Page 27 | Groupe financier Connor, Clark & Lunn ltée

Chinese money / credit trends remain weak but could be at a turning point.

Six-month rates of change of broad money and total social financing have stabilised above June lows – see chart 1. (Broad money here refers to M2 excluding money holdings of financial institutions, which are volatile and less informative about economic prospects.)

Chart 1

Narrow money is contracting at a record pace but has been distorted by regulatory changes in April that have reduced the attractiveness of demand deposits, resulting in enterprises shifting into time deposits and money substitutes while repaying some short-term bank borrowing. (The “true M1” measure shown adds household demand deposits to the published M1 aggregate to align with international monetary convention.)

Chart 2 compares six-month rates of change of the raw narrow money series and two adjusted measures. The first assumes that the share of demand deposits in total bank deposits of non-financial enterprises would have remained at its March level in the absence of the regulatory changes. The second additionally adds the inflow to instant-access wealth management products (WMPs) since end-March (data sourced from CICC), on the assumption that this represents a transfer from demand deposits. Six-month momentum of the latter measure was similar in July to the series low reached at end-2014.

Chart 2

A key reason for expecting money / credit reacceleration is that the yen rally has relieved pressure on the RMB, easing monetary conditions directly and opening up space for further PBoC policy action. The balance of payments turnaround is confirmed by a swing in the banking system’s net f/x transactions, including forwards, from sales of $58 billion in July to purchases of $10 billion in August. This series captures covert intervention via state banks (h/t Brad Setser) and an August reversal had been suggested by a sharp narrowing of the forward discount on the offshore RMB, which has remained lower so far in September – chart 3.

Chart 3

Actual and expected monetary easing has been reflected in a further steepening of the yield curve, which has correlated with, and sometimes led, money momentum historically – chart 4.

Chart 4

An easing of Chinese monetary conditions coupled with the start of a Fed rate-cutting cycle could have a powerful monetary impact in Hong Kong, where six-month momentum of local-currency M1 recently returned to positive territory, having reached its weakest level since the Asian crisis in October 2022 – chart 5.

Chart 5

After delaying the inevitable, it’s finally time to upgrade the family car. Now you’re wondering whether to switch to an electric vehicle (EV) or plug in hybrid (PHEV) or stick to the traditional internal combustion engine (ICE) vehicle?

The answer varies by region. In key markets like China, Europe and the United States, the penetration for new EV or hybrid sales ranges from 10.4% to 51%. China leads with over twice the penetration levels of Europe and five times that of the US.

Figure 1 – Global plug-in sales in key markets

Source: Autodata, CPCA, CAAM, KBA, CCFA, OFV, Macquarie Research, August 2024; *Sales in France, Germany, UK, Italy, Norway, and Sweden comprise around 80% of the total European sales

A survey conducted by McKinsey found that 49% of current EV owners in Europe and 46% in the US are likely to switch back to an ICE vehicle due to the lack of public infrastructure and the high total ownership cost. In China, only 28% of current EV owners are considering switching back.

Chinese citizens have made their decision and it’s clear to us where the trend is heading. As of July 2024, China has surpassed the 50% mark for new vehicles purchases being EV or hybrids. Some might find it surprising considering the penetration was closer to 10% during early 2021, according to Macquarie Research.

Figure 2 – China vehicles sales volume

Source: Macquarie Research

The penetration trend is attributed to government support. The Chinese government unveiled a 520B yuan ($72.3B) package of tax breaks over 4 years for EVs. From 2024-2025 all new EVs purchased will be tax-exempt and during 2026-2027 the tax exemption will be reduced by half.

A company well position to benefit from the transition from ICE vehicles to EV or PHEV in China is Hongfa Technology (600885 CH). Hongfa is the largest relay manufacturer, with 40% share of the global market in the high volt direct current (HVDC) segment (70% in its domestic market). Hongfa supplies HVDC relays to most major EV original equipment manufacturers, including Tesla, Volkswagen and BYD.

Unlike ICE vehicles that adopt 12-48V electrical systems, EVs typically operate at over 200V requiring greater reliability, insulation, durability under high voltage, large currents, high temperatures and the ability to extinguish electric arcs.

