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What Donald Trump, rising interest rates and more will mean for global equities amid a growing investor appetite. 

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The past year in global equities has seen a surprising turn of events.

The lead up to 2016 was filled with pessimistic views from analysts, who believed much of the volatility from 2015 would creep into the new year.

And it did – at least for the first half of 2016. According to research from Colonial First State Global Asset Management, investor confidence in equities fell by a total of 29 per cent in the months between January and May last year.

But as 2017 begins to unfold, this sentiment begins to change, which is being driven by lukewarm returns from bond markets as well as increasing concentration risk in Australian equities, says Ben Smoker, chief executive for Saxo Capital Markets.

“Concentration risk stemming from widely-recognised overweight holding of Australian equites in the average investor portfolio is driving an increased appetite for global equities beyond our shores,” he says.

“Other factors driving interest are around negative headwinds sapping demand from alternative asset classes, such as continuing low yields in fixed income instruments, as well as the burgeoning property market, where prices continue to surpass record highs.”

Despite a growing interest from investors, not everyone agrees that now is a good time to invest in all global equity sectors.

This year is deemed to be unpredictable, with many expecting an impact from rising interest rates and US President Donald Trump’s proposed policies.

However, it is because of these influences that others believe the global equities market is on the verge of a rebound.

As PM Capital chief investment officer Paul Moore puts it, “The Trump election has marked the end of the post-GFC era.”

“People’s focus is now going to be on how strong growth will be, how much inflation will rise, how much interest rates will rise. While at the start of the year it was all about the opposite,” he says.

“It’s amazing how much has changed over the past year.”

The opportunities

According to Gaudi Schneider, senior quantitative strategist for digital wealth management provider Quantifeed, the opportunities in global equities currently lie in at the sector level.

He says 2016 has seen “surprising political change” in many parts of the world and global monetary policy is about to enter a new regime, which is largely supported by an increasingly healthy US economy.

“These changes affect individual sectors and companies in a different fashion. As a consequence, we have seen pronounced sector-rotation in the last weeks for 2016,” he says.

“Chances are that equity risk and opportunity continue to become more sector and country-specific than in the past. An investment approach focused on sectors and emerging trends might be advantageous in this environment.”

PM Capital’s Mr Moore would agree, and add that banking, housing and transport are his preferred sectors.

“Those companies that can either grow their earnings, or provide an above normal yield, are the companies that you want to focus on,” he says.

“We still think over the next 18 months there will be a sweet spot for US domestic banks driven by higher earnings revisions. If Trump’s corporate tax reduction reforms do get passed, we think there is also a 20 to 30 per cent upside there.”

Saxo, on the other hand, will be looking at China.

Mr Smoker says his firm has a “slightly controversial bullish call on China’s stock market seeing private consumption driving growth higher and generating solid returns from the Shanghai Composite index for 2017”.

Morningstar portfolio manager Bianca Rose says she currently favours emerging markets over developed markets, adding that the US is “expensive”.

“We have concerns there in terms of valuations and high profit margins, but there are some select areas in the developed markets that we do like,” she says.

“This includes European energy and we also like Japan. With Japan, it’s more of a corporate government story, so we feel like the profit margin could be maintained there and valuations are reasonable.”

Olivia Engel, head of active quantitative equity for State Street Global Advisors (SSGA), believes the global equities market still needs to see some further earnings growth to justify current prices.

However, there is opportunity in stock return dispersions, she says.

“That is, the difference between the strongest and weakest performers. If the dispersion is large, then the payoff from selecting the right stocks is large,” Ms Engel says.

“This is a good environment for stock picking and active management. Over the last two years, this dispersion of monthly returns is now around 1.5 times what it was two years ago.”

The Trump effect

Donald Trump’s election victory may have been unexpected, but it is already having an impact on the global equities market, says Greg Goodsell, global equity strategist at boutique fund manager 4D Infrastructure (4D).

He says markets are much higher than they were before November, and there has been shift in which stocks are doing well.

“Ever since Trump moved in you’ve seen equity markets rally,” he says.

“The stocks that have done well are the cyclical stocks. Bank stocks have done well so far because there is a perception that [Mr Trump] will wind back bank regulation.

“On the flip side, defensive stocks haven’t done as well and, similarly, the bonds market has been sold off.”

Wingate chief investment officer Chad Padowitz would agree that the immediate reaction from Trump’s election has been positive, although unsure if it will last.

“I think it has brought a little bit of needed change. He certainly brings some level of unpredictability and some policies are seen, at least in the short term, to be pro-growth, which I think the market has been searching for,” he says.

