Download “Fasten Seatbelt” Sign Has Been Turned

OCTOBER 2015
International
The “Fasten Seatbelt” Sign
Has Been Turned On
INTERNATIONAL TEAM
NICK NIZIOLEK, CFA, Co-CIO, Head of International and Global Strategies, Senior Co-Portfolio Manager
DENNIS COGAN, CFA, Senior Vice President, Co-Portfolio Manager
DAVE GALLAGHER, CFA, Vice President, International Financials Sector Head
INTERNATIONAL INSIGHTS
The “Fasten Seatbelt” Sign Has Been Turned On
October 2015
“Ladies and gentlemen, the captain has now turned on the seatbelt sign. Please return to your seats and fasten your
seatbelts.” When we’re passengers, turbulence often catches us by surprise; it may even evoke fear and anxiety. The
pilots are usually more sanguine. They understand that more often than not, turbulence isn’t dangerous and only rarely
requires a significant divergence or emergency landing. Instead, they stay focused on the task at hand, adjusting the
flight path to make the plane more comfortable while relying on their well-tested systems and procedures to mitigate
discomfort and risk.
Often, market volatility can evoke the same emotions of fear and concern in investors. But typically, the best course is to
stay focused, not fearful. As would an experienced pilot, we rely on our rigorous and time-tested processes to manage
known risks and prepare for those that may be approaching on the horizon—all while maintaining our long-term course.
As our regular readers know, our top-down approach balances our longer-term macroeconomic and thematic views
with shorter-term cyclical factors around which we tactically adjust portfolio positioning. Our long-term view remains
unchanged: Deflationary pressures abound due to both cyclical and secular forces. We expect these pressures to result in
a global environment of lower economic growth and supportive central bank monetary policies for an extended period.
Meanwhile, secular themes, such as global demographic shifts and a growing global middle class, can continue to
provide tailwinds for certain companies to grow in both favorable and unfavorable economic climates. (For more on this,
see our paper, “Identifying Global Growth Opportunities Through a Thematic Lens.”)
As it relates to the near term, many of our “fasten seatbelt” indicators have been flashing. We believe the spike in
volatility, widening credit spreads, falling commodity prices, and reduced inflation expectations support a more cautious
positioning, including an overweight toward quality and secular growth across our global and international portfolios.
However, we believe we are well-equipped to navigate this turbulence and see considerable opportunities for investors
who can stay calm and buckled in during this period of elevated choppiness.
2 THE “FASTEN SEATBELT” SIGN HAS BEEN TURNED ON
FIGURE 1. GLOBAL MARKET PERFORMANCE YTD AND 3Q15
TOTAL RETURNS THROUGH 9/30/15
YTD
40%
30%
3Q15
27.6
34.4
20%
10%
7.7
0.1
0%
-10%
-5.3 -6.4
-6.6 -9.3
-4.6
-8.6
-20%
-11.9
-5.9 -4.9
-6.4
-11.2
-15.3
-22.7
-30%
-40%
4.9
-15.7 -14.7
-17.8
-25.3 -25.8
-29.7
S&P
500
MSCI
ACWI
MSCI
EUROPE
MSCI
JAPAN
MSCI
CHINA
SHANGHAI
COMPOSITE
MSCI
EM
USD
(DXY)
GOLD
OIL
(BRENT
CRUDE)
CRB
INDEX
VIX
Past performance is no guarantee of future results. Source: Bloomberg.
