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EMD in a Trump 2.0 World
Donald Trump’s and the Republican party’s sweeping victories in November signal a strong mandate for meaningful change that will influence the global economy and geopolitics for 2025 and beyond. While exact details of Trump’s policies remain unknown, the former president has made the direction of political change clear in several key areas:Read More
Antero Peak Group Reads
In the spirit of continuous improvement, the Antero Peak Group actively reads to further develop perspectives on financial markets and investing, leadership and life experiences. Please see a list of books that have challenged our thinking over the last several years.
A Q&A with Portfolio Manager Thomas Reynolds
Tom, congrats on recently celebrating your 7-year anniversary with the Artisan Partners U.S. Value team. To commemorate your time with Artisan, we have a few questions to get to know you better as an investor. You had an unconventional start to your career as you were an anthropology major in college. What was your path from anthropology to becoming a portfolio manager, and how have you been able to apply your social sciences background?
Growth Team Weekly Investment Insights
In this week's post, we highlight the recent batch of macro data, the latest company to reach the $1 trillion milestone, US market returns without NVIDIA, the outlook for advertising, a China monetary policy shift, and easing permitting messaging from Donald Trump.
Growth Team Weekly Investment Insights
This week's post highlights some of the market narratives from November.Read More
EM’s Uninvited Guest: US Duration
Investors often allocate to emerging markets debt to capture compelling stories of growth, reform and opportunity in developing economies. Yet, all too often, these carefully chosen EM exposures are overshadowed by movements in US Treasury yields. It’s a frustrating reality that can significantly amplify volatility in the asset class’s returns, and recent weeks have offered a reminder of just how powerful this effect can be.
Growth Team Weekly Investment Insights
In this week's blog post, we cover a series of economic data (inflation and retail sales), the S&P 500® index's new high, Tesla's exposure to potential regulation changes, U.S. vs. non-U.S. equities, the performance of nuclear stocks and a look at where some key COVID-19 beneficiaries are trading today.
Growth Team Weekly Investment Insights
In this week's blog post we cover a series of economic data (employment, PMI readings and the first Q3 GDP growth estimate), Super Micro Computer's round trip, big tech capex spending, Arm's transition into data centers and rising demand for transformers.
Senegal: Things are not Always What They Seem
In March 2024, Senegalese Prime Minister Ousmane Sonko and President Bassirou Diomaye Faye were elected with a promise of radical change. Their campaign, which centered on social justice and national sovereignty, resonated with a population facing high living costs and rising unemployment. Following his inauguration in April, President Faye initiated a comprehensive review of the country’s financial situation. The findings, released in late September, raised significant concerns, and suggest that Senegal’s fiscal health may be more precarious than previously believed.Read More
Sri Lanka’s Happily Ever After?
Sri Lanka’s September presidential election was a watershed moment. The left-leaning political outsider, Anura Kumara Dissanayake (AKD), was elected as the 9th President of Sri Lanka. AKD’s rise reflects the electorate’s desire for change, following the 2022 crisis which doubled the poverty rate and shrunk the middle class. His platform appealed to voters by promising to curb corruption and provide tax relief, but also antagonized markets by proposing fiscally irresponsible tax exemptions and challenging Eurobond restructuring negotiations – raising serious concerns about economic stability.
Economic Minesweeper: October 2024 IMF and World Bank Annual Meetings
Policy makers, government officials and members of the emerging markets debt investment community descended on Washington DC last week for the fall IMF meetings. Over the course of the week, the EMsights team conducted over 100 meetings and actively engaged in conversations with a diverse array of representatives and leaders.Read More
TajikiSTAR
Surrounded by emerging market darlings Uzbekistan and Kazakhstan, Tajikistan often goes overlooked by investors. Our team recently traveled to Dushanbe, and we found it timely to provide an update on the country’s macroeconomic outlook.
Growth Team Weekly Investment Insights
After a few weeks off to handle quarter-end responsibilities, it feels good to catch up on what has been driving markets in October.
Pension Tension
Uruguay is heading towards a pivotal vote on October 27th, but it’s not just about electing the next president. This time, voters will also weigh in on a plebiscite that could reshape the nation’s pension system—backtracking on key reforms passed in 2023.
The Battle of the NDF Trading Venues
Non-Deliverable Forwards (NDFs) have become essential tools in emerging market investing, allowing access to emerging and frontier currencies that do not otherwise have an FX market. NDFs, unlike standard currency forwards, do not involve the physical exchange of currencies. Instead, counterparties settle the difference between the contracted NDF price and the current spot price at the maturity of the contract. Market adoption of electronic trading and central clearing in NDFs has not kept pace with other emerging market derivatives but is quickly catching up and rapidly becoming more complicated.
The Curious Case of The Bahamas Index Exclusion
The line between emerging and developed markets can often be blurred. While we advocate for a broad investment approach that encompasses a wide range of opportunities, index providers often draw a clearer distinction. This stricter approach can result in the exclusion of certain countries from the investable universe. One example is The Bahamas.
Growth Team Weekly Investment Insights
This week's post highlights Chinese stimulus measures and equity returns, US economic data releases (PCE and GDP), how rare it is to find companies with consistent growth profiles, and the importance of digital innovation in cars.
Growth Team Weekly Investment Insights
In this week's post, we highlight the August inflation data, performance of technology and consumer staples equities, expected earnings growth of small caps, Apple product announcements, and a rising cloud computing competitor.
Goodbye "T-Bill and Chill," Hello Dividend Stocks
The “higher for longer” interest rate environment is nearing its end. The Federal Reserve is widely expected this week to join other central banks, including the European Central Bank and the Bank of England, in cutting rates after generational high US inflation has receded back toward the Fed’s 2% target.
Growth Team Weekly Investment Insights
In this week's post, we highlight PMI readings, semiconductor weakness, updates on the labor market and oil industry, and walk through a popular approach to analyzing software companies.
Jamaican Me Hurricane Ready, Others Should Follow
Emerging market countries must deal with a host of development issues, from social unrest to inadequate institutions and corruption. A select few face an additional natural disaster risk that can derail their development: hurricanes.
Growth Team Weekly Investment Insights
In this week’s post, we highlight Jay Powell’s recent comments, US rate cut expectations and the falling US dollar, health care’s bright outlook, NVIDIA’s earnings results, and record free cash flow generation by defense companies.
Growth Team Weekly Investment Insights
In this week's post, we highlight inflation and retail sales results, market performance, Starbucks's new CEO, and a key milestone hit by AstraZeneca.
Great Expectations
Narratives have always had the power to drive markets. For stocks, few narratives are more compelling than those about new technologies, innovations or business models that can produce tremendous profits growth for the foreseeable future.
Growth Team Weekly Investment Insights
1) Equity Market Roller Coaster
Recession concerns and market returns gyrated back and forth all of last week.
2024 EMsights Olympic Games
As world-class athletes vie for gold medals in Paris, the EMsights Capital Group is hosting its own unique competition where we celebrate standout countries in the emerging markets landscape.
Growth Team Weekly Investment Insights
1) Hard Landing Fears
Volatility increased last week (and has continued at the time of writing this) due to concerns that the US may not thread the soft-landing needle.
Growth Team Weekly Investment Insights
1) The Potato Economic Indicator
One of the latest bottom-up data points indicating consumer weakness comes from one of the world’s largest potato producers, Lamb Weston.
Growth Team Weekly Investment Insights
After a few weeks off due to vacation and working through the quarter-end rush, we are back.
1) Deflation
Starting at a higher level, there has been a lot of data released over the past few weeks that point to a macro environment of slowing inflation and a slowing (albeit still strong) economy.
The Dog Days of VRIs
Value Recovery Instruments (VRIs), also known as warrants, are instruments that provide contingent payouts to creditors under specific scenarios. They are typically structured as call options or warrants that are tied to a state variable (such as GDP or exports), which is strongly correlated with the borrower’s ability to repay debt.
Often seen as deal “sweeteners”, VRI’s expedite debt restructurings by helping bridge the expectation gap between creditors and debtors.
Public vs Private Credit: Golden Age, or Fool’s Gold?
One of the most widely debated investment topics in recent years is the rise of private credit, in particular the growth of the sponsored direct lending sector. We discussed our team’s view on this topic at our recent 2024 Artisan Investment Forum, diving into the drivers of growth across public and private credit along with key considerations that investors should bear in mind when allocating to credit markets in today’s investing environment.
Global Perspectives on the US Construction Boom
Following a thematic, bottom-up, valuation-sensitive investment process can lead to a differentiated, global view of local market trends with unexpected outcomes.
Benefiting from over $1.2 trillion in government-backed stimulus and a post-COVID economic recovery, many investors may not be aware of the substantial surge in US construction spending, particularly in manufacturing.
French Snap Elections
Following the strong performance of far-right National Rally (RN) in the European Parliament elections earlier this month, President Macron and his centrist Renaissance party raised the stakes in French politics by calling for snap elections of the lower house of the French parliament on June 30, with runoffs on July 7.
Growth Team Weekly Investment Insights
1. Unchanged Inflation
The latest consumer price index (CPI) data released for May indicated prices were unchanged versus April!
Growth Team Weekly Investment Insights
1) Conflicting Labor Market Results
Last week, we received two labor market data points that were largely contradictory.
Coalitions, Compromises, Continuity, Chaos
Elections offer citizens the opportunity to turn the tides by prompting political, economic and social reforms. In the past week, the global stage witnessed the unfolding of three distinct electoral contests across various regions, each yielding results that may redefine the trajectories of the respective countries.
Growth Team Weekly Investment Insights
1) Data Shows US Economy Avoids Inflationary Overheating, Fed Likely to Breathe Easier
As we bid farewell to May, the key reaction was a collective exhale of relief
Documenting Your Dollar
Sailing Towards Reform
Dominican Republic President Abinader cruised to re-election over the weekend, winning outright in the first round of voting and avoiding a run-off. While the polls heavily telegraphed the outcome in favor of Abinader, this reaffirms the country’s commitment to growth and development.
Growth Team Weekly Investment Insights
1) The S&P 500® Index’s Strong Earnings Season
According to FactSet, the S&P 500® Index’s Q1 blended (actual and estimated results) year-over-year earnings growth rate is 5.3% with 92% of index constituents reporting results.
Playing Defense
In 2023, global defense spending reached a historic high of $2.4 trillion, reflecting a 6.8% increase from the previous year—the largest since 2009. This surge, illustrated in the chart below underscores how widespread defense spending has grown in recent years, with increases across all major geographical regions.
Growth Team Weekly Investment Insights
1) Job Openings and Labor Turnover Survey (JOLTS) and Institute of Supply Management’s (ISM) Index
Last week’s macro calendar was labor-heavy. First up was the JOLTS report, which displayed continued easing in the number of job openings.
