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Systemic risk is echoing 2007

P3OPPORTUNITIES IN A

REFORMING JAPAN

P5VALUING AMAZON'S

'HYPER-GROWTH'

P6THE ERA OF PROFITS

WITH PRINCIPLES

As risks to the global economy increase, T. Rowe Price's head of international fixed income Arif Husain warns investors must be vigilant (page 2)

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Arif HusainT. Rowe Price

isks to the global economy are building. An unpredictable political

environment in the US, the possibility of a slowdown in China and the looming prospect of an end to the long period of ultra-accommodative monetary policy are among numerous potential triggers of a market correction.

Cycles begin and end because of triggers. In our view, the number of potential triggers we are seeing is reminiscent of the lead-up to the financial crisis.

Global politics is highly unpredictable today. The rise of anti-establishment, anti-immigration sentiment in parts of the world has led to some surprising outcomes, including Brexit and Donald Trump’s victory.

The UK is currently trying to negotiate Brexit terms with a severely weakened government, while in the US there is doubt whether Trump can implement his proposed domestic agenda. However, Trump arguably poses more of a risk on the international stage, where he faces fewer checks and balances.

Elsewhere, China is a potential risk the market seems too complacent about. Sentiment

towards China tends to be herd-like: one moment everybody is crowding onto one side of the boat; next the other side.

While global growth is set to rise to 3.4% this year and 3.6% in 2018, we believe this is due at least in part to China’s February 2016 stimulus. The cause for concern now is that China is applying the brakes, with the PBoC raising short-term rates three times already this year. If we accept the world’s recent spurt can be traced back to China’s stimulus, we should be concerned it is being taken away.

But it is also not the only tightening central bank. The Fed has begun, while the ECB and the BoE look set to follow this year. Even the BoJ has tentatively discussed ending QE. Combined, these tightening moves could lead to a spike in yields, potentially resulting in a wider correction.

The prospect of tightening, combined with political uncertainty in the US and a possible China slowdown, mean the overall level of systematic risk in the global economy is very high today – possibly as high as it was in 2007 before the crisis. Investors must remain vigilant.

Systemic risk today echoes 2007

anlam FOUR, the boutique investment manager

of the Sanlam Group, has boosted the team behind its strongly-performing Strategic Bond Fund.

Francois Kotze, who joins Sanlam FOUR from Rathbone Brothers, has been named as assistant manager alongside lead manager Craig Veysey, who has run the Fund since launch in March 2012. The team also includes macro analyst Matthew Brittain, who joined in 2015.

The Fund delivered a 15.2% return over one year to 30 June 2017, against 6.8% for the IA £ Strategic Bond sector, according to Trustnet. Over three years, the Fund delivered a return of 27.6%, versus 12.6% for the IA sector. Over five years, the Fund returned 46.7%, against 30.2% for the sector.

"We are pleased to add Francois to our Strategic Bond Fund team. His addition further boosts our ability to seek out undervalued opportunities, primarily within the higher credit quality bond universe," Veysey says.

"When we launched the Fund more than five years ago we understood there was an opportunity to offer investors a differentiated product – offering preservation of capital and an attractive yield, which can be delivered on a monthly basis. We are glad to have delivered on this objective over the past five years."

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Sanlam FOUR boosts Strategic Bond Fund team

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"The number of potential triggers we are seeing is reminiscent of the lead-up to the financial crisis"

Jeremy LangArdevora

Archibald CiganerT. Rowe Price

Joel Le SauxSYZ

apan has always been an unusual region in terms

of management behaviour – where aspects such as social responsibility supersede any ambition to achieve profitability.

Status is also a major factor in Japan, with many examples in recent decades of management prioritising empire building.

But over the last six months we have seen evidence of change and a reshuffling of priorities.

apan has seen transformative change in its corporate

governance structures over the last few years, with the adoption of its Corporate Governance Code in June 2015.

New dynamics, in areas such as disclosures and appointment of external directors, are cultivating a more shareholder-friendly environment. However, while these improvements are encouraging, investors must

he instance of companies defying the sceptics by

transforming practices and governance standards is growing.

This should help to deliver profit growth and generate shareholder returns. The volume of buybacks is increasing, while M&A activity is slowly emerging. Where implemented effectively, we expect transformational actions to be rewarded through higher valuations.

Some Japanese companies are finally responding to efforts from PM Abe, who is trying to undertake corporate governance reform and create an improved shareholder-friendly culture.

