world, we believe structural growth and high cash yield stocks should continue to perform relatively strongly, despite the strong outperformance already delivered, while resources, oils and industrials will struggle.

Dan Nickols: We have been positioned to take advantage of two investment themes: an overweight to structural growth, and an overweight to dependable cash-generative stocks that offer growth prospects. We have also tilted portfolios towards the UK economy. We have long argued that global growth was muted and deflationary pressures were strong. In this low growth, low inflation world we believed that bond yields were likely to remain low. In this environment, structural growth and high cash yield stocks were likely to be highly valued. By contrast, heavily internationally facing areas such as oil and gas and consumer goods – to which we have been underweight – have both been significant areas of weakness over the past 12 months. A UK focus has, and we believe will continue to be, key.

Ian Ormiston: Global exposure from European small caps is broad, with a particular emphasis on areas such as auto components and capital goods manufacturers, and much of this exposure holds a heavy reliance upon the economic fortunes of China. By contrast, we are happier to focus our attention on intra-European domestic themes. For example, we like domestic construction and building and are exposed to Italy’s economic recovery. In terms of the companies in which we invest, around 75% of company sales come from Europe and just 10% comes from emerging markets. What’s more, over 40% derive their

sales entirely from within Europe – sectors such as real estate and construction are wholly domestic. We are also increasingly interested in smaller cap banks with lending on the up, capital ratios comfortably above the required levels and bad loans continuing to decline.

WHAT ARE THE MAJOR RISKS TO YOUR VIEWS OUTLINED ABOVE?Ian Ormiston: The biggest threat to Europe and to the world is that of deflation. Whether the European Central Bank’s QE programme can or will achieve its aim of stimulating the domestic economy and reviving inflation is a moot point, but QE has generally been supportive of European equity markets.

Indeed, the advent of QE in Europe has provided a welcome fillip for smaller companies. Unlike their larger peers, small

caps are largely sheltered from the currency wars currently raging and, with banks lending more freely, they are

the biggest beneficiaries of the actual aims of QE, namely increasing the availability of credit. In this environment, we are happy to be focusing on domestic secular growth, structural growth and underappreciated domestic recovery stories.

Richard Watts: There are two risks to our UK view. Firstly, that China stabilises at a stronger growth rate than we anticipate, which would be positive for resource

and industrial-related areas. Secondly, the transmission impact of slowing China and emerging

market growth could be larger than currently assumed, knocking advanced economies off course. In this second scenario, UK domestic stocks could be vulnerable but it would certainly be the case, in our view, that emerging market sensitive stocks would also be hit hard.

FINALLY, ARE VALUATIONS STRETCHED IN YOUR RESPECTIVE INVESTMENT UNIVERSES?Dan Nickols: UK smaller companies now trade at parity with the wider market – the Numis Small Companies Index (ex Investment Trusts) trades on a 12-month forward P/E multiple of around 15.2x, matching that of the FTSE All-Share Index – with arguably superior earnings growth prospects given the bias to the relative certainty that the UK economy currently offers.

Ian Ormiston: The European small cap index is trading at what we believe to be fair value, at a 12-month forward P/E multiple of around 16x, compared to the wider market at around 15x. Ultimately, the European small cap universe generates higher growth than the market, contains higher quality companies, and deserves its premium.

Richard Watts: UK mid caps currently trade at a premium to the wider market but we do not believe valuations are stretched. We believe that it is those companies that perform consistently over time that will be the real winners going forward – growth and cash return prospects do not seem to be fully appreciated by the market.

We believe structural growth and high cash yield stocks

should continue to perform relatively strongly, despite the strong outperformance already delivered, while

resources, oils and industrials will

struggle

12


Year end is an unusually busy time for most fund managers, a time when profit forecasts are honed, sector positioning is reviewed and opinions crystallised. But in the case of the eurozone, and more specifically its two dominant players, France and Germany, we are more or less assured of a key influence to dominate markets in 2016.

I’m talking about election giveaways. In 2017 as French voters go to the polls, once again, to decide President Hollande’s fate, the German electorate will also be weighing up whether or not Angela Merkel should serve a fourth term in office and be reinstated as head of the Bundestag. What exact form these electoral giveaways will take, and their potential impact on economic growth,

remains to be seen, but there are already positive signs emerging.

In France investors can look forward to tax giveaways for both households and companies at the very least. Following a €24 billion corporate tax cut in 2015, a further €33bn of cuts will be implemented in 2016 – in line with the country’s plans to bring its rate of corporation tax down from 32% in 2017 to the European average of 28% by 2020.

While no one is denying that further reform in the labour market and increased measures to attract investment will have a limited impact on overall growth, the tailwinds of a devalued eurozone currency and the benefits of

GIVE ME FEVER

French and German elections, due in 2017,

will ensure investors can look forward to

some added political sweeteners in addition to healthy earnings growth

in the coming year, remarks

Kevin Lilley, European portfolio manager.

EQUITIES

13


cheap oil mean that, after three years of stagnation (0.4% in 2012, 2013 and 2014)1, French growth is finally on an upward trend.

Changing demographics in Germany are likely to give Chancellor Merkel a welcome fillip. Partly on account of its strong labour market, Germany is becoming the recipient of large swathes of migrating peoples, around 80% of whom are, or will be, of working age (16-64 years) over the next three years. The multiplier effect of this ever increasing pool of consumers is bound to have a positive effect on German Gross Domestic Product, with some commentators estimating the short-term fiscal boost to GDP to be somewhere in the region of 0.6%2 .

Can France and Germany afford the political giveaways? Germany, with its fiscal surplus, can run up a 3% deficit, according to the rules of Maastricht, so

in a nutshell, yes. France, given the level of public debt to GDP is forecast at just over 96% for 2015, has less room to

manoeuvre.

