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Are autos the next 'Big Short'?

P3TRUMP ANNIVERSARY:

CAN BULL RUN PERSIST?

P4NEW FED CHIEF

POWELL MAY HIT PAUSE

P6GOLDEN RULES OF

BUYING SMALL/MID CAPS

A decade on from the sub-prime property crash, Trium Capital's Randeep Grewal argues the auto industry is showing similar vulnerabilities (page 2)

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Randeep GrewalTrium Capital

ince the subprime crisis – as well as subsequent Hollywood portrayal of

the spectacular real estate bust – there has been a lot of interest in finding the world’s next 'Big Short'. The leveraged auto industry is coming under scrutiny, as investors seek the next high-payoff trade.

When an industry begins to morph into something quite different from its norm, it can be a sign of innovation, but it can also point to something darker. When the US sub-prime property market became more about derivatives and less about housing, investors were living on the side of a smoking volcano. The auto industry is now displaying amorphous traits and investors should take heed.

The automotive industry is no longer about cars – it is about lending. Increasingly complex and high-risk financing has the potential to bring down the house. Car makers have increasingly large finance arms – some with banking licences and access to central bank lending windows. Many auto analysts and investors look at the 'industrial arm' of the business and take the

finance side for granted. Also, few financial services analysts ever look at this 'captive finance' division, despite many being bigger than current banks.

However, it is not only the lending side that is poorly analysed. Some auto companies have tens of billions of dollars of outstanding derivative exposures to hedge commodity inputs, interest rates and currencies.

When a downturn arrives, people will start defaulting and loan providers will have to deal with the consequences of toxic financing. Any potential slowdown could be significantly magnified, as the auto industry is interlinked with a wide range of other industries – including retail, energy, finance and technology.

Auto finance could well be the next 'Big Short', with a potentially catastrophic sub-prime lending issue bubbling under the surface. It is not just select autos facing an impending meltdown, there will also be significant headwinds felt across the entire supply chain – including original equipment manufacturers, finance companies, auto dealerships, car rental companies, tech firms and energy groups.

Are autos the next 'Big Short'?

ermes Investment Management, the

£30.8bn manager, has added Amit Mehta as director and senior Asia analyst in its emerging markets team.

Based in London, Amit will report into Gary Greenberg, head of emerging markets. In this new role, Amit will work within the team managing the Asian stocks in the portfolio – providing research, analysis and generating models on existing and potential areas of investment.

With a career spanning over 20 years in the City, Amit has in-depth and extensive experience in equity portfolio management and analysis, working for a number of leading firms – including PIMCO, Pictet, Insight Investment, Morgan Stanley and KPMG, where he qualified as a chartered accountant.

"With his substantial expertise developed over decades of market analysis, Amit has a detailed understanding of the companies operating in Asia and the key market drivers in the region," Gary Greenberg, head of emerging markets at Hermes Investment Management, says. "His insights and skills will be an excellent complement to the existing expertise on the team as we continue to build on our strong performance and capitalise on the attractive companies we see in the market."

Hermes adds Asia analyst to EM equity team

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"Increasingly complex and high-risk financing has the potential to bring down the house"

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Mark SherlockHermes

Samed HysaAshburton

Ed CowartNordea

rump's initial few months were characterised by failure

and frustration, the poster-child being his failed attempt to repeal the Affordable Care Act.

More recently, political rhetoric seems to have given way to action and an awareness the Republicans need a few wins. A reduction in both the corporate and personal tax rates will act as a considerable near-term catalyst to both the economy and the

xpansions do not die of old age, but rather because of

policy actions or major exogenous events.

We believe current policies are supportive of continued growth. In particular, on the fiscal and regulatory fronts, policies are becoming even more conducive to growth – such as the corporate tax rate cut. By some estimates, this could add about 10% to S&P 500 earnings next year.

he Trump administration closed 2017 with its first

major legislative achievement – tax reform.

It comes at a time of monetary tightening from the Fed, combined with a global upturn in growth and trade volumes.

Consumer spending over the next two years will be positively affected by the personal tax cuts, but these are skewed towards higher-income tax payers, who

market. On the corporate side, reducing the tax rate from 35% to 21% should boost market and economic growth. Businesses are also benefitting from a determined effort to roll back punitive regulatory restrictions.

Infrastructure stimulus appears to be the next big push. A significant program, in whatever form it takes, will be stimulative, creating jobs and benefitting a wide range of businesses.