Growth Team Weekly Investment Insights
1) Another Disappointing Inflation Data Point
Expectations of a 2024 rate cut were further hampered last week when both the personal consumption expenditures (PCE) and core PCE inflation measures came in higher than expected.
A Fresh Perspective on Accessing Local Currency Markets
Growth Team Weekly Investment Insights
1) Conflicting Messaging: Strong Retail Sales vs Rising Delinquencies
Given its importance in the US economy, a lot of attention is on the consumer.
Scavenging for Treasure at the IMF Spring Meetings
Members of the emerging markets debt investment community descended on Washington DC last week for the spring IMF meetings. Over the course of the week, the EMsights team conducted over 100 meetings and actively engaged in conversations with a diverse range of government officials and representatives.
Given the sell-off in emerging markets debt year to date, we entered the week expecting a decidedly bearish mood, though we were surprised to find a rather neutral outlook overall.
Biopharma’s GLP-1 Race Heats Up
Our conviction in Novo Nordisk continues unabated, particularly in the work it is doing to treat the approximately 890 million people worldwide who struggle with obesity and the 530 million people suffering from Type 2 diabetes. While this field has attracted competition, the company has not rested on its laurels after launching its groundbreaking Type 2 diabetes medication Ozempic in 2017 and its obesity follow-on treatment Wegovy in 2021.
A Q&A with Portfolio Manager Daniel Kane
Dan, happy 16-year Artisan anniversary. You joined Artisan during the ’08-’09 financial crisis. I’m sure you have some great stories to tell from those days. What was it like to start your Artisan career at that time?
Life, Liberty and the Pursuit of… Investment Returns
EMsights Capital Group believes that economic and political freedoms and rule of law are important precursors for the economic development, growth, education and sustainability of sovereign countries. Through our on-the-ground country visits, we follow a country’s pursuit and execution of fair and free elections, civil liberties, functioning of government, and the importance it places on economic freedom.Read More
Growth Team Weekly Investment Insights
In this week’s blog post, we highlight some of our takeaways from the first quarter’s market returns.
Growth Team Weekly Investment Insights
1) Credit Card Data Suggests Consumer Weakness?
Like most things in this industry, looking at credit card data sends a nuanced message about the health of the consumer.
Growth Team Weekly Investment Insights
1) Inflation Progress Shows Signs of Slowing
Last week brought signs that progress towards the central bank’s inflation target may be slowing as both the Consumer Price Index (CPI) and Producer Price Index (PPI) metrics were higher than expected.
US Treasury Reforms: The Crystal Ball for EM Traders
The SEC voted in December to require more US Treasury bonds to be centrally cleared in order to improve market resiliency, and it continues to propose major reforms to that market. These reforms are getting significant attention in the press and sparking a debate on financial news and social media platforms. Emerging markets investors might be forgiven for paying little attention to market structure developments in US Treasuries, but ignoring these developments is a mistake.
Growth Team Weekly Investment Insights
1) February Jobs Report
The big macro data point last week was the US employment report, which offered both upside and downside surprises.
Dare to be Different
The National Bank of Serbia opted to hold benchmark interest rates unchanged at 6.5% for the eighth consecutive meeting, citing global uncertainties and persistent inflationary pressures as the rationale. This restrictive policy is at odds with its Central European peers, some of which are already several rate cuts deep into their easing cycles, but we applaud this prudent approach for Serbia.
Serbian inflation fell to 5.6% year over year in February, but forecasts do not show inflation dropping into its target band of 3% +/- 1.5% for a few more months.
Growth Team Weekly Investment Insights
1) The Shift from EVs to Hybrids
A recent Financial Times article explains how Toyota has been hesitant to significantly invest in fully electric vehicles (EVs) over the past few years, favoring hybrids instead.
Smoke and Mirrors in South Africa
The South African government announced an unconventional strategy last week that involved tapping into its gold and foreign exchange reserves in an effort to temper its growing debt burden. While investors initially cheered this financial maneuver, we are more skeptical. Unfortunately the government announced this strategy without clearly outlining the governance of the framework. We break down the transaction and potential drawbacks below:
Growth Team Weekly Investment Insights
1) NVIDIA Delivers Again
Fueled by its H100 chip, which has become the industry standard for AI development, NVIDIAs’ earnings have risen more than 700% from a year ago.
What “Kenya” Do? What Kenya Did!
Kenya’s upcoming $2 billion Eurobond payment due in June 2024 had been a cause of concern for many investors as the maturity quickly approached. However, in mid-February, a pivot in the country’s approach to raise funds quickly alleviated investors’ anxieties: Kenya successfully issued $1.5 billion through an international bond sale that was well oversubscribed, and used the cash to buy back 96% of its 2024 obligation at par. In our eyes, the government’s decision to issue was a smart move and a crucial step towards alleviating short-term risks for the country. It greatly reduces the event risk surrounding the impending Eurobond maturity and creates room for policymakers to turn their attention to a policy agenda that puts the country on a better and more sustainable path moving forward.
Growth Team Weekly Investment Insights
1) One Company is Driving Most of the YTD Russell 2000 Growth Return
An interesting phenomenon happening within small caps this year is the dominance of Super Micro Computer.
Growth Team Weekly Investment Insights
1) Why Central Banks May Be Reluctant to Declare Victory Over Inflation
This Financial Times article highlighted a few reasons global policymakers may hesitate to declare that inflation is under control. Most notably, economic strength, particularly in labor markets, may be too good.
Vroom, Vroom, Vroom!
Did you hear that sound? That was the sound of Vroom’s engine shutting down. If you’re not familiar with the name, Vroom, was, an online-only used car retailer, which along with Carvana and several other upstarts, aimed to disrupt the incumbent “old-school” auto retailing model. With the announcement that Vroom is winding down its e-commerce operations, we looked back at our Q2 2021 portfolio letter. In it, we compared the business of Vroom to one of the incumbents, AutoNation, through the lens of our three margin of safety investment criteria: business economics, financial condition and valuation.
At the time, both businesses were valued at roughly the same market value, approximately $5.5bn, so we posed the question: if you had to pick one of these two businesses to buy, which would you choose?
A Glimmer of Gold in the Pacific
Hiding behind the picturesque beaches, tropical rainforests, and immense coral reef biodiversity of Papua New Guinea is a precarious socio-economic situation. High unemployment, crime and a volatile political landscape often dominate the headlines of the natural-resource rich pacific nation and have hindered economic development. However, tailwinds from ongoing and prospective natural resource projects along with a recent push for fiscal reforms poise the country for an upswing and position it for increasing geopolitical importance.
Growth Team Weekly Investment Insights
1. Hot jobs report and Fed Speak takes March cut off the table
Last week the Fed held rates steady at the 5.25% - 5.5% level but pushed back a bit on expectations for near term cuts due to a desire for “greater confidence” that inflation will return to the 2% goal or if the labor market weakened.
Democracy’s Blockbuster Year
2024 is expected to be one of the biggest election years on record with more than half of the world’s population planning to go to the polls. This busy election calendar comes at a particularly opportune time as geo-political tensions are running high across the globe.
Thoughts and Takeaways From The EMsights Annual Research Retreat
The EMsights Capital Group held their annual research retreat in December. For two days the investment team gathered off-site to recap the events of 2023 and look forward to 2024. This year’s agenda also featured several outside speakers ranging in expertise from the Russia/Ukraine war to the current health of the US economy.
Over the course of the two days, the team identified several cross-regional trends they expect to remain prominent in 2024:
The Case for a Dedicated Allocation to Mid Caps
In our previous blog post “Narrow Leadership Creates Opportunity”, we highlighted the attractive valuations of US mid-cap stocks, which are at their cheapest levels relative to large caps in over 20 years. As value investors, we distinctly understand the importance of starting-point valuations for forward returns, however you don’t have to be a value investor to appreciate the asset class’s appeal.
Since 1979, the Russell Midcap® Index has outperformed both the Russell 1000® and 2000® indices (Exhibit 1) on an annualized basis by 0.8 percentage points and 1.9 percentage points, respectively. While that may seem small, the power of compounding can result in large differences as one’s time horizon expands.Read More
Unworkable Common Framework
Zambia defaulted in 2020 on its sovereign bonds and has been on an unrelenting quest to restructure its debt since. While finding itself in distress is not notable, the country’s plan to find its way out may be. Zambia serves as the first meaningful test of the Common Framework—a Group of 20 (G20) initiative to simplify and accelerate the sovereign debt restructuring process. In a perfect world, this initiative should create a quick and successful resolution for Zambia and pave the way for other emerging economies seeking debt-relief. Unfortunately, as we know all too well, the world is far from perfect.
Is Argentina Out Of The Woods Yet?
On Sunday, November 19, Argentina elected Javier Milei to be its next president in a decisive run-off election. Radical libertarian outsider, Milei, defeated Sergio Massa, the country’s Minister of Economy since August 2022. Voters, investors, and business owners are hopeful Milei’s libertarian policies, which are a drastic divergence from the current policies, will aid Argentina’s recession-prone economy. The country is currently facing inflation topping 140%, interest rates at 130%, dwindling central bank reserves, and a weakening currency regime. However, the grass may not be greener on the other side. Implementing Milei’s policies will be a challenge without a congressional majority, and his abrupt, “chainsaw” approach may backfire. Even Taylor Swift's Eras Tour, which visited Buenos Aires last week, could not boost this economy—is there anything that can?!
Narrow Leadership Creates Opportunity
The US equity market’s narrow leadership in 2023 is well chronicled, but it’s nearly impossible to overstate. The “Magnificent Seven”, as the largest seven US stocks have been dubbed, have dominated YTD equity returns—contributing, in effect, 100% of the S&P 500 Index’s total return (through October).
These seven stocks have returned on average 84%, compared to -3% for the “S&P 493”, and more than half of S&P 500 stocks have generated negative returns. In fact, the equal-weight S&P 500® Index is lagging the market-cap weighted S&P 500 by the most since 1998 as the S&P 500 Index is up over 10%, while the equal-weighted S&P 500 was down ~2% through October.Read More
Nigeria’s New President: We Hear The Talk, But Where Is The Walk?
President Bola Tinubu won Nigeria’s presidential election in February 2023 and was faced with the seemingly impossible task of improving the battered economy he inherited. While the legitimacy of Tinubu’s win was contested by many voters, investors welcomed the new administration with open arms as key tenants of Tinubu’s campaign rested on making Nigeria a friendlier investment destination. Tinubu wasted no time getting to work, but a few months into his term, he was falling flat on his promises… or at least that is what it seemed. So, the EMsights team traveled to Nigeria twice in the past few months to learn more!
What "Kenya" Do?