“But I’m not sure how long lasting that is. We certainly wouldn’t, and don’t, invest on those things. I think in the weeks and months to come, any Trump effect will die down substantially.”

That’s not what PM Capital’s Mr Moore believes. He thinks people have “totally misjudged” what has subsequently transpired from the Trump election.

“Trump wants to get rid of all disincentives for US companies to invest in America and get rid of all of the incentives to invest offshore,” Mr Moore says.

“Businesses have become so frustrated with the stagnation, and the fact that government has been all talk and no action, whereas now, they’ve got some pretty simple principles that are all based on infrastructure spending and border protection.”

He adds: “Interestingly, that frustration with stagnation and the lack of dealing with tax and regulatory issues is around the whole global economy. So Trump being elected and the implementation of his platform will lead to others following.

“Other jurisdictions will therefore have more confidence to take on [growth] programs.”

SSGA’s Ms Engel would note, however, that while there is a degree of optimism attached to Trump’s administration, there is still risk as well.

“Without a crystal ball, the best we can do right now is focus on finding companies for the portfolio that exhibit sustainable earnings growth, strong cashflow, a positive outlook, are high quality and can be bought at a reasonable price,” she says.

Rising interest rates

There is talk around rising interest rates in many parts the world, but perhaps the most anticipated hike is the US federal government’s.

SSGA’s Ms Engel says interest rates usually rise when there is recovery in economic growth, upward pressure on wages and low unemployment.

She says this is positive for equities in general.

“It will be risk for equities if inflation starts to get too strong and interest rates have to rise too fast,” she says.

“A steady moderation of interest rates to more normal levels will signal strength in the economy.”

Quantifeed’s Mr Schneider said one of the general expectations from rising interest rates is that banks will profit, while equities held largely for income generation will come under pressure from fixed income alternatives.

“Some sectors are less sensitive to interest rates and thrive on cyclical growth, like consumer stocks, or secular growth, like some technology companies,” he says.

Saxo’s Mr Smoker notes, however, that there was an “aggressive sell-off” in January 2016 following the US rates increase in December 2015.

Still, he does not expect the same reaction this year.

“This time around, there seems to be greater comfort and optimism around sustained growth in the world’s largest economy, despite the prospect of further rate increases into 2017,” Mr Smoker says.

The prospect of rising interest rates is also prompting investors to sell out of bonds and into equities, says 4D’s Mr Goodsell.

“In fact, you’re seeing a movement out of the bond market and into the equity market because there is this perception that you’re going to see a period of stronger growth and that’s going to help equities perform,” he says.

Rising interest rates is not the only factor pushing investors into global equities.

Quantifeed’s Mr Schneider says Australian investors are increasingly becoming aware of the diversification and opportunities offered by offshore stocks.

“While the Australian market offers good coverage of the materials sector and domestic financials, the technology sector – to give an example – only represents 1.2 per cent of the ASX 200,” he says.

“Investors looking to diversify into technology, or even into global trends like the rise of social media, might have to look abroad for suitable opportunities.”

The best vehicles for exposure

When it comes to which vehicle is best to gain global equity exposure, Saxo’s Mr Smoker says it all comes down to the understanding of the instrument.

“Direct investing in individual international equities has increased over the past 12 months,” he says.

“At Saxo, we have seen a gradual trend of investors seeking to own shares outright in household names, such as Apple, Google, Microsoft, Johnson & Johnson, HSBC, Deutsche Bank, etc.

“The ETF space is growing exponentially and remains a good low-cost way to invest in global equities for the time-poor investor.”

Quantifeed’s Mr Schneider believes separately managed accounts are good, as the investor is not impacted by other investors leaving and realising capital gains.

“The only tax realisation occurs when you sell out of your own holding of the underlying securities,” he says.

“This is important for global assets, as some unhedged investors may seek to realise gains on the back of combined asset and foreign exchange returns, while others may prefer to stay in the investment.”

Meanwhile, SSGA’s Ms Engel says index funds can offer diversified exposure to equities at a very low rate, while active funds can provide differentiated exposure and the benefit that they seek to outperform the indices.

“Currency exposure is an extra dimension to consider when investing offshore. Each investment vehicle should specify the currency management approach used,” she adds.

No matter the vehicle, however, 4D’s Mr Goodsell notes that global equities should be looked at as three- to five-year investments.

“What happens in the equity market tomorrow is anyone’s guess,” he says.

“You need to be investing with a medium-term time horizon in mind. I’d be very confident in saying that in five years’ time, equity markets will be higher than they are today.”