A typical EV requires 5-8 units of HVDC relay including 2 main relays, 1 pre-charge relay, 2 normal charging relays, 2 fast-charging relays (not required for PHEV) and 1 auxiliary relay. Average content per vehicle ranges from RMB750-1,250 for battery electric vehicles (BEV) and RMB500-850 for PHEV.

Figure 3 – HVDC relay in electric vehicles

Source: Hongfa Technologies, BofA Global Research

The growing demand for relays is driven by three factors:

EVs require a higher content per vehicles when it comes to relays.
EVs require special relays to handle the arcs, which has a higher price point.
EV manufacturers transitioning from 400V to 800V infrastructure (+30% relays vs 400V).

The competitive advantage comes from three main factors:

Lowest cost manufacturer due to scale and vertical integration.
High quality, with a customer complaint rate of ceramic high-voltage DC relays being less than 0.5 ppm.
Stickiness, as relays approved for car builds are not interchangeable due to third-party verified regulations. Hongfa works with EV makers during the design phase, 3 to 5 years before launch.

We believe the company will greatly benefit from the transition to EVs and is well-positioned to thrive within its market, given its leading position, high-quality products and growing demand for HVDC relays.

The recent push by Mexico’s ruling Morena Party to undermine the country’s judiciary is a perfect example of why relying on company fundamentals alone in emerging markets can leave investors exposed to being whipsawed by macro factors.

We covered election risks across EM In July – Political risks in EM spike as Indian, South African and Mexican elections surprise – and flagged that outgoing president AMLO and president-elect Claudia Sheinbaum threaten to undermine Mexico’s institutional quality through a series of regressive reforms. The most damaging of these is the proposal to overhaul the country’s judicial system through having all judges elected by popular vote, along with relaxing the term limits and age/experience hurdles for Supreme Court justices.

As the Financial Times put it in September (FT: Mexico’s retrograde path on the rule of law):

Mexico is barrelling ahead with one of the world’s most radical shake-ups of a legal system, alarming investors and citizens alike. In his final month in office, President Andrés Manuel López Obrador is using his coalition’s congressional supermajority to ram through constitutional changes to change the entire supreme court and several thousand state, federal and appeal court judges with replacements elected by popular vote. Candidates for some posts will need only a law degree, five years of undefined “legal experience” and a letter of recommendation from anyone in order to run.

Lawmakers have been on strike in recent months protesting the move, but to no avail. In September, Morena wielded supermajorities in both the lower house and Senate to push the reform through, which will see thousands of judicial positions up for election over the next three years. Rather than officials working their way up the legal hierarchy, the judiciary will now be exposed to the corruption, bribery and intimidation of Mexico’s cartels, according to critics.

Snatching defeat from the jaws of victory

Mexico should be in prime position to benefit from supply chain reshoring following the pandemic and ratcheting-up of the Sino-US dispute. Indeed, FDI (much of it from China – Why Chinese Companies Are Investing Billions in Mexico – The New York Times (nytimes.com) was pouring into the country to pursue a bright trade story. We saw this in the sharp appreciation of the Mexican peso and a bull market in Mexican equities through 2023 (MSCI Mexico up 42% in USD terms) with the market a favourite among foreign investors.

US imports from Mexico have outpaced imports from the rest of the world
US imports, index Jan. 2017 = 100

Source: GBM Nearshoring Barometer, August 2024.

Mexico a favourite for foreign equity investors through 2023

Source: EPFR

Sentiment soured on deterioration in the political outlook as Morena’s dominant performance in Mexican elections in June emboldened the party to pursue a series of regressive policies. As we noted in June:

Investors fear that a strengthened mandate will allow Sheinbaum (or even an outgoing AMLO) to undermine judicial independence and pursue plans to eliminate autonomous government agencies overseeing telecoms, energy and access to information, as well as weaken electoral supervisory bodies.

Currency overvaluation correcting in Mexico and Brazil
Real broad effective exchange rates, % deviation from 5y ma

Source: NS Partners and LSEG Datastream

From being one of the consensus overweights among EM investors last year, Mexican equities have been hammered in 2024. MSCI Mexico is down 21% in USD terms to mid-September, while the broader index is up 7%.