And yet while we have some degree of

visibility on the political front, we are still no nearer to concluding how the stretched valuations between more cyclically- sensitive stocks and those with more defensive

earnings will pan out. Presuming US Federal

Reserve chair, Janet Yellen, pushes the button on US interest

rates in December, even if she only hikes once in the near term, this will signal to markets that monetary tightening is well and truly underway...in theory paving the way for the return of economic growth.

Despite interest rates in the eurozone likely to remain low, it is the direction of US interest rates that has been the key driver of style and sector performance in global equities. As the chart shows a period of tightening by the US Federal

Reserve – most recently in 2004 – saw value stocks – materials, automotive and energy - outperform quality, defensive stocks by a wide margin.

There are good arguments for suggesting that value might outperform quality once again in the event of a rate rise. Stretched valuations for one. The certainty of growth has resulted in defensive stock Nestlé being valued on 22 times3 forward earnings, with further negative earnings growth revisions (partly currency related) in the pipeline. Contrast this with German airliner Lufthansa’s earnings being continuously upgraded and commanding a not so heady prospective price/earnings multiple of just six times4. While Nestlé has outperformed its benchmark index for the year, Lufthansa’s share price has fallen in absolute terms5.

Of course the optimists amongst us have been here before – this time last year to be precise. Unfortunately geopolitical tensions in Syria and Russia curtailed investor optimism. And there’s nothing to say that the prospect of heightened tensions in trying to defeat ISIL or ongoing tensions between Russia and Turkey may not continue to result in investor sentiment remaining fragile. But with the oil price unlikely to rise significantly from current levels and President Draghi’s stimulus measures keeping a lid on any rise in the euro, aggregate earnings per share, forecast to grow by 8% in 2016 for the eurozone do not look hugely threatened.

1 Source: Exane BNP Paribas as at November 2015. 2 Source: Berenberg as at November 2015.3 Source: Bloomberg as at 03 December 2015.4 Source: Bloomberg as at 03 December 2015.5 Source: Factset as at 02 December 2015.

Kevin Lilley joined Old Mutual in October 2011 with a strong 20-year track record. He was previously senior portfolio manager, European equities, at Royal London Asset Management, and earlier managed Continental European equities for TT International and NPI. Kevin is a Fellow of the Chartered Institute for Securities & Investment (FCSI).

In the case of the eurozone, and more

specifically its two dominant players,

France and Germany, we are more or less

assured of a key influence to dominate

markets in 2016

0

1

2

3

4

5

6

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Ratio of EuroStoxx Value Index/Growth Index (left scale)

US 10 year Treasury Yield (right scale)

Source: Bloomberg as at 30 November 2015.

VALUE STOCKS TYPICALLY OUTPERFORM IN RISING BOND YIELD ENVIRONMENTS

14


POWER TO THE PEOPLE

As global stock markets became embroiled in the guessing game of when the US Federal Reserve would push the button on interest rates, and investors fretted over whether or not China would suffer a hard landing, Asian equities received their fair share of negative media headlines over the course of 2015. Yet, despite some substantial emerging market equity outflows, which have left many underweight in the asset class, there are good reasons why we believe investors can start the New Year in more sanguine mood.

Inevitably, Asian equity investing is still an area where it pays to be highly selective. But with valuations where they currently stand, a significant correction in currencies, some of which are only just off 1998 lows, and numerous highly persuasive investment themes developing, the region is becoming increasingly difficult to ignore.

Focusing on the Chinese equity market first, we reiterate our belief that the

move towards an economy based on consumption and services, and one more akin to the Western style economies of the US and UK, should ultimately command a higher valuation. A move to value added services, particularly within the life assurance, healthcare and travel sectors, courtesy of China’s ageing and more affluent consumer, will inevitably reduce the proportion of

economic activity exposed to the vagaries of the economic cycle.

This should, in practice, accord a far greater visibility of earnings to corporate China as the country moves away from its dependence on exports and capital goods.

The transition is already happening

at a faster rate than might be expected. For the first

time, in September 2015, domestic consumption and services made up more than 50% of Chinese GDP. And the scope for ‘catch up’ is a powerful argument when factoring in the effect on consumer based earnings potential, not only in China but throughout the Asian region.

Despite emerging market equity outflows in 2015,

powerful investment themes existing within

the Asian region mean investors should think

twice about being underweight the asset

class, maintains Josh Crabb, head of

Asian equities.

Inevitably, Asian equity

investing is still an area where it pays

to be highly selective

EQUITIES

15


An obvious example is soaring appetite for car and home ownership. In China alone 25% of households own a car, whereas in the US the figure is closer to 80%.

Technology wise, examples of China moving up the value chain by producing more complex and higher margin goods are commonplace. The internet of things (IOT) is all about capturing and refining data with a view to driving business outcomes. Opportunities to drum home the message that ‘Made in China’ is a sophisticated force to be reckoned with abound across sectors, not least in smart metering amongst utilities and optimisation of automotive telemetry in electric cars. While the benefits of this concept have attracted huge amounts of investment on a global scale, and while Microsoft is still considered the global standard bearer for personal and business computing, China is already creating similar product parallels in these and other fields.

While indiscriminate capital spend in China is a thing of the past, the move towards regional investment spend, embodied in President Xi Jinping’s latest five year economic plan, is very much encapsulated in his ambitious plans for the ‘One Road, One Belt’ project. The programme, based on a revival of the historical Silk Road, aims to link newly revived roads, railways, ports and other infrastructure across a trade corridor which will pass from China to Europe and across central Asia. For the savvy investor the opportunities that are being thrown up amongst regional construction companies are manifold.