PM Capital’s Mr Moore would agree.

“When you’re investing in equities, it’s not a short-term commitment,” he says.

“If you want absolute certainty over a time period, you have to have cash or bonds. But provided you’re willing to invest over the longer term, our belief is that the best risk adjust return will come from equities.”

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What Donald Trump, rising interest rates and more will mean for global equities amid a growing investor appetite. 

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ifa quizzes a range of financial services specialists on how advice firms operating in the non-aligned space can embrace the shift towards goals-based advice.

Write comment (3 Comments) " ["fulltext"]=> string(4810) "

 

Jeff Thurecht, Evalesco Financial Services

"Embracing a shift to goals based advice entails getting to the core of what it is that we can really do for our clients. How can we use our experience, skills and knowledge to maximise the likelihood that our client is on the best path to achieving their goals?

"By choosing to have the conversations that others won’t, by really getting to the heart of what is important to our client, what are their fears and complexities, we become the trusted adviser and centre of our clients financial life. Allowing us to strengthen the relationship we have with our client.

"Non-aligned advice firms hold a significant competitive advantage in offering meaningful goals based advice because we do not have to deliver a product based outcome. Our clear role is to help the client to stay on course to achieve their goals."

Bridget Lamphee, Lamphee Financial Advisors

"A truly independent, non-aligned financial advisory firm can embrace the shift to goal-based from transaction-based advice since non-aligned advice firms are able to deliver targeted, holistic, completely independent and un-conflicted advice which is in the client’s best interests. By focusing on achieving the goals of the clients we remove any potential product bias.

"In contrast, financial advice provided by banks and insurance companies is inherently conflicted and tends to be transaction-based rather than goals-based.

"Many banks and insurance companies manage the investment options and/or insurances recommended. Banking staff push product suggesting hidden motives which are not client driven. In my opinion they offer a transaction-based solution, not goal-based and it is questionable as to whether the so called “advice” is in the best interests of the client."

Marc Bineham, Noall & Co

"As a profession, we have slowly moved from transactional to a goals-based relationship with our clients and not before time. With commission and margins being reduced or removed, firms can either be forced to change, or preferably embrace the change.

"It just makes sense though, as goals based advice ensures a stronger, more meaningful connection with your clients, where they see value and are willing to pay an appropriate fee.

"How to do this, to me you must start with the basics for building any new relationship.  As when talking to a prospective client, realise they are thinking just one simple question: Can I trust you?

"They are not thinking how smart you are or what products you can advise on, just whether I can trust and build a long-term relationship with you. So, you need to let them know what makes you tick, your ‘why’. Only then can you move to solution mode for their goals, with their trust. The final step is ensuring you back it all up with a great ongoing service offering so you are there for the journey to ensure your client has the best possible chance to reach their goals."

Shane Nicholas, Innate Financial Services Group

"I tend to think non-aligned advice firms are in a great position to embrace the shift towards goals-based advice and in fact I suspect most have been doing so for many years.

"In the non-aligned world there are limited restrictions or pressures from a parent company or dealer group and as such the barriers to have in-depth conversations with clients required to truly shift into goal based advice don’t exist.

"This is not to say for a second that aligned advisers don’t have these conversations however for us in the non-aligned land without the support from a larger group who often can assist with training and the like in this space, we have to continually ask ourselves the questions to the challenges and shifts in trends we see, such as goals-based advice, and from there develop ways to get better.

"To that end, we see real importance in delving into the context of the client rather than purely focusing on the content is one of the keys for our business to further embrace the shift to genuine goals-based advice."

 

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ifa quizzes a range of financial services specialists on how advice firms operating in the non-aligned space can embrace the shift towards goals-based advice.

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Financial services is one of the most targeted industries for cybercrime attacks across the globe. Ifa speaks to experts on how advisers can protect themselves.

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As businesses that deal with troves of sensitive data via technological devices and digital platforms, it is no surprise that the financial services industry has long been a hot target for cyber criminals.

Financial services is the third most cyber-attacked industry in the world, according to the 2016 IBM X-Force Cyber Security Intelligence Index.

As financial advice businesses increasingly rely on technology to drive operational efficiency, cyber security is becoming a top priority for the industry. History has shown that damage from cyber breaches ranges far beyond ransom payments and data loss, through to client litigation and reputational damage.

However, there are ways for financial advisers to protect themselves, cyber experts say, and there are steps advisers can take to build a stable business environment in an increasingly complex technological landscape.

Causes for concern

Partner at KPMG Forensic Stan Gallo says there are numerous reasons why financial advice businesses make profitable targets for cyber criminals.