Kenya’s fundamentals today may be the most exciting they’ve been in decades. Following a peaceful election last August, President Ruto’s new administration has continuously expressed commitment to fiscal consolidation and structural reform that will improve the sovereign’s credit quality. Kenya is supported by the international community, which wants to help fund its success—as most recently evidenced by the IMF’s announcement it will extend further aid to the country (more on which shortly). So what gives—why do Kenyan asset prices tell such a different story?
Emerging Markets Debt: Beyond the Benchmarks
The macroeconomic backdrop in emerging markets has been uncertain for some time now—indeed, if anything, uncertainty seems to be increasing. War continues in Ukraine, inflation globally remains sticky (particularly core inflation) and, consequently, global monetary policy is, overall tilted toward tightening (relatedly, the Reserve Bank of Australia announced a surprise hike in early May). And at least partially thanks to tighter monetary policy (which is ongoing, with both the Fed and ECB raising rates again at their recent May meetings), some things have broken—e.g., we’ve seen a cryptocurrency winter, trouble with UK pension funds, concern about global real estate and, most recently, bank failures in the US and Europe.
Easter-Egg Hunting: IMF Edition
EMsights team members returned to Washington, D.C., in April for the IMF and World Bank Spring Meetings, conducting some 200 interactions with a swath of government officials and representatives. Frequent readers will recall we similarly attended the IMF and World Bank Annual Meetings last fall—and were unsurprised by the somber mood, given ongoing macro and geopolitical uncertainty.
Growth Team 5 in 5: Health Care
The Growth team has consistently found health care to be a key area of idea generation given the existence of companies with attractive franchise characteristics experiencing interesting profit cycles. From a franchise standpoint, many health care companies enjoy defensible competitive positions through intellectual property protection, strong brands or leading market share positions. From a profit cycle standpoint, this is an area of constant innovation, and innovation tends to breed profit cycles.
A Q&A with Portfolio Manager Craig Inman
Craig, happy 11-year Artisan anniversary. To commemorate your time at Artisan Partners and with the U.S. Value team, we have a few questions to better get to know you personally and professionally. To break the ice, please tell us a bit about yourself.
I grew up in South Carolina and have lived in the southern US my entire life. One thing that is interesting about my childhood is my dad was a professional golfer on the PGA Tour (he also played the Senior PGA Tour later in life).
Let Freedom Ring
EMsights Capital Group believes that economic and political freedoms and rule of law are important precursors for the economic development, growth, education and sustainability of sovereign countries. Through active due diligence, including on-the-ground country visits, in-person meetings with political, business and government officials, and daily monitoring of political and financial news, we actively follow a country’s pursuit and execution of fair and free elections, civil liberties, functioning of government, and the importance it places on economic freedom in real-time – in both its rhetoric as well as its enforcement of these principles.
Reality Bites
Over the past year, Egypt made headlines as it worked to navigate through a challenging macroeconomic operating environment and high external financing needs. In particular, the recent surge in US Treasury yields gave rise to the harmful narrative that “markets are closed” to countries like Egypt that would need to price new issuance yields in excess of 10%. We think this narrative has been harmful as it incentivizes countries to wait until they are facing significant time pressure. Instead, we believe countries should take a long-term view, recognizing that yields move around, and begin to formulate financing plans that acknowledge the reality of current market pricing.
Anthro-Vision
Researchers, investors, the occasional interviewees[1] and even the CEO of Artisan are often incredulous when I say my undergraduate anthropology major is a cornerstone of my daily investment process. Occasionally I get feisty and defend myself, but I often defuse the situation with what passes for humor in the investment world and move on. No more! Gillian Tett’s 2021 book Anthro-Vision: A New Way to See in Business and Life will be my public defender.
Boring Is Beautiful
I was recently asked to speak about investing to a group of undergraduate students at the University of Florida who manage a university student fund. I was initially stumped regarding what we would discuss, but upon speaking with one of the students, it became clear they were eager to discuss a real-world example in relation to our approach to investment research.
A Look Forward to 2023: Giving It a Wide Berth
In the emerging markets debt space, the political process can turn the tide of policy and outcomes in a country. As we flip the calendar to 2023, there are several elections and potential policymaker changes on the horizon that could make a splash. As such, we monitor developments on elections closely and find that the following may carry the most weight in the coming months as they will dictate the direction of macroeconomic policy and changes to the quality of governance in the countries we look at.
2022: No Love Lost
Merriam-Webster’s word of the year for 2022: gaslighting. After 2021’s market resurgence from the worst of pandemic-lows, investors were left feeling like a spurned lover in 2022—misled, manipulated and filled with self-doubt from the volatility this year.
Another One Bites the Dust: Ghana’s Gaffes
Following its return to democracy in the early 1990s, investors began to show renewed optimism for Ghana as a pacesetter in the region. In ensuing years, the country was a beneficiary of the heavily indebted poor countries (HIPC) initiative that saw a successful reduction of its public debt from approximately 80% of its GDP in 2000 to around 20% in 2004, putting the country on a positive trajectory. Instead of taking advantage of a clean slate, Ghana’s post-HIPC history has included widening deficits, the abandonment of a disciplined fiscal framework at the onset of Covid-19 and rising core rates as of late. Markets have punished Ghana and given an increasingly unsustainable debt load, Ghana is unable to access external financing sources. Public debt is projected to reach about 100% of GDP by the end of 2022.
Bravo Tokayev—What a Difference a Year Makes
Recently, EMsights partook in a due diligence trip to the nations of Kazakhstan, Uzbekistan and Azerbaijan. We found Kazakhstan, which began 2022 in a bit of chaos, headed down a fascinating path towards reform and disentanglement from Russia. While we would like to see more progress made on Kazakhstan’s economic reform agenda, we are excited to see what President Tokayev does next.
The Folly of Forecasting
“It’s tough to make predictions, especially about the future”
—Yogi Berra
Given it’s that time of year when Wall Street’s market strategists trot out their year ahead outlooks, we thought we might share our thoughts on the value of forecasting or perhaps the lack thereof. If the following sampling of prior year outlooks for CY2022 are any gauge, we doubt next year’s predictions are worth the paper they’re printed on.
Inflation Communication Breakdown
The decision-making process and subsequent market reaction to central bank actions largely dictated financial headlines over the past few weeks. As a recap, the European Central Bank, the US Federal Reserve and the Bank of England all implemented 75 basis point rate hikes. These increases came in an effort to stave off persistently high inflation prints in their regions, including 9.9%, 8.2% and 10.1% annualized rates of inflation in September, respectively.
Lula—Take 2: Lula Victorious in Brazilian Presidential Election
Following a tightly contested race, Brazil’s presidential election on Sunday, October 30 resulted in victory for former President (2003-2011) Luiz Inácio Lula da Silva (or “Lula”) of the Workers’ Party and subsequent defeat for right-wing incumbent, Jair Bolsonaro. Lula amassed more than 60 million votes for the most in the country’s history to defeat Bolsonaro by less than 2% in Brazil’s tightest finish on record.
Trick or Treat: Policymaking Edition
In mid-October, EMsights team members traveled to Washington D.C. to attend meetings around the International Monetary Fund (IMF) and the World Bank Group annual meetings. Given that uncertainty permeates the macro backdrop, it came as no surprise that the meetings held a somber tone. Given Russia’s invasion of Ukraine, Fed tightening and the global inflationary environment in general, uncertainty and bearishness abound. Ultimately, the IMF opted to lower its global economic growth outlook for 2023 to 2.7%, down 0.2 percentage points from its most recent outlook in July, and lower than its projection for 3.2% growth in 2022.
A Market Head Fake While the Foundation Continues to Crack
The convergence of rising interest rates, high inflation and slowing growth have roiled global financial markets, including emerging markets (EM) debt. The Federal Reserve’s rate hikes are taking place against the backdrop of tightening by many central banks in developed and emerging markets. We believe these factors are fueling risk-off sentiment for EM fixed income assets.
Inflation, Inflation Everywhere?
All eyes have been focused on inflation over the course of 2022. Ours too! Most of the attention has been given to the developed world and for good reason—inflation is the highest it’s been in over 40 years for many countries. Consumer prices remain volatile and elevated across much of the world, denting investor optimism for easing inflation and less aggressive interest rate hikes. One country’s recent inflation print really caught our attention. One hint: They do not have an Inflation Reduction Act.Read More
Intelligent Investing: Looking beyond Interest Rates
Low interest rates have been a defining feature of the investing landscape in recent years. The rate on the benchmark US 10-year Treasury Note has been in a 40-year downtrend (Exhibit 1), leading to sub-3.0% yields for the better part of the past decade.Read More
Summer Dreams, Ripped at the Seams
For those in the northern hemisphere, it’s been a volatile summer for emerging market bonds. The asset class has swung between gains and losses amid concerns about rising interest rates, high inflation, slowing growth and the Russia-Ukraine conflict. Then in late-August, Federal Reserve Chairman Jerome Powell’s speech on sustained higher interest rates rattled global markets, halting a rally in risk assets.
Got Dividends?
If you’re of a certain age you’ll probably recall those Got Milk? commercials that were omnipresent in the mid-1990s. It was one of the all-time greatest ad campaigns, becoming a cultural touchstone. Seeing as milk consumption per capita in the US has been decreasing for at least 20 years, the milk producing industry might want to consider dusting off its old playbook. Though not entirely clear why Americans are drinking less milk, the decline is at least partially explained by an aging population.
Demographics might be hurting milk consumption, but aging populations in the US and other major economies are a distinct tailwind for income-producing securities, including dividend-paying stocks.
The Fed Cures Bird Flu
**FED HIKES 75BPS, INITIATES QT, TARGETS FOOD INFLATION. FED CURES BIRD FLU, LIFTS FOOD EXPORT RESTRICTIONS IN FOREIGN COUNTRIES, SHIFTS WATER TABLE FROM FLOODED FARM AREAS TO DROUGHT AREAS, RELEASES WHEAT FROM STRATEGIC GRAIN RESERVE, INCREASES BABY FORMULA PRODUCTION.
Finding Opportunities Amid Policy-Driven Volatility
There’s been no shortage of volatility so far this year as building inflationary pressures and increasingly tighter monetary conditions have led to spikes in volatility across interest rates and risk assets. Across credit markets, de-risking has become more common as investors price in their expectations for higher policy rates and the potential impact on global growth. Uncertainty continues to drive price action in the near term, but through the noise, growing pockets of value are emerging across the high yield landscape.
Three Trends to Watch in the Evolving Software Enterprise Landscape
The software industry is witnessing monumental shifts that evolve its economics. Like all industry transitions, this change will create both winners and losers. As forces that will reshape the future of business, we are interested in the opportunities made possible by (1) the ubiquity of digitalization, (2) the increased transition to the cloud and (3) the proliferation of artificial intelligence (AI).