Whereas attractive sector themes prevail in China, a country where valuations remain cheap relative to the rest of the Asian region is Vietnam. A key beneficiary of the newly signed Trans-

Pacific Partnership trade agreement, on account of its manufacturing and exports potential, FDI (foreign direct investment) flows into the country remain strong. The government is now forecasting around US$23bn in FDI pledges this year, up 40% from 2014 and taking the total to US$84.8bn since 20111. Almost three quarters of the flows have gone into manufacturing enabling the likes of Samsung and LG Electronics to invest just under US$10bn in Vietnamese manufacturing plants, attracted by the country’s relatively cheap and plentiful labour force.

By contrast, progress in Indian equities will depend largely on Premier Modi’s ability to drive through reform. Nevertheless, the Indian infrastructure build out continues apace in recognition that the country’s lack of good roads, bridges and ports is a major obstacle for promoting economic growth. Yet Modi is acutely aware of existing challenges – not least a need to recapitalise stressed banks and how to address India’s burgeoning deficit.

Further political unrest in the Levant, US interest rates rising faster than the consensus, which could in turn put the break on a rise in US corporate earnings, and the difficulty of implementing reform in both China and India serve as potential headwinds for investors in the coming year. No one is unwilling to accept that transitioning growth and Western monetary tightening won’t produce yet more pockets of volatility. But the ongoing benefits of cheap oil, together with the authorities’ willingness to push through further structural and market reforms, coupled with the fact that Asian equities are trading at a discount of over a third price/book discount to world equities, should provide a degree of comfort for investors in the region going forward. 1 Source: Bloomberg as at September 2015)

Josh Crabb joined Old Mutual Global Investors in October 2014 as head of Asian equities. Josh is based in our Hong Kong office as an employee of Old Mutual Global Investors (Asia Pacific) Limited. He has over 18 years’ investment experience, including roles at BlackRock, (Hong Kong), Prudential Asset Management, (Hong Kong) and Bankers Trust in Sydney. Josh holds a BCom (Hons) from the University of Western Australia and has a CFA accreditation.

16


It is difficult to make predictions – especially about the future, as a wag once said. But one thing we can expect next year with a reasonable degree of certainty is that equity market volatility will increase.

This may be due to diverging economic policies between countries, or the normalising of monetary policy in the US, or simply investor jitters at this stage in a multi-year rally in risk assets. And while we are not arguing that markets are about to enter a highly volatile environment, investors need to grasp that

the days of 7-9% realised volatility on the S&P 500 index are gone.

Rising volatility impacts portfolios in a number of ways, one of which is by triggering a significant change in markets: a ‘break’ in one direction or another. These market breaks can often lead to significant underperformance. An increase in volatility also means investors stand a higher chance of losing money on momentum-based strategies. So in such an environment, the idea of buying assets just because their prices have gone up historically is not necessarily the most

MOMENTUM MAY HAVE HAD ITS TIME IN THE SUN

A likely increase in volatility in 2016 means investors stand a higher chance of losing money

on momentum-based strategies, according to Ian Heslop, head of

global equities.

EQUITIES

17


astute approach. We will be monitoring the feasibility of using momentum under these circumstances over the course of 2016. There are other approaches to measuring investors’ interest in stocks over and above momentum, if we do move beyond a focus on trend-followers.

After a strong run over the past few years, probably due to central bank intervention, momentum may indeed have had its time in the sun.

This view is qualified, however, by the fact that some developed-market central banks are still adding monetary stimulus even as the US Federal Reserve (Fed) takes baby steps towards reducing its emergency support to the US economy. So if you are in a region where quantitative easing is still alive or gathering pace, this will probably offset to some degree the rising volatility that stems from dollars being withdrawn from the global economy.

Meanwhile, you do not have to be a rocket scientist to know that

value investing has been an unrewarding strategy in

Europe and the US over the past six years. It has been more painful over the past 18 months – a situation that is likely to continue if there is no change in investor sentiment. We do not expect

any dramatic shifts in this in the short term.

But there still could be. The European Central Bank has the potential to alter investor morale, particularly in Europe, through its asset purchases and interest rate policy. And in the US, the Fed’s interest rate outlook will be crucial.

If the Fed were to tighten policy and then take a step back, to gauge the impact of its first interest rate increase in almost a decade, the US central bank could remove some of the uncertainty that has been weighing on investors. Sentiment is being held back as market participants desperately try to understand

the implications of a rising interest rate environment.

As we move through the next six months, we could get a better understanding of how the economy and the market might react to such an environment. Perhaps this would lead to a more positive sentiment within equities.

China is also likely to remain at the forefront of investors’ minds. People may have misunderstood what the world’s second biggest economy is trying to engineer, despite repeated statements on the subject by its government: to move towards consumption-led growth from investment-led growth.

This could lead to a slowdown in gross domestic product growth as the economy transitions. Yet the country is also likely to continue loosening monetary policy, and there is a chance that growth figures improve, on the back of massive stimulus. This, too, would probably improve investor spirits.

Our base-case view, though, is that China continues down the road it has set itself, accompanied by small downgrades to GDP expectations over the near term. And on balance, we see sentiment over the coming months as remaining somewhat moribund – which may lead to similar returns to those seen in the second half of 2015.

Ian Heslop is head of our global equities team. He joined Old Mutual in 2000 and, previously, he was a fund manager at Barclays Global Investors. He has a BA in Chemistry from the University of Oxford and a PhD in Medicinal Chemistry from the University of Edinburgh.

After a strong run over the past few years,

probably due to central bank intervention, momentum may

indeed have had its time in the sun

0%

10%

20%

30%

40%

50%

60%

70%

80%

2008 2009 2010 2011 2012 2013 2014 2015

Source: Bloomberg as at 6 December 2015.

