Mathias was previously a Senior Portfolio Manager at State Street Global Investors, with responsibility for Liability Driven Investment (LDI) strategies. He has extensive knowledge of the UK pensions market, including fund structures and regulation. Based at St Mary Axe, London, Mathias will be responsible for the development of pooled and segregated pension fund solutions.

Led by Robert de Roeck, the Structuring team has extensive LDI expertise and has responsibility for the design, development and management of circa £50bn of LDI mandates. This includes the recently launched suite of pooled fund solutions – Integrated Liability Plus Solutions (ILPS). The Structuring team consists of nine people and is part of the 70-strong MAI team.

Commenting on the appointment Robert de Roeck, Head of Multi-Asset Structuring said: “The appointment of Mathias reinforces the commitment of Standard Life Investments to growing its Liability Aware business. Mathias brings with him a wealth of experience and expertise, adding to the already extensive knowledge and experience within the MAI Structuring team.

“Our mandates draw on a range of sophisticated investment strategies, and I have no doubt that the appointment of Mathias will enhance capabilities and idea generation across our whole Liability Aware offering.

“The team has seen significant growth over the last 18 months. This, coupled with excellent collaboration across our fund management teams, supports the long term performance of our mandates. We constantly strive to provide investors with optimal solutions, and that means having the right people in place to help understand and meet investor needs and expectations.”

Standard Life has experience of managing assets on behalf of insurers and pension schemes for over 100 years, and has earned an international reputation as a provider of innovative investment solutions.

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He will be based in London and report to Stephen Acheson, Executive Director, Global Strategic Partnerships. This is a new position and Richard will enhance the capabilities of Standard Life Investments to support, strengthen and grow the insurance asset management business with clients around the globe.

Richard joins from JP Morgan where since April 2010 he was Executive Director (Insurance & Pensions Solutions), responsible for advising institutional clients on investment strategy, investment & risk solutions and managing insurance assets under Solvency II.

Commenting on the new appointment, Stephen Acheson, said: “Standard Life Investments has a long heritage in managing insurance company assets and Richard is a senior strategic hire. He is an Investment Actuary with extensive financial markets and investment expertise and brings a wealth of experience of the global insurance industry. His understanding of institutional investor requirements will complement and strengthen our existing capabilities. Richard is highly regarded within the insurance sector and will work closely with our global clients to ensure that Standard Life Investments remains a market leader in innovative investment solutions across all asset classes and in the management of insurance assets.”

Commenting on his appointment, Richard Pereira said: “I am delighted to be joining Standard Life Investments, one the world’s largest managers of insurance assets with a long history of serving the needs of insurers across the globe. The Insurance Solutions team’s combination of thought leadership in investment innovation and insurance expertise is impressive. I look forward to working with clients to deliver new investment solutions designed to meet their evolving requirements.”

Richard is a Fellow of the Institute & Faculty of Actuaries (FIA) (specialism in Investment & Asset Management); a Fellow of the Institute of Chartered Accountants in England & Wales (FCA); a Chartered Member of the Chartered Institute for Securities & Investment (Chartered MCSI); and holds a First Class BSc (Hons) Degree in Mathematics from Imperial College London.

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The first statutory minimum wage was introduced in New Zealand in 1894 and 27 out of 35 OECD countries use this tool. Minimum wages vary widely across countries. France, Chile, Turkey and New Zealand have the most generous minimum wages across the OECD, with these around 60% or more of domestic median earnings.

The least generous statutory rates can be found in the US, Spain, Japan and Mexico, where minimum wages are between 35-40% of median earnings. Minimum wages stagnated after the financial crisis, mirroring trends in the broader labour market.

The average OECD statutory rate increased just 0.2% annually in real terms between 2010 and 2013. More recently we have seen better real pay growth for minimum wage earners, albeit supported by weak inflation. Is it time for a more material rise in minimum wages?

The classic counter to this argument is that high minimum wages can damage employment. However, empirical evidence suggests that minimum wages need not have large negative effects on jobs, if appropriately set.

In particular, minimum wages should be carefully calibrated according to local growth, productivity, employment and living costs. Differentiated wage floors, such as lower rates for young workers, can also help address these employment concerns. Finally, reduced labour taxes can help mitigate the effect of rising minimum wages on firms.

Overall, the scope to raise minimum wages will depend on local economic, tax and labour market conditions/institutions. However, this is not the only tool at policymakers’ disposal. There is a range of initiatives that can be used alongside (or instead of) minimum wages to support those on lower incomes.

