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Keys to solving gender inequality

P3HAPPY 9TH BIRTHDAY TO THE BULL MARKET

P4REPRICING THE FIXED

INCOME PREMIUM

P6CHINA HOLDS THE KEY

TO STOCK SUCCESS

The asset management industry needs to address structural issues to unlock latent female talent, according to EdenTree’s Sue Round (page 2)

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Sue RoundEdenTree

his year marks my 30-year milestone of managing the Amity UK Fund.

During this time, I have witnessed a great deal of industry change. Advancement in some respects has been rapid – such as the pace of technological innovation. However, in other areas, change has been slow. Only now is responsible investing attaining mainstream recognition, while the issues of diversity and gender equality have proved just as difficult to achieve meaningful and lasting change.

The good news is the industry can change, but it must address several structural issues to unlock latent female talent.

In our industry, fewer women rise through the ranks than is ideal, with disclosures from some of the biggest fund houses last year showing only 25% of senior jobs are filled by women. Meanwhile, gender pay gap disclosures have revealed wide gaps. Female representation must be increased, not only at fund manager and board level, but across the ranks.

Fortunately, we are in an industry well-placed to support a flexible work/life balance.

However, rapid change may not necessarily follow. There is not an extensive pool of women to take board positions, particularly as board appointments usually come from incumbents. The framework for board appointments needs to be developed to address this.

It is crucial we have better facilities to support female 'returners' to work, which can often be daunting. Unfortunately, many women never return from maternity leave, but increased flexibility will help. At EdenTree, we are striving to increase levels of diversity, attract women and support returners.

Industry-wide, we have not yet fully created a supportive environment for building a long-term career, given the particular challenges women face. While some companies have made strides in this area, many are still trailing behind.

It is the responsibility of us already in the industry to be vigilant and champion diversity. Indeed, as always, great change is made by the few. One lesson I have learned in my three decades of investing is innovators do not wait for change – we must drive the next wave of transformation.

Keys to solving gender inequality

ordea Asset Management has

this month celebrated the 10-year anniversary of its €855m Global Climate and Environment Fund.

The strategy, managed since launch by Thomas Sørensen and Henning Padberg, identifies businesses playing a positive role in confronting one of today's greatest challenges – the need to safeguard our environment and tackle climate change.

"We see a convergence of interests within society. A decade ago, the scene was mostly driven by politics, in areas such as subsidies and regulation. Today, it is about economics. Investing in climate solutions is a rational decision for consumers and enterprises. Climate and environment is a sustainable megatrend," the managers say.

"The impact of climate and environment as a driver of company cash flows is under-researched and underestimated by most market participants."

Christophe Girondel, global head of institutional and wholesale distribution, adds: "Investors are increasingly sensitive to environmental challenges. At the same time, they do not want to sacrifice returns. The Fund addresses this. It was designed first and foremost to provide alpha, while investing into companies using talent and innovation to make a positive difference."

Nordea Climate and Environment reaches milestone

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"The industry can change, but it must address several structural issues to unlock latent female talent"

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Ed CowartNordea

Stuart MitchellS. W. Mitchell

Joel Le SauxSYZ

ome investors have expressed concern a recession is likely

sometime soon – as the current expansion has already lasted more than twice as long as historical averages. We do not share this concern.

There is a natural tendency towards growth in the US. Expansions do not die of old age, but because of policy actions or major exogenous events.

We believe current policies are

he forward P/E on the TOPIX rose to 15.4x in 2017, near

its post-global financial crisis high. The price-to-book ratio is also at a decade high of 1.45x.

These metrics seem fair, as RoE remains below 10%. For higher valuations to occur, a structurally higher RoE is a must. While this could be reached with more leverage, most companies seem satisfied with a typical 40% shareholder return policy.

he outlook for European equities remains positive.

Indeed, manufacturing PMI and business confidence indices remain near all-time highs. The German economy is especially strong, with the manufacturing index hitting the second highest reading ever. Importantly, on our company visits, we are noting a corporate sector continuing to outpace cautious expectations.

Most strikingly, European

supportive of continued growth. In particular, on the fiscal and regulatory fronts, policies are becoming even more conducive to growth. Just as was the case in 2017, we believe the broad stock market averages can rise in line with earnings this year.

However, we believe a change in the nature of the market is likely. We believe – for a number of reasons – there will be a revival of value investing.

The distinguishing feature in Japan since the end of the crisis has been the 235% rise of mid caps, significantly outpacing the 172% and 126% gains for large and mega caps, respectively.

