Research and Commentray

A Clear Perspective and Point of View

FIS Group Global Market Outlook


Big Winners in the Neglected Frontier Universe

Our Q1 2017 Global Market Outlook, Who Knows? Navigating the Known Knowns and Underappreciated Knowns In Current Market Consensus, examines vulnerabilities in the bullish consensus narrative underpinning global equity markets. The key vulnerabilities discussed are U.S. dollar appreciation, elevated U.S. Small Cap valuations, questionable assumptions behind the bullish narrative on EM equities, as well as gathering geopolitical risks.

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Q1 2017: Who Knows? Navigating the Known Knowns and Underappreciated Knowns In Current Market Consensus

Our Q1 2017 Global Market Outlook, Who Knows? Navigating the Known Knowns and Underappreciated Knowns In Current Market Consensus, examines vulnerabilities in the bullish consensus narrative underpinning global equity markets. The key vulnerabilities discussed are U.S. dollar appreciation, elevated U.S. Small Cap valuations, questionable assumptions behind the bullish narrative on EM equities, as well as gathering geopolitical risks.

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Goldilocks is On life Support: Gathering Policy Headwinds and Monetary Policy Exhaustion

Our outlook looks at global equity markets, earnings, emerging markets, and currencies through the end of the year in the face of another interest rate hike in December and impending political events in the U.S. and Europe. We also evaluate the longer term macroeconomic and investment strategy implications of impending monetary policy exhaustion and resurgent populism in a piece entitled: Goldilocks is on Life Support: Investment Strategy in Light of Monetary Policy Exhaustion and Resurgent Populism

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The Revenge Of The Precariat Over Davos Man

The turmoil that erupted after the June 23rd Brexit referendum has purportedly prompted many people who voted “Leave” to rethink their decision. New PM Theresa May has stated that “Brexit means Brexit,” dimming hopes that the referendum’s results would be reversed; but also inferring that Article 50 will not be invoked until next year. May has also appointed a number of prominent Brexit supporters to her cabinet,
with David Davis heading the new “Brexit Ministry” and Boris Johnson installed as the Foreign Secretary. These pronouncements and appointments could indicate that she has succumbed to Brexit (despite her earlier opposition) or it could be a shrewd political strategy to allow its economic and political consequences to hit home with voters and force her former rivals to “own” the fallout if and when the public turns on Brexit and its proponents. If future opinion polls show that a decisive plurality of UK voters favor remaining in the EU, this would give the British government the excuse necessary to call for a second plebiscite.

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Q1 2016 – Equities Elude The Four Horsemen…Again!

The upsurge in equity prices that started on March 10, 2009 has been among the most despised and distrusted bullmarkets of all time. For each of its seven years, newfound horror stories materialized to interrupt the bull trend with corrections roughly as large and as scary as the one which began this year. In 2009 the S&P 500, still reeling from the aftermath of the GFC, declined by 25% through March 9, 2009. In 2010, fear over the U.S. deficit set off a -15 % correction. In 2011, panic over a U.S. Treasury default sent the S&P down
-19.5%. In 2012, the euro crisis caused two corrections, -10% in the spring and then -8% in the autumn. In 2013, the panic was about Federal Reserve tapering and a U.S. government shutdown, although these only hit the S&P by -6%. In 2014, carnage in the Middle East and Ukraine catalyzed an -8% setback. And last summer, policy blunders in China caused a correction of -12%. Importantly, each of these corrections turned out to be a buying opportunity.

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Outlook For Frontier Markets

Similar to most other major global markets, 2015 was also largely a year to forget on the frontier. The few bright spots of meaningfully positive local returns (Argentina and Romania) were largely overwhelmed by further currency weakness relative to the U.S. Dollar. Looking ahead for 2016, we see a global sense of skittishness and thin growth leadership as extending to the frontier markets as well, though their lesser lack of integration and correlation with global markets will separate some markets more than others. To that end, the asset concentration within the small universe of global frontier markets managers is our top concern across frontier markets for 2016. Thus at the broadest level, we recommend underweighting global frontier markets vis a vis other clearer opportunities in Japanese equities, but see some genuine opportunities in the frontier universe relative to emerging markets. Otherwise our views here largely reflect our recommendations for medium-term allocations within the frontier universe. As in emerging markets, we expect U.S. dollar strength to continue, and indeed may even be exacerbated by local currency weakness in selected markets (e.g. Nigeria). Saudi Arabia and the rest of the GCC are making headlines for their regional confrontations, both hot and cold, fiscal struggles and influence in the oil market, but also for some peculiar reforms to the stock market. Nigeria is both cheap and expensive in different parts, and could be poised for a truly volatile 2016. Indeed much of the big African stocks seem expensive compared to their European, Asian, or Latin American counterparts, and these stocks seem poised at best for stagnation in 2016 and possibly a significant de-rating. But the universe is not without its bright spots and we see very positive macro fundamentals and micro market catalysts in Argentina, Vietnam, and Frontier Europe (ex Kazakhstan).