Indeed, many are likely to be more effective in addressing poverty. These include more generous tax and benefit allowances, structural reform aimed at boosting aggregate employment and education/training.

Policymakers should focus on improving the overall package for those on low incomes, rather than focusing on minimum wages.

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Much of this growth has been underpinned by booming housing markets, which are difficult to control with interest-rate policies alone. Indeed, this is especially challenging in the current environment, with the loose policy required to address sluggish growth and inflation risks exacerbating financial imbalances.

In recent years, central bankers across developed Asia have sought to prevent excesses through a wide range of macroprudential policy measures. The results have been mixed.

In Australia, policymakers have been locked in a battle against household leverage for many years, with household debt-to-GDP rising above 120% – ranking number one globally.

In particular, the Council of Financial Regulators and the APRA have been vocal of late about the risks posed by interest-only loans and investor lending.

According to the recently published Financial Stability Review, interest only (IO) loans account for 23% of total owner-occupied loans, but a striking 64% of investor loans. It is the recent uptick in these IO loans, particularly the latter category, which has caught the regulator’s eye (Chart 9).

The concern is well founded. Given their structure, IO loans result in a higher average level of indebtedness over the life of the loan than a typical principal and interest payment loan.

Consequently, borrowers are more susceptible to falling into negative equity in the event of a housing price decline, while higher required payments at the end of an IO loan period increases the risk of default.

To make matters more awkward, it is exactly these types of loans that macroprudential tools were used to target in late 2014. The initial response to measures, such as higher interest serviceability requirements, was encouraging.

However, the recent resurgence in these loans raises questions about the effectiveness of these measures in the medium term. The latest Financial Stability Review certainly increases pressure on banks to rein in excessive risk and lenders are already responding, with out-of-cycle mortgage-rate hikes and tougher loan serviceability tests.

However, the persistence of IO and investor loan growth is likely to continue to increase vulnerabilities in the Australian housing market.

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This concept focuses on the relative price of exports to imports and seeks to quantify the domestic purchasing power of an economy and its competitiveness abroad. Using this metric, it is no surprise that Australia emerges as the biggest beneficiary of higher commodity prices (see Chart 8).

The nation’s trade balance has soared, with total exports up 29.7% y/y in February driven by iron ore, coal and natural gas exports. Furthermore, one would expect improving national income to translate into better spending and investment. Looking at the hard data though, the evidence that terms of trade effects are spilling over to domestic activity remains somewhat scant. Retail sales remain sluggish, falling 0.1% m/m in February, while the latest labour report offered little encouragement with unemployment ticking up to 5.9%, while wage growth remains stagnant. Elsewhere, the improvement in corporate cash flow has also been slow to translate to higher wages or capital investment.

On the latter, the Australian Bureau of Statistics’ private capex survey pointed to plans to reduce capex in 2016-2017 and 2017-2018, with mining investment expected to fall by -20% in FY2018. Despite the tepid response from the domestic economy so far, we continue to see Australia as a beneficiary of the global cycle.

Elsewhere in Asia, the repercussions of improving commodity price trends are less clear. As a major commodities importer, Japan proved a key beneficiary of the collapse in commodity prices, with the terms of trade turning positive in September 2015.

However, rising oil prices and a weaker yen meant that the terms of trade narrowed in Q4 last year and turned negative in January. Higher import prices have been associated with weaker consumption and downward pressure on corporate earnings in the manufacturing sector.

However, recent episodes have been triggered by significant currency weakness, rather than commodity price changes. With the currency having stabilised at a level close to the estimated breakeven rate for Japan’s manufacturing sector of ¥110, the impact on corporate profit margins may be limited. If the yen was to see another rapid decline, one suspects the translation effects might be more severe.

Given the importance of the terms of trade to economic activity, can investors avoid being blindsided by volatile commodity price movements? The typical method of forecasting a country’s terms of trade is to identify which goods or services are the most powerful determinant on the terms of trade in the past.

In Australia’s case, non-rural bulk commodities such as iron ore and coal tend to have the biggest impact on the terms of trade. The next task is calculating some form of future demand and supply curve based on mining activity and producer’s cost structures and structural and cyclical estimates of future commodity demand. Using these techniques, the government’s latest estimate is for a fall of around 16% to 2017-2018 (see Chart 9). Caution is probably still wise, but if the global cycle continues to improve we may expect Australian activity to surprise on the upside.

