Day: 18 May 2020

As European economies slowly start to come out of coronavirus lockdowns, it could be some time before growth returns to pre-crisis levels, according to David Zahn, Franklin Templeton’s Head of European Fixed Income. He says the crisis has been another test for the European Union as the coronavirus has affected some countries more so than others. But he sees this as perhaps the best time in years to invest in European fixed income.

There’s no doubt COVID-19 has been devastating to the European economy, with gross domestic product (GDP) in the euro area contracting 3.8% in the first quarter in Europe. Given the period only included a couple weeks of shutdowns, we saw quite a big impact in a short period of time. We would anticipate GDP is likely to shrink further in the second quarter, but then hopefully we will see growth rebound a bit in the third and fourth quarters. For the year as a whole, we could see European GDP down 10% or more.

Disparate Impacts, Disparate Needs

COVID-19 has impacted countries in Europe differently. As such, individual needs have differed, as have local government responses to the crisis. In our view, the European Union’s (EU’s) response so far has been weak; policymakers are still debating how much stimulus is needed and in what form, while individual countries have already taken actions. We are seeing almost a “Balkanisation” of Europe, in that some countries have dealt with the virus more effectively, have suffered less impact from it, and thus have been able to reopen their economies earlier than others. Italy and Spain are not allowing movement in and out of the country, for example, but Lithuania, Estonia and Latvia are allowing movement amongst them as a block. So, we will see certain country groupings where slow movement of trade and people is allowed.

Tourism is vital for many European economies, so a lack of travel during the summer season ahead is likely to have longer-term impacts on certain countries more than others. For example, travel and tourism represent roughly 15% of Spain’s GDP, so a prolonged drop off in travel is likely to negatively impact Spain more than some other countries.

There has been some fiscal stimulus to tide people over while they are at home, but in our view, additional stimulus will be needed as countries come out of lockdowns to get economies moving. We are seeing early signs of progress, but there’s also human psychology to deal with—what will make people feel safe to come back out of their homes, travel and spend?

It could take several years for the European economy to get back to the growth level prior to the pandemic, and there will be hiccups. Economies have never been stopped and then restarted on this type of scale.

Looking at the United Kingdom, policymakers on the fiscal and monetary side have come out with a strong support package—in that sense, we think they’ve taken the right actions to support the economy. On May 12, the UK government announced its furlough programme will be extended into October, so people out of work will have income coming in for a few more months.

In our view, the Bank of England (BoE) will probably announce more quantitative easing at its next meeting in June. The economic fallout in the United Kingdom has been similar to broader Europe, with GDP this year likely down about 10%, so we think the central bank will need to be ultra-accommodative and continue to buy bonds into the summer and beyond. As such, we think gilts will continue to perform well.

German Court Adds Wrinkle

The European Central Bank (ECB) has been ultra-accommodative—and with inflation not near its target, it can be. At the most recent policy meeting, the ECB announced new targeted longer-term refinancing operations (TLTRO III) at -1% and pandemic emergency longer-term refinancing operations (PELTROs) at -0.75 basis points, so bank funding is very inexpensive right now. The ECB also announced its €750 billion pandemic emergency quantitative easing programme of bond buying may need to be increased.

Meanwhile, we are seeing friction between one country—Germany—and pan-European institutions. The German constitutional court ruled on 5 May that the ECB’s 2015-2018 bond-buying programme didn’t respect “the principal of proportionality” and may have financed government deficits. While the ruling didn’t target the current program tied to the coronavirus, some observers say there could be implications down the road—it too could later be deemed illegal. It’s an interesting wrinkle that represents a test to the strength of the EU, pitting north against south.

Spain and Italy to the south were hit hardest by the coronavirus and have said they need more help. They support the issuance of “coronabonds,” a new debt instrument that would be backed by all countries in the eurozone to fund the crisis fallout. Meanwhile, Germany and the Netherlands are against the bonds.