But not all areas are responding. We have yet to see any evidence of change in the conglomerates, but change is occurring in mid-caps, those operating simpler, more ‘Western’, business models.

understand the context: this is a long-term process in a country with an engrained state-influenced corporate culture.

A tailwind for the improving outlook has also been the increasing influence of the GPIF. As it has increased its holdings in Japan’s equity market, it has heighted scrutiny of shareholder RoE. It is boosting dividend growth and buybacks, powering stronger long-term total returns.

We firmly believe the valuation case for Japan still holds and corporate earnings growth is likely to exceed global peers.

Macro data is improving and as unemployment falls, we are positioned to benefit from labour shortages through our investment in staffing and work-related benefits companies. We also remain upbeat on stocks central to Japan’s evolution, including those in IT and machinery.

"The last six months we have seen evidence of change and a reshuffling of priorities"

"It is a long-term process in a country with an engrained state-influenced culture"

"The valuation case for Japan still holds and earnings growth is likely to exceed global peers"

Opportunities in a reforming Japan

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Geir LodeHermes

ver the last two decades, certain technology companies have

transformed the way consumers and companies behave.

According to historic metrics like P/B, these behemoths look vastly overpriced, yet it would appear growth prospects of these monopolies represent valuable investment opportunities.

Amazon is a clear example. It has changed the way we live – with innovations like the Kindle, Prime and now Echo. Moreover, It has also challenged accepted practices by offering a retail platform for third-party suppliers and by creating a new standard in logistics. The breadth of Amazon means it cannot simply be considered a retail business.

This multi-faceted model allows Amazon to continuously innovate, providing strong future growth prospects. Instead of emphasising earnings, it has pursued revenue growth and significant re-investment in order

to consolidate positions. This has been largely successful.

While there have been some mistakes, the sheer scale of the company means these have been absorbed relatively painlessly. All of these factors combine to create expected annual revenue growth of roughly 20%, a healthy balance sheet and phenomenal sentiment.

Although Amazon's been successful, its decision to pursue this model has impacted backward-looking metrics. As stated, traditional measures like P/B ratio make Amazon look very expensive, but it fails to take into account its growth potential.

In order to fully account for potential growth, it is necessary to value Amazon and similar businesses using our 'hyper-growth' model. This model places greater emphasis on forward expectations and sentiment, to more accurately track the likely direction of a share price. Amazon is the textbook example.

The 'hyper-growth' of Amazon

euberger Berman has added to its China equity

capabilities with portfolio manager Bin Yu joining the group.

Yu brings with him a team of four research analysts, all from CloudRidge Capital, an investment management firm he founded in 2014.

The team, located in Hong Kong and Beijing, brings strong local expertise and experience in both the H and A-share markets – as well as a track record of outperformance. Its long-term, high conviction, value oriented investment approach is grounded in fundamental research and looks to capitalise on sustainable trends.

"I am excited to join Neuberger Berman as Chinese equities become increasingly integrated in global investor portfolios," Yu says. "My team and I have worked to build our institutional investment process and record, and as we approach our three-year anniversary we look forward to joining a firm with the depth and resources of Neuberger Berman."

Joseph Amato, president and CIO at Neuberger Berman, adds: "We are excited about extending our investment capabilities in China – a large and increasingly important equity market. Bin's approach is grounded in fundamental research and we expect him to be a great fit in the Neuberger Berman culture."

Neuberger adds to China equity capabilities

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"The breadth of Amazon means it cannot simply be considered a retail business"

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Roberto MagnatantiniSYZ

Rogier QuirijnsCohen & Steers

t the 87th Geneva Auto Show, we came face-to-face with a number of

original equipment manufacturers (OEMs).

While the car market has growth potential, due largely to technical innovations in the electric and autonomous car spaces, it is hard for traditional manufacturers to access these opportunities as technology companies enter the fray.

While OEMs currently have low valuations, caution is required due to the challenges facing the space. Similarly, the high valuations of the car industry's disruptors should also concern investors.

Instead, investors should look across the spectrum for those with competitive advantages.

e have held a positive view of UK property in recent

years, as investors seem to have consistently underestimated the market's growth potential.

But even before the referendum last year, the economy was shifting gears, prompting us to adjust our UK exposure away from more economically sensitive real estate.

Since voting to leave the EU, the UK economy has faced even more pressure. The declining pound and rising cost of imports, the prospect of businesses departing, general uncertainty surrounding Brexit and anticipated job losses – particularly in the City – all suggest rising vacancies for the major UK office, retail and

Among the OEMs, Subaru's niche positioning and unparalleled combination of quality and price is attractive. Ferrari's brand and strategy of undersupplying demand has generated unrivalled pricing power. Opportunities can also arise from restructuring and M&A, like at Peugeot.

