BNP Paribas Asset Management

This week’s chart of the week comes from the 85th annual report of the Bank for International Settlements (BIS), an institution which acts as a central bank for the central banks.

One-third of the food the world produces is wasted. In Europe, 50% of the food produced goes uneaten. Each year, the 27 European Union member states generate over 89 million tonnes of food waste – that’s 179 kilos per person. According to the EU, by 2020 this figure will have risen by 40% to 126 million tonnes. Worldwide, the figures are alarming too. One-third of the world’s food is lost or wasted at a cost of some USD 1 trillion.

As much as our investment strategy group would like to stop talking about the situation in Greece, it still garners some of our attention. Alexis Tsipras seems to be taking Oscar Wilde to heart, wanting us to continue talking about him and Greece when in fact it should have little to do with our thoughts on investment positioning. Much like a car accident in the other lane on the highway, we cannot seem to look away. Even though we know we should keep our eyes on our side of the road and focus on our driving, we cannot help but look at the wreck.

In the first half of 2015, investors faced a favourable environment, with crude oil prices far below the USD 110 a barrel level to many of us had become accustomed, a euro/US dollar exchange rate of USD 1.05 to USD 1.15 and – last but certainly not least – the announcement in January by the ECB of a full-blown programme of asset purchases (‘quantitative easing’). Reflecting the significance of this macroeconomic news (and the long-awaited signs of an economic recovery), valuations in many asset markets rose to historic highs – if they didn’t exceed them!

The idea that outperformance comes more easily to a fund manager managing portfolios with a larger Active Share is in fact the result of small-capitalisation biases. When such biases are excluded, Active Share has no predictive value for a manager’s performance. The size of a portfolio’s Active Share depends heavily on the composition and structure of the fund’s benchmark and a persistently large Active Share may reflect a strong bias to small-cap stocks or an excessive number of non-benchmark assets in a portfolio. We believe Active Share tells investors nothing about the systematic and unsystematic exposures in a portfolio. It should therefore be used in conjunction with other indicators.

The rally that took yields on 10-year German sovereign bonds down to 0.04% on 17 April has since turned into a full scale rout. Data on the level of inflation in the eurozone, released in the first week of June 2015, has not helped matters. The annual rate of inflation in the eurozone was 0.3% in May 2015, up from 0.0% in April according to the flash estimate published on 2 June 2015 by Eurostat (the European Union’s statistical office). Exhibit 1 below illustrates how the headline inflation rate has bounced backed into positive territory since the start of 2015.

Before 17 November 2014, foreign investors only had exposure to Chinese equities via Chinese listings on the Hong Kong Stock Exchange. Only institutional investors were given access to the Shanghai and Shenzhen stock exchanges via the Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) programmes. For the average onshore retail investor, there was no option to own investments outside of China except through onshore Qualified Domestic Institutional Investor (QDII) products.

In the first two weeks of May 2015 yields of US Treasuries and German Bunds have showed some tentative signs of stabilization after rising sharply in the second half of April.

We believe a favourable combination of external and domestic factors, coupled with relative attractive valuations, have put Asian equities in a “sweet spot”. With the Standard & Poor’s 500 and Nasdaq indices breaching all-time high levels pushing P/E multiples for the MSCI United States index to above the 5-year historic average, some investors are likely to re-think their portfolio in search of more attractively valued investments.

Assets managed by official institutions have risen significantly in recent years making them a powerful force in financial markets. A recent report highlights the fact that in the face of sub-optimal returns from traditional investment strategies, official institutions are increasingly diversifying their holdings into riskier assets.