There has been debate about a joint pandemic response plan as well. The northern countries generally favour loans that must be paid back, while the southern countries want grants. This type of disagreement harkens back to the 2011 sovereign crisis in Europe, which similarly pitted Italy and Spain against Germany and the Netherlands. The two sides of the eurozone are arguing again in terms of who should pay for the current crisis—and how.

What’s different today is that COVID-19 represents an external shock from a humanitarian event that is nobody’s fault. It seems like it should be fairly easy for the two sides to come together. If we don’t see EU countries come together with a solid, unified pandemic response, we are sowing the seeds for more distrust. There could be renewed noise about the future of Europe.

Given the poor outlook for economic growth and employment in the near term, in our view something will be needed to get the European economy restarted. There will be a European-wide assistance program coming, but slower than other individual countries. This easy money policy will be with us for several more years.

Brexit Issues Will Bubble Up Again

While Brexit headlines have taken a bit of a backseat to the coronavirus, there are still issues to be worked out—namely a trade deal. The United Kingdom has a deadline of 1 July to ask for an extension, but the UK government hasn’t asked for one. There is a template, but the EU countries want access to UK fishing waters, or they won’t do a deal. Both sides are digging in their heels, but neither side can afford a no-deal Brexit because neither the EU or UK economy is doing very well right now. We may see some brinkmanship but with trade currently reduced, maybe it doesn’t matter as much if there isn’t a trade deal.

Another interesting point is that the EU prohibits bilateral agreements between individual countries. However, with the coronavirus situation, we are seeing individual countries forming small travel and trade blocks, as noted previously.

If the United Kingdom does ask for an extension, that raises an interesting question: Would the United Kingdom be expected to contribute to a pandemic fund?

Franklin Templeton Key risks & Disclaimers:

Important Legal Information

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as of publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.

Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own professional adviser or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Issued in the U.S. by Franklin Templeton Distributors, Inc., One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com—Franklin Templeton Distributors, Inc. is the principal distributor of Franklin Templeton’s U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

What are the risks?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging market countries involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Such investments could experience significant price volatility in any given year.

MeDirect Disclaimers:

This information has been accurately reproduced, as received from Franklin Templeton Investment Management Limited (FTIML). No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

An article written by Ray Calleja: Head – Private Clients, MeDirect

In the previous article when we discussed the when and how to buy a mutual fund, we touched on the matter of the cost involved, mainly the fee charged by MeDirect whether you are buying a fund online on your own or through our Advisory service.

Today we will discuss the investing costs actually charged by the fund itself. This can be a key factor in your final investment decision bearing in mind that any service charges for mutual funds come right off the top of your investment or straight out of your returns. Unfortunately, many investors are not aware of how much they are paying for their mutual funds.

Although costs alone should not be driving your investment decisions, it is very important to understand what is charged to your fund.

Sales Charges and Annual Expenses

There are two general categories of mutual fund costs – sales charges and annual expenses. A sales charge, often referred to as a load, is the broker’s sales commission or it is deducted from your investment when you buy the fund. Not all funds have an associated load. Most of the funds that we offer in our Advisory service do not have a front-end and back-end load other than the trading fee charged by the Bank, referred to above and in the previous article, i.e. 0.5% for online purchases and 0.75% for purchases effected via advisory, at the time of buying into the fund. For information purposes a front-end sales load is paid when you purchase fund shares while a back-end or deferred sales load is paid when you redeem your shares.

On the other hand, all funds charge annual expenses to cover the fund’s operating costs, including management fees, distribution and service fees and also general administrative expenses. These expenses are deducted from the fund before its returns are calculated.

Operating costs are common to most mutual funds and these are disclosed in the fund’s prospectus and annual report, usually as a percentage of assets and it represents the fund’s cost of doing business. So, for example, if ABC Mutual Fund has assets of €500 million and charges €4m in expenses, it will report an expense ratio of 0.8%.

These expenses are paid out of the fund’s overall assets, not charged directly to an individual shareholder and such deductions reduce the fund’s overall portfolio value.