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Here, the outlook remains favourable even if activity is lagging expectations in Q1, while a potentially stimulative fiscal approach waits in the wings. A more intriguing facet of the current pick-up has been the leading nature of Chinese data (see Chart 1).

That sentiment pre-empted improvement elsewhere reflects Beijing’s interventionist instinct.

After a growth wobble in 2015, policymakers reversed course on a series of reforms and boosted spending through budget increases, more lending to local government financing vehicles and the launching of a municipal bond market. In addition, credit conditions eased with interest-rate cuts while housing policies were loosened.

This coordinated effort was designed to reassert Beijing’s authority over the trajectory of domestic growth.

However, by coinciding with stronger developed market demand it amplified a global growth phenomenon. Unfortunately, the stimulus is unlikely to be sustained. Firstly, conditions in China no longer warrant such counter-cyclical measures, with sentiment and activity much improved.

Secondly, the abandoned reforms remain critical to prevent systemic risks, even if they pose a risk to growth in the near term. A more balanced approach from Beijing need not slow global growth if the nascent rebound in domestic demand in other emerging markets continues.

Recessions in Russia and Brazil have alleviated, while higher prices have supported consumption among commodity exporters.

EM import volume growth has surged to the highest level since April 2013, while service PMIs have surged. Whether favourable EM domestic demand trends can be sustained in the event of a more rapid slowdown in China remains to be seen, given the numerous linkages through trade and the commodities complex.

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Stephanie Kelly

Accounting for political risk has traditionally been viewed as more relevant when investing in emerging rather than developed markets. However, after the electoral upsets of 2016 and the rise of ‘populist’ parties across the advanced economies, investors are increasingly aware of the powerful effect politics can have on developed market outcomes.

In the latest edition of Global Horizons, Stephanie Kelly, Political Economist, outlines our analytical framework for assessing the factors that drive political risk and the potential consequences for investors. By identifying risk factors within two distinct categories, institutional and cyclical, it is possible to identify the key drivers of political risk events and build an investment view that takes these factors into account. The framework is especially useful for examining the key political events of 2017 and considering how likely they are to deliver further shocks to the status quo. In particular:

• The French two-round presidential election system makes it difficult for non-centrist parties to win. However, reputational risk for centrist candidates, security-event risks and the recent tendency for polling to understate the support for populist parties mean that a pro-market outcome cannot be taken for granted.
• Germany’s federal election in September and a potential snap election in Italy carry comparatively less risk due to the proportional representation system that these countries use. Populist success would require more mainstream parties to alter their political allegiances dramatically; monitoring party rhetoric carefully for signals of such a turnaround is therefore important.

Stephanie commented “In light of recent elections in both the UK and US, where pre-election polling gave an inaccurate steer about the final outcome, our analysis suggests that uncertainty about political and policy outcomes can lead GDP growth, exchange rates and equities lower, although the magnitude and time scale of this effect varies significantly across markets.“In the presence of political risk, scenario analysis is an effective tool for considering the consequences of different political outcomes. In the case of the US election, our pre-election scenario analysis showed that individual and corporate income tax cuts were a likely consequence of Donald Trump winning the presidential election and Republicans retaining control of both the House of Representatives and the Senate. However, it also pointed to potential conflicts in other areas of policy as the president’s populist agenda rubbed against traditional congressional Republican priorities.

“In the presence of political risk, scenario analysis is an effective tool for considering the consequences of different political outcomes. In the case of the US election, our pre-election scenario analysis showed that individual and corporate income tax cuts were a likely consequence of Donald Trump winning the presidential election and Republicans retaining control of both the House of Representatives and the Senate. However, it also pointed to potential conflicts in other areas of policy as the president’s populist agenda rubbed against traditional congressional Republican priorities.

“While the events of 2016 and wider popular opinion illustrate a strong populist undercurrent in the developed economies, each country remains anchored by domestic institutions and idiosyncratic cyclical dynamics. By analysing political risk in a systematic way, we can dive deeper into the economic and political drivers of populism, the policy responses by mainstream parties and the associated implications for globalisation and the broader economic agenda”.

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Anne Breen

Global asset manager, Standard Life Investments (SLI) expects Sydney and Melbourne office space to be the top performers in Asia Pacific commercial real estate in 2017.