In 3Q 2015, Outperformance Meant
Falling Less
developed economies, and Brazil, Indonesia, South Africa,
Over the quarter, equity markets were down globally
economies. Within emerging markets, commodity-
(Figure 1). U.S. markets held up slightly better relative to
consumers and reform-driven economies declined less
other developed market regions, narrowing their year-to-
steeply, with Taiwan and South Korea being examples
date underperformance. Emerging market equities began
of the former and India, the Philippines, and Mexico
to underperform in late May due to concerns surrounding
exemplifying both characteristics.
the Chinese equity markets, while developed markets
remained relatively more resilient beyond some short-term
concerns related to Greece and the euro zone. Conditions
became more inhospitable for developed and emerging
markets alike in early August, when the People’s Bank of
China (PBOC) announced a change to renminbi policy—
a move that surprised the global markets and exacerbated
existing anxiety about a hard landing for the Chinese
economy and its potential ripple effects on global growth.
and Malaysia were among the weakest of the emerging
While growth continued to outperform value during the
third quarter, August’s selloff was broad based and the
degree of outperformance was narrower than during
the first half of 2015. By sector, cyclicals underperformed
globally, with the steepest declines in energy and
materials. While we did see some resilience in the more
defensive consumer staples and utilities sectors, other
historically defensive sectors, such as health care and
telecom, sold off with the broader market. Health care
Not surprisingly given fears of slowing global growth,
specifically was hindered by U.S. political commentary on
markets within commodity-export-dependent economies
drug pricing and further health care reform, with concerns
performed worse over the quarter. Canada and Australia
that pressures on the sector could increase leading up to
were among the weakest-performing markets both
the 2016 presidential elections.
in terms of equity and currency returns within the
OCTOBER 2015 3
As we noted, the mid-August renminbi policy
FIGURE 2. EURO AREA LEADS IN POSITIVE ECONOMIC SURPRISES
CITI ECONOMIC SURPRISE INDEXES
U.S.
125
JAPAN
EURO AREA
EM
100
announcement sparked a global risk-off event. Europe
was not immune from concerns about slowing growth
expectations and fears of accelerating competitive
75
50
currency devaluations, with many of the stronger
25
performing regions during the 1H 2015 experiencing
0
the most pain during the third quarter. Mario Draghi
-25
-50
attempted to soothe European markets in early September
-75
by reiterating the ECB’s commitment to supportive
-100
JUL ’14
SEP ’14
NOV ’14
JAN ’15
MAR ’15
MAY ’15
JUL ’15
SEP ’15
Past performance is no guarantee of future results. Source: Macrobond.
to hold off declines, particularly as the Federal Reserve’s
decision to delay raising short-term interest rates has
FIGURE 3. OECD MAIN ECONOMIC INDICATORS
furthered global growth worries.
OECD MEI, CLI NORMALIZED SA, INDEX
102.0
OECD COUNTRIES, CLI AMPLITUDE ADJUSTED
monetary policy, but his efforts have not been enough
U.S.
JAPAN
EURO AREA
CHINA
In addition to these global headwinds, regional concerns
101.5
are contributing to the fragility of economic fundamentals
101.0
in Europe. These include the Syrian refugee situation—
100.0
both a humanitarian crisis and a political flashpoint—and
INDEX
100.5
99.5
renewed geopolitical risks as Russia takes a more active
99.0
role in Syria. Also, well-publicized company-specific issues
98.5
98.0
JAN ‘11 JUL ’11 JAN ‘12 JUL ’12 JAN ‘13 JUL ’13 JAN ‘14 JUL ’14 JAN ‘15 JUL ’15
Source: Macrobond.
could have secondary impacts on consumer and business
confidence, with recent data out of Germany already
showing weakness in business confidence.
Regional Outlooks
However, there is also more encouraging data throughout
Europe
the euro zone (Figures 2 and 3). Although employment
It is difficult to believe Greece was one of the greatest
and growth remain weak, we have seen improvements
concerns for the euro zone and the global markets at
in data, particularly within Germany and Spain. Positive
the start of the quarter. Although we expect Greece to
economic surprises and PMIs continue to trend well,
eventually re-emerge as a key issue, the “kick-the-can”
particularly relative to other regions, and we are seeing
strategy appears to be working for now. We were pleased
stable leading indicators in Germany and Italy. Fiscal
to see very little economic impact from the Greece
austerity is also becoming less of a drag, although the
negotiations as consumer sentiment, business confidence,
Syrian refugee situation could create new economic
and PMI data in Europe remained resilient, while the
pressures on the region. If consumer and business
equity markets began to recover.
