As U.S. investors return from a three-day holiday weekend, gains in European equities suggest that market risk has shifted to a narrative of bad news is good news, as deteriorating economic data sparks hopes of action by the European Central Bank. Final August Markit manufacturing purchasing managers’ index (PMI) data released yesterday registered a sequential contraction to 50.7 from 51.8 in July, lower than the flash 50.8 initially released. Individual measures for Germany, Italy and Spain were also weaker than their respective flash releases. France saw an improvement, albeit still deep in negative territory at 46.9. Across the channel UK manufacturing managers also indicated a slowing pace of activity as final index data registered lower than forecasts. With ECB president Mario Draghi scheduled to make the bank’s monthly rate announcement on Thursday, stock and currency traders are clearly signaling expectation for a fresh dose of stimulus to combat low inflation and sluggish activity. The growing crisis in eastern Ukraine, where hostilities escalated over the weekend, casts a shadow over the bank’s policymakers as they position themselves. With historically accommodative policy already in place and the prospect of a Russian natural gas squeeze as winter begins, memories of the 1973 OPEC embargo and ensuing inflationary spike provides an outlier concern.
Detroit readies for day of reckoning. A federal bankruptcy court session to determine approval for Detroit’s proposed debt restructure is set to start today. The $18 billion filing will be closely watched for indications of how future municipal shortfalls will be managed as pension obligations continue to weigh on U.S. municipalities.
Bidding war for Family Dollar ratchets up. After Charlotte–headquartered discount retail chain Family Dollar rejected an earlier bid in favor of one from Dollar Tree, Dollar General raised its bid to take over its smaller rival. The increase, to $80 per share, represents an additional 2 percent increase to a total in excess of $9 billion for the retailer.
U.S. manufacturing and construction data to be released. ISM manufacturing survey results are set to be announced at 10 am U.S. Eastern time. Consensus forecasts show a modest decline to 56.8 from July’s 57.1 reading. The July level was the strongest since April 2011, driven by a sharp increase in new orders. Separately, July construction spending data is expected to rebound from a month-over-month contraction in June as both public and private sector outlays rebound. Improvements in both measures would continue broadly to support relative strength for the U.S. economy.
Manufacturing activity in China cools. Official China Federation of Logistics and Purchasing (CFLP) manufacturing PMI for August registered at 51.1 from 51.7, the first decline in six months. HSBC’s final measure for the month came in at 50.2, versus the 50.3 flash estimate. The private HSBC index differs from the official measure in focusing on small and mid-sized companies. While the manufacturing sector continues to expand activity as a slowing pace, employment sub-indexes are a pressing concern in Beijing, where near-universal employment remains a critical component of the social contract.
Australian interest rates stay put. The Reserve Bank of Australia made no shift in interest rates in its monthly announcement today as expected. In its statement, RBA Governor Glenn Stevens noted that data shows “gradually improving business conditions and some recovery in household sentiment after a weaker period around mid-year, suggesting moderate growth in the economy is occurring.” A second release of Australia’s second-quarter gross domestic product is scheduled for release on Wednesday with consensus forecasts for a moderation from the initial release, with concerns over weaker potential Chinese demand for raw materials.
Portfolio Perspective: A Straightforward Approach to Impact Investing through U.S. Fixed Income — Ron Homer and Catherine Banat, RBC Global Asset Management
Traditionally, being a socially conscious investor required acts of omission in terms of making a difference with your money by avoiding investments in particular sectors or companies, even if that meant occasionally lower yields.
That is changing. What today we call impact investing is about a double-bottom line approach of overweighting investments that promote causes or impacts that an altruistic investor may cherish and also delivering a competitive return.
According to a recent study by J.P. Morgan and the Global Impact Investing Network (GIIN), impact investing is expected to grow 19 percent by the end of 2014. And though driven by pension funds and foundations, the movement is also attracting managers of multigenerational wealth. Increasingly, they’re discovering that they can add a socially conscious dimension to a standard U.S. fixed-income allocation without giving up yield.
We’ve identified three portfolio modifications that we believe have the ability to achieve just that. Each preserves the liquidity and security that investors expect from fixed-income portfolios.
Impact agency mortgage-backed securities: Some investors want to provide capital to low- and moderate-income families, support affordable housing or promote home ownership in specific geographic areas. They can by shifting to impact MBS. These come with the same government backing as generic MBS. Because they tend to have lower loan balances, they can also provide more stable cash flow.
Impact agency commercial mortgage-backed securities: Replacing part of Treasury portfolios with CMBS can support affordable rental housing, health care facilities in underserved communities or care for the elderly and disabled. Impact agency CMBS can provide higher levels of call protection and agency quality credit characteristics.
Impact taxable municipal bonds: These may provide the most impact bang for the investment buck. They can directly support social causes such as access to higher education to care of the elderly. Multifamily housing bonds, for example, help provide affordable housing. Since they’re sold by housing finance agencies, they typically have lower default rates and may feature government guarantees.
Again, we believe each of these securities can provide at least as much cash flow and return potential as their nonimpact counterparts. More importantly, each offers the unlimited upside of helping investors feel good about where their money’s going.
Ron Homer is co-founder of the RBC Access Capital Community Investment Strategy and Catherine Banat is an institutional portfolio manager at RBC Global Asset Management in the U.S.