Source: Bloomberg

Losing the FDI beauty pageant

As one trade official explained to us on a recent research trip in India, competing for FDI is a beauty contest where participants must maximise their appeal relative to their competition to attract those seeking to deploy capital. China’s retrogressive turn to favour state-owned enterprises rather than the entrepreneurs that fuelled its economy’s meteoric rise is a golden opportunity for ambitious leaders in other emerging markets to step up and attract capital and supercharge development. We are seeing this across ASEAN and in India, eastern Europe and the GCC.

But none have Mexico’s advantage of geographic proximity to an economic juggernaut in the US. President-elect Sheinbaum has talked up Mexico’s nearshoring potential and support for private investment in recent months. However, the rhetoric belies an agenda to undermine Mexico’s institutions, which has unnerved key trade partners and investors.

Nothing scares investors and compromises progress up the development ladder more than attacks on key institutions such as the judiciary. In August, the US Chamber of Commerce warned the Mexican government that the reforms would be likely jeopardise trade relations:

“The U.S. Chamber of Commerce respectfully calls on the sovereign Government of Mexico to continue deliberations with the private sector, academics and legal experts on the package of reforms the new Mexican Congress intends to consider in September. This dialogue is essential to ensure that the proposed reforms contribute to strengthening the rule of law and conditions for economic growth in Mexico.

Given our longstanding commitment to Mexico’s growth and prosperity, the U.S. business community is an important stakeholder in the reform process. American companies represent by far the largest source of foreign direct investment in Mexico and provide good jobs to millions of Mexicans. Whether operating in the U.S., Mexico or anywhere else in the world, American businesses depend on respect for the rule of law as the foundation of a vibrant investment climate, sustainable development, and job creation.

While there is a broad consensus about the need to strengthen Mexico’s judicial system, we strongly believe that certain constitutional and legal reforms currently proposed by the Mexican government – in particular, the judicial reform and the proposed elimination of independent regulatory agencies – risk undermining the rule of law and the guarantees of protection for business operations in Mexico, including the minimum standard of treatment under the U.S.-Mexico-Canada Agreement. The reforms also put at risk Mexico’s obligations under other international treaties to provide all with the right to a competent, independent, and impartial judicial system.

Further deliberation to address these concerns is needed to avoid jeopardizing the incoming Mexican government’s ability to generate shared prosperity and to tap into the potential of nearshoring to strengthen the country’s economic growth and development.”

Macro matters – downgrading Mexico

Our process involves scoring the level of team conviction for every emerging market each month and includes an assessment of the direction of travel for politics in the short run and institutional quality in the long run. The trajectory is negative on both counts, and we think souring sentiment could have some way to run.

We have been underweight and defensively positioned in Mexico for well over a year, on a view that a slowing US economy would be an economic drag for Mexico. The deteriorating political backdrop flows through to a downgrade of our conviction rating for Mexico, and consequently a reduction in exposure. The market is already trading at a significant valuation discount to the 10-year average, but we think it can get cheaper still.

Portfolio activity

We sold our defensive staple Walmex last month, in favour of shale oil producer Vista Energy. While listed in Mexico, Vista is actually an Argentinian company boasting a growing production profile. Its shale assets in the Vaca Muerta (Spanish for Dead Cow) geologic formation are some of the best in the world. In contrast to Mexico, there are also some signs that the political backdrop in Argentina is improving under libertarian president Javier Milei, including efforts to deregulate the oil and gas sector which could provide an additional tailwind for Vista.

The race is on

As Mexico falters, we expect competition to reap the fruits of reshoring to heat up. ASEAN, the GCC and India are all banging on the door for foreign investment flows. Political stability, as well as safeguarding and improving institutional quality, will be the keys to success.

Monetary considerations argue that the ECB’s latest inflation forecast, like earlier projections, will be undershot.

Annual growth of broad money – as measured by non-financial M3 – returned to its pre-pandemic (i.e. 2015-19) average of 4.8% in October 2022. Allowing for a typical two-year lead, this suggested that annual CPI inflation would return to about 2% in late 2024 – see chart 1. The August reading was 2.1% (ECB seasonally-adjusted measure).