confidence remain resilient in the face of the pressures
we’ve outlined above, we’d expect fundamental economic
4 THE “FASTEN SEATBELT” SIGN HAS BEEN TURNED ON
data to remain resilient as well. Euro zone companies
FIGURE 4. EURO ZONE MARGINS HAVE SOME CATCHING UP TO DO
should benefit from this stabilization as well as
NET MARGINS FOR MSCI U.S. AND EURO ZONE (EX-FINANCIALS)
from several tailwinds to earnings, including lower
U.S. NET MARGINS EX-FINANCIALS (LHS)
10.0%
EURO ZONE NET MARGINS EX-FINANCIALS (RHS)
7.5%
commodity prices, lower rates reducing funding costs,
9.5%
7.0%
and a weaker euro improving competiveness of exports,
9.0%
6.5%
which should drive margin expansion (Figure 4).
8.5%
6.0%
8.0%
5.5%
The European Central Bank’s QE program is in full
7.5%
5.0%
swing, with the potential for increased asset purchases
7.0%
4.5%
down the road (Figure 5). We are skeptical of the
6.5%
benefits of
QE insofar as the real economy is concerned,
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
4.0%
Source: J.P. Morgan Global Equity Research October 2015, using data from IBES.
and the transmission mechanisms in the euro zone are
even more questionable than in the United States. But
FIGURE 5. ECB QE STABILIZING MONETARY CONDITIONS
in terms of increasing demand for risk assets, the boost
EURO AREA MONETARY BASE
2.0
European banking system remains fragile and private
1.7
sector balance sheets need to deleverage further, we’ve
1.5
indicator, which measures the issuance of credit to the
private sector, as a percent of GDP (Figure 6).
LEVEL (LHS)
YOY GROWTH (RHS)
75%
50%
1.2
25%
1.0
0.7
0%
0.5
-25%
0.2
While the relative performance of the European equity
markets has weakened recently due to the factors
0.0
100%
YOY%
seen some improvement in the euro zone credit impulse
EURO, TRILLION
to liquidity from QE is supportive. And although the
2000
2002
2004
2006
2008
2010
-50%
2014 2015
2012
Source: GaveKal Data/Macrobond.
discussed, we are still seeing attractive valuations
relative to other regions. These valuations, combined
FIGURE 6. GLOBAL CREDIT CONDITIONS
with a positive liquidity environment and resilient-
DEVELOPED MARKET CREDIT IMPULSE
7.5%
overweight positioning in our global and international
5.0%
portfolios. We continue to identify exporters that can
2.5%
benefit from a weaker euro, while remaining vigilant
to individual companies’ end-market exposures,
particularly when those end-markets are experiencing
decelerating growth. Many of these companies operate
within the industrials, consumer staples, and health care
sectors. Within financial services, we have identified
% OF GDP
to-improving economic fundamentals, support our
JAPAN
U.S.
EURO ZONE
0.0%
-2.5%
-5.0%
-7.5%
-10.0%
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: Macrobond.
opportunities among high-quality banks but have
focused primarily on real estate, which is benefiting
OCTOBER 2015 5
2015
FIGURE 7. JAPAN: EQUITIES APPEAR WELL POSITIONED, DESPITE
ECONOMIC CHALLENGES
from the lower-rate environment and economic
recovery, as well as asset managers and insurance. We
7A. ORDINARY PROFITS REACH NEW HIGHS
NON-MANUFACTURING
80
remain largely underweight energy and materials across
ALL
all regions. Across sectors, we focus on secular growth
All-Time High Q2 2015
70
¥ TRILLON (ANNUALIZED)
MANUFACTURING
opportunities where possible.