Three Reasons to Consider an Allocation to Leveraged Loans
In looking at the year ahead, we expect an environment that inches ever closer to normal across all facets of the economy. For fixed income investors, normal means the end of accommodative monetary policy and the beginning of a tightening cycle that is likely to challenge returns in 2022. To offset some of these headwinds, we think allocating to leveraged loans is a compelling strategy for fixed income investors. Here are three reasons why leveraged loans have the potential to perform well in the year ahead.
Where We Are Finding Growth: Renewable Energy Economy
The team believes the world is in the early stages of a meaningful mix shift from hydrocarbon-based energy to renewables-powered energy enabled by improving economics, social awareness and increasing regulatory pressures. These dynamics have enabled the team to uncover several profit cycle opportunities globally.
Where We Are Finding Growth: Industrial Process Innovation
A relatively slower capital expenditure cycle is often cited as one factor behind the past decade’s tepid expansion in many developed markets. However, we believe this top-down point of view obscures a healthy, albeit different, sort of capex cycle—one that is more technology-driven and focused on efficiency and margin improvements.
Where We Are Finding Growth: Health Care Innovation
In the six-plus decades since Francis Crick and James Watson published their short but revelatory article about DNA’s double-helix structure, ongoing research has accelerated understanding of human genetics.
Smarter Buildings—An Unsung Hero in the Climate Fight
The increasing evidence that greenhouse gases created by human activity is driving climate change—including higher temperatures, more droughts, extreme weather and melting glaciers—has created a call to action for public and private-market solutions to slow these trends.Read More
Evergrande: Maybe Not a Lehman Moment but Risks Are Real
As one of China’s largest property developers, Evergrande’s size and precarious financial position pose real risks for China’s authorities, economy and financial markets.
Are You Getting the Right Non-US Exposure?
Tepid economic growth in the post financial crisis decade left investors searching for companies that could stand out from the market by disproportionately growing their profits. The technology-centric US economy became the preferred destination for capital, with profit growth far exceeding its non-US peers (Exhibit 1). This rise in profits combined with more multiple expansion drove US equities to deliver over 600bps of higher annual returns and higher returns on equity (Exhibit 1). That said, it might be appropriate for investors to sharpen their pencils and give their non-US equity exposure a closer look given the price being paid for US profit growth appears a bit stretched today, and past performance is not indicative of future results (Exhibit 2).
Revisiting Bond vs Loan Relative Value
Opportunities to capture additional yield by moving up in quality are uncommon for fixed income investors, but that’s the dynamic at play today in leveraged credit.
More Summer Fun: Market Bingo
Yep, the dog days of summer are here. And now that people are getting together more frequently, there is the age-old matter of what to discuss. Politics is a bit touchy these days. Sports is an option, of course, but who really wants to talk about pitch spin rate and the Olympics seemed to lack the typical inspiring excitement—thanks a lot COVID-19! And there is what to binge-watch next. But with stocks continuing to climb, new asset classes seemingly bursting onto the scene and plenty of uncertainty ahead, one should expect a bit of market banter.
Below is a little game to go along with those investing conversations.
High Yield Credit—First Half 2021 Review and Thoughts for What’s Ahead
Through the first six months of 2021, high yield credit markets have provided an above-coupon return on the back of tighter credit spreads—though this has been somewhat offset by the increase in Treasury yields. The benign credit backdrop and deep bid for yield has favored a down-in-quality approach, particularly among economic reopening beneficiaries. Across the capital structure, loans have benefited from investor focus on rising rates. Loans have provided strong absolute gains so far, but receding inflation expectations led to lower Treasury yields in Q2, which in turn weighed on relative returns for the floating-rate asset class.
Summer Vacation Reads for Investors
Looking for additional summer beach reading to go along with your latest murder mystery, self-improvement book or crossword puzzle? Now is a good time to get some fresh perspectives on investing and financial markets.
We queried our investment teams about some of their favorite books and how those reads have impacted their approach to investing.
We hope you enjoy!
Latin America’s Pandemic Election Cycle
Featured Author: Meagan Nace
Meagan Nace is an analyst on the Artisan Partners Sustainable Emerging Markets Team.
In addition to the public health tragedy, the pandemic has been a source of significant economic and fiscal setbacks for Latin America—at a time when social discontent over inequality was already beginning to surface. While we see some signs of economic improvement, the pandemic led to drops in much-needed investment—foreign, corporate and government—while fiscal conditions have become further strained. Now, a series of elections will reveal what leaders and policies each country feels will help it move forward—with potentially significant implications for the region’s financial markets.
Laser-Eyed Focus on Value
This recent ransomware attack on America’s energy infrastructure has me concerned. Imagine the chaos if the clandestine cyberweapons market shutters America’s electrical power grid. I mean, how would Americans access their trillion dollars of crypto?!? How will I know if my friends have laser-eyed avatars and will get offended when I don’t accept bitcoin as barter for my backup generator?
Supply/Demand: Revenge Spending in Commodities
Supply/Demand is a semi-regular feature of the Artisan Canvas rounding up interesting and quirky subjects from across the Internet with a focus on economic and business trends. A good rule of thumb among the Artisan Canvas editorial staff is “never reason from a price change.” With that in mind, our latest edition of Supply/Demand.
The price tags for (seemingly) everything have gone up, from electronics to cars to food—partly because commodities prices have also jumped. Some are related to pandemic recovery, particularly in China. For others, geopolitics are at play—again, also frequently related to China. Here are the commodities trends that caught our collective eye:
Inflation: Just Passing Through, or Here to Stay?
As the US economy fully reopens and folks are able to return to their traditional spending patterns (to what degree only time will tell), price increases for a number of goods and services should not be a surprise. Indeed, many have seen it coming for a while.
High Yield’s High-Quality Overhaul
While most segments of fixed income offer paltry yields with growing risk levels—either credit or interest rate—and valuations that are back to pre-pandemic levels, the high yield market remains one of the few areas that still provides positive real yields while benefiting from a credit quality mix that is at all-time highs.
Finding Value in Disruption
Disrupted. Is there a better word to describe the past 12 months? Disrupted lives. Disrupted routines. Disrupted travel. Disrupted work. Disrupted education. Disrupted supply chains. Disrupted markets.
Turkey's Tricky Path Forward
In late March, Turkey’s President Recep Tayyip Erdogan fired the country’s central bank head Naci Agbal, along with his deputy 10 days later, making Agbal the third fired central bank leader in less than two years and curtailing his tenure at roughly four months. A former member of Parliament (and fellow member of Erdogan’s Justice and Development party), Sahap Kavcioglu, will assume the (historically perilously short-lived) role.
Is Japan Back?
Perhaps you missed it, but Japan’s equity market is back to levels not seen since before its 1991 crash and subsequent lost decade—arguably decades. In March, the Topix Index reached a 31-year high and has since held up relatively well despite a resurgence in COVID-19 cases, a seemingly slow start to vaccinations, renewed business restrictions, an earthquake in February and the decision to hold the Tokyo Olympics at least without fans from abroad and possibly without any at all.
Give Me Shelter: What a Rising Rate Environment Might Mean for Credit Markets
With vaccination rates ramping and the economy beginning to emerge from its COVID-induced slowdown, the days of record-low interest rates are likely numbered—which raises questions about the broader fixed income environment. While rising rates could mean conventional fixed income areas are in for a relatively rough ride, they could also provide an interesting environment for high yield and leveraged loans, which have historically fared relatively well as rates rise thanks to some potentially overlooked considerations.
A(nother) New Day in Italy
Stop us if you’ve heard this one before: A newly named Italian prime minister declares he will finally enact changes to the country’s bureaucratic and legal structures to get the third-largest EU economy rolling again. This time, it’s Mario Draghi—of euro-savior fame—who will also be coordinating efforts to secure €200 billion in funding from the EU’s inaugural stimulus package raising debt as an entity. Italy, whose economy has been deeply damaged by COVID-19, is set to receive more funds than any other country. If the EU plan is to succeed, Italy must arguably play a big part in the success.
Supply/Demand: The Supply Chain Crunch
Supply/Demand is a semi-regular feature of the Artisan Canvas rounding up interesting and quirky subjects from across the Internet with a focus on economic and business trends. A good rule of thumb among the Artisan Canvas editorial staff is “never reason from a price change.” With that in mind, we present our latest edition of Supply/Demand.
As much of the world attempts to get business back to pre-pandemic norms, global supply chains face an added challenge in the form of shifting consumer preferences. As consumers and employees do more from home, this “new normal” has had some interesting impacts.
Where Might Yield-Seekers Turn Now?
A year of increased asset purchases, new emergency facilities and lower interest rates—unleashed by global central banks in response to the pandemic’s economic disruption—has made it increasingly challenging for investors to find yield in today’s market. As it stands, only about 30% of the world’s bonds trade with yields over 1%. For investors looking to generate income over and above inflation, high yield credit stands as one of the last remaining asset classes that still offers compelling yield opportunities on an absolute and risk-adjusted basis.
Was Sisyphus a Value Investor?
“I leave Sisyphus at the foot of the mountain! One always finds one's burden again. But Sisyphus teaches the higher fidelity that negates the gods and raises rocks. He too concludes that all is well. This universe henceforth without a master seems to him neither sterile nor futile. Each atom of that stone, each mineral flake of that night filled mountain, in itself forms a world. The struggle itself toward the heights is enough to fill a man's heart. One must imagine Sisyphus happy.” —Albert Camus, The Myth of Sisyphus, 1942
The plight of Sisyphus is not wholly unfamiliar to value investors. And so it’s reasonable for these investors to ask themselves: Are we like Sisyphus?
The Global Stimulus Race
Among the new US administration’s top priorities is another round of stimulus. Though the bill looks different from the measures previously passed under a more divided government, it doesn’t go as far as the Democrat-controlled House went in its May 2020 $3 trillion proposal.
Brexit Has Ended. Long Live Brexit Debate
Well, they did it: The UK and EU signed a trade deal mere days before a no-deal Brexit would have become official. Beyond avoiding higher tariffs and significant trading delays , the agreement also frees the UK to seek separate trade deals with the US and other major partners—something that has, by and large, been on hold. Both sides won some important concessions:
Understated Outcomes of an Evolving Covenant Environment
The pandemic’s financial toll has been widespread, but a surprising silver lining has been the relatively short-lived corporate default wave. Default volumes were certainly elevated throughout 2020 but steadily declined over the last several months as risk-seeking capital rushed to meet companies’ liquidity shortfalls. Even more notable, defaults have been relatively rare among COVID-impacted businesses, with most default activity occurring in areas already struggling before the pandemic—not because of it.
Potential Implications of a Wider Chinese Stock Blacklist
In November 2020, US President Donald Trump signed an executive order prohibiting US investors from investing in a group of Chinese companies. The targeted companies are believed to supply and/or support China’s military. Subsequently, there have been media reports of the US government potentially adding companies to the blacklist. Most recently, media reports indicated the US government was considering adding Alibaba and Tencent.