60-day realised volatility on the S&P 500 Index

THE DAYS OF 7-9% REALISED VOLATILITY ON THE S&P 500 INDEX ARE GONE

18


INFLATION STEALING AND UBER-PRODUCTIVITY

Investors have been fretting over two contradictory subjects of late: the prospect of the US Federal Reserve (Fed) embarking on a brisk series of rate increases, and the deflationary impact of weakening commodities prices and Chinese growth.

In each case, however, concerns may be misplaced.

There is a growing consensus among market participants that the Fed will begin a series of rate increases, prompted by the strength of the domestic jobs market. Yet this view downplays the importance of the US dollar – which in addition to

its influence on US competitiveness, particularly the labour market, is crucial to import prices and inflation.

Much to everyone’s surprise this year, inflation has emerged as a scarce resource. There simply is not enough of it to go around. Central banks around the world have been striving to steal it from their foreign counterparts and pull into their own economies, largely by adopting ‘accommodative’ policies that have the pleasant side-effect of depreciating their currencies.

If the dollar appreciates further, fresh declines are likely in commodity prices,

The underlying dynamics for waves of rate rises

and sharply higher yields don’t seem to be building

in 2016, according to Christine Johnson, head of fixed income.

FIXED INCOME

19


and economies like Australia, Brazil or Russia, whose economies depend on them, will continue to decline – weighing on global growth. As exporters like China or the eurozone would gleefully use the stronger dollar to pour cheap goods into the US, pushing down the country’s inflation rate, the US central bank is likely to try and contain any further dollar strength even as it tightens policy.

The Fed is no exception in seeking to raise domestic consumer prices. The European Central Bank’s (ECB) increasingly accommodative monetary policy is another factor that will probably limit the Fed’s room to raise rates. Because even though the ECB would never admit to indulging in so sordid an activity as currency manipulation, a major channel through which its stimulus works is by weakening the euro. By extension, this makes the dollar stronger.

These dynamics will probably make the much-anticipated liftoff in US policy rates a rather bumpy ride, with the Fed only tightening fitfully as it seeks to prevent the dollar from surging.

TAXIES AND PRODUCTIVITYMeanwhile, too great an emphasis has been placed on declining commodities prices as the sole driver of low inflation. While this is certainly part of the picture, it is only a temporary issue.

Far more important is the technological revolution underway as we all become part of a so-called ‘Uber-economy.’ We now complete many activities that only recently would have required contact with other people – from booking taxies and hotel rooms to buying books and clothes

– via computers and mobile phones. We do not need to speak to a costly human being anymore. We can search for the lowest price across retailers and across the world, while incurring negligible travel costs.

This is hugely deflationary but very hard to measure, and it is spurring a pickup in productivity that statisticians are struggling to capture. It is also weighing on consumer prices in a structural

manner. A few years ago, then-Fed chair Ben Bernanke talked about

low inflation effects being transient. It does not

look like they are: in the US, core inflation – so discounting those ‘transient’ drivers of oil and food – is lower today than it was two years ago, if shelter costs are stripped out.

So how to position in fixed income in this rather odd

world, where everyone is focused on inflation but where productivity is ballooning?

It seems likely that under these circumstances, the Fed will not be incentivised to conduct a relentless sequence of rate hikes. The risks posed by a strengthening dollar will also help stay the central bank’s hand.

While government bonds may struggle under any tightening of monetary policy, from the very outset, credit still offers opportunities for excess returns as spreads tend to compress for 12-18 months following a rate increase. Shorter-dated corporate debt, which enjoys some ‘equity-like’ characteristics, could be particularly attractive, given the carry and roll on offer on this part of the curve.

This is not a time to adopt a ‘sell everything’ attitude. There just do not

seem to be the underlying dynamics for waves of rate rises and higher yields from here. In short, as 2016 approaches, there are no grounds for panic.

Christine Johnson joined Old Mutual in September 2010 from Halbis Capital Management (formerly HSBC Asset Management), where she was a senior fixed income fund manager, initially focusing on sterling credit before also managing global portfolios. She moved to Halbis from Investec Asset Management , which she joined as a high yield credit analyst, becoming a high yield fixed income fund manager a year later. She began her asset management career as a credit analyst at Royal & Sun Alliance Investment Management, having previously been a relationship manager at NatWest Bank. Christine has a BA in Economics from the University of Manchester.

While government bonds may struggle

under any tightening of monetary policy,

from the very outset, credit still offers opportunities for

excess returns

19

20


WHY CHINA’S SLOWDOWN WON’T WRECK THE WESTERN RECOVERY

Throughout much of 2015, investors have been concerned over the risk that the economic slowdown in China will throw the recovery in the developed world, and the US in particular, off course. They need not be so worried.

While in a world of free flowing capital and freely floating exchange rates a slowdown in the world’s second largest economy would be bad for everyone, in the present case the underlying cause of the slowdown means that it is actually good for the rest of the world.

This stems in part from the country having more or less reached the end of the line with expansion driven by urbanisation, which has spurred very strong growth and gains in per capita income. China’s demographic profile, reflecting the impact of 30 years of its one child policy, means it can no longer bank on moving people from the farm to the factory to fan economic growth.

Data from the US Bureau of Labor Statistics suggest that as labour began to grow scarce in both Chinese urban

and rural areas, its costs started to rise. A result of this is that the supply side of the Chinese economy can no longer support the sort of expansion rates we have seen in the past. One way or the other, the country’s growth is going to slow materially.

But with a tight labour market, and without being able to expand the supply side as fast as it needs to, China is not going to be able to control their real exchange rate in quite the same way it has done previously – which has held down both US activity and inflation.

Taken together, this suggests China has started to lose its competitive advantage. This actually applies to the broader slowdown in emerging markets – whose underlying cause is largely to do with a loss of competitiveness and the inability to manage their economic demand sides by using demand from the US for domestic purposes.