“Small to medium (SME) businesses like some financial advice practices will not have the same levels of security as their larger colleagues,” Mr Gallo says.

“Planners will have a raft of personally identifiable information (PII) and other sensitive data that is extremely valuable to a hacker. Identity theft is still a critical issue, and financial planning businesses provide a valuable source of internal company data and employee information.

“Businesses who are linked to a larger organisation are also hot targets because they are usually the weaker links and act as an avenue for hackers to target a bigger business.”

Founder and director of Threat Intelligence and prominent Australian IT security figure, Ty Miller, says the most common type of attack used to compromise a business is a spear phishing attack.

“Unlike a phishing email, which might spam millions of people with a fake email pretending to be from the CBA for example, spear phishing is specifically designed to break into one particular organisation using detailed communication like a personalised email subject line. These kinds of attacks are very common attacks that often target SME businesses,” he says.

“Untraceable bitcoin ransoms demanded by a hacker can range from anywhere between 10 - 50 bitcoins ($10,000 - $50,000).”

As an increasing number of financial advice businesses move operations over to the cloud, Mr Miller says, “The biggest assumption made by businesses is that the cloud is secure.”

“In reality, cloud providers operate on what is called a ‘shared responsibility model’. They will protect their own systems, but it is up to the individual businesses to secure their systems and data,” he says.

“A lot of organisations don't realise this and they build all these systems in the cloud but won't take into account any security or very minimal security.

“Obviously this opens up opportunities for attacks like web application hacking, which is also common today.”

“We’re moving into this era where everything is interconnected: your laptop, your phone, your watch, your camera, your car, your microwave and fridge. All of these things are often connected to the internet and have really terrible security in place. Hackers can now access all of those devices by breaking into just one of them,” Mr Miller says

Distributed Denial of Service (DDoS) attacks are also extremely common in the banking and financial services sectors, according to the ACSC Cyber Security Report 2016.

“We’ve seen an increase in ransomware and extortion of companies as well as a rise in DDoS attacks - where hackers break into a device and gain access to a particular system and then flood an organisation with large amounts of traffic - effectively knocking them off the internet,” Mr Miller says.

There are typically four types of cyber threat actors, according to Mr Miller.

“You have your ‘script kiddies’ who are essentially a bunch of kids running around hacking into businesses for fun and trying to build a reputation with their friends,” he says.

“Then you have your ‘hacktivists’ who have an agenda, which might be to damage the reputation of a company.

“You then have organised cyber criminals who are trying to make a profit out of security breaches.

“The fourth category of cyber criminals are those that carry out state sponsored attacks - typically your government sponsored attacks.”

The consequences of cyber crime

With new disclosure laws working their way through Parliament it’s only a matter of time before businesses will have a legal obligation to publicly report cyber breaches and face the costs of reputational damage, Mr Gallo says.

“In terms of cost, it’s not just the initial data loss and consequent remediation costs – there is a range of other flow on of costs,” he says.

“If it gets out, even for a small business, that your organisation is not secure, that’s going to have a significant impact.

“You also have things like regulatory and legal issues. If the data that was breached was personally identifiable information or sensitive information then you may have regulatory obligations to disclose.

“You also have the possibility of clients taking legal action against the business if sensitive data relating to them has been exposed - so businesses need to consider the broader consequences.”

Becoming a ‘cyber-wise adviser’

Mr Gallo says the issue of cyber security is at the top of most businesses’ risk agendas, however there are problems turning knowledge about cyber security into action.

“A lot of organisations are still focused on cybercrime being an IT problem and it’s not,” he says.

“IT controls will help but they’re not infallible, and cyberattacks target end users so you need a security mindset culturally within the organisation - a human firewall.”

BDO national leader for cyber security Leon Fouche suggests that the first step for advice businesses is to carry out a risk assessment to understand the most valuable parts of a business and identify vulnerabilities.

“Then you need to do a proper assessment to determine how well the valuable areas are protected and what other protections you need to put in place,” he says.

“Because malware is deployed through phishing emails and infected websites - you need to conduct awareness training among your employees.

“Malware typically exploits outdated, unpatched software. Only 60 per cent of all organisations have proper patching in place, so if you have an outdated version of Windows or Adobe, you need to make sure your software is the latest version.

“Businesses dealing with third parties, like an email provider or cloud service, should request evidence that the external provider has tested their security and get a clear understanding of what risks are involved in that environment.”

“It might sound quite daunting for an organisation but due to the nature of our interconnected world, businesses can no longer ignore the fact that they're going to be attacked,” Mr Fouche says.