Will Suganomics Usher in Japan’s New Dawn?
Amid a year peppered with trade disputes, Brexit talks and the pandemic’s all-encompassing impacts, long-time Japanese prime minister Shinzo Abe’s decision to step down may have gotten short shrift—a bit surprising, given Japan is the world’s third-largest economy. As Japan also looks to recover from the COVID’s economic disruption (destruction?), the question becomes whether new prime minister Yoshihide Suga and his already eponymously nicknamed economic plan, Suganomics, can finally usher in for Japan a new dawn of economic relevance. Perhaps not surprisingly, there are reasons for hope as well as for concern.
The Many Battlefronts for Chinese Technology Companies
The recent cancellation of Ant’s IPO and investigation of Alibaba by the Chinese government has sparked a wide-ranging discussion about the outlook for Chinese technology companies heading into 2021.
The Peaceful Transition of Power?
With the US election almost officially behind us, it’s an opportune time to discuss politics. Ha! Just kidding. Let’s talk value stocks, which peacefully assumed power on November 9, 2020, with Pfizer’s vaccine announcement.
OPEC Anticipates Economic Recovery
A common refrain in 2020: Oil prices took a massive hit this year. Indeed, the US crude oil futures markets went haywire in April when WTI prices went negative—an anomaly owing to scarce storage. The spot price for Brent crude, the global benchmark, approached $10/barrel in April. This cratering followed a devastating one-two punch in early 2020. As for many other commodities, demand for hydrocarbons effectively halted amid COVID-19-induced economic shutdowns. But Saudi Arabia and Russia simultaneously ramped up production as they engaged in an ill-fated (ill-timed, certainly) oil price war. As the world slowly climbs out of economic malaise—particularly China, the world’s second-largest oil consumer—and OPEC relations return to something resembling normalcy, it seems logical to expect oil markets to also return to normal. As is often the case, reality is likely to prove slightly more complicated.
Quasi-Money: The Hunch-Buck of the ECB
If ever a company’s president and most senior executive publicly expresses a hunch about something that company might well do, it’s notable. Even more so when the c-suite officer is Madame Lagarde of the European Central Bank (ECB), who coyly alluded to the adoption of a central bank digital currency (CBDC). Regarding a crypto coin for the euro zone, she said, “My hunch is that it will come.… If it’s cheaper, faster, more secure for the users then we should explore it. If it’s going to contribute to a better monetary sovereignty, a better autonomy for the euro area, I think we should explore it.” But is a CBDC faster, cheaper, more secure? Would it contribute to monetary sovereignty and euro-area autonomy? What are those things, anyway?
Brexit Nears a Real Deadline
To date, deadlines around Brexit haven’t actually proven to be deadlines as such—they’ve been at best guidelines. But with December 31 around the corner, the risk the UK and EU will henceforth operate under the rather tariff-heavy World Trade Organization rules looms. Still at issue are three major sticking points.
The Still-Murky Global Trade Waters
There’s been something of a trend in recent years away from trade pacts among large blocs and toward more bilateral agreements. Naturally, there are notable exceptions—the renegotiated NAFTA and the recently agreed Asia Pacific pact jump immediately to mind—but relative to the number of recently agreed bilateral treaties, the momentum seems to have swung in favor of the latter. Perhaps because bilateral agreements are easier to hammer out—a potentially significant factor in an overall tenser geopolitical environment. Whether it’s that simple or something deeper is at work is up for debate—which we’ll leave to the political scientists—but with some big political shifts among major countries in the offing (namely, the US, China, and the UK), it’s worth evaluating the potential direction of future trade deals as we head into 2021.
China’s Next Five Years
One of the more surprising (though not entirely unanticipated) announcements from China’s recent Fifth Plenum outlining its five-year plan for the country’s economy was that the country would no longer provide a target GDP growth rate as it has historically done. While some observers may view it as a signal the country is decreasingly able to generate the heady growth rates of years past, it’s worth considering alternate possibilities. Namely, a shift in focus from absolute growth toward quality of growth—a move with significant implications.
Supply/Demand: The COVID Economy
Supply/Demand is a semi-regular feature of the Artisan Canvas rounding up interesting and quirky subjects from across the Internet with a focus on economic and business trends. A good rule of thumb among the Artisan Canvas editorial staff is “never reason from a price change.” With that in mind, our latest edition of Supply/Demand.
As consumption habits have dramatically shifted amid the pandemic, demand for some seemingly out-of-the-ordinary goods and services has spiked. Whether these behavioral changes prove lasting, only time will tell.
Beneath the Equities Rally’s Hood
A cursory glance at major global equity indices shows a pretty clear V-shaped recovery—with a total return of 1.6% in the S&P 500® Index from February 19, 2020 through October 26 and similar pictures in the Russell 2000 and the MSCI ACWI ex US Indices. So are stocks just invincible? Or considering the available economic data, nascent spikes in COVID cases in Europe, and historically poor corporate earnings, is the market too optimistic? Breaking down the broad indices provides some interesting insights for both the bull and the bear cases.
Perspectives on the Trend Toward Stakeholder Capitalism
Beginning in the 1970s, Milton Friedman and his economist colleagues at the University of Chicago successfully steered private enterprises to prioritize the pursuit of profits as their sole social responsibility. While we will not venture to agree or disagree here, several forces are seemingly working together to shift this mindset. Though still in its infancy, our research and work on ESG for the past two years suggest a more balanced “stakeholder primacy” is taking hold.
The Spread of E-Commerce Accelerates in the Pandemic
Featured Author: Jessica Lin
Jessica Lin is an analyst on the Artisan Partners Sustainable Emerging Markets Team.
E-commerce was growing markedly faster than overall retail sales before COVID-19, especially in EM. But the global response to COVID-19—drastic containment measures and cautious economic reopenings—led to a surge in online shopping fueled largely by millions of consumers shopping online for the first time. China’s Alibaba reported an increase of 28 million mobile active users in Q2, while Latin American e-commerce company MercadoLibre reported 16 million new active users during the quarter.
Will Dividends Experience a V-Shaped Recovery?
While not as dramatic as during the global financial crisis, dividends in 2020 have taken a hit: Dividends globally declined some $108 billion to $382 billion in Q2—a 22% YoY drop. An estimated 27% of companies globally cut their dividends, including more than half of European companies. In the UK, 176 companies canceled dividends altogether. The story is slightly different in the US:
Is Infrastructure Spending the Super-Highway to Recovery?
As governments globally seek fresh means of stemming the economic devastation wrought by COVID-19 and its attendant lockdowns, a common consideration is infrastructure spending—hardly surprising, considering governments have historically turned to infrastructure as a means of creating jobs and, ideally in turn, goosing consumption (see: Alphabet Soup, FDR). Considering it’s a public good which can often go begging when the economic outlook is rosier, infrastructure seems a natural candidate amid a period of flagging aggregate demand. And indeed, 2020 has seen its share of planned infrastructure spending globally.
Value Versus YOLO
The pandemic has accelerated secular trends—such as the shifts to e-commerce and digital payments, social media’s dominance of advertising spend and the rise of gaming. It’s also intensifying normal cyclical fluctuations, pulling forward home improvement projects and pressuring retailers—particularly those reliant on shopping mall locations—to declare bankruptcy. None of this is terribly surprising. More likely to catch market participants’ eyes, the combination of COVID-19 and social media is amplifying the oldest cyclical phenomenon known to mankind: greed!
Supply/Demand: The Commodities Recovery
Supply/Demand is a semi-regular feature of the Artisan Canvas rounding up interesting and quirky subjects from across the Internet with a focus on economic and business trends. A good rule of thumb among the Artisan Canvas editorial staff is “never reason from a price change.” With that in mind, we present Supply/Demand.
Broadly speaking, commodities prices have risen considerably since early March’s sharp downturn. Is this portending an economic recovery as demand picks up? Or are we facing down sustained supply chain disruptions?
Market Rally Met With Narrowing Leadership
Active, bottom-up oriented investors can be caught flat-footed by unforeseen bouts of volatility—indeed, 2020 has already seen several unprecedented selloffs and remarkable recoveries. However, a bottom-up approach needn’t preclude using tools to help identify and, to the extent possible, mitigate the portfolio risks associated with meaningful market reversals. Admittedly, market unwinds will likely never be entirely foreseeable. But we believe it is possible to anticipate periods where the risk of a market reversal is high—and as active managers, to then reevaluate the risk-return tradeoff for portfolio holdings with material unwind risk.
Europe’s Ongoing Evolution
Relative to the US, Europe’s stock markets have a reputation of being staid, dominated by “old economy” industries and national champions. But Europe may no longer deserve this reputation. Since the global financial crisis (GFC), the makeup of Europe’s equity market has undergone a gradual but meaningful evolution.
Housing: How Fed Policy Is Aiding the Real Economy
Amid a world of economic headwinds, the US housing market has been a bright spot—delivering a V-shaped recovery since April’s plunge and possibly offering some insight into the efficacy of the Fed’s activities year to date, as well as broader consumer health.
US Stimulus: Congress Continues Its Dance
Well, the Congressional music seems not to have stopped just yet—with the deeply divided House and Senate continuing their (unsurprising) stimulus dance. The negotiations have moved little since late July, when Senate Republicans released their outline for a $1 trillion bill (which they’ve since followed up with a scaled-back plan). For their part, Democrats have thus far remained committed to the House’s $3.5 trillion package, passed on a near-party-line vote in May.
But is further stimulus yet warranted?
Thoughtful Evolution in the ESG Era
ESG has been an increasingly hot topic over the past couple years—and if anything, the recent pandemic and accompanying market volatility have accelerated many ESG-related conversations. As a firm without a centralized research function or a CIO, Artisan Partners’ approach to ESG and related topics has necessarily looked different.
A Russian Crisis No More?
Russia has had its fair share of market-moving news this year. Normally, the dispute with Saudi Arabia over oil production and President Putin’s announcement he would reset his term limits would take center stage—yet both have been overshadowed by the dual threats of COVID-19 and the corresponding pressure on oil demand. The economy has predictably struggled, with GDP down 9.6% YOY in Q2, while personal incomes fell 8.0%. Predictably, the ruble has also weakened relative to both the euro and USD—likely a byproduct of not only relative economic weakness but also the oil price collapse.
While the market has responded as we might expect (the MSCI Russia Index is down 22.5% YTD through July in USD terms), Russia is nevertheless still near the middle of the EM pack. It trails countries which have rebounded sharply, such as China and Taiwan, while leading harder-hit compatriots Brazil, Turkey, Hungary and Greece.
Might M&A, IPO Activity Offer a Window to Sentiment?
