Seven fund manager views that will make investors think again
Investment managers across BNY Mellon‘s boutiques identify market trends and idiosyncrasies that stand out as areas of particular opportunity and risk.
1. Know your fellow shareholders – 75% of the Chinese equity market is government owned.
“When investing in emerging markets, investors should pay close attention to the identities of fellow shareholders.”
“Given that almost 30 per cent of the MSCI Emerging Markets index is owned by governments, including large companies such as Petrobras, it is important to be active investors in order to seek out those companies with sound governance and which are run in the interests of all shareholders.”
Sophia Whitbread, investment manager – emerging markets at Newton
2. No smoke without fire? The market for e-cigarettes could expand by 7,500%.
“The development of electronic nicotine-delivery systems (ENDS), or e-cigarettes, is arguably the most disruptive innovation in consumer products over the past century and the market potential is substantial.”
“Today, the global market stands at just over $3bn in annual revenue, which puts ENDS’ market share at a mere 0.5 per cent of the $670bn global cigarette industry.”
“However, estimates suggest that the potential market for ENDS could eventually expand to $225bn in annual sales, nearly 75 times greater than today. Explosive consumer demand is drawing the attention of larger corporations.”
“We expect market consolidation to accelerate as ‘big tobacco’ becomes more comfortable with the regulatory environment.”
David Sealy, director, The Boston Company Asset Management
3. The market is listening to a different tune – has the S&P 500 become impervious to negative news?
“Since the second quarter of 2010, US negative earnings preannouncements have far outweighed positive ones. Yet the S&P 500 barely stuttered last year – in the fourth quarter of 2013 there were 94 negative forecasts to just 13 positives but the market rose regardless.”
“Through debt-fuelled share buybacks and other means, corporates are doing their best to mask the true underlying picture.”
James Harries, investment manager, Newton
4. CoCo channel awash with issuance – at $9.5bn in the first quarter, is it reaching a critical level?
“We suspect there has been some indiscriminate buying of CoCos as investors have been attracted by the high coupons on offer. We believe CoCos are mispriced: fundamental credit analysis is key.”
“Some fixed income investors may not appreciate the risks associated with CoCos as these bonds have blurred the lines between bonds and equities.”
April LaRusse, Insight Investment
5. A question of trust – 30% of elected MPs in India are facing criminal cases.
“The Indian equity market did well in the run-up to the election in anticipation of a change in government but we think such optimism might be overdone.”
“Speedy political change in India is rare given its entrenched bureaucracy; it is a cumbersome, chaotic country in many ways. Its potential is enormous if one day effective economic policy could be put in place and corruption levels were to reduced.”
“However, for the moment it remains a fairly trading-orientated market that generally looks quite expensive.”
Jason Pidcock, portfolio manager, Newton
6. Splashing the cash – M&A activity is at its highest level for seven years.
“We have just witnessed one of the strongest starts to the year in M&A in a decade. Financing markets are a key ingredient, as interest rates remain near cycle lows and at absolute low levels for companies to lock in long-term financing.”
“In a slow-growth environment, improving chief executive confidence is helping to fuel decisions to buy competitors. What’s more, as the share prices of many acquirers have been faring well, peer companies are incentivised to contemplate their long-term competitive positioning.”
James M. Boyd, The Boston Company Asset Management
7. High yield defaults are at low levels – 2.3% over the past 10 years versus the 5% long-term average.
“The maturity cliff for high yield does not begin to look daunting until 2017. That is one reason why default rates have been significantly lower than their long-term average over the past decade and why they may stay low for a few years yet.”
“A rise in defaults might be that elusive catalyst for a sell-off. But the current environment is very benign.”
Alex Veroude, head of credit, Insight Investment
This content was sourced from BNY Mellon’s new blog, Market Eye. It is designed to provide you with a 15 second investment view of key market trends expert research and insights. Visit the site to subscribe for updates.
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