Chart 1

20240918_NSP_MMM_C1_EurozoneConsumerPricesBroadMoney

The ECB staff forecast in December 2022 was more pessimistic, projecting annual inflation of 3.3% in Q4 2024. The forecast for that quarter was still up at 2.9% in June 2023 after natural gas prices had collapsed.

Annual broad money growth continued to plunge in 2023, reaching a low just above zero in November, since recovering to a paltry 2.5%. Simplistic monetarism, therefore, suggests that inflation will move below target in 2025 and remain there into 2026 – chart 2.

Chart 2

20240918_NSP_MMM_C2_EurozoneConsumerPricesBroadMoney

The September 2024 ECB staff forecast, by contrast, shows inflation rising in Q4 and remaining above 2% until Q4 2025.

The monetarist relationship, taken at face value, implies a period of annual price deflation in H2 2025 / H1 2026. The judgement here is to downplay this possibility and regard the current monetary signal as directional rather than giving strong guidance about levels.

It is possible that the stock of money is still above an “equilibrium” level relative to nominal GDP. The current ratio is below its 2000-19 trend but in line with the 2010-19 trend, and higher than at end-2019 – chart 3. There may still be “excess” money to act as a deflation cushion.

Chart 3

20240918_NSP_MMM_C3_EurozoneBroadMoneyasofNominalGDPNon-FinancialM3

The forecast of a target undershoot requires services inflation – an annual 4.2% in August – to break lower. The price expectations balance in the EU services survey has displayed a (loose) leading relationship with annual services inflation historically, with the current reading consistent with a move down to about 2.5% in H1 2025 – chart 4.

Chart 4

20240918_NSP_MMM_C4_EurozoneServicesCPIEUCommissionServicesSurveyPriceExpectationsBalance

Decarbonization continues in parts of the world, although there is a long way to go. Ongoing use of coal amid rising energy demand somewhat negates the transition to natural gas and/or the implementation of carbon capture technologies. On average, coal-fired power plants emit about 2.2 to 2.5 tons of CO2 per megawatt-hour (MWh) of electricity produced. By contrast, natural gas-fired power plants emit about 0.4 to 0.5 tons of CO2 per MWh.

But the good news is that we are making strides in other areas. Consider green steel.

Traditional steelmaking emits approximately 3 billion tons of CO2, mostly from smelting which turns iron ore into steel. This process is very energy intensive and is a top-3 CO2 emitter, with electricity production at number one and cement number two. However, metallurgical processes to turn iron ore into steel are now converting from traditional furnace smelters, which emit 2 tons of CO2, to low-energy Electric Arc Furnaces (EAF), which emit 0.5 tons per ton of steel.

Historically, new metallurgical processes have been difficult to scale. Fortunately, the steel industry, as it moves towards greener production methods, has been borrowing proven technology from its aluminum counterparts. EAF today play a crucial role in the global steel industry, with around 2,500 to 3,000 units in operation and a combined capacity of approximately 500 to 600 million tons per year. The share of EAFs in global steel production is around 5% and growing, reflecting their expanding importance in the industry and in a (slowly) decarbonizing world.

Major steel-producing regions like North America, Europe, China, and India are enhancing their EAF capacities to improve sustainability and reduce carbon emissions. Recent EAF investments include Nucor, $2.7 billion for 3 million tons of steel in 2024, and Steel Dynamics, $1.9 billion for 3 million tons in 2024. Cleveland Cliff, Arcelor and Gerdau are also transforming to EAF.

Transforming the entire supply chain will produce green steel, which represents a transformative shift in the steel industry towards significantly reduced CO2 emissions and more sustainable practices. Key technologies in this greening process include hydrogen-based steelmaking, EAFs powered by renewable energy, and advanced methods like molten oxide electrolysis. While there are challenges, including high costs and technical feasibility, green steel holds promise for a more sustainable future in steel production.

