George Lucas

Instreet Investment Limited has today announced that, through its subsidiary Instreet Acorns Pty Limited, it has increased its holding in Acorns Grow Australia Limited.

Previously, Acorns Grow Australia Limited was a joint venture between Instreet Investment and U.S.-based Acorns Grow Incorporated. Acorns Grow Incorporated will keep a minority interest in the new ownership structure.

As part of the arrangement, Acorns Grow Australia will rebrand its business over the coming months.

The new arrangement grants Acorns Grow Australia a perpetual licence to operate in additional markets in Southeast Asia, including New Zealand, Indonesia, Singapore, Malaysia, Thailand, and Vietnam.

Acorns Grow Australia has also granted a perpetual licence to Acorns Grow Incorporated for technology it has developed.

Acorns Grow Australia will continue to invest in its unique product developments pipeline tailored to the Australian market. Managing Director George Lucas will remain in his role, overseeing operations in Australia, where Acorns Grow Australia has been building momentum with more than 550,000 downloads and more than $150 million in funds under management in under two years.

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George Lucas

The boutique fund manager Instreet Investment has raised more than $1 billion since its inception in 2007 following a solid June quarter this year for its own and third party structured products business.

Although these financial products have attracted less retail investor interest due to the falling number of independent financial advisors (IFAs) and a more prescriptive asset allocation model from financial planning dealer groups, there is stronger demand from wholesale/sophisticated investors, says Instreet Managing Director George Lucas.

Lucas says: “Wholesale investors still see the benefit of these products as a viable investment option to increase yields, gain exposure to alternative markets not readily available through existing managed investment products or to diversify and manage downside risks while maintaining upside exposure.

“Some SMSF trustees like to allocate a small percentage of their portfolio to catch any market upside to emerging or overseas market, whether it be equities or commodities, while having a known downside risk. It’s all about risk versus reward and getting some certainty into the portfolio on the downside.

“So there remains a solid core of investors still attracted to structured products and how they can play an important part in their overall investment strategy.”

Instreet currently offers four retail structured products, and is also delivering wholesale/sophisticated investor products on demand.

“Our business model allows us to put together and deliver an investment solution for an advisor’s wholesale clients within 48 hours,” Lucas says. “This makes us a workable alternative to private banks and allows advisors to add value to a wholesale client similar to the service they would get at a traditional private bank.

“The client’s advisor hears first-hand from their clients what they want in their portfolio – and we respond accordingly.

“By listening to adviser feedback on these products, getting an understanding on their client gaps and needs, we are able to deliver an investment solution that meets the demands of their clients.”
Lucas says structured products offer the capacity to craft an investment structure to meet a specific client goal. “They are not for everyone, but for those investors who have a strong view on a market, as well as a firm understanding of the risk involved, they can be an invaluable investment tool.”

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George Lucas

Boutique investment manager, Instreet Investment has launched a new fund designed to give investors exposure to innovative start-ups. Named the Instreet Start-Up Fund, this fund also provides the potential for investors to benefit from the early stage innovation companies (ESIC) tax incentives.

The fund’s objective is to invest in early stage innovation companies that are disruptive in their industry.

Instreet Investment Managing Director George Lucas says: “This is an asset class with the potential to produce high levels of capital growth but also have the highest risk, and so is often attractive to high net worth investors.”

The fund is open to professional, wholesale and sophisticated investors. Instreet is targeting a fund size of $5 million and has set a minimum investment size of $50,000. The offer closes on 28th April 2017.

It will have a five to 10-year term and will not be listed on any securities exchange.

Lucas adds “Instreet intends to launch a new fund quarterly as there are significant opportunities in the current market. The fund has been designed to allow investors to take advantage of tax incentives provided as part of the Australian Government’s National Innovation and Science Agenda, which aims to support entrepreneurship.”

Under the ESIC rules eligible investors may receive a tax offset of up to 20 per cent of their investment in the current financial year. Also capital gains tax may not be payable on distributions when the fund manager disposes of an eligible investment.

The fund has been set up as an unregistered managed investment scheme. Each investor will hold their equitable interest in the underlying investment directly through a separate bare trust.