Trying to time style and market cap rotation is highly risky. It is paramount to have a disciplined approach that focuses on those companies selling at a discount to fair value, instead of chasing earnings momentum.

markets remain good value, trading at a large 23% P/E discount to the US – many domestically-orientated stocks trade at heftier 50%+ discounts.

While we have uncovered some gems in the UK, such as IAG, the outlook for the domestic economy is highly uncertain. Consumers are suffering from a squeeze in real incomes with the collapse in sterling pushing up the cost of imported goods.

"Expansions do not die of old age, but because of policy actions or exogenous events"

"For higher valuations to occur in Japan, a structurally higher RoE is a must"

"Manufacturing PMI and business confidence indices in Europe remain near all-time highs"

Happy 9th birthday to the bull market

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Quentin FitzsimmonsT. Rowe Price

ince the financial crisis, aggressive monetary easing has suppressed

the premiums demanded for holding fixed income assets. However, with major central banks moving toward tightening, the compensation required for holding bonds is likely to increase.

As we saw last month, DM government bonds suffered as investors began repricing the liquidity premium attached to central bank actions. After years of cash being pumped into the system, central banks are now tightening in synchronisation.

The correction helped to correctly price in higher premiums in some countries. In the US, the 5yr/5yr forward breakeven rate currently hovers at about 3.25%, above the Fed's current long-term terminal rate expectation of around 3%.

What about inflation premiums? After years of low inflation, there is the potential for price pressures to increase across

DMs on stronger growth, higher oil and tight labour markets in several DM countries. Inflation-linked bonds remain attractive as protection against the risk of rising inflation pressures.

Meanwhile, demand for credit remains fairly robust. However, the credit premium is looking stretched, with spreads relative to government bonds at historic lows, especially on a risk-adjusted basis. Similarly, the differential between BBB and B-rated bonds is at record lows – generally a sign the market is no longer differentiating between rating qualities and risk structures.

These conditions suggest it may be time for credit premiums to reprice higher. But what will be the trigger – higher issuance, less central bank buying or shifting sentiment? While the potential catalyst for wider spreads is unclear, the recent vol in credit is a good reminder investors are likely to require a higher credit premium at some point this year.

A repricing of the bond premium

ermes Investment Management, the £33bn

investment manager, has established a participation agreement with Oxford-based financial technology company Util.

Hermes will access Util’s proprietary holistic company valuation methodology, which addresses the need for a standardised and comparable analysis considering social and environmental performance, alongside financial performance.

The methodology builds upon the best practice of existing global frameworks – including the UN-supported Principles for Responsible Investing, Integrated Reporting and the UN Sustainable Development Goals (SDGs).

Over the next twelve months, Hermes will assess and audit Util’s methodology through its application to specific Hermes equity funds. Leon Kamhi, head of responsibility at Hermes, will be joining Util’s advisory committee.

"The effective measurement of social and environmental returns to stakeholders, alongside the financial, is key to enabling the investment industry to deliver the holistic needs of beneficiaries and achieving the UN SDGs," Kamhi says.

"We are looking forward to supporting Util in the development of this methodology."

Hermes supports development of new methodology

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"There is the potential for price pressures to increase across DMs"

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Robert LeaAshburton

Shoaib ZafarSYZ

resident Donald Trump's decision to impose tariffs on US imports of steel and

aluminium surprised markets, raising the fear of a trade war.

While Trump tweeted 'trade wars are good, and easy to win', this is wishful thinking. History shows trade wars end up having a negative impact on all protagonists.

Under Trump's plans, the US will place an additional 25% global tariff on imported steel and a further 10% tariff on aluminium. The US is the world's largest importer of steel, importing over 35m metric tons in 2017, for use in a wide variety of industries – including construction, automobiles, white goods, packaging and general manufacturing.

here are a number of main concerns surrounding Facebook for investors.

These include its apparent inability to fully comprehend the magnitude of the problem, fears of intensifying regulatory risk, potential sabotage of ad campaigns using enhanced user data and the potential financial liabilities from this episode. These worries are justified.

Significant political bashing has already begun from both sides of the Atlantic. While Mark Zuckerberg said he is willing to work on fixing the imperfections in the system he created, we wonder how much control FB really does have over the data from its two billion users. Can FB really close all, or at least most, loopholes in data security?

A review of past US tariff decisions does not paint an encouraging picture. Moves by George W Bush in steel and Barack Obama in tyres had negative overall outcomes. Trump needs to understand trade is not a zero-sum game; it is a net contributor to productivity and economic growth.

