securitised debt in the sweet spot...the sweet spot p6 europe's fiscal firepower pgim fixed...

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How to address rising US inequality

P3IS THE UK SET FOR A

BORIS BOUNCE?

P4SECURITISED DEBT IN

THE SWEET SPOT

P6EUROPE'S FISCAL

FIREPOWER

PGIM Fixed Income's Nathan Sheets examines a number of possible approaches to tackling wealth inequality in the US (page 2)

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Nathan SheetsPGIM

ince the global financial crisis, US households in aggregate have come a

long way in strengthening balance sheets, with liabilities relative to disposable income trending down to more sustainable levels.

In tandem, household assets have surged as the value of financial assets and housing has increased. Overall net worth has risen briskly and now exceeds pre-crisis levels at about 650% of disposable income. But lurking under the surface of the data is the thorny issue of inequality.

Each household in the top 1% of the wealth distribution has, on average, $25m of assets, including ~$10m of equities. The next 9% hold $3.5m each, with $1m of pension entitlements. In contrast, the bottom half of households has only $20,000 – less than 0.1% of the top.

All in all, the top 10% now hold 70% of the wealth. This disparity has become more severe in recent decades. From 2002-10, the share of the top 10% jumped from 62% to 70% and has since been roughly flat.

Broadly speaking, we see two approaches to addressing this problem. First, lifting the

bottom of the distribution, or compressing the top. For reasons of economic efficiency, we prefer the former. However, these two approaches may not be entirely independent. Measures to lift the lower portion may need to be financed by increasing the burden of those at the top.

We see possible steps forward. First, over time, home ownership has proved to be one of the best ways for middle class families to accumulate wealth. On balance, policy initiatives to encourage broad-based home ownership are likely to help mitigate inequality over the medium to long run.

Second, equities are a core driver of wealth for the upper portion, and rising prices are a key factor explaining increasing inequality. The policy prescriptions should not focus on penalising those holding equities, but to expand the set of investors.

Also, pension entitlements are a defining feature of the top half. The fundamental policy question is how to boost household retirement saving. This could happen through increased saving by households directly, or via larger contributions by employers – perhaps with tax subsidies.

Addressing US wealth inequality

ordea Asset Management – the €229.1bn asset

manager of the Nordea Group, the largest financial services group in the Nordic region – has enhanced UK investor access to a number of its innovative strategies.

The group has recently made six specialist solutions available on the Standard Life Wrap and Aviva platforms – including its popular €2.2bn Nordea 1 - Global Climate and Environment Fund.

The climate investment space has undoubtedly grown in prominence in recent times and Nordea has one of the longest track records in this area – with the Climate and Environment Fund having launched almost 12 years ago.

"Sustainability and responsible investment have been embedded in the business model and culture of Nordea Asset Management for many years and we are pleased to be able to boost UK investor access to some of our specialist strategies in this area," Anders Madsen, head of UK institutional and wholesale distribution at Nordea Asset Management, says.

"In addition to this, we are enhancing UK investor access to strategies managed by our multi assets team. We believe the best way to meet the challenge of consistent long-term performance and true diversification is to control risk at all times, rather than simply targeting the highest returns."

Nordea enhances investor access to innovative funds

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"Measures to lift the lower portion may need to be financed by increasing the burden of those at the top"

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Ken WottonGresham House

James ThorntonMayfair Capital

Tony YarrowWise Funds

espite the immediate post-election bounce, the

UK equity market continues to trade at a large discount to other developed markets. Although the UK economy has held up, domestic smaller-cap stocks continue to be out of favour, trading at even greater discounts than mid and large caps.

The decisive election result last year has reduced near-term political uncertainty. Better

he situation today is reminiscent of 'The Lion, the

Witch and the Wardrobe'. Under the rule of the White Witch, it was always winter but never Christmas. Then Aslan came back, spring appeared and everything started moving.

We may be about to see a similar pattern unfolding in the UK economy. Last year was the quietest year for IPOs since 2012. People have not been buying cars

he resounding Conservative victory last year removed

the short-term risk of a no-deal Brexit and the fog of political uncertainty, although the medium-term risk of the UK crashing out of the EU remains.

We expect to see greater public spending this year, which will include additional infrastructure funding – one of our core investment themes. We also expect higher GDP growth

corporate visibility and improving investor sentiment could rapidly drive up currently underweight allocations to UK small caps. As asset allocations improve, these valuation discounts could quickly unwind, positively impacting small and micro-cap share prices.

Already elevated levels of small-cap takeover activity could increase, as large corporates and private equity funds target undervalued UK assets.

or houses or booking holidays. There is more political clarity today than anyone could have imagined a couple months ago.