None of this is actually a bad thing for the US, from the point of view of maintaining full employment without requiring large

An underlying cause of China’s economic

deceleration is a loss of competitiveness against the West, according to

Adam Purzitsky, senior portfolio manager, rates

and LDI team.

FIXED INCOME

21


asset bubbles. Once the US can maintain full demand – and the same applies to Europe – its growth rate will be determined by how fast its supply side expands.

There is little in China’s slowdown, meanwhile, that is likely to reverse the income gains among those of its citizens who are going to keep buying consumer goods, designs and know-how from the US in the future.

This means a key support remains in place for most Western countries that are not commodity producers but are exporters of the most highly engineered technology- or knowledge-intensive goods – as well as consumer goods. Basically, there are a large number of people in China making something close to US$20,000 (adjusted for purchasing power parity) a year, and they will most probably continue consuming.

These incomes are likely to grow further, even if China’s total capacity grows

more slowly as the farm-to-factory migration ends. And while they

will grow at a slower pace, they will increase at something close to the world’s technological growth rate – and that is good enough for maintaining demand for global goods, all-in.

A separate but related point is that the current

value of the US dollar just takes the greenback to where it was in about 1995 in terms of its broad, real trade-weighted index. And the currency at that point certainly did not prove much of a hindrance to the US economy, which continued to expand robustly for the next several years. So there is little reason to believe that the dollar today is in any sense too high for the US to continue growing.

In short, investors can take succour that fears of China dragging the West back into recession are unlikely to be realised, which is why we remain bullish on real economic activity both in the US and the eurozone in 2015.

Adam Purzitsky brings over 10 years of investment management and investment banking experience to Old Mutual Global Investors. Prior to joining the company, Adam worked at Ignis Asset Management from 2009 as a senior quantitative portfolio manager on the rates team. In 2011 he became co-manager of the Ignis Absolute Return Government Bond Fund, where he was crucial in developing the proprietary analytical tools for the team as well driving the macro-economic discussion for the team. Prior to joining Ignis Adam was vice president at Société Générale from 2007-2008 and was an associate in fixed income quantitative strategies at Lehman Brothers from 2004-2007.

Investors can take succour that fears of China dragging the West back into

recession are unlikely to be realised

22


EMD: THINGS CAN ONLY GET BETTER

Amid the volatility that has characterised emerging markets through much of 2015, it is worth occasionally reminding ourselves that not so long ago the picture was a very much rosier one. As recently as early 2013, emerging markets were the ‘darlings’ of investment, when some pundits waxed lyrical about ‘decoupling’ but others pointed out that the suggestion that emerging economies had become masters of their own destinies had already been comprehensively debunked.

It has been something of a rollercoaster ride ever since, with the US ‘taper tantrum’ serving as the source of the first, powerful reminder that emerging economies were still, very clearly, highly influenced by the fortunes of their developed peers. Frayed nerves were soon calmed in 2014, as investors speculated that the first rate hike by the US Federal Reserve was (once again) further away than consensus had begun to indicate. Before long though, jitters had again returned to emerging markets in 2015, with a marked decline in commodity prices weighing on the fortunes of commodity exporters, while

Chinese economic growth concerns caused a correction in broader emerging markets.

The ‘Fed fear factor’ has been virtually omnipresent in 2015, with ongoing uncertainty over the timing of the ‘lift-off’ leading several central bankers – from the Reserve Bank of India’s Raghuram Rajan to Peru’s Julio Valarde and Indonesia’s Mirza Adityaswara – to express publicly their enthusiasm for the Fed to act.Sentiment continued to swing back and forth, however. Following the marked decline in China’s equity market, and ensuing currency devaluations, October’s weaker-than-anticipated US employment numbers were accompanied by a rebound in emerging market risk assets. Once again, the timing of the Fed’s first hike was called into question, before subsequent stronger US employment data caused yet another change in sentiment.

If we accept that the great emerging market ‘decoupling’ myth is just that – and on the strength of events over the course of 2015, this would seem prudent – then we believe the outlook

To understand why the outlook for emerging

market debt looks a little cheerier we must first

understand why 2015 has been such a difficult

year, explains John Peta, head of emerging

market debt.

FIXED INCOME

23


becomes potentially a little clearer. Once the Fed does hike, and if investors are subsequently able to reassure themselves that the next US rate cycle will not peak too high, or too fast, then the backdrop for emerging market debt as an asset class looks decidedly more optimistic, possibly supporting for example a relatively ‘soft landing’ for China’s economy. Such an outcome would, ultimately, represent a continuation of the theme of the power of the Fed’s influence over the global economy. Put another way, since the 2013 ‘watershed’, at times when emerging market assets have performed well, strong performance has been largely a reflection of the US employment picture and the market’s perception of what this implies for US rates, rather than being driven by sound domestic fundamentals.

Looking ahead, we believe the outcome most likely to continue to weigh down emerging market debt would be a scenario in which it ultimately emerges that the Fed has acted ‘too little, too late’. Clearly this scenario is more likely to materialise if US employment and wage figures continue to surprise to the upside. While, at the time of writing, the market on average appears to be pricing a US policy rate a couple of years from now of 1.385%, according to Federal Funds futures1, it is worth noting that the Fed’s own ‘dot plot’ shows policy rates closer to 3.5% by 2018. We currently place greater store by the ‘dot plot’ forecast, which is largely consistent with our view that the global economic healing process is still underway.

Setting aside the influence of the Fed, it is prudent to remind ourselves that emerging markets are not homogeneous. Indeed, last summer’s sell-off in emerging market assets was led by a combination of China and commodity exporters such as Brazil, while central European economies were more sympathetic to their neighbours in the eurozone periphery. We expect these trends broadly to continue.