As COVID-19 hit and economies shuttered, long-planned IPOs and mergers slowed to a halt around the globe. German chemical firm Atotech, Russian oil giant Sibur, China’s 58 Home and the US’s Airbnb—to name a few—all delayed or halted IPO efforts in March and April. The same was true for M&A, where banks, financial firms and other parts of the market rethought agreed upon deals. M&A globally dropped nearly 50% through the first two quarters of 2020 compared to 2019, while IPO activity fell a more modest 6.8%.
None of this is surprising: M&A and IPO activity are likely a decent proxy for sentiment—with participants’ appetite waning as the macro backdrop’s favorability declines. On the flip side, then, it can potentially provide early insight into how quickly sentiment is rebounding. And we may now be seeing some sign of life in certain markets.
Has the EU Had Its Hamiltonian Moment?
Seven months after the first COVID-19-related lockdowns, the economic impact is starting to manifest in the numbers. The EU, one of the hardest hit regions, expects an 8.3% contraction in GDP in 2020. The decline’s potential depth, coupled with decisions countries made during the 2008-2009 global recession, has elicited yet more creative tactics from the EU to attempt to stem a longer-term pullback—the latest of which is a large stimulus package. The €750bn deal, passed in July, still requires approval from individual parliaments, but it could alter how the EU operates moving forward.
The Importance of Profit Growth in Equity Returns
There is frequent debate among market participants about which style factors will be in favor in the future: growth, value, momentum, active, passive, etc. While we do not possess the ability to pinpoint the timing of when one style may be in favor over another, we believe the key element in determining the future path of a share price over the duration of an economic cycle is highly dependent on knowing which way profits are headed.
Trade Uncertainty on the Rise
The likelihood of a second trade deal this year with China appears to have materially faded—if it’s not off the table altogether. President Trump recently relayed he isn’t currently focused on a phase-two deal. To be fair, a phase-two deal may have already been dead in the water for 2020, given the next round of negotiations was intended to aim at some of the bigger bones of contention between the US and China. Then, too, Beijing officials have long stated their preference for a wait-and-see approach to ongoing negotiations—pending the US’s November election outcome. But now, it seems an even longer-term delay is possible—with potentially significant global ramifications.
There’s A New Question About Inflation
The Consumer Price Index (CPI), which has declined for three straight months and is up just 0.1% over the past year, paints a picture of stagnant inflation. But ask any pit master about meat prices this summer, and they’ll point to some noticeable price surges. Meanwhile, gasoline has seldom been cheaper. Of course, any summer travel plans were probably canceled due to the pandemic. And that’s not necessarily a trivial point—because, while headline inflation numbers always mask some important facts about what’s happening with prices in the components, the pandemic’s rapid effects on consumption patterns may be altering some of these nuances in more fundamental ways.
Brexit: The UK Decides Not to Let It Linger
In June, Brexit hit a rather inauspicious milestone, marking the four-year anniversary of the vote to split from the European Union but with little to show for it practically: While the UK has separated in spirit, it remains economically linked to the EU. However, with the UK Cabinet Office confirming that EU trade talks would not extend through next year, the breakup now has a firm date. What remains less clear is how trade will flow between the two regions moving forward.
FOMC Update: What, Me Worry?
The Federal Reserve concluded its June meeting, and the results were more dovish than anticipated as 10-year US Treasury yields retreated toward their all-time lows. That the Fed could even appear more dovish after its recent historic liquidity interventions may seem surprising, especially since some of those polices seem to be working (or at least seem not to be doing major near-term harm). Equity markets have erased most corona crisis losses, the latest employment data are shockingly positive and consumers are rushing back to stores given the opportunity. Financial markets are stable, and valuations are rising. The real economy is mending. Everything is looking up! So why is the Fed so glum?
Tracking the Economy Out of Lockdown
Memorial Day marks the unofficial start of summer and a key moment for the US in its journey through the COVID-19 pandemic: All 50 states have begun—to varying degrees—easing COVID-19 related restrictions.
As restrictions on movement ease, we will start to get a handle on the answer to one very important question: What shape will the US economic recovery take?
About That Tech Rally …
As markets have bounced off what has proven at least a near-term bottom on March 23, many have commented on narrowing breadth—i.e., market leadership among a decreasing number of stocks. Specifically, many noted the bounce was largely driven by the big tech stocks—particularly those commonly known as the FANG stocks (Facebook, Amazon, Netflix and Google, with some adding Microsoft and Apple and rendering the acronym unpronounceable). It’s worth noting that not all of those names are classified as technology companies from a GICS sector perspective: Facebook, Netflix and Google (Alphabet) all fall in the communication services sector, while Amazon is considered discretionary and Microsoft is the only “true” technology company.
Nevertheless, sector returns—in the US and overseas—tell a slightly different story from a tech(/communication services/discretionary)-led bounce.
A New Era of Alphabet Soup?
Unprecedented times beget unprecedented measures—and with the global financial crisis still visible in our rear-view mirrors, global central banks have in some ways responded to fresh crisis with substantially similar tools. Meaning they’ve lowered rates (to the extent they can, given relatively low rates to start with) and they’ve offered various lending facilities to ensure markets maintain sufficient liquidity levels.
Employment Limbo for Millions
Another day, another grim US economic milestone amid the COVID-19 pandemic. On May 8, the US Labor Department released its April Employment Situation report. The magnitude of the numbers was momentous—nonfarm payroll employment fell by 20.5 million people and the unemployment rate jumped to 14.7%, from 4.4% in March.
Emerging Markets Case Study: India Amid COVID-19
Featured Author: Gurpreet Pal
Gurpreet Pal is an analyst on the Artisan Partners Sustainable Emerging Markets Team.
As the COVID-19 pandemic evolves, emerging markets are set to take center stage. The US, Italy and other developed markets appear to be flattening the curve and starting to reopen their economies. In comparison, many emerging markets appear to be in much earlier phases of an outbreak. Within EM, India is an especially intriguing country to watch as it seems to be managing the pandemic better than previously feared.
India has the seemingly right conditions for a high number of cases and rapid transmission:
Investing Amid a Rising Range of Outcomes
The Q1 market selloff was broad-based and intense, fueled by deep uncertainty about the pandemic’s true threat. In our view, the market did little to discriminate among individual firms, preferring to re-rate sectors given the short timeframe, rapid price action and lack of information.
Of course, our process is built to capitalize on market dislocations, when fear and uncertainty dominate, as is the case in our current environment. But we are also vigilantly risk-aware. This is where a thoughtful and repeatable process makes all the difference.
Six Noteworthy Oil-Related Charts
Oil has been the lead story recently—for a few reasons. In January, Saudi Arabia and Russia kicked off a heated competition for market share—after several years of cooperating and coordinating output in order to attempt to control oil prices. The result has been a well-documented collapse in oil prices—and growing challenges for oil producers and investors alike. Though it seems the near-term race to the bottom may have concluded, it also seems unlikely prices rocket back in the near term. Here are six interesting charts showcasing some of the recent phenomena.
A Closer Look at Global Fiscal Packages
Governments globally have responded to the ongoing COVID-19 pandemic variously—some have effectively shuttered their economies, full stop; others have taken less radical approaches (like Sweden). Similarly on the fiscal front, some governments have passed sweeping spending packages aimed at dulling a full shutdown’s likely economic impact. Top of this list in terms of scale is the US, where Congress passed and the President signed a roughly $2 trillion aid package on 27 March 2020. In the intervening weeks (yes, it’s only been weeks—believe it or not), some countries have followed suit—in intention if not in magnitude. Japan’s cabinet approved a $1 trillion package on 7 April. The EU is struggling to agree on a €500 billion package (more on the EU momentarily).
Maintaining a Long-Term Orientation Amid Heightened Volatility
Amid significant market volatility due to the COVID-19 pandemic, we remain steadfast in our commitment to our investment philosophy. With a foundation in long-term structural tailwinds, resilient businesses and strong operators, our approach is designed for not only good times but challenging ones as well. Acknowledging the unprecedented nature of these circumstances and the uncertainty of a global health crisis, we thought a few words about our investment approach and how the investment team is spending its time would be appropriate.
Backed by the Fed, Corporates Borrow Record Amount
Despite the worst selloff for credit since the great financial crisis, investment grade companies set a record level of new issuance in March. The thawing of primary market activities comes just two weeks after the Fed returned to its crisis-era playbook, announcing several new emergency lending facilities to contain the fallout of the COVID-19 pandemic—including the unprecedent measure of purchasing investment grade debt in both the primary and secondary markets. Facing evaporating liquidity and a severe contraction in credit conditions, the Fed effectively moved to become the liquidity provider of last resort to facilitate price discovery, reopen primary market activity and stave off the risk of a potential credit crisis.
Evolution of a Crisis Response—Part 5: Market Liquidity
This is part 5 in a series discussing Artisan Partners’ response to the COVID-19 outbreak. Read part 1 here, part 2 here, part 3 here and part 4 here.
Long-term, sophisticated relationships require two willing partners. By design, our client base consists of long-term, sophisticated investors in two primary groups: 66% of our AUM is from institutional clients, and 29% of our AUM is sourced through financial intermediaries—including broker/dealers, bank trust departments and financial advisors. Over the years, these two groups have adopted similar research processes for selecting their investment management partners and have asked relatively similar questions of us. As I alluded to in my last post, one of the critical recent questions we’ve been getting is how liquidity currently looks in the markets—a multifaceted question.
Evolution of a Crisis Response—Part 4: The Perspective Shifts
This is part 4 in a series discussing Artisan Partners’ response to the COVID-19 outbreak. Read part 1 here, part 2 here and part 3 here.
Leading a large organization during a global crisis gives you a front-row seat to clients’ and shareholders’ evolving thought processes and concerns. We started receiving questions from our clients in early March. At first, their focus was primarily on our business continuity plan—whether we have a formal plan and structure in place to allow us to continue business as usual and whether we were prepared to deploy it should circumstances warrant. Clients asked questions like: Could our employees work from home if necessary? Would our systems and existing technology support a remote workforce? As discussed in prior posts, business continuity planning has long been part of our normal operations, so we were pleased to readily answer these early questions in the affirmative.
Over the ensuing weeks, the questions’ tenor shifted a few times.Read More
Navigating Volatility in Global Equity Markets
As the COVID-19 pandemic continues to drive heightened uncertainty and historic daily volatility, we thought an update may be appropriate. We are closely monitoring this rapidly evolving situation, remaining focused on our deep company analysis in order to understand the impacts to businesses’ growth outlooks, as appropriate. As this crisis has unfolded, companies have revised their revenue and earnings outlooks sharply lower. While supply-chain disruptions emanated from China as early as January, the economies of Western Europe and the US are just now experiencing their corresponding demand shocks.