Instreet will tap into its network of incubator platforms and accelerators to select five to 10 start-ups that have the potential to produce high revenue growth. The fund will then invest between $250,000 and $1 million in each investee company and will target ownership of between five per cent and twenty per cent.
Lucas says, the fund will be looking for investee companies whose management has proven leadership ability, technical expertise and operating experience. Investee companies must be producing revenue or show signs that revenue is imminent.

“These companies will operate in niche or new markets that have the potential to change the traditional business landscape,” Lucas says.

He says the fund is suited to investors wanting venture capital-like exposure but who may not have the expertise or resources to undertake due diligence of direct venture capital investments themselves.

Previous early stage investments made by the fund manager’s investment team include the mobile investment platform Acorns Australia, the education website Wealth Know How, and Emerald Club, the designer of the socially responsible investment platform Emerald Wrap.

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Markets subdued ahead of Trump’s inauguration.

Equity markets are hovering in limbo this week as they sit and wait for Trump’s inauguration on 20 January before deciding what way they will go, says boutique fund manager Managing Director George Lucas.

He says doubts around the outcome of European Central Bank’s first monetary policy meeting of the year to be held on Thursday, at which it should reaffirm its commitment to its Asset Purchase Program that it extended in December, is compounding the market situation.

“Some had hoped for more positive signs from the President-elect at his press conference last week (his first since his election victory); however, it was decidedly short on policy detail.

“This left markets wondering what was in store under Trump. The only real impact his speech had was on the pharmaceutical industry, when he came down hard on the sector and triggered big losses for healthcare and biotech stocks.

“There was more meat in the subsequent media release, with promises of fiscal stimulus and infrastructure spending.

“Once the inauguration is out of the way, these promises could help the markets return to the upward trajectory that they started in November last year.

“This will likely be led by growth-focused assets and, if approved, Trump’s tax cut policies that could give many US companies a 20 per cent earnings growth boost (after tax) if passed.”

He says the equity market pause has also affected forex markets with the US dollar taking a breather. “Once the inauguration is over, we expect the USD to continue its recent rally as the divergence of the US economy from Europe and Japan will drive the greenback’s strength.

“In Australia, our dollar is less driven by the interest differential and more by investor appetite for risk, commodity prices, China’s growth and our own growth. The AUD should hold up well in the current environment of improving commodity prices and China.

“We learnt during the week that Chinese exports and imports jumped in November, driven by stronger external demand, domestic recovery and rising prices. We expect trade to have improved further in December, with PMI readings suggesting that China’s trading partners continued to experience strengthening growth at the end of 2016. Rising commodity price inflation should have also provided a boost to trade values by increasing export and import prices.”

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Janet Yellen

Markets appear to have settled in the belief that Trump will be positive for US businesses, says Instreet managing director George Lucas.

“Sectors such as construction and banks have done particularly well as investors expect the new president to deliver a surge in infrastructure spending and a lighter regulatory touch,” he says.

“The possible economic leg-up that the market believes Trump’s policies will deliver has also put a spark under the US Dollar.

“In turn, investors have fled government bonds on expectations the US Federal Reserve (Fed) may need to raise interest rates faster than expected to contain inflation.

“Chair of the Federal Reserve Janet Yellen backed this up last week when she said an increase in short-term interest rates could ‘become appropriate relatively soon’.

“We believe solid US data is also supporting the case for tighter monetary policy.

“Markets are now expecting a rate rise in December with the federal futures market implying a 95% probability of a 25 basis points hike at the FOMC meeting on 14th December.

“10-year US Treasury yields are at a 12 month high after climbing around 40 basis points since the election,” he said.

Commenting on the negative reaction to a Trump presidency in emerging markets Mr Lucas said he understands the reasons for the decline but does not necessarily agree with the sentiment.

“While the MSCI US Index has risen since the election, the MSCI Emerging Markets Index has fallen by around 4% in local currency terms.

“This implies two things. One, emerging market investors are exiting amid uncertainty about policymaking and a sell-off in US Treasuries. Second, investors in US shares have taken solace in the likelihood that Trump will loosen the public purse strings once he takes office in January.

“This could in part be driven by speculation that Trump’s policies will not benefit emerging markets. However, we at Instreet don’t necessarily agree with this view.