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2015 In Review – A Forgettable Year

For the most part, 2015 was a forgettable year as growth anemia and disappointment, enduring characteristics of the post GFC period, continued. At 3.1%, global growth once again underperformed IMF forecasts from October 2014 with most of the disappointment emanating from the Emerging world that is most exposed to the slowdown in China and the end of the commodity super-cycle. With notable exceptions of commodity producers such as Brazil and South Africa, inflation also underperformed the 2014 forecast, underpinned primarily by weak demand and the precipitous decline in commodity prices.

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Market Insights Alert

Papers: FIS Group Proprietary Research


Momentum: Beware of the Double-Edged Sword

This paper analyzes situations where momentum can be either a significant tailwind or exacerbate risks and undermine portfolio diversification. The Special Report looks at historical data and focuses on four key points.

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If You Believe In Falling Basic Health Care Costs Go Long…Yemen?!?

At our just concluded 20th anniversary FIS investment conference in Philadelphia, we were privileged to have a guest speaker Professor Vivek Wadhwa. Prof. Wadhwa is an entrepreneur, author, and researcher at Carnegie Mellon University focused on the implications of the present revolutions in various aspects of technological innovation. In his entertaining and insightful address, Prof. Wadhwa profiled the radical advances and efficiencies in basic health care that are expected to dramatically drive down the costs of basic health care worldwide.1 These include technologies that are already available such as EKGs, glucose tests, HIV, syphilis, eye exams, and more from affordable smartphone assisted devices. On the market in India, but still yet to be deployed elsewhere, is the Swasthya Slate, a health tablet that can be used by any literate nurse to run dozens of diagnostic tests for pennies on the dollar that used to require hundreds if not thousands of dollars each and require long journeys to specific health facilities and onsite laboratories. Together with the myriad of other innovations including telemedicine and others is the prospect of substantially more affordable levels of basic health care for billions of consumers worldwide.

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Beyond Brexit

Last night’s Brexit vote reiterated just how out of touch financial and political elites in the UK are with the mass population. Fears of similar class polarization now cast their gaze on the recent rise of similar isolationist political movements elsewhere in Europe and the US with newfound gravity. While the short and intermediate impact could tip the UK into a recession, the most likely second order effect will be to hike premiums demanded for European risk assets under fear of rising Euroscepticism. Euro area capital investment, which had just begun to show some sign of life would likely be also be discouraged by exit risk uncertainty. US stocks will probably act as a safe haven for equity investors due to the safety of the dollar, a lower likelihood of US rate hikes and the prospect that earnings will fall less than in other economies. Additionally, exports to the UK and the Eurozone account for only 0.4% and 1.6% of US GDP respectively and the US dollar has risen by only 1.4% against the euro. That’s not going to make a huge difference on its own, though we have to expect a serious drop in business and consumer confidence across Europe, so demand for US exports (14% of total US exports) will fall. Absent aggressive BOJ action, yen strength will continue to challenge Japanese equities. Emerging markets may end up benefiting from a gentler pace of rate rises by the Fed, but they could suffer if the dollar continues to climb.

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A Short Note On Brazil’S House Of Cards

Brazilians are famous (or at least stereotyped) for their supposedly laid back “tropical” attitude towards life. Generations of foreign visitors smitten by the profound beauty and docility of Brazil’s natural landscape have marveled at “the Brazilian way” (o jeitinho brasileiro) of managing what to outsiders appears to be a relaxed, happy-go-lucky life amid structural chaos, bureaucratic ineptitude, and economic disarray. The old and famous Brazilian joke cited above pokes fun at these seeming contradictions.

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What Is Really Happening In China? — A Late-Year Revisit And Local Insights From Our China Trip

Since mid-June this year, the wild ride in the Chinese A-share stock market along with deteriorating economic and profit data have unnerved many global investors. Against this backdrop, the Chinese government’s remarkably stable GDP growth reports of 7% for Q2 and 6.9% for Q3 have engendered increasing concern over the credibility of official figures. In an attempt to counter this slowdown, the government has rolled out a series of measures designed to stimulate demand. It has cut interest rates and reduced bank reserve requirements seven times this year, released funds for infrastructure investment, cut taxes on automobile sales and lowered the required down-payment for home mortgages. Historical precedent suggest that as China transitions to a “middle income” economy, the path of least resistance is downward. Based in part on observations from our recent visit to China, in this report, we posit that the key to understanding opportunities and risks in China is to:

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Transition To A Chinese-Style “New Normal”: Less Is More

In China, economic results of late have largely been disappointing, with traditional headline indicators highlighting sluggish growth and mounting deflation risk. Our view is that China is experiencing the economic transition to a so-called “New Normal”, and the prevailing growth slowdown, gauged by traditional industrial-focused indicators, is both necessary and essential for the ongoing economic transformation. In this paper, we will discuss the key priorities of the reform agenda, along with the Chinese government’s progress in implementing these reforms to date. In the last section, we will discuss the nascence of this round of the bull stock market and the recent massive correction, along with our short-term and long-term expectations. The bottom line is that we are positive on China’s economic reform and the government’s efforts in supporting capital market reform. We also believe that there will be more upside in Chinese A-shares, but that the next leg will be characterized by extreme volatility.

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Big Is Bad (Really Bad) In Frontier Market Equities

For 19 years FIS Group has successfully invested with entrepreneurial managers in global equities markets based on the considerable body of research suggesting that talented, high-active share, entrepreneurial managers are best positioned to outperform market benchmarks, net of fees. We believe that there are generally two reasons, both timeless and universal, why this inefficiency will continue. First, entrepreneurs with “skin in the game” are motivated to work harder, as entrepreneurs generally are in every other business across the time and space of human history. Second, in the modern markets of listed equities, size and scale are the enemies of alpha. While we have long known both of these simple (but nonetheless surprisingly ignored) truths to be self-evident in asset management, the significant opportunity of investing with entrepreneurial managers continues unabated. However in our firm’s 19 years of investing and decades more of experience of our principals, we have rarely (if ever) seen so clear a demonstration of both of these sources of alpha in one simple chart.

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Observations On The Greek Debt Crisis From Across The Pond

As Greece’s negotiations with its creditors devolved over the weekend fostering a global rout in risk assets on Monday, through my attendance at a global investor forum in Europe, I solicited the thoughts of institutional investors that live and work closer to the epicenter of the crisis. Not surprisingly, I found a wide divergence of risk appetites and aversion. However, my overwhelming impression is that, while many recognize a high risk of short term volatility, investors here are quite sanguine about the medium and long-term risks of a Greek default or even a so called “Grexit”. This document reflects my observations from the various presentations and conversations over the last few days. This commentary borrows heavily in particular from a presentation and paper by Marko Papic, from BCA Research.

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The Big Structural Upside In Japanese Equities

Since late 2012, coinciding with the election of reformist Prime Minister Shinzo Abe, Japanese equity markets have surged nearly 70% (in local currency) in the past two years. Yet ‘Abenomics’, as the set of ambitious and bold fiscal and monetary policies pursued by the Abe Administration have been dubbed, have thus far failed to move the appetites of Japanese household savings. But there is reason to believe that Japan is on the precipice of reordering its domestic savings structure as soon as this year, with potentially significant implications for its equity markets.

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Will Emerging Markets Continue To Dance When The Fed Stops Playing?

There is no shortage of prognostication on which assets/ strategies will be most/least impacted as the Fed and the BOE become less accommodative, and how they will be affected. How we answer both questions will be critical to performance over the next year or so. This paper evaluates the likely path and impact of Fed tightening with specific focus on the counterbalancing effects of asynchronous monetary policies globally and the likely impact of Fed tightening on EM risk assets.

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Arabian Nights: Mysteries On The Frontier

In the first half of 2014, the MSCI Frontier Markets Index substantially outperformed its actively managed peer group. The degree of this outperformance is deeply ahistorical for major equities classes and poses several implications for manager selection and evaluation. This paper examines the unique structure of this market rally in an effort to better understand the frontier markets environment, assess the complicated interplay between index structure and performance measurement, and discusses how allocators should evaluate and respond to these special circumstances.

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Pain & Gain: What Happens Now That Emerging Markets Have Submerged?

During a rather sobering January, several clients wondered whether we were maintaining our generally bullish sentiment on G3 equity markets discussed in our mid-month market outlook presentation. Thus far (January 30, 2014), that conviction has admittedly been severely tested with the Dow down 4.39%; the S&P 500 down 2.39%; the Russell 2000 down 2.09%; MSCI EAFE down 3.57% and Emerging Markets down by a whopping 6.61%. First, let’s recall the highlights of our 2014 strategy report:

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Is Active Equity Management Alpha On Permanent Or Temporary Disability?