A particular fund, including a no-load fund (as in most cases of mutual funds found on MeDirect’s wealth platform) may charge some or all of them, depending on how the fund is structured:

• Management fees – These pay the fund’s investment manager or management firm for making investment decisions about which securities to invest in and when to buy and sell.
• 12b-1 fees – Named after the section of the law that allows them, 12b-1 fees pay for the fund’s advertising and sales expenses. Not all funds charge this kind of fee. Around half of them do not.
• Reinvestment fees – These may be charged when you reinvest distributions, such as dividends, back into the fund.
• Exchange fees – These may be imposed when you switch your assets from one fund to another within the same fund company.
• Custodial fees – These are charged by the custodian (generally, the bank or other financial institution holding the fund assets in-house) for the service it provides.
• Administrative fees – These include everything from rent to shareholder services such as mailing out of prospectuses, annual reports, and account statements.

There are other costs which are not included in the expense ratio but instead are listed separately in a fund’s annual report or statement of additional information. Such costs include the brokerage costs, which are incurred by a fund as it buys and sells securities.

MeDirect’s website provides comprehensive information about each fund available for trading on the bank’s online platform and such information includes a section called Fees and Charges in the Key Information section, where you will know upfront what you will be paying in terms of Entry Fee; Custody Fee; Exit Fee and Ongoing Fee (or annual expenses). The ongoing fee includes a portion that is paid back to the Bank by the Fund Management Company as the trailer fee or retrocession.

In Europe, with the introduction of MIFID II regulations in January 2018, stricter rules have come into place in the way costs and charges are calculated and presented for funds. These changes apply to all asset management transactions where there is a cost of investing money in the market. The fund industry is under continued and deepening regulatory scrutiny, across all aspects of the business for the protection of the retail investor.

MeDirect’s Annual Costs and Charges Report

At MeDirect our investment customers receive their annual costs and charges report, which includes fees and charges related to mutual funds. The bank believes that it must not only be fully compliant with all the laws and regulations, but just as important is the need to provide transparency to our customers with important information which allows them to make informed investment decisions.

This annual statement lists the service fees collected by the Bank (as the investment firm), as an amount and also as a % of the value of investments.

The Costs and Charges are shown under three headings, namely

• The Investment Service and/or Ancillary Services, which refer to costs charged by MeDirect for the provision of investment services related to all investment securities (not just mutual funds). These may include any transaction charges such as when buying mutual funds, foreign exchange fees as well as capital gains tax and withholding tax on interest and dividends.
• The Investment Product Costs, which are fees embedded within the trading price/net asset value (NAV) and are charged directly by the fund house for mutual funds. Such costs apply to all investors. These may include any transaction fees, ongoing charges including distribution fees, performance fees and management fees (excluding trailer fees), as explained above.
• Third Party Payments Received by MeDirect shows the payments received by the bank from fund houses, and this refers to the portion of the management fees which the fund house pays the bank as a distributor of the mutual fund. This is also referred to as trailer fee or retrocession. On average this is 0.5% per annum of the client’s value of the investment in the fund. Please see example below.

The Costs and Charges statement also shows the cumulative effect of cost and charges on the return by displaying the return before the deduction of cost and charges and the return after the deduction of cost and charges, as a percentage of the value of the investment. Please see example below.

The report shows the effect charges have when comparing the return before and after the applied charges.

The return on investment calculation is based only on investments that are settled up to the last business day of the reporting period of the statement (e.g. 31 December xxxx). Pending orders or investments that are not fully settled are not taken into consideration. The return on investment calculations includes unrealized gains/losses as at the last day of the reporting period and also take into account cash distributions (dividends and interest) paid out on the client’s holdings, as well as any capital gains value, realized during the year.

Any costs or charges incurred in foreign currency and/or return on investment valuations based on holdings in foreign currency are converted into euro, using exchange rates applicable as at the last date of the reporting period.

Important Documents

Fund groups who market their funds for sale within Europe, including Malta, must produce a document for each fund (at share class level) called a Key Investor Information Document (KIID). Acting as a simplified prospectus, and around 2 pages long, the KIID has to be laid out in a standardised format which will allow investors to compare funds side by side. The purpose of the document is to provide information to retail investors in a straightforward and easy-to-understand format but which delivers critical information about the fund.