Evolution of a Crisis Response—Part 3: Communication
This is part 3 in a series discussing Artisan Partners’ response to the COVID-19 outbreak. Read part 1 here and part 2 here.
With our associates around the world working from home, one of the next challenges was ensuring they were all talking effectively under unusual circumstances. From a business standpoint, it doesn’t really matter if everyone is working remotely if they’re unable to maintain their standard practices and actually get their jobs done efficiently and well. Communication is paramount during periods of uncertainty—not only with and among our associates, but also with our clients and shareholders.
Evolution of a Crisis Response—Part 2: Mobility
This is part 2 in a series discussing Artisan Partners’ response to the COVID-19 outbreak. Read part 1 here.
Getting a global, 400+ member workforce out of the physical offices and home is one thing. Getting them on the network and ensuring it doesn’t crash and remains secure is another altogether. So how have we done it?
The Decline and (Nascent) Bounce—in Pictures
An interesting tidbit: The 11 trading days between Friday, 13 March 2020, and Friday, 27 March 2020, represented the fastest shift in market history from bull market to technical bear market and back to bull market. The next closest was in 1929 but wasn’t particularly close—18 days. (HT: Morgan Stanley)
US Labor Market Gets Sick: Jobless Claims Soar
US initial jobless claims hit a record of 3.28 million last week. For perspective, the previous weekly record for workers filing for unemployment benefits was 695,000 in 1982 (Exhibit 1). From another angle, the latest weekly total is 1% of the entire US population and 2% of the US civilian labor force.
Exhibit 1: US Intial Jobless Claims
Source: St. Louis Fed, as of 28 Mar 2020. Gray bars represent recessions as defined by the NBER.Nobody can be positive what future weekly jobless claims will look like—it’s not unreasonable to call current circumstances unprecedented, epic, maybe even inconceivable. But a couple of generalizations already seem reasonable.
Evolution of a Crisis Response—Part 1: Introduction and Background
The recent COVID-19 pandemic and accompanying market volatility have presented unprecedented challenges for firms globally—Artisan Partners is no exception. The crisis’s rapid evolution—from the World Health Organization’s (WHO) declaration of a public health emergency of international concern on 30 January 2020, to the virus’s identification as COVID-19 on 11 February, to the WHO’s characterizing the outbreak as a pandemic on 11 March—has given the world little time to prepare. Companies who maintained ready-to-deploy, updated business continuity plans (BCP) have likely had an edge in ensuring relatively uninterrupted and seamless ongoing service.
In late-January, it became clear COVID-19 was a risk beyond China’s borders and could pose a threat to Artisan associates traveling or working in remote locations. Accordingly, our corporate crisis management team met on 29 January to assess the situation and determine our next steps.
Emerging Markets Opportunities Amid Market Volatility
Global financial markets have been experiencing sharp drawdowns and extreme volatility. Although the catalysts may be unique—COVID-19 and an oil price war between Saudi Arabia and Russia—the occurrence of such dramatic turns in global financial market and economic conditions is not. We believe a narrow focus on sustainability helps account for such unpredictable periods. While we are not immune to these gyrations, we believe we are also in a period of opportunity. We continue searching for companies with sustainable competitive advantages or unique access to growth—characteristics that enable companies to persist through volatility, succeed after the dust settles, and generate alpha over the long term.
Disciplined Value Investing in Volatile Times
In my nearly 30-year investing career, I have been through a number of stock market routs. This one ranks up there as one of the worst—if not for its depth (which remains as yet undetermined), then certainly for its intensity. The market has sold off faster than ever in history, and I have never seen more days of double-digits or nearly double-digits declines in such a short time period. This makes sense, as it’s probably the fastest drop-off in economic activity we’ve ever seen—one day, everyone’s at work; the next, everyone’s at home and all the restaurants are closed. The panic and fear are extreme, with emotion filling the void where information and analysis normally exist. Yet in every instance during my career, periods of fear and panic have presented incredible bargains; I believe this one is no different. I have learned that when it feels really bad, it’s usually the best time to allocate capital. It is painful and ugly right now, but our goal is buying the long-term survivors and compounders to position the portfolio for strong multi-year gains later.
Volatility Creates High Yield Opportunity
Escalating concern around the containment of COVID-19 and its impact on global economic growth has sparked an aggressive turn in risk sentiment over the last few weeks. The selloff in noninvestment grade markets has been unprecedented in terms of speed and severity. The repricing of risk has resulted in high yield spreads moving from under 400bps to more than 900bps in just 4 weeks (Exhibit 1). For context, it took 11 months during the 2008 recession for spreads to cross the same threshold, and more than 28 months during the 2000 downturn.
Thoughts on Recent Market Volatility
Escalating COVID-19 concerns and Saudi Arabia’s decision to cut oil prices and boost production have prompted a sharp selloff in global equity markets over the past month. We are monitoring both situations closely and believe the biggest relative performance risk from here is massive volatility. While there will likely be large up days for battered sectors, we expect a drift lower on balance until the true extent of the COVID-19 impact can be discounted into stock prices.
Artisan Partners’ Business Continuity Planning Amid COVID-19
At Artisan Partners, we take tremendous care to safeguard our goal of generating successful outcomes for our clients; our associates’ and clients’ well-being is our highest priority. We have a thoughtful and robust Business Continuity Management Program to ensure the safety and security of our associates and the continuation of business operations with as little interruption to our ability to serve clients as reasonable.
Given the fluidity of the COVID-19 situation, our Business Continuity Planning and Pandemic Preparedness committees have been regularly meeting jointly to ensure we are well-positioned to quickly adjust and react as circumstances warrant. This working group’s focus is evaluating the outbreak’s status, monitoring local and global governmental websites, adjusting the firm’s COVID-19 guidelines accordingly and bolstering our ongoing business continuity plan as needed.Read More
Beyond Brexit
Just when it seemed Brexit was behind us and sailing might be smoother, there have been a handful of recent political shake-ups in and around Europe.
Germany at a Crossroads
With stereotypical German efficiency, Chancellor Angela Merkel lined up her presumptive heir, Annegret Kramp-Karrenbauer, two years ago. But Merkel’s plan fell apart on 10 February when Kramp-Karrenbauer relinquished her post a as head of the center-right Christian Democratic Union (CDU) party and said she would not run for Chancellor in the 2021 national election.
Brexit: UK Says Goodbye, but Not So Fast
At 11pm GMT on January 31, 2020, the UK officially Brexited. While Prime Minister Boris Johnson and fellow Brexiteers jubilantly celebrated the UK’s departure from the EU, both sides will soon sit back down to discuss what comes next.
Our ESG Journey
We view the increasing importance placed on environmental, social and governance (ESG) factors as one of the most notable investment management trends in recent years. Conversations with our clients, management teams of portfolio holdings and team members have suggested that “how business is conducted” is increasingly important. The business news media certainly took note of this trend in 2019, prompting widespread public discussion of the role of business in society.
Identifying Long-Term Tailwinds in Health Care and Technology
Portfolio manager Rezo Kanovich discusses the compelling opportunities in health care and technology.
Managing Unique Risks of International Small- and Mid-Cap Equities
Portfolio manager Rezo Kanovich discusses the team’s risk management process.
How We Define Quality Businesses
Portfolio manager Rezo Kanovich discusses how the team defines quality.
Lifelong Passion for Portfolio Management
Portfolio manager Mark Yockey explains why his competitive nature has served him well throughout his career.
Are Flash Boys Becoming Too Efficient?
Perhaps the adage, “Time is money,” is no truer anywhere than in equity markets. Some new research into high frequency trading (HFT) by the UK’s financial regulator, the Financial Conduct Authority, has quantified how much money may be tied to minuscule amounts of time—its answer: $4.8 billion, which represents the estimated revenue traders make from capitalizing on “slightly out-of-date prices.” Flash Boys kind of stuff.
About Impeachment . . .
As the last two impeachments (and possibly the one prior, too) have shown, impeachment has basically become a political way to say you don’t like the other guy. Whether that should be the case, whether the various parties were right to dislike him, whether they should have used other means to make their point—all topics for another day. In the current case, no matter what anyone thinks of President Trump, House Republicans or Democrats, Senator McConnell, Speaker Pelosi or anyone else in the ongoing theatrical production known as impeachment, US stocks have spoken loud and clear in 2019 (to date): They don’t care one whit about impeachment.
Brexit Beckons
Well, Prime Minister Boris Johnson has done it. Nearing four years after the UK’s referendum, it now seems almost certain the UK will officially leaving the EU early in 2020, following an election most have justifiably described as a landslide for the Conservative party and a rout for Labour and the Liberal Democrats.
Finding Value Across the Capital Structure
One of my fundamental beliefs about investing in credit markets is it’s possible to find the best risk-adjusted return opportunities through fundamental credit analysis and value identification across the capital structure—flexing between high yield bonds and bank loans. I take a value investor’s approach to the below-investment grade market to look for opportunities tied to dislocation and mispricing.
In the News
Earnings season kicks off as usual with the big financials, while the UK and EU seem to be making progress.
Interest-Rate Limbo—How Low Can You Go?
Just when it seems like monetary policy has gotten as abnormal as possible, a monetary authority says, “Hold my beer.” Among the more extraordinary examples is and has been Japan, where the Bank of Japan is considering ways to force already negative interest rates further negative.
This is the painting of oneself into a corner. On one hand, Japan is carrying a tremendous government debt load—well over 200% of GDP at last count. On the other, all that government spending seems not to be generating the anticipated economic activity. Rather, growth is stagnant, as is inflation, while the population is declining—a deadly combo. Meanwhile, the government’s hyper-focus on keeping exports up requires it to maintain an artificially undervalued yen.
Greece's Dramatic Decade
What a difference a decade makes: Greece, which not long ago was bailed out not once, but twice, and whose interest rates seemed headed for triple digits, has issued negative-yielding debt. Exhibit 1 shows generic Greek 10-year yields since 2010—and their dramatic fall.
In the News
A busy day with ample interesting headlines.
In the News
A smattering of global headlines.
Investors Should Fear More Competition Among Ratings Companies
Does competition among ratings agencies tend to lower the bar or raise it? The evidence presented here would suggest it lowers the bar. Perhaps the way to address the ratings agencies is to fundamentally restructure the business model—for example, if potential buyers paid for ratings, instead of the issuers, agencies would have an incentive to provide an accurate rating to the buyer, rather than satisfy the issuer they were looking sufficiently favorably on their business. Just one idea (with its own flaws—no solution is perfect).
In the News
Softer economic data continue rolling in—prompting rather unsurprising reactions from both equity and bond markets. Plus, we have a new head of the IMF along with a deep dive into the Mexican oil industry to round out the week.