60
50
Japan
40
30
While Japan’s economy remains challenged, we are
20
optimistic that its equity market can continue to
10
0
-10
1985
outperform as we believe many Japanese companies
1989
1993
1997
2001
2005
2009
2013 2015 CY
Seasonally Adjusted. Source: Barclays Research September 2015, using data from MoF (corporate survey).
surprises. Profits have surged over the past few years to
record highs with very little help from revenue growth
7B. SALES REMAIN SLUGGISH
MANUFACTURING (LHS)
NON-MANUFACTURING (RHS)
(Figures 7A and 7B). Although we don’t expect the
margins and returns of Japanese companies to rival
500
1,100
those of their U.S. or euro zone peers in the near term,
450
1,000
400
900
350
800
300
700
250
600
200
¥ TRILLON (ANNUALIZED)
1,200
550
¥ TRILLON (ANNUALIZED)
are less dependent on top-line growth to drive earnings
500
1985
1989
1993
1997
2001
2005
2009
we do see bottom-up opportunities for continued
improvement. We also maintain our view that valuations
in Japan remain relatively attractive, given the prospects
for structural improvements to margins and returns on
invested capital.
2013 2015 CY
Seasonally Adjusted. Source: Barclays Research September 2015, using data from MoF (corporate survey).
As we have discussed in our blogs, we believe
management teams’ new focus on cost management
7C. INCREASE IN SHARE BUYBACKS
and improved capital allocation could provide significant
¥ TRILLON (ANNUALIZED)
TOPIX BUYBACKS, ACTUAL VS. ANNOUNCED
9
8
7
6
5
4
3
2
1
0
ACTUAL BUYBACKS
BUYBACK SIZE ON ANNOUNCEMENT DATE
catalysts for earnings growth. The changed mindset
of Japanese corporations is evidenced by soaring share
buybacks (Figure 7C), which jumped by more than
50% last year to ¥4.6 trillion, and we believe buybacks
may approach ¥7 trillion in 2015, or approximately 1%
of the Tokyo Stock Exchange’s market capitalization.
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
(YTD)
Source: Bloomberg (announcements), FactSet (actual buybacks), Macquarie Research, September 2015.
Corporate tax rates have also declined. In our view,
these tailwinds, combined with the pending TransPacific Partnership (TPP) trade agreement, should drive
increased competitiveness in several industries.
6 THE “FASTEN SEATBELT” SIGN HAS BEEN TURNED ON
While our outlook for Japanese corporations and
FIGURE 8. FEDERAL RESERVE AND ECB: DIVERGING MONETARY POLICIES
equities is positive over the near term, we expect the
BALANCE SHEET AS A % OF GDP
Japanese economy to continue to struggle. The biggest
30
disappointment thus far has been the lack of reform
FED (LHS)
ECB (RHS)
35
25
30
20
25
political capital that Abe had to expend to push through
15
20
his defense agenda could limit his ability to advance key
10
15
momentum, Prime Minister Abe’s “Third Arrow.” We
are especially concerned that the significant amount of
economic reforms. However, the economic benefits of
a growing relationship with the U.S. arguably offset the
5
2007 2008
2009
2010
2011
2012
2013
2014
2015
2016
10
Source: J.P. Morgan Global Equity Research October 2015, using data from Bloomberg and J.P.
Morgan forecast.
near-term costs of delaying reforms.
With positive economic surprises trending down recently,
weaker wage growth due to lower-than-expected
summer bonuses, and less encouraging export and
industrial production data, we would not rule out
another round of quantitative easing with a likely focus
on exchange traded fund purchases and/or a cut in the
interest on excess reserves.
the relatively more attractive opportunities we have seen
in other developed markets. Our view on this allocation
hasn’t materially changed. We believe valuations are
more challenging, particularly given corporate profits are
elevated and may be peaking and many U.S. corporations
are facing the headwinds of a stronger dollar, which in
part stems from diverging monetary policies between the
We are generally positioned equal to overweight to
Japan across most of our portfolios, with an ongoing
focus on secular growth opportunities and companies
that we believe can benefit from improved corporate
governance, capital allocation policies, a weaker yen,
and asset reflation expectations. We are finding these
opportunities primarily within the industrials, consumer,
information technology and financial sectors.
Federal Reserve and other global central banks (Figure
8). Near-term uncertainty over Fed policy has added to
volatility in recent months.