“China is already taking initiatives to protect trade in the region and the likely long-term outcome is for the Asia Pacific region to become less reliant on US trade.

“There’s likely to be a lot of talk and plenty of action over coming months and years as China seeks to expand its influence and presence by adopting more liberal trade initiatives as the US digests and deals with the Trump anti-trade rhetoric,” Mr Lucas said.

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George Lucas

George Lucas, managing director Instreet Investment, says Asian markets will be the first to react to the US Presidential election result, although they may close before a result is known depending on how tight the election is.

So how will the market respond to the election?

He notes:

• If Trump wins, the market is expecting a 5% to 10% sell off as a knee jerk reaction, but with a Brexit style recovery afterwards.
• A Clinton win could see the US market easily recover the 3% it has already lost, but this also depends on who wins the Senate and House.

“If you’re a Trump hater, beware – this election is too close to call and the relatively high proportion of undecided voters, along with the historically-high disapproval ratings for both candidates, means it could go either way. Clinton appears to hold a slim lead but it’s within a margin of error,” says Lucas.

On the possibility of US Federal Reserve (Fed) rate hike Lucas noted that “even if Trump wins the election this week, there will be little excuse for the US Federal Reserve (Fed) not to hike interest rates in December following strong recent data.”

“The last couple of weeks have been miserable for Australian and global equities as participants feared a Trump win in the final countdown to the US Presidential election.

“The S&P500 has shed about 3% over the past nine trading days; the ASX200 has shed 4.6% over the last 2 weeks; whilst the pan-European Stoxx 600 index fell to its lowest point since early July. In Japan, the Nikkei 225 dropped 3.1 per cent last week – its worst drop in four months. Not helping the situation was a sell-off in oil and weak US employment data.

“As this was happening, US money market funds (a proxy for cash) absorbed more than $36 billion in the week to 2 November as investors looked for safer assets. Investors also scrambled for “core” government bonds, gold and the Yen,” he said.

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George Lucas

Equity markets are looking fatigued, lumbering along with little volatility as they wait for the US election result says boutique investment manager Instreet.

This, of course, is completely contrary to what we had expected for 2016, especially how the markets opened the year, adds George Lucas, managing director Instreet.

“The ASX200 closed at 5430 on Friday last week, which is pretty much the same level it was three years ago. Whilst we haven’t been rewarded through capital appreciation, we have at least had dividends that are generally higher than the rest of the world.

“Now all eyes are currently on the US Presidential election. Markets are anticipating a Clinton win, with the expectation the Democrats will win the Senate whilst the Republicans will win the House.

“If Trump fails to get 40% of the popular votes, and let’s face it – he’s not doing his party any favours, the House may also go the Democrats. Currently the polls show Trump with 45% of the popular vote.

“Whilst this would make it easier for Clinton to get policy approved, the market won’t necessarily be happy with the outcome given the Democrats’ recent shift to a more protectionist stance (led by Bernie Sanders). Healthcare stocks will also take a hit as the Democratic party plans to mend Obamacare.

Looking closer at US and EU economies, Lucas says that diverging economic outlooks and policies between the US and Europe have helped push the US Dollar (USD) higher whilst the Euro has hit a seven-month low.

“This came as the European Central Bank (ECB) decided to leave policy on hold at its Thursday meeting. Initially the Euro rallied on the back of the decision because there was no direct discussion about whether the Asset Purchase Program would be extended beyond March 2017.

“Later, however, ECB President Draghi signalled that asset purchases would not end abruptly. The market took this as a sign that the quantitative easing program will be extended past the March 2017 date.

“There is also divergence in inflation expectations between the EU and US. Expectations are growing that inflation in the US will rise and, in response, we are beginning to see traders increase their exposure to rising inflation – especially as the price of gasoline and oil continue to rally.

The US Federal Reserve is meeting in the first week of November and rates will likely stay put. The market is, however, expecting an increase in December. This is in stark contrast to the EU and Japan where inflation expectations remain subdued and monetary policy may be loosened further.

He adds “Positive commentary has been circling emerging markets recently as issues in Brazil seem to be coming under control – they even cut interest rates last week.