In addition, favourable terms for repatriation of the $2-3trn in US company cash stranded overseas is likely. That, in turn, could unleash a number of favourable actions for the US economy and for shareholders.

Also, great progress has been made in rolling back the growth-inhibiting policies of the previous administration. Further regulatory relief, particularly for financial institutions, is in prospect.

have a lower marginal propensity to consume higher income. The additional impulse to investment kicks in with a lag around mid-2018, with the 100% expensing of capital investments encouraging a front-loaded approach.

Disincentives from other areas, such as discouraging the use of debt financing relative to equity financing, could limit any large increases in investments that the administration hoped for.

"Reducing the tax rate from 35% to 21% should boost market and economic growth"

"Great progress has been made in rolling back policies of the previous administration"

"Consumer spending over the next two years will be positively affected by the tax cuts"

Trump anniversary: Can bull run persist?

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Thanos BardasNeuberger Berman

ith the changing of the guard at the Federal Reserve, we

do not expect an immediate shift in policy.

Strong growth trends – as well as generally favourable market conditions – could continue through at least mid-2018. However, the business cycle is rapidly aging and we believe rate increases could start having more of an impact – especially when combined with the pending $1trn reduction in liquidity from central bank balance sheets and short-term rate increases over the next 12-18 months.

Taking a look at the last time the Fed raised interest rates, in 2004-2006, the length of the tightening period was similar to today, but the pace was faster.

Historically, continuity has been the norm in transitions between Fed chairs – for a while. With the change from Alan Greenspan to Ben Bernanke, for example, rate hikes continued

for six months before ending in June 2006. And after Yellen replaced Bernanke, tapering rolled on, accompanied by rate increases – interrupted by the oil price collapse of 2015 – which followed the script written before Bernanke’s departure.

With that history, we expect Jerome Powell to wait a couple quarters while taking the temperature of the economy and inflation. Any new direction should start becoming apparent at the September and December meetings of 2018.

Along the way, Powell is likely to receive a host of competing opinions, given new Fed appointees and the increasingly outspoken voice of regional Fed presidents.

Holding together a consensus could become more challenging as continued rate hikes and quantitative tightening start to have a meaningful impact on the macro picture and as market volatility climbs upward.

New Fed chief Powell to hit pause

YZ Asset Management, the institutional asset

management arm of the SYZ Group, has launched a sterling version of its OYSTER Diversified EUR Fund.

The OYSTER Diversified GBP Fund expands on SYZ Asset Management's evolving range of strategies denominated in and hedged into sterling. Early investors into the Fund will be rewarded with preferred fee conditions, with a 0% management fee until 1 March 2019.

The Fund's launch recognises the growing demand for multi-asset income strategies among UK investors. It is run by lead portfolio manager Hartwig Kos and portfolio manager Maurice Harari.

SYZ Asset Management has offered robust multi-asset investment solutions to investors for over 19 years, including the well-established OYSTER Absolute Return GBP strategy – launched in 2008. SYZ Asset Management's multi-asset team is renowned for undertaking in-depth analysis of the macroeconomic environment and prevailing asset valuations. As of the end of 2017, SYZ Asset Management managed £1.27bn in multi-asset.

"At a time when valuations in many assets classes are stretched, multi-asset approaches are attractive for investors who want to better manage their risk," Kos says.

SYZ unveils GBP version of OYSTER Diversified Fund

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"Historically, continuity has been the norm in Fed chair transitions"

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Oliver BellT. Rowe Price

Jeremy LangArdevora

he macro fundamentals and demographics in many frontier markets are

favourable today – in some cases resembling emerging countries 15 to 20 years ago.

For example, GDP growth for many frontier markets is likely to range from about 6% to 9% in the years ahead, much stronger than in the developed and emerging markets universes. In addition, nearly 60% of the aggregate population in the frontier universe is below age 30. This young workforce should drive economic growth and develop into a solid middle class of consumers in many countries.

Of course, conditions and investment opportunities will vary widely among frontier markets, even those within

e like the UK stock market, but we do not like the UK

economy. This is no paradoxs.The UK economy hardly

impacts the UK stock market. A few areas have a tether to the UK economy, but most of the rest are negligibly affected. There are plenty of UK stocks to invest in that can plod along regardless of Brexit or recession.

As an 'active' manager, you must take a view. Fund managers try to make it seem these decisions are a series of powerful predictions. However, in practice, our success is driven more by choices of what not to own – an unglamorous game of rejection.

At Ardevora, we think large mining companies are attractive. Global growth and commodity

the same region. While stock valuations are still reasonable and the long-term growth outlook of many corporations remains underpriced, we acknowledge there will be individual winners and losers.