In Asia, it seems likely that China will continue to stimulate its economy through rate cuts, rather than through further weakening of the currency, or at least not before the yuan’s admission to the IMF’s special drawing rights (SDR) basket takes effect. This is increasingly imminent,

however, and is widely expected to result in substantial capital inflows.

Meanwhile, Latin America is the region we expect to continue to be most influenced by the economic fortunes of its neighbour to the north. Naturally, global commodity prices will also play their role in a region dominated by commodity exporting countries. Some Latin American central banks – notably those responsible for monetary policy in the region’s higher beta markets, such as Peru, Colombia and Mexico – have already begun hiking their policy rates in anticipation of the Fed ‘lift-off’, providing further credence to the suggestion that the economic healing process is well underway. A particular bright spot in the region, in our view, is Argentina, following the elections in November. Incoming president Mauricio Macri and his finance minister Alsonso Prat-Gay (a former senior JP Morgan executive) should be something of a leadership ‘dream team’, especially after the controversial Christina Kirchner regime. The immediate reaction to the election result was resoundingly positive, and we expect this sentiment to continue into 2016.

In a boon to the broader region, we believe that Argentina’s move away from Kirchner’s essentially socialist stance has the potential to trigger similar sentiment shifts elsewhere in the region, with Brazil’s Dilma Rousseff’s approval ratings in rapid decline amid dire GDP figures, and Nicolás Maduro in Venezuela under extreme pressure to deliver better economic growth amid a persistently low price of oil, the country’s key export. Against this backdrop, we expect the upcoming Venezuelan Congress election – in particular the extent to which it is fair – to be closely observed.

Elsewhere, we see the situation in the Middle East remaining tense, as the dynamic in and above Syria evolves; the shooting down of a Russian jet within seconds of entry to Turkish airspace shows not only just what a tinderbox

the region remains, but also how many protagonists are involved.

Amid all of this complexity, and the identifiable risks, investors could perhaps be forgiven for writing off emerging

market debt as an asset class. It remains highly probable,

for instance, that rising US interest rates

will continue to dominate the headlines in 2016, alongside European monetary easing, weak commodity prices and ongoing challenges for China. We believe,

however, that many investors would do well to

take another look at emerging market debt.

Inevitably, difficulties will remain, but we believe that some of the challenges have the potential to bottom out in 2016. That said, there are some areas of the market we consider to be already attractive. A strong example is in the Brazilian government market, where real local currency rates of 5% (based on yields at the time of writing of over 15%2) could scarcely be described as unattractive, not least given our belief that the backdrop should begin to stabilise over the course of the year. The art, as ever, will be to identify these opportunities.

1 Source: Bloomberg, as at 03 December 2015.2 Source: Bloomberg, as at 03 December 2015.

John Peta joined Old Mutual Global Investors as head of emerging market debt in March 2015. John previously worked at Threadneedle Asset Management, London where he was fund manager, head of emerging market debt since 2012. John started his career in Fixed Income in 1987 at Merrill Lynch, Seattle, before joining Chancellor LGT Asset Management, San Francisco in 1994. John began specialising in managing dedicated emerging market (external and local) debt assets when he joined Standish Mellon Asset Management, Boston in 1997, before moving to Acadian Asset Management, Boston.

If we accept that the great emerging market ‘decoupling’ myth is just that...

then we believe the outlook becomes potentially a little

clearer

24


THE ART OF EXECUTION

WHAT PROMPTED YOU TO WRITE THE BOOK?A few years after we launched the Best Ideas concept (2006) I became rather obsessed with trying to understand how one well-known investor on the team could deliver such outstanding returns when only one in three of his ideas made money. I simply had to know what his secret was. This led me to analyse every investment, every trade he made.

The outcome of this investigation was that he was able to deliver this outcome because of key habits of execution that he religiously stuck to when he found himself in a losing situation, and also winning situations. I then analysed all the other managers that ran money for me and I discovered that the successful ones all adopted those same habits of execution.

If success in property is about “location, location, location”, I came to understand success in equity markets was down to “execution, execution, execution” of ideas. I needed to find out more; the

touch paper had been lit.

DID THE PROCESS OF WRITING THE BOOK GIVE YOU A GREATER INSIGHT INTO THE ART OF INVESTING?It affirmed the genesis of the idea, that the best managers are so

because they are great executers and not

because they come up with better investment ideas than the

rest of us. In the book I demonstrate that successful investors are either ‘assassins’ or ‘hunters’ when losing, and ‘connoisseurs’ when winning. Sadly, most investors fail because they are ‘rabbits’ when losing, and ‘raiders’ when winning.

The Art of Execution, the first book by Lee

Freeman-Shor, portfolio manager at Old Mutual Global

Investors, was published in September 2015. Here he discusses the book, the

ideas behind it and the reaction it has provoked.

If success in property is about “location, location, location”, I came to

understand success in equity markets was down to “execution,

execution, execution” of ideas

MULTI-ASSET

25


IF YOU HAD THE CHANCE TO GO BACK IN TIME, WHAT ONE BIT OF INVESTMENT ADVICE WOULD YOU SHARE WITH A FRESH-FACED 21-YEAR-OLD LEE FREEMAN-SHOR?Have a plan with respect to what you will do when you find yourself in a losing position. Decide at the outset to be an ‘assassin’ or ‘hunter’. When winning, enjoy the ride; be a true ‘connoisseur’.

WHAT HAS BEEN THE REACTION TO THE BOOK FROM THE MANAGERS WITH WHOM YOU HAVE INVESTED OVER THE PAST DECADE?Extremely positive. They have enjoyed the insight of other managers and many of them have bought copies of the book to share among their respective teams. Indeed, I was most flattered that Dennis M. Bryan, partner, FPA Funds, said that, “I am often asked by graduate students what books I have read that I could recommend to make them better investors. My answer generally is that the student should read The Intelligent Investor and Reminiscences of a Stock Operator; I have now added this book to the list… I wish I had read it 30 years ago!”. A comment like that from an investor of his stature means a huge amount to me.