Parts suppliers are particularly appealing. Companies like Plastic Omnium, Valeo and Nexteer sell to a range of OEMs, making revenues more resilient.

The disruptors are hardest to value. A loss-making company like Tesla sells few units and will face significant future competition. However, Tesla must be valued on the basis of its disruptive potential and it has a clear head start. While the risk is high, so is the potential reward.

residential sectors. Compounding the challenge is the high supply of new offices coming to market.

We still see bright spots, especially in more defensive sectors such as self-storage, student housing and healthcare, which should be more resilient. But for UK investors, we believe the case for diversifying globally is increasing. As the UK faces headwinds, other major markets are seeing stronger operating fundamentals amid accelerating economic growth and favourable monetary conditions.

For example, we hold a constructive view of Continental Europe's property markets. In contrast to the UK, economic growth in the region is expected to remain healthy, which should bolster real estate demand.

The opportunity in autos

Look global for property

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Hermes publishes modern slavery statement

"Tesla must be valued on its disruptive potential"

"The case for diversifying globally is increasing"

ermes Investment Management is

committed to being a responsible business and endeavours to uphold high ethical principles and to respect human rights. As such, it has published its Modern Slavery Statement, in accordance with the Modern Slavery Act 2015.

This has provided an opportunity for Hermes to review the way it operates its own business, together with the way in which it interacts with others, including clients and suppliers. Moreover, Hermes has also considered the area where it has the ability to make the most impact – its investments.

Hermes already has a number of policies and procedures in place in an effort to ensure it acts as a transparent, responsible and ethical business. These policies and procedures also support its efforts to address the risks of engaging in modern slavery and human trafficking.

"Hermes is strongly opposed to slavery and human trafficking. As a responsible business, we are focussed on helping people invest better, retire better and create a better society for all," Hermes CEO Saker Nusseibeh says.

"Our activities will have impacts on the world in which our beneficiaries live and work today, as well as the one in which they will retire into tomorrow."

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

David OsfieldEdenTree

he active management industry is under immense scrutiny. Cost pressures

and the rise of smart beta are pushing closet trackers to the brink of extinction. In the forging of the new investment landscape, a narrow seam of active strategies is coming to the surface.

The industry is expected to coalesce around a number of elite managers delivering consistent long-term outperformance; a result of well-defined and repeatable processes. However, there is another evolutionary and complementary force at work that aims to provide a source of long-term alpha: the ascent of responsible investing.

Originally seen as niche, responsible investment is not just in the ascendancy, it is becoming mainstream. Achieving superior performance through responsible investment requires a mind-set shift beyond merely being UNPRI signatories. Institutions must move beyond box-ticking and focus on investing in companies fully embracing sustainability. This is the essence of delivering profits with principles.

Responsible investing embodies the very essence of long-term active management. We believe we can identify sustainable multi-year trends with greater certainty and predictability, as opposed to forecasting short-term global macro events. We see global thematic shifts around several sustainable outcomes, including

health and wellness, sustainable consumption, energy efficiency and environmental solutions, training and educational shifts and sustainable infrastructure.

Investing with this view is supported by a growing body of research. Studies indicate companies outperforming on ESG not only reduce risk through operational management, but also achieve superior revenue and profit growth.

Due to a varying adoption of ESG screening across the globe, we see differing trends in terms of rewarding companies for exhibiting positive sustainable characteristics. In Europe, where the majority of investors deploy a degree of ESG screening, the sustainable re-rating trend is well-entrenched. However, in Asia, where less than 5% of assets are managed with an element of ESG screening, stocks are

The profits with principles era

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less recognised for sustainable characteristics and this demand profile has not manifested in a higher valuation. In Asia, this provides a significant opportunity for long-term sustainable investors. The US lies somewhere between Europe and Asia in terms of ESG penetration.

In a changing world, markets have realised the importance of factoring in ESG risk into analysis. The active edge comes when you combine ESG and fundamental analysis, experienced insight into sustainable themes, a disciplined valuation framework and conviction stockpicking. The resulting portfolio's measurement of success is the creation of mutually beneficial arrangements for investors, in the form of superior index-beating long-term returns, and for society overall. An era of profits with principles beckons.

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"Originally seen as niche, responsible investment is becoming mainstream"