In 2011, FIS Group published a research paper which analyzed the drivers of entrepreneurial (or smaller) manager outperformance in US equity strategies from 2006-2010.1 While the study illustrated out-performance for five out of seven long-only equity investment styles offered through smaller managers/strategies (based on assets under management (AUM)) relative to their larger manager peers, it also detected the apparent beginnings of diminishing excess returns to fundamental active equity management strategies in the post-financial crash period. The most marked erosion of return has been observed among active Large Growth and Large Core products. By the end of 2012, the S&P 500 Index had risen over 100% since the market bottom in March 2009; but as a class, U.S. Large Cap active managers have been underperforming the market benchmark with a tenacity that is troubling. The paper analyzes several key questions including:

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Survival Of The Nimble

The three to five years ending December 31, 2010 have challenged many active long only (and long-short) equity managers’ ability to produce alpha, particularly if their investment decisions are based on the intrinsic fundamental characteristics of individual stocks. As a manager of Entrepreneurial managers1 , the majority of whom employ this type of investment approach, FIS Group conducted research on the major factors driving the impairment of excess return observed over the last five years. Additionally, we examined whether the performance advantage of Entrepreneurial managers over their Established manager peers (by investment style and market capitalization) observed in our and others’ prior research had altered as a result of the changing macroeconomic and market environments. Our conclusions are as follows:

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Performance Drivers For Emerging Managers

The purpose of this study is to determine whether there are significant relationships between asset levels that traditionally determine a manager’s status as emerging and various measurements of risk-adjusted return. Those measurements include the Information Ratio, Sharpe Ratio and Sortino Ratio. Additionally, the study attempts to evaluate the impact of certain salient characteristics of the firm universe, such as portfolio concentration (as measured by average number of portfolio securities), degree of trading activity (as measured by portfolio turnover) and number of research analysts and portfolio managers.

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Global Market Outlook

Our CIO, Tina Byles Williams, publishes our market outlook on a quarterly basis, based on research that examines market conditions over a three- to six-month period. These quarterly analyses serve as key inputs to our fund construction process, which incorporates strategic tilts to the market segments we believe will outperform over a six- to 12-month time frame. For global equity portfolios, these tilts incorporate regional, sector, and capitalization strata as well as investment process and style factors. For U.S. equity portfolios, tilts include sector, capitalization strata, investment process, and/or style factors.

Our objective is to construct a portfolio of “best in class” investments with weightings consistent with our overall investment strategy.

Webinars

Market Outlook and Research Webinars


View Q4, 2014 Webinar

Tina Byles Williams, CEO/CIO of FIS Group leads a wide-ranging discussion on FIS Group’s view of geopolitical, demographic and macroeconomic trends shaping risk and investable opportunities for institutional investors.
The panel moderator Sam Austin, III, SVP Director of Marketing and Client Service (FIS Group) and Ms. Byles Williams conducted this discussion as a part of FIS Group’s third annual Investment Symposium. The event was held on September 26, 2014 in Philadelphia.
FIS Group, Inc. is an 20-year old Philadelphia based institutional asset management firm that focuses on investing in long-only global and international equity strategies.

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Ecosystem Webinar Presentation

Facilitating opportunity
• Grow and diversify the pool of talented entrepreneurial managers to the benefit
of the asset management industry
• Support entrepreneurial efforts of talented investment managers
• Increase FIS Group’s first mover track record from 25% to 50%
of all funded firms
• Funded entirely by revenue generated from
FIS Group’s core business
• Services provided at no cost to the managers

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From Versus to Versatilit​y: Exploring the Cyclicalit​y of Active & Passive Management

Panelist Information: N/A
Duration: 51 minutes
Description: This interactive webinar discussion will be led by FIS Group’s Founder and CIO, Tina Byles Williams. The discussion will highlight the actionable implications from our recently published white paper entitled, “Is Active Equity Management Alpha on Permanent or Temporary Disability?” Additionally, the paper’s models have been updated for this discussion, and Tina will reveal whether the updates had a significant effect on the original conclusions. Tina will close this webinar by providing participants with a peek at what FIS Group’s market and risk models are forecasting for 4th Quarter.

The topics to be discussed during the webinar include the following:

• Evidence pointing to the cyclical nature of periods when either active or passive management are in favor rather than a permanent “new normal” where active U.S. large-cap managers struggle to beat their benchmarks;

• Updates on several of the conclusions published in the original paper and their implication for active managers in a time of anticipated Fed tapering and slowing of corporate profit growth;

• The uncertainty of whether the ‘Risk On, Risk Off’ trading environment of the last five years will persist or give way to a renewed premium on stock picking;

• FIS Group’s forecast for the 4Q 2013 market environment and our view on investment opportunities for capital allocators and equity managers for the remainder of the year.

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