Within the U.S., our exposure is primarily focused on
secular growth opportunities and companies that are
domestically focused and less exposed to weakening
demand trends elsewhere. We are monitoring data
very closely for indications of an inflection point, but
a significant acceleration in U.S. or global economic
United States
Fundamentally, the U.S. economy is performing better
than global peers. The housing market continues to
recover, while the consumer remains strong, supported
by improvements in employment, wages, and lower oil
prices. However, we’ve been generally underweight to
the U.S. across our portfolios for most of 2015 due to
growth seems unlikely at this point. Accordingly, we
are continuing to underweight cyclicals. We maintain
our emphasis on technology and consumer companies
that are producing innovative products and services,
while effectively navigating a slower global growth
environment.
OCTOBER 2015 7
FIGURE 9. CHINESE EQUITIES: ATTRACTIVE VALUATIONS, GOOD FUNDAMENTALS
Emerging Markets
EARNINGS PER SHARE
Our approach to emerging markets remains highly
S&P 500 INDEX
400
CHINA H SHARES
Up 259%
300
selective. In previous decades, investors often viewed
the emerging markets as a single class that benefited
uniformly from global growth and positive demographic
200
tailwinds. In recent years, it has become clear that this
100
Up 26%
0
2008
2010
2012
“one-size-fits-all” view is no longer appropriate. For
example, many emerging market economies are facing
2014
significant headwinds from falling commodity prices,
DIVIDEND PER SHARE
S&P 500 INDEX
400
CHINA H SHARES
Up 249%
300
while others are benefiting from this same trend. Some
countries are enacting positive reforms to improve the
sustainability of their growth prospects, while others
200
have not. Our approach to investing in emerging markets
Up 74%
100
to selectively allocate capital from both a top-down and
0
2008
2010
2012
2014
bottom-up perspective.
Past performance is no guarantee of future results.
Note: All data shown in U.S. dollars, smoothed and rebased to January 2007 = 100.
Source: BCA Research 2015.
China
The deceleration of China’s economy over recent quarters
INDEX
FIGURE 10. CHINA: STABILIZING MANUFACTURING PMI
CHINA
59
58
57
56
55
54
53
52
51
50
49
48
47
46
U.S.
JAPAN
EURO AREA
has exacerbated fears of a hard landing. While we remain
concerned for the risks the Chinese economy faces as it
attempts to transition from an investment-led economy
to an economy more dependent on consumption and
services, we do not believe a hard landing is the most
probable outcome over the near term. As we have noted in
2013
2014
the past, the Chinese government has a variety of tools to
2015
prevent a sharp deceleration in growth. In recent months,
Source: Macrobond.
we’ve seen monetary policy become more accommodative,
FIGURE 11. CHINA: RISING CPI INFLATION
additional infrastructure stimulus announced and, most
REGIONAL CPI INFLATION, %YOY
U.S.
4.0
JAPAN
EURO ZONE
CHINA
recently, fiscal stimulus meant to support the housing and
auto industries. We do not expect these measures to spark
3.5
3.0
a reacceleration in growth as they are largely designed
2.5
2.0
to offset the destabilizing monetary effects of capital
1.5
1.0
outflows on domestic liquidity and declining investment
0.5
0.0
and trade growth, but believe they could contribute to a
-0.5
-1.0
has been to identify these tailwinds and headwinds and
JUL 2012
JAN 2013
JUL 2013
JAN 2014
JUL 2014
JAN 2015
JUL 2015 OCT 2015
Source: Macrobond.
8 THE “FASTEN SEATBELT” SIGN HAS BEEN TURNED ON
stream of stabilizing data (Figures 9-12) that can improve
FIGURE 12. CHINA: IMPROVEMENTS IN HOUSING MARKET
this, please see our recent blog).