It is natural that you want to avoid unnecessary charges wherever possible. The bottom line for any investment is how it performs for the investor, and assessing that performance requires thoughtful consideration of all commission, fees and expenses. Just as important are a fund’s investment objectives and risks, which can also be found in the prospectus available for the fund. This should be read carefully, and questions asked about the fund’s published return figures, in the Annual Report. These documents are all available on MeDirect’s website in the Legal Documents section for each mutual fund and are kept up-to-date on an ongoing basis. In the next article we will go over the details of the most important documents related to mutual funds.

The above is for informative purposes only and should not be construed as an offer to sell or solicitation of an offer to subscribe for or purchase any investment. The information provided is subject to change without notice and does not constitute investment advice. MeDirect Bank (Malta) plc has based this document on information obtained from sources it believes to be reliable but which have not been independently verified and therefore does not provide any guarantees, representations or warranties.

MeDirect Bank (Malta) plc, company registration number C34125, is licensed by the Malta Financial Services Authority under the Banking Act (Cap. 371) and the Investment Services Act (Cap. 370).

The financial instruments discussed may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein. 

If you invest in any of the products discussed you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

Head of Equities at Franklin Templeton, Stephen Dover gives his take on the new globalisation, how the US Midwest may be the next emerging market, and what he thinks it means for strategic industries and supply chains.

The global spread of COVID-19 may drive changes in the way countries and companies engage with each other globally. There were already trade wars and a growing anti-globalisation movement prior to the current crisis. As people look to their own governments for guidance in this health crisis, a rise in nationalism is to be expected. Is globalisation dead? No! I believe COVID-19 is a catalyst for a new globalisation to emerge.

• Newly defined “strategic industries” will require local sourcing and manufacturing. Health care and health supplies, food services, 5G networks, telecommunications and perhaps some additional technologies will increasingly be domestically manufactured.

• Supply chains will change from “just-in-time” inventory management and manufacturing to “just-in-case.” Companies are likely to move manufacturing and supply chains away from China toward other countries and home. This will be less efficient and more costly for companies and ultimately more costly for consumers.

• Companies that help localize supply chains will benefit. Technological innovations such as robotics, 3D printing, artificial intelligence and automated production facilities will allow manufacturing to be more local.

• “Work from home” becomes “work from anywhere.” Many businesses will either allow or require their employees to work from outside of the office into the foreseeable future. While manufacturing may localise, this will allow companies to unitise workers from any location globally. Working from home creates huge cybersecurity issues, which should be a good opportunity for cybersecurity companies.

• A possible resurgence in industrial spending. Investment could become a larger part of the economy as companies bring manufacturing home.

• The Midwest of the United States may become a “new emerging market.” As US companies seek to source manufacturing locally, the Midwest could offer the right mix of workforce and an affordable standard of living.

• New restrictions on capital flows and foreign investment: The loans and grants that governments have given companies during the crisis will give them more leverage to dictate how companies behave. Governments may restrict foreign capital investment and foreign ownership of their domestic companies.

I don’t believe we had real globalisation before COVID-19. China produced most of the world’s exports and the United States was—and remains—its largest customer. The United States and other developed countries are likely to diversify their supply chains, particularly to other emerging markets. And so, that’s positive for neighbouring countries that can easily supply developed markets, such as Southeast Asia or Mexico.

Franklin Templeton Key risks & Disclaimers:

Important Legal Information

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as of publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.

Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own professional adviser or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Issued in the U.S. by Franklin Templeton Distributors, Inc., One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com—Franklin Templeton Distributors, Inc. is the principal distributor of Franklin Templeton’s U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

What are the risks?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging market countries involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Such investments could experience significant price volatility in any given year.

MeDirect Disclaimers:

This information has been accurately reproduced, as received from Franklin Templeton Investment Management Limited (FTIML). No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.