Emerging markets are now better placed to withstand potential shocks from an increase in US rates. External vulnerabilities have been reduced, equity valuations are generally not high and many markets should receive support from rising commodity prices and improving outlooks for economic growth.

“In Australia, CPI inflation data for the third quarter is due out on Wednesday and it will likely show a rise in inflation. If it is up, the RBA is unlikely to cut rates in November.

“We also received employment data for September which showed a further decline of 9,800. I don’t think it will bother many people though given the monthly data is often volatile and unemployment has fallen from 5.7% to 5.6%,” said Lucas. as senior institutional business development manager, based in Sydney and reporting to Damen Purcell, head of distribution at Australian Unity Funds Management.

Mr Lees joins Australian Unity from Citadel SPV where he was vice president – business development.  He has over 15 years’ experience in the financial services industry in both Australia and Asia, holding senior client relationship roles at organisations including National Australia Bank, Pershing LLC, BNY Mellon and Potter Warburg Asset Management.

Mr Purcell said that Mr Lees brings a wealth of experience across both the institutional and middle market channels which will be key in helping Australian Unity Funds Management grow its institutional footprint across its joint ventures, real estate investment and internal asset management capabilities.

“Boyd has a wide range of existing relationships including private banks, wealth managers, stockbrokers, family offices and financial advisers, and these will stand him in good stead in the new role,” Mr Purcell said.

“His background in asset management distribution and business development were particularly attractive to us when looking to appoint someone to the team, and his in-depth understanding of both traditional and alternative asset classes fits well with our business.”

Mr Lees holds a MBA (international business), a BA Liberal Arts and is a candidate in the Master of Agribusiness at The University of Melbourne.  He also has a graduate diploma in applied finance and investments from Kaplan Professional.

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George Lucas

The Australian market has seen an increased inflow of capital as global investors search for yield in the current low interest rate environment, says George Lucas, managing director Instreet Investments.

“With the amount of debt in negative yield now at a staggering $13 trillion, it is no wonder that the main driving force for equities will be the global hunt for yield.

“Thanks to years of continued investor activism, top Australian companies pay higher dividends and help produce one of the highest yielding companies in the world. Compared to the S&P 500, which yields about 2.3%, the yield from ASX 200 companies is attractive, resulting in foreign inflows and leading Australian companies being included in global yield ETFs listed in the US.

“And it’s not just equity yield that is attractive in Australia. The AAA rated government bonds are producing significant yield when compared to negative yields.

“Foreign inflows are also having an effect on the Aussie dollar, which is on the rise despite the RBA cutting rates to record lows in August. This rise in the dollar, coupled with mortgage lenders not passing on the full rate cut to borrowers, has seen the RBAs recent decision completely wasted. If it is a weakening in the dollar that the RBA are interested in, then they may think twice about cutting again.

“A quick look at Japan shows that further weakening should see a flow of YEN into Australian equities for yield.
“The recent announcement by the Bank of Japan to buy more equity-linked ETFs means that the Japanese equity market is at risk of becoming overvalued – similar to the way that the Japanese bond market was distorted, and now trades in negative yields,” said Lucas.

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“However there are still some reasons to remain optimistic as we analyse these developments”, he added.
“Starting with Japan, where the Bank of Japan (BoJ) decided last week not to cut the interest rate it pays on excess reserves or to target a more rapid increase in Japan’s monetary base. In response, the Japanese Yen climbed to its highest level against the US Dollar in three weeks and Japanese government bond prices sank.

“The BoJ did decide to increase purchases of equity-linked exchange-traded funds (ETF), however investors had expected the BoJ to do significantly more in order to try to raise inflation towards its target of 2%. The ETF purchase announcement did at least help the equity market to rebound even though the Yen strengthened.

In the US, GDP grew by a disappointing 1.2% annualised in quarter two.

“The only good news was that consumption increased significantly and net exports boosted growth. Contractions were reported in business and residential investment, government expenditure and inventories.
Looking ahead to the second half of the year, there are still some reasons to remain optimistic. For example, the drag from mining-related investment will fade, residential investment should recover and net exports ought to benefit from the stabilisation of the US Dollar.

Non-farm payrolls for July are also due out on Friday and we are expecting a gain of 190,000, which should be enough to bring the unemployment rate back down to 4.8%. Average hourly earnings will also be keenly watched.