Unless Trump decides to reverse his decision, we expect downgrades of US growth estimates. Price rises will also raise inflation forecasts, making it more likely the Fed will hike rates at a faster pace than the market currently anticipates. While neither revision is likely to change the fundamental US and global economic outlook, we expect these negative incremental revisions to weigh on sentiment.

Unfortunately, many questions remain unanswered.

On the positive side, with FB's deep pockets, the company is in good shape to carry out meaningful investments without hurting its operating or net incomes. Most importantly, FB's brand equity is likely to stay intact. The company will continue to deepen its presence in emerging areas of AI, digital marketing, online auctioning and in-app payments, for example. In addition, any enhancements in the business model, particularly in the area of security, will be quickly acknowledged by both users and regulators.

We stay invested and continue to see its valuations as attractive – with the stock trading at 19x 2018e EPS and 16x 2019e EPS.

War. What is it good for?

Facebook brand is intact

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Neuberger hires product strategy & marketing head

"Trump needs to realise trade is not a zero-sum game"

"With FB's deep pockets, the company is in good shape"

euberger Berman has hired Alan Isenberg to

lead its global product strategy and marketing efforts.

Over the last several years, Neuberger Berman's global client base of institutions, intermediary partners, financial advisers and high net worth families has grown in number and geographic diversity. Isenberg will lead internal teams, including product development, product management, marketing, thought leadership, digital strategy and media relations.

Isenberg joins from PIMCO, most recently serving as head of strategy and business management for Asia Pacific. He has had prior roles at CNN and Newsweek International. He will report to Andy Komaroff, Neuberger Berman's COO and head of client coverage.

"Alan continues our success in attracting passionate, focused, experienced professionals with diverse perspectives to join our private firm," Komaroff says.

"I am confident he will enhance our engagement and deepen our connectivity with the clients we are fortunate to serve across all of our channels."

Isenberg adds: "I am honoured to be joining Neuberger Berman, having admired its culture, differentiated investment solutions and thoughtful alignment to client needs."

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T: +44 (0) 203 137 7823www.kl-communications.cominfo@kl-communications.com

Jeremy LangArdevora

t Ardevora, we look for information which can help us understand

the behaviour of three groups: company managers, financial analysts and investors.

Once a year we take stock, sift through the information we deem important and try to understand why the market behaved the way it did. The first thing jumping out to us is error.

When we look at the pattern of analyst errors through time, it looks like we walked into a global recession in late 2015 – with lots of economically-sensitive stocks suffering profit warnings. The pattern since early 2016 looks a lot like a post-recession recovery. We have been trying to figure out what drove this and why it seems to have gone largely unnoticed. We think it was all about China.

We think the stutter of 2015-16 was caused by China's desire to shift its economy away from 'old' style heavy industry. A push to restructure inefficient industries and a tighter environmental agenda caused a break in growth, growth which had previously spilled out of China to the benefit of many non-Chinese companies.

It looks like the changes worked after Q1 2016. Apparently gloomy news on Chinese debt and zombie businesses struggling was really a symptom of positive change. The Chinese economy was shifting into new industries and the nature of Chinese growth was changing.

This explains the marked shift in analyst forecast error after March 2016. There was a rapid jump in EM stocks beating forecasts in almost every sector, both industrial and consumer. But the way it spread out to the rest of the world looked different in several subtle ways.

Industrial technology stocks felt the quickest benefit and the most. Tech companies tied to industrial investment, not the consumer, have seen explosive growth and surprised the most. China is investing aggressively in automation, production efficiency and R&D-heavy industries.

Consumer-facing non-Chinese stocks did not benefit much, outside a few areas like autos and luxury. It was especially obvious for major consumer groups. These benefited from the early phases of China growth, but now look increasingly locked out.

China holds key to stock success

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We detect a deliberate shift in Chinese priorities to drive the development, wherever possible, of domestic consumer brands to supplant non-Chinese ones.

Also, Chinese companies are beginning to leapfrog overseas rivals and are turning attention to competing outside of China – for example, ANTA is pushing hard in athleisure, as is Geely in cars.

It seems China has successfully rebalanced its economy, but the US is trying to unbalance. Trump only got tax reform passed last year. It looks like an exercise in stimulus, applied when there is not much slack in the economy. Wage pressure is building and the Fed is tightening. China looks safer than the US from here.

China seems to hold the key to relative success for stocks. It seems to be driving sustainable growth, yet our sense is its importance is still downplayed.

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"China has successfully rebalanced its economy, but the US is trying to unbalance"