In SLI’s Q1 Real Estate Update, Anne Breen, Head of Real Estate Research and Strategy said she expected another year of healthy economic growth in Asia pacific in 2017 “and another year of attractive returns for Asia Pacific real estate”.

However, she warned there would be losers as well as winners in the region this year.

“The top performers should be Sydney and Melbourne offices given a resilient Australian economy, while dominant prime regional shopping centres should also perform well. The Tokyo office market is peaking and we expect healthy, but lower returns in 2017 as the new supply-line grows.

“Perth offices, Hong Kong office and retail, Singapore office and retail and some mainland China office markets are expected to underperform given high and growing supply, and weakening demand,” she said.

Other SLI Q1 Real Estate Update highlights include:

• 2017 is likely to be another subdued year for the UK real estate market.
• The European real estate cycle is entering a mature phase and the strongest market returns have passed.
• Shifting US policies will affect commercial real estate demand across North America, and there is likely to be increased demand for office and industrial space as companies choose to grow their workforces domestically.

Read the report.

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Between the end of 2014 and 2016 unemployment rates fell in 31 of the 39 advanced economies in the IMF economic outlook database.

Signs of an ongoing acceleration in global growth bode well for further progress. Data last week showed that the US economy continues to create new jobs at a decent clip, helping bring unemployment rates even lower.

Eurozone unemployment has also declined steadily over recent months and survey data suggest that firms’ hiring plans have rocketed to a nine-year high.

In Japan, the unemployment rate has been stable at low levels of late, although rising participation suggests that job creation is pulling workers into the labour market.

The UK bucks the trend slightly, with employment growth slower after the EU referendum. Data issues always make it hard to monitor labour-market performance in emerging markets. However, the composite Purchasing Managers’ Index suggests that job creation is running at a three-year high across this region.

Labour market dynamics will be important in determining how inflation evolves over coming years.

There have been few signs of pronounced inflationary pressures emanating from labour markets, even in those economies which have seemingly brought unemployment towards equilibrium rates (the non-accelerating inflation rate of unemployment (NAIRU) in ‘economist speak’).

There are a couple of explanations here. First, there could be more slack than appears at first glance. Both the Federal Reserve and the Bank of England recently downgraded their estimates of NAIRU following stubbornly subdued wage growth.

Moreover, spare capacity can be hidden from headline unemployment rates, making it important to focus on broader measures of labour utilisation and trends in labour force participation. Second, inflation has over many years shown signs of becoming less responsive to labour market fluctuations (again in economist terms: the Philips Curve has flattened).

Central banks will have to watch these dynamics closely when plotting a course for policy over coming years. Recent evidence suggests that inflationary pressures will build only slowly, although this should not provide an excuse for complacency.

By Jeremy Lawson, Chief Economist

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When we break down PMIs by region, it is clear that despite nine months of consecutive gains in the advanced economies – a time in which the composite PMI jumped from 51.4 to 54.6, sentiment is still only marginally above the level 12 months ago.

Indeed, what the pattern in the data mostly reflects is a rebound following the collapse in sentiment in early 2016 (see Chart 1).

For EM, the rebound has been more persistent, if somewhat bumpier, but still only pushes sentiment back to the levels of late 2014. So are the benefits of an easing of distress in the commodities complex and inventory restocking being misconstrued as cyclical recovery?
While it would be remiss not to recognise the low starting base, there are a number of distinctive improvements in the economic data that suggests the global upswing is the ‘real deal’.

First, the disconnect between buoyant PMI readings and more pedestrian industrial activity has started to fade.

Advanced economies’ production surged towards the end of last year, and core manufacturing components have remained strong, even as the latest headline prints in the US and Germany saw a mild correction. Second, there are signs the corporate capex drought is coming to an end.

This partly reflects the improving earnings environment, but also signals that private sector deleveraging has bottomed.

The jump in equipment investment in Japan and the US in the Q4 national accounts data corroborates the trend.

Looking forward, the indicators for the technology and manufacturing investment cycle bode well, even if gas and oil investment were to plateau.

Finally, trade dynamics point to a meaningful acceleration in global demand. Here too, we should be cautious about the impact that rising commodity prices can have on inflating trade values.

A better indication comes from trade volumes, but they too have turned a corner, jumping 3.5% in H2.

The omens for Q1 are also encouraging with carried over growth expected to push global volumes up 1.2% on the quarter, while our favoured trade bellwether, Korean exports, saw a 11.2% y/y volume jump on a seasonally adjusted sequential basis.

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