In the News
Just one day into the quarter, markets are off to a rough start—likely resurfacing memories of Q4 2018 and raising questions about whether we’re in for a redux. Time will tell, of course, and in the meantime, here are some of today’s interesting headlines.
Brazil Welcomes Trade, Ricardo Cheers
President Jair Bolsonaro’s young tenure as Brazil’s leader has been tumultuous since he was sworn in on January 1, 2019. But from purely an economic standpoint, one clear positive has been his leadership on trade. Since the EU and Mercosur (the South American trade bloc) inked a deal to create a new trade bloc in June, Bolsonaro has taken steps aimed at holding up Brazil’s end—the most recent: lifting tariffs on some 2,300 imported products (no doubt raising a posthumous cheer from David Ricardo).
About That Irish Backstop …
A key hold-up in Brexit negotiations is the so-called Irish backstop—which has to do with the fact that the only physical border between the UK and an EU country is that between the Irish Republic and Northern Ireland. This introduces questions about how trade between the two will be conducted once the UK (and Northern Ireland with it) is no longer in the EU, but Ireland remains part of the common market.
In one sense, these tensions go back centuries, resurrecting questions that have long-plagued the island about its proper place—as a country, in relation to the UK, and in relation to the rest of Europe. And then there is the age-old religious divide between Catholics and Protestants.
In the News
Another busy day in monetary policy and macroeconomic news. Here’s a handful of the headlines that caught our interest.
In the News
The repo market garnered a lot of attention as rates spiked, prompting the Fed to provide additional liquidity to bring rates down—just one of several monetary policy headlines today.
Can Countries Improve Their Corporate Governance Practices?
Artisan Partners International Value Team Portfolio Manager David Samra discusses whether he believes countries can improve their corporate governance standards over time.
Enhancing Fundamental Research With Analytical Tools
In addition to rigorous bottom-up research, the Antero Peak Group leverages a slew of analytical tools to eliminate subjectivity and manage risk.
The Impact of Negative Rates and Passive Investing
Global Value team portfolio manager Dan O’Keefe discusses the impact of passive investing on price discovery.
Identifying Long-Term Opportunities in the International Small-Mid Universe
Portfolio manager Rezo Kanovich explains why a long-term investment horizon and a contrarian view are cornerstones of his team’s approach.
Identifying Value Amid a Shifting Rates Outlook
Founding portfolio manager Bryan Krug discusses where he’s finding opportunities in the high yield market given the recent move in interest rates.
Risk Awareness and Downside Protection
After witnessing firsthand two massive market corrections, portfolio manager Tom Reynolds discusses his acute focus on risk management and downside protection.
In the News
Lots of stimulus talk making today’s headlines. Whether global economies are on the verge of recession is unknowable—but global leaders are certainly keen to calm nerves lest investors fret their abilities to respond in the face of such a slowdown.
Broken Brexit?
Hard as it is to believe, the British voted to leave the EU almost 1,200 days ago—yet the country seems no closer to Brexiting than it was on June 22, 2016. How have we arrived (or rather, not arrived) at this point?
In the News
Investors are turning their attention to the upcoming US Fed policy meeting, at which the majority expects a rate cut. We have today’s Fed headlines and other major global news:
In the News
Ample headlines coming off a long weekend in the US—from the inverted yield curve to ongoing global geopolitical machinations of various stripes:
In the News
No August lull in 2019, with global monetary policy chiefs meeting in Jackson Hole, WY, and the ongoing trade dispute between China and the US garnering ample attention. Among today’s headlines:
In the News
Making headlines today is a variety of economic news, including more data which send contradictory messages about the expansion’s resilience. A sample:
Banks Get Some Relief in Volcker-Rule Changes
Banks Get Some Relief in Volcker-Rule Changes
US regulators are easing some of the regulatory headwinds that have faced US financial institutions since Dodd-Frank’s 2010 passage. The recent focus has been on some of the more complex and onerous Volcker rule requirements—which sought to limit banks’ ability to speculate with their own funds. The rule is based on the assumption that such short-term trades only benefit the banks—not their customers—and should therefore be limited. Further, the rule put the onus squarely on the banks to prove otherwise for every transaction that occurred within a 60-day window.
The assumption is faulty, though.
The Disparate Impact of Brexit on UK-Domiciled Companies
The Brexit deadline is looming. Again. While it doesn’t seem inconceivable the can could be kicked yet again, as things currently stand, the UK will leave the EU with or without a deal on October 31. For investors, a clear concern is just how a post-Brexit world will impact companies domiciled in the UK. While it’s nearly impossible to predict with any measure of certainty, the thought experiment is worthwhile.
Gold Price Tops $1,500
Consider first this headline—Gold Price Tops $1,500—and then consider this combination of recent events:
Not All PEs Are Created Equal
Value investing is out of favor. That may be a gross understatement. Growth has outperformed value in 8 of the past 10 years—2011 was a dead heat, and value bested growth in 2016 only to trail by a relative 14% over the next 2 years. According to some measures, growth stocks trade at a nearly 50% premium to their value counterparts. That should be cause for some optimism from the value crowd as such extreme disparities tend to sow the seeds of their own undoing. That said, we saw growth premiums stretch as high as 100% during the dot-com era.
We must admit we don’t spend much time worrying about this. We focus on the economics, not the machinations of the market per se or which way the winds of popularity blow. Economics endure and ultimately prevail.
So in this market of massive growth premiums, what is for sale in the value bin?
Defining Sustainability in Emerging Markets
To me, sustainability means having the ability to endure. It includes—but goes beyond—environmental, social and governance (ESG) considerations. More broadly, it entails businesses making the right strategic choices that bring continuity to their shareholders, employees, customers and the communities around them. Ultimately, my team invests in emerging markets because as a team of people who were born, educated and have spent large amounts of time in these countries, we want to direct capital to companies that can have a long-term positive impact on emerging markets’ people.
We believe companies manifest and embody sustainability in a variety of ways.
The Transformative Power of Data and Workflow Automation
The printing press, invented in Europe around 1440 CE, was for roughly the next 500 years the primary means of generating and storing data. However, since the advent of computers in the mid-1990s (depending on which model you consider the “first”), we’ve seen an attendant explosion of data, which is only accelerating.
Moore’s Law projected the number of transistors that can fit on an integrated circuit would double roughly every two years—which has proven particularly accurate. Remarkably, the rate at which data are being generated is even faster than Moore’s Law. However, the combination of 3 billion people on the Internet with mobile apps and sensors in an increasing number of smart devices is a recipe for an exponential increase in data which computers will have a hard time keeping up with—not only from a storage standpoint, but also a processing standpoint. The need to find ways to harness, understand and use data will ultimately transform the way we work.
Harnessing the IoT
We’ve gone from smartphones and smart TVs to smart factories, smart health, smart cars and smart homes—connectivity has become deeply ingrained in our society. Low-cost sensors, along with cheaper and faster computing resources, are enabling the connectivity of the real world in a paradigm shift to what is called the Internet of things, or the IoT.
With growing connectivity comes still more data— we’re just scratching the surface on the scale of what data generation will be. Data creation in general is already doubling every two years, and it’s estimated machine data can grow 50 times over the next 5 years.
How can investors capitalize on the data and analytics explosion?
Data and the IoT
Antero Peak Group portfolio manager Chris Smith discusses the opportunities his team is finding thanks to the rising importance of the Internet of things (IoT).
The Artisan Difference
Antero Peak Group portfolio manager Chris Smith explains why Artisan Partners is the right place for his team.
Thematic Idea Generation
Antero Peak Group portfolio manager Chris Smith discusses his team’s thematic approach to idea generation.
Investing in the Automobile of the Future
The automobile industry is experiencing massive change as a result of increased demand for electric and hybrid cars that require batteries and the evolution of autonomous driving features that rely on connectivity. We believe these structural shifts are enduring and offer potential opportunities for long-term oriented investors, such as ourselves. However, investors will need to be discerning as both winners and losers will emerge.
Eric Colson, CEO at The Artisan Partners Investment Forum
Eric Colson, CEO, at the Artisan Partners Investment Forum, shares how high value-added investments, a talent driven business model and thoughtful growth make us who we are.
The Search for Sustainable Growth
After global growth gained momentum through 2016 and 2017, the investment outlook turned cloudier in 2018. Concerns about decelerating economic and earnings growth due to normalizing monetary policies, softening global growth and US-China trade tensions drove a sharp increase in equity market volatility, leading to the MSCI All Country World Index’s worst calendar year since 2008. No regions were unscathed: Europe, Japan and emerging markets were each down double-digit percentages, while the US market fell 5% for the year.
In contrast to the rest of the world, the US economy strengthened in 2018. The substantial fiscal stimulus in the form of tax cuts contributed to stronger economic growth and corporate profits. Yet, with tax reform in the rearview mirror, growth rates are inclined to come down in our estimation as comparisons become more difficult in upcoming quarters. In addition, margins are at risk as the costs of raw materials, labor and interest are increasing.
Credit at a Crossroads
Market volatility at the end of 2018 understandably tipped off an array of analysis—from whether it marked a larger turn in the economic cycle and the market to whether it increased the attractiveness of some investing opportunities. And if the latter, where those opportunities might lie. We believe that despite some signs of economic softening, the broader economic and market cycle are likely not over. Further, volatility has indeed introduced new compelling investing opportunities—though likely not where many would first look.
Late-Cycle Credit Investing
There appears to be growing anxiety among investors that the current credit cycle, now more than 10 years old, is nearing old age and susceptible to a downturn. The implications for high yield credit investors is obvious, as the end of credit cycles tends to coincide with a marked uptick in corporate defaults and asset price corrections.
While we’re mindful we’re closer to the end of the current cycle than the beginning, we see no near-term catalyst to suggest high yield markets are approaching an inflection point.
A Forward-Looking Approach to Sustainability
Portfolio Manager Maria Negrete-Gruson explains how the sustainability of a company's earnings goes hand-in-hand with its environmental, social and corporate governance factors.
ESG in Emerging Markets: A Differentiated Perspective
Sustainable Emerging Markets Portfolio Manager Maria Negrete-Gruson discusses her team’s differentiated perspective on identifying ESG opportunities in emerging economies.
A Distinctive Investment Culture
At Artisan Partners we believe strongly in our investment culture and share a commitment to the values that make our culture distinctive.
The Digital Payments Revolution
We think there are several secular tailwinds contributing to the massive ongoing shift toward digital payments. First, we’re seeing rapid growth in e-commerce, which requires that customers be able to make secure, digital payments. The growth in cross-border transactions and the general impact of an increasingly globalized marketplace are helping accelerate this trend. Second, technological innovations that simplify cash transactions—such as Square and Uber, as well as point-of-sale devices in areas they’ve not historically been, such as taxis, vending machines, parking meters, etc.—are helping drive digital payments growth.