After being plagued by drought and economic stagnation last year, 2018 could be the year Africa returns to focus for all the right reasons. Positive news can travel fast across the Frontier universe – where small, positive changes can quickly lead to the unlocking of vast economic potential. While we have witnessed many examples of this in Asia and Latin America, our biggest wish of all this year is for the positive recent political developments in Africa to lead into a real reversal of fortunes.

prices are hard to predict, but how cautious and conservative mining CEOs will behave is, in our view, easier – and worth predicting. We think the trauma of the last few years will keep management well behaved and make these companies sound investments.

Energy companies are riskier. Fortunately we have a few large, more conservative companies in the UK – such as Shell. But unlike mining, there are still a lot of risk-loving CEOs out there, which makes us nervous. Our view is to stick to the big and safe companies.

Elsewhere, we would avoid most retailers, house builders, restaurant and cafe chains, electricity and gas utilities and building contractors.

Africa's time to shine

Areas to avoid in the UK

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Morphic launches L/S ESG strategy on Trium platform

"2018 could be the year Africa returns to focus"

"Success is driven more by choices of what not to own"

ydney-based Morphic Asset Management is

launching a new long/short global equity strategy on the Trium UCITS platform.

The Trium Morphic ESG L/S Fund launches on 20 February and will employ ESG factors to generate alpha on both long and short positions.

It will be run by portfolio managers Jack Lowenstein and Chad Slater, who both have a multi-decade track record in sustainable investing.

"Responsible investing is having a gravitational effect on investment markets – reshaping the flow of capital to those companies demonstrating improvements in ESG and delivering sustainable returns to investors," Lowenstein says.

"It is clear markets reward companies making material ESG improvements. Hence, we do not view exposure to companies with impressive ESG scorecards as a source of maximising alpha. Instead, we seek companies implementing measures to improve ESG profiles. This means accessing the future shape of change by identifying early catalysts for ESG improvements.

"This applies to both longs and shorts working from the premise that if companies outperform due to material ESG improvement, we can consequently expect stocks to underperform if they continue to exhibit poor or materially deteriorating ESG practices."

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

Phil HarrisEdenTree

he sharp fall in sterling after the EU referendum in 2016 against a range

of currencies had a predictable effect on the UK equity market.

Large-cap stocks, with on average 70% of earnings overseas, were mechanically re-rated to take account of 'cheaper' valuations. Conversely, for the first time since the financial crisis, mid-caps endured a steep sell-off. This correlated with mid-caps' lower percentage of overseas earnings and commodity exposure.

Since then, we have seen a revival in mid-sized companies. Moreover, mid-caps have outperformed the FTSE 100 over almost every longer-term time period.

While small and mid-caps are susceptible to pockets of volatility, they remain the market's best source of long-term growth opportunities.

Below is an outline of our five golden rules to unearthing the small and mid-cap firms able to deliver sustainable growth:

Capitalise on thin broker coverage

As you go down the market cap scale, the efficacy of a quantitative approach to investing diminishes. This opens up the opportunity for alpha capture. When we identify a company in a far corner of the UK with a lack of institutional share ownership and limited analyst coverage, we know we may have found a hidden gem.

Know when to take profits'Buy low and sell high' may be

oft-quoted investment wisdom, but in practice, it is hard to do. Certainly, in our experience, the first part is easier. A defined process paired with an instinct honed from years of experience sharpens the eye for attractive entry points.

Unfortunately, when it comes to selling, deep behavioural biases can interfere with an investor’s radar. For example, a trend known as 'anchoring' occurs where, in the absence of better or new information, investors assume the market price is the correct price.

Be discerning about the IPO market

We see two principal types of IPOs. The first is a genuine capital-raising exercise, where management seeks to raise cash for expansion while retaining a

Golden rules of small/mid caps

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significant stake. The second is an attempt by private equity to unload a company they cannot trade sale or sell to other private equity funds.

Always remember... cash is king

Classic growth stocks are the engine of a successful small and mid-sized portfolio. These companies deliver strong, stable growth with high returns on capital and rising dividends. We like to find these opportunities often in unloved companies at low P/Es, but with great growth prospects.

Do not be afraid to turn your back to the crowd

If you want to lead the orchestra, you have to turn your back to the crowd. This could also be applied to equity investing. Often in the small-cap world, to find great ideas you have to look in out-of-favour areas.

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"Mid-caps have outperformed the FTSE 100 over almost every longer-term time period"