HOUSING SALES IN TOP CITIES STABILIZES
China’s decision to “reform” the renminbi has fueled
considerable concern that China is embarking on a
competitive devaluation that could exacerbate the global
currency war that has unfolded over the previous few
THOUSAND SQM
sentiment around the Chinese equity market (for more on
years. Near term, it appears China is attempting to
quell market concerns by supporting the renminbi at
current levels, at least until the IMF makes its decision on
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
120
reserve in November. We will be monitoring currency
100
yen but, in our view, the rate of change will be just as
meaningful as the direction.
APR MAY
JUN JUL
AUG SEP
OCT NOV
COMMODITY HOUSING INVENTORY
companies positioned to benefit from secular growth
opportunities, which has led to heavier weights within the
technology and consumer sectors. We have also identified
opportunities within industrials and financials that we
expect to benefit from financial reforms and infrastructure
investments.
A comparison between India and Brazil highlights
the importance of a selective approach to emerging
markets. In the early 1990s, India and Brazil both rose
to prominence alongside China and Russia as members
of the “BRIC” group. More recently, the two countries
have taken divergent paths. Both countries benefit from
favorable demographics, but while India has recently
focused on positive economic reforms and prudent
fiscal policy, Brazil has lacked the political will to address
16
80
SQM MN
20
18
14
12
60
10
40
8
20
6
0
structural issues in its economy. As commodity prices
continue to decline, Brazil’s economy has struggled given
the country’s heavy reliance on commodity exports.
In contrast, India, a commodity-consumer, has reaped
benefits from lower commodity prices due to its increased
reliance on imports. These differences have contributed
to a divergence in monetary policies as well as equity and
India vs. Brazil: A Contrast in Fundamentals
DEC
INVENTORY-TO-SALES RATIO (RHS)
Source: Wind, Macquarie Research, September 2015
In this environment, we maintain a focus on Chinese
2015
NO
V‘
1
FE 0
B‘
MA 11
Y‘
AU 11
G‘
NO 11
V‘
1
FE 1
B‘
1
MA 2
Y
AU ‘12
G‘
NO 12
V‘
1
FE 2
B‘
MA 13
Y
AU ‘13
G‘
NO 13
V‘
1
FE 3
B‘
MA 14
Y‘
AU 14
G‘
NO 14
V‘
FE 14
B
MA ‘15
Y‘
AU 15
G‘
15
strength versus major trading currencies like the euro and
FEB MAR
2014
currency market returns.
The Reserve Bank of India recently announced a 50 basis
point cut in its repo rate (the rate at which the Reserve
Bank of India lends money to commercial banks). This
larger-than-expected cut illustrates India’s confidence
in inflation remaining subdued and the country’s ability
to maintain accommodative monetary policy as global
growth struggles. While India will not be immune to a
global slowdown, the progress it has made in reducing its
current account and fiscal deficits as well as in containing
OCTOBER 2015 9
4
MONTHS
reserves and deposits in upcoming months for signs of
the renminbi might depreciate further to reverse its recent
JAN
2013
INVENTORY-TO-SALES RATIO DROPS FURTHER
including the currency within its special drawing rights
further capital flight. Over the medium term, we’d expect
2012
FIGURE 13: INDIA: BENEFITING FROM TAILWINDS
13A. CREDIT GROWTH AT A MULTI-DECADE LOW
DEPOSITS
30%
CREDIT
13B. IMPROVEMENTS IN MONETARY TRANSMISSION
M3
25%
10%
20%
9%
BASE RATE
8%
15%
7%
10%
5%
REPO RATE
11%
6%
2008
2009
2010
2011
2012
2013
2014
5%
2015
13C. SUBDUED INFLATION PRESSURES
2010
2011
2012
2014
2015
13D. REAL INTEREST RATE HIGHER THAN EM PEERS
CPI
15%
WPI
GDP DEFLATOR
INDIA
8%
CHINA
INDONESIA
4%
10%
0%
5%
-4%
0%
-5%
-8%
2006
2007
2008
2010
2011
2012
2013
2015
-12%
2005
2007
2009
2011
2013
2015
Source: Deutsche Bank Markets Research, “Emerging Markets Monthly, Risks Within” September 18, 2015. Using data from CEIC and Deutsche Bank.