After nearly four years of high uncertainty, it would be a mistake to underestimate the amount of upside potential in the UK stock market, from a starting point just 3% higher than its level of twenty years ago, driven by a combination of increasing confidence and rising profits.

and continued high employment.All of these factors support

occupier demand and improve liquidity. We do not believe a higher sterling will deter foreign investors who have been more concerned by the political uncertainty in the UK.

Ultimately, property returns are correlated with growth. The removal of one risk factor should enable confidence to return, leading to stronger growth.

"Valuation discounts could quickly unwind, positively impacting small and mid caps"

"It would be a mistake to underestimate the amount of upside potential in the UK"

"We expect to see greater public spending this year, which will include infrastructure"

Are UK assets set for a Boris bounce?

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Ken OrchardT. Rowe Price

orporate credit had a very good year in 2019, with record low interest

rates encouraging firms to issue huge amounts of debt – which was eagerly snapped up by yield thirsty investors.

However, about two thirds of the strong returns were driven by the significant decline in government bond yields, leaving corporates vulnerable if government yields reverse.

Additionally, investment grade corporates are not cheap. With spreads around the 20th percentile of the historical range, there are fears the sector could be hit if there are any jitters over the global economy.

We recently diversified some corporate exposure into securitised debt – which pool together contractual debt such as residential and commercial mortgages, car loans, student loans and credit card debt.

The securitised debt sector has benefited over the past decade

from consumer deleveraging and more robust structuring, while it also currently has generally higher credit ratings than corporate debt.

It also offers attractive spreads and short duration profiles, which should provide some protection against a rise in government yields. In addition, the securitised debt sector has historically displayed a moderate correlation to corporate debt and other risky assets, making it an attractive avenue for diversification and reducing portfolio volatility.

Non agency residential mortgage backed securities (RMBS) look particularly interesting. The rebuilding of the RMBS sector is still in its infancy, but the combination of relatively low leverage, beefed up protections, and high compensation per unit of credit risk will likely gradually attract more investors seeking to diversify away from corporate debt.

Securitised debt in sweet spot

ennBridge boutique Skerryvore Asset

Management has attracted six senior executives to join its newly established emerging markets business.

Stephen Deane, Nicholas Cowley, Ian Tabberer, Michael Cahoon and Ronan Kelleher join Skerryvore as portfolio managers, while Ben Lawson has been appointed head of dealing. Skerryvore's managing partner, Glen Finegan, established the boutique in partnership with BennBridge in October 2019.

BennBridge is part of the BFM Group, an investment company partnering with 12 active equity boutiques from across the globe. The boutiques invest across Australian, UK, Asian and global equities, listed global infrastructure and real estate, as well as global emerging markets. In Australia, the group is known as Bennelong Funds Management.

Finegan comments: "The team brings a wealth of expertise and experience in global emerging market equities portfolio management. I have worked with all six of them in the past, and they share a dedicated investment focus and knowledge.

"They are an excellent fit for the Skerryvore business, which aims to generate long-term returns by investing in emerging markets with an unwavering focus on quality."

Glen Finegan brings team to BennBridge

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"Corporates are vulnerable if government bond yields reverse"

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Cédric VuignierSYZ

Liam ThomasUS Solar Fund

iquid alternatives can play an important role in identifying alpha. We

believe three themes will stand out over the 12 months ahead.

The first is convertible bond arbitrage – capturing value in the difference between a convertible bond and its underlying stock. This strategy can take advantage of a volatile environment and maintains a position in the equity market. It is also backed by a favourable corporate action pipeline and improved US new issuances, due to a new tax law.

Secondly, there is value to be found in Japan. Thanks to recent reforms under Prime Minister Shinzō Abe, Japan’s corporate sector is undergoing profound changes. By making cash more expensive for businesses to

he solar market in the US is booming, with total installed utility scale

capacity exceeding 39 GWDC.Government subsidies have

historically played a large role in driving the adoption of solar energy in the US – in the form of a 30% federal tax credit. Large institutions with high tax bills are attracted by the opportunity and invest alongside equity sponsors in a 'tax equity partnership'.

The energy output is contracted to offtakers via a Power Purchase Agreement (PPA). Offtakers in the US – typically investment-grade entities such as large corporates, utilities, municipalities, or institutions – sign PPAs ranging from ten to 25 years. The steady long-term cash flow resulting

hold, Japanese companies are being encouraged to engage in more corporate activities, such as merger and share buybacks. Activity is picking up, creating opportunities with more value for shareholders.