Concerns about the ongoing oil glut continue to hammer prices, with Brent Crude heading towards $42 a barrel for the first time since April.

“The latest slide comes as energy traders are storing more crude off the UK coast, with some parking as much as two weeks’ worth of UK production on supertankers. They are struggling to find buyers as demand from refiners has slipped after they produced too much gasoline in the first half of the year.

There are signs, however, that the oil market has made progress since prices slipped to a 13-year low of less than $30 a barrel at the start of this year. Global crude oil inventories have started to draw and forecasts remain for the market to come closer to balance by the end of this year.

The stronger US dollar has also helped cause some of the weakness in dollar-priced commodities like crude.

Global PMIs

The latest Global PMI data is on its way. Here’s our round up of the different markets:

• US – We expect a rebound in both the ISM manufacturing and non-manufacturing indices.
• China – Both the Caixin/Markit manufacturing PMI and the “official” index fell in June, but we expect them to rebound slightly in July.
• Japan – Activity data released last week suggests Japan’s economy continued to recover last quarter. The labour market continues to tighten further with the unemployment rate falling to 3.1%.
• Euro-zone – The preliminary flash GDP estimate shows that growth slowed in the euro-zone in Q2. The 0.3% quarterly gain came as something of a relief after a very sharp slowdown in France. Euro-zone inflation rose from +0.1% to +0.2% in July as a result of higher food inflation. Core inflation remained subdued, and the unemployment rate remained at 10.1% in June.
  Finally, a word on Australia where the market expects the Reserve Bank of Australia (RBA) to cut its policy rate from 1.75% to 1.50% on Tuesday.

Retail sales for Australia are also due out this week and we are expecting a rise of 0.4% m/m in June.

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Japan likely to roll out an aggressive fiscal stimulus: Instreet

The landslide victory for Japan’s ruling coalition in the Upper House election last weekend has provided further fuel for equity markets that have been in overdrive around the globe for the past two weeks.

Solid gains have been made in Europe, Australia and the US over this period as markets shrugged off Brexit, but the standout performer has been Japan with a 9.2% jump in the Nikkei 225 alone last week – the best five-day showing for more than six years.

Instreet Managing Director George Lucas says it now seems likely that Japan will roll out an aggressive fiscal stimulus, as well as more quantitative easing, to bolster growth and inflation. This is putting pressure on the Yen, with the US Dollar up 4.9% against it last week to ¥105.41.

“We expect the Bank of Japan will soon announce the expansion of asset purchases under its current policy of Quantitative and Qualitative Monetary Easing (QQE), perhaps as soon as the end of this month. However, we doubt the bank will directly finance a game-changing fiscal boost via ‘helicopter money’ as some in the market speculate.

“The ¥10 trillion fiscal stimulus package now being proposed by the Abe Government is certainly large at about 2% of annual GDP, but it would not be unprecedented and should assist the economy.”
Instreet expects attention to shift from Japan to the US this week where it expects markets may get a boost from better economic numbers and earnings announcements

Lucas says the earnings season has had an encouraging start, notably the banks. But improved earnings need to be seen in technology and energy to maintain momentum.

June economic data highlights include:

• Unexpected strength in US retail sales means second-quarter GDP growth appears to be between 2.5% and 3.0% annualised, and real consumption growth should be about 4%.
• US core consumer prices increased by 0.2% month on month, which was enough to push the annual core inflation rate back up to 2.3% (from 2.2%).
• The 0.6% month on month rise in US industrial production was primarily because of a rebound in manufacturing output. This included a 5.9% month on month increase in motor vehicle production.
  European markets, however, continue to struggle, and financial stocks have significantly underperformed. Italy is suffering badly, having underperformed the rest of the euro-zone as fears of a banking crisis mount.

Lucas says fears in Italy are justified in light of EU rules that make it politically difficult to recapitalise banks in Italy.

“But we believe Italian policy-makers will find ways to provide support to the banks, and more broadly we are optimistic about Europe, believing their bank stocks may not be a drag on equity markets for much longer.

“In our opinion there is scope for equities in the euro-zone to recover as tighter than anticipated monetary policy in the US will cause the Euro to depreciate against the dollar.”

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