its inflation rate has decreased its vulnerability relative
exports, which resulted in a strong currency that
to other emerging markets (Figure 13). With economic
also crowded out non-commodity exporters. The
growth momentum improving over the previous
Brazilian government was lax on policy and significantly
two years, optimism around new leadership, and
overspent on welfare programs. Over the past few
the potential for positive reforms, India looks better
years, the mistakes of the previous decade have come
positioned to attract and retain capital despite recent
home to roost, as weak commodity prices have hurt
volatility in the emerging markets. Looking forward,
Brazil’s fiscal situation and growth prospects. As a
subdued inflationary pressure should permit more
result, capital has moved out of the country. The near-
accommodative monetary policy to continue while
term prospects are not much brighter, as the economy
an improved fiscal situation can provide additional
contracts under weaker domestic spending and the
flexibility to support growth.
banking sector tries to manage through a credit bubble
(Figure 14). Brazil is in a slightly better position than it
10
Brazil, on the other hand is the poster child for
was during the 1980s commodity collapse, as much of
dysfunction within developing economies. During the
the country’s debt is locally denominated, rather than
commodity super-cycle of the previous decade, Brazil
dollar denominated. The depreciation of the Brazilian
enjoyed strong economic growth tied to commodity
real, which has fallen nearly 43% versus the U.S. dollar

THE “FASTEN SEATBELT” SIGN HAS BEEN TURNED ON
FIGURE 14. BRAZIL: FACING HEADWINDS
14A. RETAIL SALES & INDUSTRIAL PRODUCTION (2007 = 100)
RETAIL SALES
170
INDUSTRIAL PRODUCTION
14B. CREDIT TO PRIVATE SECTOR: PERCENT OF GDP
70%
160
65%
150
60%
140
55%
130
50%
120
45%
110
40%
100
35%
90
30%
80
25%
2007
2008
2009
2010
2011
2012
2013
2014
Note: Data is calendar adjusted and rebased from January 2007 = 100.
Source: Macrobond.
2015
Credit Ratio
Jumps
2002
2004
2006
2008
2010
2012
Source: Macrobond.
since the beginning of 2014, should ultimately provide
built within the commodity complex means we will likely
a tailwind for non-commodity exporters and improve
see lower commodity prices for much longer, which will
Brazil’s current account deficits, but this will be a multi-
be a positive tailwind for businesses and consumers that
year process that requires structural changes within the
will be able to consume these commodities at lower
Brazilian economy to have a sustainable impact on longer-
prices. While we may see some credit impacts, we do not
term growth prospects.
yet see a global liquidity event unwinding like 2008 as
less of the debt used to finance the build-up of capacity
We remain underweight to Brazil, along with many
resides within the banking sector.
other commodity-producing emerging markets,
including Malaysia, South Africa, and Russia. We are also
underweight to those that are running twin fiscal and
current account deficits (such as Turkey). Instead, we are
favoring countries that are commodity consumers and
those that are enacting the structural reforms that their
economies require for a sustainable growth platform.
Conclusion
While we’d like to say that the “fasten seatbelt” sign will
be turned off momentarily, we believe investors should
be prepared to stay buckled in their seats for a while
longer. In the meantime, we believe our portfolios are
well positioned to navigate through this current bout of
In some ways, the commodity “super cycle” that we are
financial market turbulence. We have long believed that
now on the other side of can be considered a “good
while we cannot manage returns, we can manage risk. In
bubble,” not unlike the IT bubble of the early 2000s.