One company benefiting from EAF is Australian-based iron ore producer Champion Minerals (CIA:AU). By acquiring a distressed Canadian asset from Cleveland Cliff in 2017, Champion revitalized the asset towards producing over 12 million tons of iron ore per year. This North American asset represents the main value of the company, as it has received over USD$4.8 billion of investments over the years from past and present owners. Its products receive a premium to market, justified by the quality of its iron ore.

Champion has multiple catalysts on the horizon. For example, they are adding transportation links to help reach nameplate production of 16 million tons, and start-up of its EAF material processing facility will soon commence. As well, any further steel tariffs on Chinese steel will help bolster demand for its production, particularly among the new EAF North American steel mills. Indeed, Champion expects its exports to China to decrease from 70% to 30% in the coming years as the firm switches to markets closer to home.

This client diversification has many positive implications for Champion, and savings on cross-ocean transit costs are worth the EAF investment alone. It is important to note that all the electricity used in Champion Minerals operations are from hydropower except for the mobile fleet. It is therefore a definite leader in green steel branding.

There are other methods of reducing CO2 emissions while producing steel. We own a small position in Aperam (Apam.NA), which produces steel from its facilities in Brazil, Belgium and France. Aperam was spun out of ArcelorMittal at the start of 2011. Their Brazilian facility uses charcoal from a series of eucalyptus forests owned and managed by the group, rather than coking coal. Their European facilities use EAF furnaces fed with scrap.

(EAF requires scrap steel, as it is does not work well with high contaminant iron ore. Producers of iron ore have adjusted and are now producing high-quality ore, as well as metal bars instead of contaminated iron powder.)

We are also exposed to EAF in other commodities, specifically copper. The copper market is 10 times smaller than steel, so CO2 headlines have been less prolific. Yet copper CO2 emissions are still fairly elevated, at 3 tons of CO2 per ton.

Aurubis AG (NDA.GY) is a leading global provider of non-ferrous metals, particularly copper, and it operates several key assets and facilities across the globe. The company’s assets include smelting and refining facilities in Germany, Bulgaria and Finland. The Helsinki and Luebeck facility are flash smelting furnaces, which emit around 1.5 to 2.5 tons of CO2 per ton of copper produced. This is lower compared to traditional furnaces. Aurubis also operates EAF facilities at different production sites.

Aurubis has leading recycling operations in Europe, especially for copper, and it is developing the copper recycling market in North America. The company recently opened a new smelting facility in Richmond, British Columbia.

The days of complete green steel are likely years away, but they are within view. We continue to follow developments in these areas so as to participate in important decarbonization investment themes going forward.

The “double dip” downturn in global manufacturing continued last month.

Global manufacturing PMI new orders fell steeply from a peak in May 2021 to a trough in December 2022 (first dip), with a subsequent recovery ending in May 2024. The second dip was confirmed by a sharp fall to below 50 in July, with the index unchanged in August – see chart 1.

Chart 1

As the chart shows, an alternative global indicator based on national surveys weakened further last month.

The alternative indicator implies a shorter interim recovery between the two dips than the PMI, starting from May 2023 and ending in January 2024. These timings align better with turning points in global six-month real narrow money momentum (low in June 2022, high in December 2022) – chart 2.

Chart 2

The September 2023 low in real money momentum suggests that the double dip will bottom out by end-2024.

A key issue is whether manufacturing weakness will now transfer to services.

Services indicators remain mixed. The global services PMI new business index regained its May high last month and is close to the pre-pandemic average – chart 3.

Chart 3

Order backlogs, however, fell further and are well below the corresponding average, as they are in manufacturing – chart 4. The decline suggests that current output is running above the (increased) level of incoming demand.

Chart 4

Accordingly, services firms are curbing hiring, with the sector employment index falling sharply in August and almost as weak as in manufacturing – chart 5.

Chart 5

Rises in the global services PMI activity and new business indices last month partly reflected further strength in US components. The corresponding measures in the US ISM services survey are weaker, however, especially relative to pre-pandemic averages – chart 6.

Chart 6

The PMI surveys continue to support the expectation here of rapid easing of services price pressures and likely inflation undershoots by H1 2025. Output price indices for consumer goods and services remain close to their 2015-19 averages, a period when G7 annual core CPI inflation averaged 1.6% – chart 7.