According to Mr Miller, the costs for a risk assessment and receiving initial visibility on business cyber vulnerabilities can range between $10,000 and $20,000.

For advice businesses without that kind of budget, Mr Miller says the best place to start is with employees.

“The most common way that organisations are breached is through their employees,” he says.

“Make sure that you lock down your laptops and you have all your different security controls in place - whether it’s antivirus programs or whether you keep patching your systems regularly with updated software.”

“The next thing would be to make sure that anything exposed to the internet actually has security controls in place that will detect and prevent attacks proactively.

“Businesses can also implement network segmentation within their environment that acts to contain network security breaches so that if you do get breached, the breach does not spread throughout your whole organisation.”

“A really good place to start, no matter what size your business, is to have a look at the information that is made available by the federal government Mr Gallo suggests.

“The Australian Signals Directorate is free and they publish mitigation strategies to target cyber-attacks. According to the government website, if a business implements the top four strategies it will mitigate in excess of 80 per cent of common cyber attacks,” he says.

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Financial services is one of the most targeted industries for cybercrime attacks across the globe. Ifa speaks to experts on how advisers can protect themselves.

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The managing director of Atlas Wealth Management, Brett Evans, tells ifa how he drew from his own upbringing in identifying Aussie expatriates as a lucrative area in the advice market.

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Even as a child, Atlas Wealth Management managing director, Brett Evans, was always travelling.

Born in Newcastle, NSW, Mr Evans moved to Tucson, Arizona in the US at six-months old due to his father’s role in the air force.

He lived there for a number of years before moving back to Newcastle. His father then found a job as a pilot with Cathay Pacific.

“In the mid ‘80s, we moved to Hong Kong and pretty much lived in Hong Kong and commuted back and forth at boarding school until around ’97,” he says.

By virtue of his expat background, Mr Evans says he always has friends and colleagues asking him for financial advice.

“In 2011, I said, ‘There is a definite demand for this’,” he says.

“I could see regulation and compliance escalating in the expat space, and also the complexity of managing expat finances increasing as well, too.”

While Mr Evans says he always knew that that the expat market was incredibly exciting, he also recognised it as underserviced.

“So I did a bit of market research, then realised that no-one was doing it on a full-time basis, and doing it to a level that I generally tend to execute on any sort of project I do, and just went all in and created a very niche offering,” he says.

“But when I say niche, there's a million Australian expats overseas, so it's not a small market but it's a very refined market, I guess you could say.”

Despite having to engage with a range of clients under different jurisdictional regulations, Mr Evans says the firm operates on a non-discretionary basis, and that everything done with their clients is at face value.

“We reach out to our clients and we communicate every single recommendation with our clients when it comes to managing those portfolios,” he says.

“And clients love it because it's regular communication. We're talking to our clients quite frequently.

“It doesn't matter whether you're in New York, Shanghai or Sydney. We're talking to all our clients at the same frequency.”

Communicating with clients

Formulating and effective method of client communication is one of the obvious challenges with having a client base spread all over the world.

For Mr Evans, a combination of Skype and email does the job.

“We use a combination of both of those and it's great because a lot of our clients don't have the benefit of being able to come in to our office because they're overseas,” he says.

Mr Evans says he uses email for general commentary pieces, mainly due to time zone differences.

“[A client] might have a question at two o'clock in the afternoon, their time, which is four o'clock in the morning our time,” he says.

“It's great, because they can fire a question off. I wake up, come in to work, answer the question, fire it back, they wake up and there's the answer for them.”

For more high-level, technical client conversations, Mr Evans says it is easier to conduct those on Skype.

“Skype's great, because we can run through a Statement of Advice in ten minutes on Skype,” he says.

“We can have those more 'gritty' conversations on Skype, whereas on email it would be a lot of going back and forth.

“It's important for us to have a personal representation and a personal relationship with our clients, and videos do that very effectively.”

Eyeing further growth

As for Atlas’ goals moving forward, Mr Evans says he is taking “a two-pronged approach” to recruiting new advisers – recruiting both locally and internationally.

Further, he says the firm is in the process of talking to Aussie advisers already overseas about coming on board.

“We've also talked to Australian advisers who are looking at moving overseas to work in the expat space,” Mr Evans says.

“We're also probably in the new year going to look at putting more advisers on locally as well just to manage the amount of demand we've had for our services.”

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The managing director of Atlas Wealth Management, Brett Evans, tells ifa how he drew from his own upbringing in identifying Aussie expatriates as a lucrative area in the advice market.

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