Finally, machine learning is a revolutionary technology, profoundly altering our experience of the world. Machines are data mining to build models and make discoveries in a range of fields independent of human hypotheses. This has created a race for data and a search for alpha in the market. These are investable technologies, through highly specialised managers working to optimise portfolios and create investment and forecasting models.

from offtake agreements is similar to the income generated by an investment grade bond. With interest rates at record lows around the world, this offers a compelling alternative for income-seeking investors.

The US tax credit is set to fall in the coming years but the rapidly declining cost of solar means it is cost competitive in many parts of the US. Given this cost-competitiveness, the country is projected to require more than $59bn for building and replacing existing solar infrastructure over the next six years.

The solar energy sector is creating jobs, and currently employs more workers than fossil fuel production. Moreover, it is contributing to driving down the cost of energy.

The alpha in alternatives

Solar returns are shining

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Neuberger unveils macro currency strategy

"Three themes will stand out over the 12 months ahead"

"The steady long-term cash flow is similar to an IG bond"

euberger Berman, a private, independent,

employee-owned investment manager, has unveiled the Neuberger Berman Macro Opportunities FX Fund.

The strategy aims to deliver positive returns of 5-6% in excess of cash per annum before fees, primarily by exploring relative value across G10 currencies. The fund’s investment strategy is based on an established process, which has a track record of producing returns with a low correlation to equities, bonds and alternatives. It also demonstrates particularly strong resilience in adverse market conditions.

Ugo Lancioni, Neuberger Berman’s head of currency management, is responsible for the strategy – with additional support from a dedicated team of five investment professionals. Lancioni has been managing active currency strategies at Neuberger Berman since 2008.

Lancioni comments: "With the ever-changing geopolitical landscape, the FX market will continue to provide relative value opportunities, which we are looking to capitalise on through a disciplined fundamental investment process.

"Our strategy is designed to be resilient in adverse market conditions and offers a perfect complement to traditional asset classes in investor portfolios."

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T: +44 (0) 203 995 [email protected]

Jacob MitchellAntipodes

onetary policy may have inflated asset prices, but

beyond leading to indirect and increasingly counterproductive wealth affects, it seems increasingly ineffective.

If monetary policy is not the solution, it is inevitable countries will look to fiscal stimulus, as we have already seen in the US. China and Europe have the most dry powder, while the US is running emerging market-style twin deficits.

Europe – driven by Germany – has long favoured fiscal austerity, but given the current economic backdrop, we believe Germany is prepared to loosen its grip. The move to spend is held back only by Germany’s desire to balance its budget, which may need rethinking in a world where Germany is being paid to borrow money.

Importantly, the rhetoric in Europe has pivoted towards the need for fiscal stimulus, and the chorus is growing louder. New ECB president Christine Lagarde explained 'central banks are not the only game in town' and is urging the richer eurozone governments, which are either running surpluses or low deficits, to spend during downturns.

We have started to see some action. Germany’s recent €50bn package to reduce carbon-dioxide emissions is a step in the right direction. At more than 1% of GDP, this proposal is significant, similar in size to the stimulus

packages announced in 2009. The famously stingy Dutch government has indicated €3bn in additional investment and tax cuts, which is 0.4% of GDP, as well as the potential to create a special investment fund of up to €50bn – which will focus on infrastructure, education and innovation.

In addition, in a bid to achieve pan-European carbon neutrality by 2050, European Commission President Ursula von der Leyen has proposed a European ‘Green Deal’ – with €1trn earmarked for a swathe of pro-climate policies. With Europe priced for a recession, not for fiscal stimulus like the US, the stage has been set for a major green/infrastructure-related spending cycle.

The potential for stimulus extends beyond Europe. For example, South Korea has drafted its most expansionary budget

Europe's fiscal firepower

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since the global financial crisis a decade ago, while India has announced corporate tax cuts to the tune of 0.8% of GDP, and China has the firepower to continue to stimulate.

There is changing of the guard in Europe and a growing army of vocal fiscal stimulus advocates. There is a risk is it takes a recession to get to this point, so there is a need to remain circumspect in regard to the valuation of cyclical stocks.

Nevertheless, populism and fiscal stimulus are ultimately inflationary, and we must question what this means for bonds and bond-like equities – which have grown significantly over the past decade and now account for almost half of the global market cap. Indeed, now is not the time to sell quality cyclicals, with embedded structural growth opportunities.


"Importantly, the rhetoric in Europe has pivoted towards the need for fiscal stimulus"

securitised debt in the sweet spot...the sweet spot p6 europe's fiscal firepower pgim fixed...

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