As
this environment, we remain vigilant to the risks on the
we have noted in past outlooks, when a productive asset
horizon and confident in our selective approach and time-
bubble pops, those productive assets move to strong
tested process.
hands at attractive prices and continue to provide benefits
to the global economy. The excess capacity that has been
OCTOBER 2015 11
2014 2015
ABOUT THE AUTHORS
Nick Niziolek, CFA, Co-CIO, Head of International and Global Strategies, Senior Co-Portfolio Manager
As a Co-Chief Investment Officer, Nick Niziolek is responsible for oversight of investment team resources, investment
processes, performance and risk. As Head of International and Global Strategies, he manages investment team members
and has portfolio management responsibilities for international, global and emerging market strategies. He is also a
member of the Calamos Investment Committee, which is charged with providing a top-down framework, maintaining
oversight of risk and performance metrics, and evaluating investment processes. Nick joined the firm in 2005 and has 13
years of industry experience, including tenures at ABN AMRO and Bank One. He received a B.S. in Finance and an M.B.A.
from DePaul University.
Dennis Cogan, CFA, Senior Vice President, Co-Portfolio Manager
Dennis Cogan is responsible for portfolio management and investment research for the firm’s global, international, and
emerging market equity strategies. Based in our London office, he joined Calamos in 2005 and has 15 years of industry
experience. Previously, Dennis worked for Accenture in Strategic Planning and Analysis. He received a B.S. in Finance
from Northern Illinois University.
Dave Gallagher, CFA, Vice President, International Financials Sector Head
Dave Gallagher is responsible for leading the research effort for the international financials sector. In this capacity,
he conducts top-down and fundamental analysis on the international financials sector and makes portfolio
recommendations to the co-portfolio managers. Based in our London office, Dave joined the firm in 2005 and has 13
years of industry experience, including tenure at J.P. Morgan Chase. He received a B.S. in Finance from Indiana University.
Indexes are unmanaged, not available for direct investment and do not include fees and expenses. The U.S. Dollar
Index measures the value of the U.S. dollar relative to a basket of foreign currencies, including Euro Area, Canada,
Japan, United Kingdom, Switzerland, Australia, and Sweden. The CRB Commodity Index is a measure of the price
movements of 22 sensitive basic commodities. The S&P 500 Index is considered generally representative of the U.S.
equity market. The MSCI All Country World Index represents the performance of global equities, including emerging
and developed markets. The MSCI Emerging Markets Index is a free float adjusted market capitalization index cited
as a measure of the performance of emerging market equities. The MSCI Europe Index represents the performance of
developed European equity markets. The MSCI Japan Index represents the performance of Japanese equities. MSCI
China Index captures large- and mid-cap representation across Chinese companies incorporated on the mainland
and traded in Hong Kong. The Shanghai Composite Index is an index composed of A-share and B-share stocks that
are listed on the Shanghai stock exchange. Oil is represented by the Brent Blend Index. CBOE Volatility Index (VIX)
measures market expectations of near term volatility conveyed by stock index option prices. Gold measures gold spot
price, quoted as U.S. dollars per Troy ounce. USD is represented by the Deutsche Bank USD Trade Weighted Index Spot,
calculated using a geometric average of the U.S. Dollar against 5 currencies.
The Topix measures stock prices of the Tokyo Stock Exchange. The Organisation for Economic Co-operation
and Development (OECD) includes 34 countries that have ratified the convention of the OECD. The OECD’s Main
Economic Indicators track the recent economic developments for the OECD countries, the euro zone and a number of
non-member economies. Credit impulse measures the credit flowing to the private sector, as a percent of GDP.
The Citi Economic Surprise Indexes are objective, quantitative measures of economic news that measure the
difference between actual releases and the median of Bloomberg survey data. The Consumer Price Index (CPI) is a
measure of inflation that represents changes goods and services purchased by consumers. The Wholesale Price Index
(WPI) is a measure of inflation that represents prices of goods prior to the retail level. Purchasing Managers Index
(PMI) measures the strength of the manufacturing sector.
Quantitative easing refers to central bank bond buying activities.
M3 is the broadest classification of a country’s money supply.
This material is distributed for informational purposes only. The information contained herein is based on internal
research derived from various sources and does not purport to be statements of all material facts relating to the
information mentioned, and while not guaranteed as to the accuracy or completeness, has been obtained from sources
we believe to be reliable.
Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions
Hedge
constitute our judgment and are subject to change without notice. The views and strategies described may not be
suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes
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