WHAT HAS BEEN THE STRANGEST PIECE OF FEEDBACK?While not feedback per se, I’ve been struck by the amount of curiosity surrounding the identity of the bad and good investors from whom I derived my findings. It seems some people were

disappointed I didn’t name and shame the bad investors, or praise the good ones. In general, there has been a lot of interest in ‘who’ rather than ‘why’. In all situations I refuse to disclose who the bad and good investors were as it serves no purpose.

ARE YOU ALREADY WRITING A SEQUEL? Given the number of evenings and weekends that disappeared while working on The Art of Execution, I’m not sure my wife and son would forgive me if I started writing another one straight away; I think a break is required… for now!

Lee Freeman-Shor joined Old Mutual in October 2005, and currently manages high-alpha and multi-asset strategies at Old Mutual Global Investors. He was previously co-head of equity research. Prior to joining Old Mutual, Lee worked at Schroders and Winterthur, and in private client wealth management. In total, he has over 15 years’ investment experience. Lee holds the Investment Management Certificate and has a law degree from Nottingham Trent University.

Over seven years, 45 of the world’s top investors were given between US$25m and US$150m to invest by fund manager Lee Freeman-Shor. His instructions were simple. There was only one rule. They could only invest in their ten best ideas to make money. It seemed like a fool proof plan to make a lot of money. What could possibly go wrong? These were some of the greatest minds at work in the markets today – from top European hedge fund managers to Wall Street legends. But most of the investors’ great ideas actually lost money.

Shockingly, a toss of a coin would have been a better method of choosing whether or not to invest in a stock. Nevertheless, despite being wrong most of the time, many of these investors still ended up making a lot of money. How could they be wrong most of the time and still be profitable? The answer lay in their hidden habits of execution, which until now have only been guessed at from the outside world. This book lays bare those secret habits for the first time, explaining them with real-life data, case studies and stories taken from Freeman-Shor’s unique position of managing these investors on a day-to-day basis.

26


In the eyes of financial markets the past year, like the one before it, and the one before that… in fact, much like every year since the onset of the global financial crisis, has been dominated by two major factors – global economic growth and the monetary policy response. Uncertain economic conditions and the way in which central banks have responded have been the hallmark of the post-crisis years. With the US Federal Reserve in interest rate hike mode for the first time in almost a decade, not only does this obsession seem certain to continue over the coming 12 months, the focus on it will surely only grow.

Nowhere more so right now than the US, which finds itself at the forefront of the growth/policy response interplay. Leading

economic indicators in the US, most notably those pertaining to employment, paint a rosy picture of the world’s largest economy yet this is in stark contrast with other indicators are suggesting which is that all might not be well with the world. In particular, financial markets seem to be telling us that such optimism might not be warranted, none more so than certain commodity markets. For example, the copper price, historically an accurate yardstick on the strength of the global economy, has fallen precipitously over the past year (and continues to do so) while the oil price continues to plumb new depths, calling into question whether we can really pin blame for the fall squarely on a glut of supply and instead whether we should question the issue of demand more closely.

SIX FOR 2016

Anthony Gillham, co-director of multi-asset, looks ahead to 2016 and the standout themes likely

to dominate financial market proceedings.

MULTI-ASSET

27


In government bond markets, meanwhile, we have seen the yield curve flattening, suggesting that while markets expect that interest rates are indeed finally on the way up, they are none too bothered about inflation, despite what the business surveys and the media are telling us about one of the most critical drives of long run inflation – wage demands. At the same time, credit spreads are widening, adding further weight to the concern for the state of the global economy.The signs are confusing and continued uncertainty is the likely result: uncertainty about global growth; uncertainty about monetary policy. As far as financial markets are concerned, volatility will be the by-product.

THE RIGHT VALUATIONOnce again, volatility will need to be factored in by active managers in 2016. The ‘hunt for income’ is set to continue although with equity valuations stretched, most notably in the US, we believe greater income opportunities are likely to be found in investment grade and high yield credit in 2016, where spreads remain quite attractive. We maintain that there is little, if any, valuation argument to be made for developed market equities. There is, however, a valuation case to be made for emerging market equities.

We have been happy to maintain an overweight exposure to emerging markets given what we perceive to be an attractive valuation opportunity. Emerging markets

were challenged in 2015 but we believe such challenges should

create opportunities in the coming 12 months.

Will there be signs of success in the form of China’s drive to shift its economy from export-led to domestic-focused? The answer, undoubtedly, will have

a major impact on global growth, for better

or for worse. And, if better, it will have a significant knock-on effect

on other emerging markets. As always, security selection in emerging markets is likely to be of paramount importance.

Cheap valuations abound Latin America and with good reason: economic weakness and political uncertainty – most high profile in Argentina and Brazil – mean there are few obvious catalysts to prompt a turnaround in economic fortunes. We are happy to sit out that particular dance. But if China can gain momentum with its economic plans, we could see a really positive impact across many sections of the emerging markets.

GEOPOLITICS AT PLAYPolitical unrest has dominated proceedings in the Middle East for

decades but the rise of so-called ISIS has brought the region into greater focus for investors. With more decisive action expected from the West and Russia in the fight against global terrorism in the Middle East, the oil price could be further affected.

