23 January 2020
James Moir
Analyst, UK Growth
The UK market is too focused on its rear-view mirror
UK domestics have had a weaker start to 2020, said James Moir, Equities Analyst, UK Growth. The JPM Domestic Exposure Index is down 1.5% while the JPM UK Exporters Index is up 1.3% since the turn of the year. For comparison, the FTSE 250 Index is also down 0.2% while the FTSE 100 Index is up 1.5%.
James said that one of the key drivers has been a slew of mostly negative macro data. The market is now pricing in a 60% expectation of a cut to base interest rates at the next Monetary Policy Committee meeting on 30th January.
Recently, however, there has been strong figures from the housebuilders sector. The RICS Residential Market Survey saw more respondents reporting increased buyer interest for the first time in seven months, and at the greatest level since the Brexit referendum. In addition, Rightmove has reported that the average price of new properties coming onto its platform increased by 2.3% month-on-month.
James thinks that the market’s pricing in of a base rate cut is overly focused on data from the pre-election period, and overlooks a strong increase of confidence in the UK since then.
The balance of survey respondents reporting higher buyer interest is the highest since the Brexit referendum
Source: Bloomberg, Royal Institution of Chartered Surveyors, December 2019 RICS Residential Market Survey
Antoine Hucher
Equities Analyst
Three trends set to shake up the European payments sector
Three trends could change the competitive dynamics of the European payments sector, said Antoine Hucher, Equities Analyst, Global.
- The acceleration in innovation: Over the past two decades, innovation in the payments sector was mainly driven by e-commerce. Antoine believes innovation is now also spreading to the high street, creating an opening for new players.
- Regulation: The second European Payment Services Directive takes effect in the next 12-18 months. The regulation aims to foster competition and innovation. Antoine believes it is likely to create additional pressure for traditional payment providers – notably banks – on two fronts. First, they will need to invest more in technology, and this could put their profitability under pressure. Second, they will face competition from new financial services providers – notably the fintech start-ups.
- Consolidation (in Europe): There has already been a lot of M&A in the US payments sector last year, all of which provided good returns to investors. Unlike the US, the European payment sector remains fragmented and Antoine expects consolidation to accelerate in the future. In particular, banks could be tempted to sell their payments assets.
Antoine believes the rise of cashless and digital/online transactions are likely to be among the key drivers of returns in the financials sector. Payments are at the forefront of this structural change and Jupiter’s Financials strategy currently has around ~30% of assets allocated to this theme.
Paul Pulickal
Credit Analyst, Fixed Income
Can financial credit continue its strong run in 2020?
Financial credit had a pretty strong year in 2019, said Paul Pulickal, Credit Analyst, Fixed Income. The Bank of America Merrill Lynch Contingent Capital Index that tracks contingent convertibles (also known as Additional Tier 1 securities or ‘CoCos’) had a total return of around 18%.
There were three main drivers behind this stellar performance. Firstly, there was the decline of euro area government bond yields throughout the year: the German 10-year bund yield started the year at around +20 basis points and ending the year at around -20 basis points. The European Central Bank also delivered a supportive rate cut in September, restarted its quantitative easing program, extended the TLTRO funding scheme for banks and introduced deposit tiering which tries to offset some of the effects of negative interest rates on bank deposits.
Secondly, European bank fundamentals continued to improve, with banks generally deleveraging their balance sheets and increasing capital levels. For example, total capital in 2015 was 12.7% and it currently stands at 18.0%. Non-performing loans over the same period decreased from 7.5% to 3.4%. Finally, the outcome of the UK general election was very positive for UK banks that had lagged their European counterparts heading into the summer. As it became more apparent that Boris Johnson would win the election, investors that may have shunned the space came back in in a major way, and spreads tightened around 200 basis points from the end of the summer through to year end.
But can the sector emulate that kind of performance this year? Paul says it may be unlikely. There has been a flood of new issuance so far this year (€45 billion), which isn’t surprising given the favourable financing environment. Major deals have been heavily oversubscribed, which have allowed banks to issue at levels that are perhaps not reflective of the real risk of the underlying bank or security.
Colin Croft
Fund Manager, Emerging Markets
Identifying bright spots in Latin America
Latin America’s growth rate is expected to accelerate by roughly 1% this year. However, Colin Croft, Fund Manager, Emerging Markets, is mindful that similar expectations for last year did not materialise. In hindsight that is unsurprising, given that in 2019 growth in the region was impacted by the trade war and a global economic slowdown, as well as country-specific factors.
In Mexico, politics and the fight against corruption, often through quite arbitrary methods, have undermined the confidence of investors. For now, Colin does not think there’s any sign of this changing because President AMLO’s ratings are still very high. Colin expects to see continued weakness in markets, particularly in the construction sector, as well as in business investment. There are, however, some bright spots: unemployment in Mexico is below 4% and real wages are growing at 3%. There aren’t really any problems with credit quality or loan growth either, with mortgages growing at high single digits.
It’s a rosier picture in Brazil. Several positive reforms have been introduced there, fiscal policy is under control, and interest rates have come down significantly. Corruption in the country has been cleaned up significantly, especially compared to many countries elsewhere in the region. Brazilian stocks rose around 20% last year, helped by a switch from fixed income into equities by Brazilian pension funds. Their allocation to equities is still relatively low in an historical context, though, and Colin thinks there are likely to be foreign inflows too. Relative to bond yields, valuations are not very expensive, and have risen from a very low base due to Brazil’s severe recession of recent years. Colin believes it’s still possible to find attractive opportunities in Brazil, but you have to be selective.
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