The weakened oil price of the past 18 months has been a key contributor behind low global inflation. It has also been a significant fillip for fuel-guzzling consumers in economies such as the US, in turn, boosting growth in the underlying economy. However, with military intervention likely in parts of the Middle East, the oil price could shift higher. Energy makes up around one third of inflation baskets so although a rising oil price could alleviate deflationary concerns, it could provide an unwelcome dampener on global growth. It is certainly something on which to keep a close eye over the year ahead.

Anthony Gillham joined Old Mutual in 2000 and is co-investment director of our multi-asset unit. In 2007, Anthony became a global bond portfolio manager having been a fixed income research analyst since 2006. Prior to focusing on fixed income, Anthony’s areas of coverage included multi-asset, Nordic equities and quantitative US equity and fixed income research. Anthony is a CFA Charterholder and has over 15 years of experience.

We maintain that there is little, if any, valuation argument

to be made for developed market

equities

OPPORTUNITIES FOR 2016 CHALLENGES FOR 2016

US AND UK INVESTMENT GRADE GEOPOLITICAL UNREST

SELECT HIGH YIELD CREDIT DEVELOPED MARKET EQUITIES

POTENTIAL CHINESE TAILWINDS EMERGING MARKET WEAKNESS

1 4

2 5

3 6

28


GET IN TOUCH

WWW.OMGLOBALINVESTORS.COM

[email protected]: +44 (0) 20 7332 8348

[email protected]: +852 3552 5908M: +852 9199 4581

[email protected]: +44 (0) 131 297 2465M: +44 (0) 773 311 8646

[email protected]: +44 (0) 20 7332 7659

[email protected]: + 44 (0) 20 7332 7687M: +44(0) 787 7266 5149

[email protected]: + 44 (0) 20 7332 8345M: +44(0) 782 334 8792

ALLAN MACLEODHEAD OF INTERNATIONAL DISTRIBUTION

CAROL WONGMANAGING DIRECTOR, ASIA PACIFIC

SIMON BARRETTREGIONAL HEAD, NORDICS

SIMON SMITHHEAD OF UK WHOLESALE

VEE MONTEBELLOPUBLIC RELATIONS

AMELIE SHEPHERDCOMMUNICATIONS EXECUTIVE

[email protected]: +1 (617) 535 9713M: +1 (617) 680 4854

CHRIS STAPLETONHEAD OF AMERICAS OFFSHORE DISTRIBUTION

[email protected]: +44 (0) 20 7332 7505

[email protected]: +41 44 201 10 71M: +41 79 625 65 91

DONALD PEPPERMANAGING DIRECTOR OF ALTERNATIVES

DOMINIK ISSLERHEAD OF D-A-CH

29


Please remember that past performance is not a guide to future performance. The value of investments and the income from them can go down as well as up and investors may not get back any of the amount originally invested. Exchange rate changes may cause the value of overseas investments to rise or fall.

This communication is issued by Old Mutual Global Investors (UK) Limited. Old Mutual Global Investors (UK) Limited is the appointed investment adviser for Old Mutual Investment Management Limited’s in-house funds. Old Mutual Global Investors is the trading name of Old Mutual Global Investors (UK) Limited and Old Mutual Investment Management Limited. Old Mutual Investment Management Limited, Millennium Bridge House, 2 Lambeth Hill, London EC4V 4AJ. Authorised and regulated by the Financial Conduct Authority. Old Mutual Global Investors (UK) Limited, Millennium Bridge House, 2 Lambeth Hill, London EC4P 4AJ. Authorised and regulated by the Financial Conduct Authority. A member of the IA.

Nothing in this communication constitutes a recommendation suitable or appropriate to a recipient’s individual circumstances or otherwise constitutes a personal recommendation. It is distributed solely for information purposes, it does not constitute an advertisement and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments in any jurisdiction. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the document.

Any opinions expressed in this communication are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of Old Mutual Global Investors as a result of using different assumptions and criteria. Our asset allocation overlay is applied to some, but not all; Old Mutual Global Investors’ funds and is subject to interpretation based on specific fund objectives and risk tolerance as well as portfolio manager discretion. Therefore, such opinions are not necessarily reflected in Old Mutual Global Investors funds. This communication is for information purposes only and does not constitute a financial promotion (as defined in the Financial Services and Markets Act 2000) or other financial, professional or investment advice in any way. This communication has not been reviewed by the Securities and Futures Commission in Hong Kong. You are advised to exercise caution in relation to the offer. If you are in doubt about any of the contents of this document you should obtain independent professional advice.

In Hong Kong, this material is issued by Old Mutual Global Investors (Asia Pacific) Limited, a member of the Old Mutual Group. Old Mutual Global Investors (Asia Pacific) Limited is licensed to carry out Type 1, Type 4 and Type 9 regulated activities in Hong Kong.

Old Mutual Global Investors is not registered as an investment company in the United States under the U.S. Investment Company Act of 1940, as amended, and its shares are not registered under the U.S Securities Act of 1933, as amended (“Securities Act”). Shares of Old Mutual Global Investors Funds are not available for purchase by “US Persons” as that term is defined under Regulation S of the Securities Act. The information provided in this document is not intended for distribution to, or use by, any person or entity in the United States, or in any jurisdiction or country where such distribution or use would be contrary to law or regulation, or which would subject any of the funds described herein, any member of the Old Mutual Global Investors Group or any of their products or services to any registration, licensing or other authorisation requirement within such jurisdiction or country. This communication is only intended for and will only be distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations. In particular, the shares are not for distribution in the US or to US persons.

OMGI 12/15/0055

Building better solutions.

THE INVESTMENT YEAR - Old Mutual · 2016 THE INVESTMENT YEAR 20 26 28 22 24 18 05 06 14 08 10 12 16...

Documents

Transcript of THE INVESTMENT YEAR - Old Mutual · 2016 THE INVESTMENT YEAR 20 26 28 22 24 18 05 06 14 08 10 12 16...