Chart 7

Investissements immobiliers Crestpoint Ltée (Crestpoint) a annoncé aujourd’hui l’acquisition d’une participation de 50 % dans un portefeuille à trois composantes (le Portefeuille) de Loblaw Properties Limited et de Shoppers Realty Inc. La transaction d’acquisition a été conclue dans le cadre d’une coentreprise à parts égales avec une société affiliée de Choice Properties Real Estate Investment Trust (Choice Properties).

Le portefeuille est composé d’un centre de distribution et de deux immeubles commerciaux. Le centre de distribution est une installation de distribution à double chargement de 711 000 pieds carrés située à Mississauga, en Ontario. Les deux immeubles de détail comprennent un Real Canadian Superstore de 150 000 pieds carrés à Winnipeg, au Manitoba, et une participation dans le titre de copropiété au rez-de-chaussée du 60 Carlton Street à Toronto, en Ontario, anciennement Maple Leaf Gardens. Construit à l’origine en 1931, cet immeuble emblématique était l’aréna principal des Maple Leafs de Toronto jusqu’en 1999, mais il abrite maintenant 95 000 pieds carrés d’espace de commerce de détail, y compris une épicerie vedette de Loblaws, un comptoir de la LCBO, un emplacement Joe Fresh et 150 espaces de stationnement souterrains. La Toronto Metropolitan University conservera la propriété de l’étage supérieur de la propriété qui abrite le Mattamy Athletic Centre.

Le portefeuille est entièrement loué depuis plus de 15 ans et est appuyé par la société mère de catégorie investissement de Loblaw et de Shoppers, Loblaw Companies Limited. Crestpoint, au nom de Stratégie immobilière de base plus Crestpoint (son fonds à capital variable), a conclu cette coentreprise avec Choice Properties (TSX : CHP.UN), la plus importante FPI au Canada, qui compte plus de 700 immeubles évalués à 16,7 G$ et dont la capitalisation boursière est d’environ 10,6 G$.

La conclusion de cette acquisition porte l’actif sous gestion total de Crestpoint à environ 10,4 milliards de dollars et de 38,3 millions de pieds carrés.

À propos de Crestpoint

Investissements immobiliers Crestpoint Ltée est une société de gestion de placements immobiliers commerciaux qui cherche à fournir aux investisseurs un accès direct à un portefeuille diversifié d’actifs du secteur immobilier commercial. Crestpoint est membre du Groupe financier Connor, Clark & Lunn, une société de gestion de placements dotée d’une structure multientreprise qui offre des produits et des services de gestion de placements à des clients institutionnels et à valeur nette élevée. Comptant des bureaux au Canada, aux États-Unis, au Royaume-Uni et en Inde, le Groupe financier Connor, Clark & Lunn et ses sociétés affiliées gèrent collectivement un actif d’environ 133 milliards de dollars. Pour obtenir de plus amples renseignements, veuillez consulter le site www.crestpoint.ca.

Personne-ressource

Elizabeth Steele
Directrice, Relations avec les clients
Investissements immobiliers Crestpoint Ltée
416-304-8743
[email protected]

When global investors think of opportunities in Taiwan, the first thought that often comes to mind is its technology sector, particularly its world-leading semiconductor cluster. This tendency is understandable given that the semiconductor industry is a cornerstone of Taiwan’s economy, directly contributing more than 15% to the nation’s GDP. The relevance of the country’s semiconductor capabilities extends far beyond its borders. Taiwan produces over 60% of the world’s semiconductors, and more than 90% of the most advanced, leading-edge integrated circuits. Most of these advanced chips are manufactured by a single company – Taiwan Semiconductor Manufacturing Corporation (TSMC) – giving it a critical role in the global technology supply chain. From smartphones to most advanced AI accelerators, most of the tech advancements we see today would not be possible without the world leading foundry. Jensen Huang of Nvidia has repeatedly praised the indispensable role of TSMC in driving global innovation.

TSMC’s dominance has a significant influence on decisions of investors in emerging markets (EM). As of July 2024, TSMC accounted for 9.3% of the MSCI EM Index, while Taiwan as a whole made up 18.5%. Such concentration can pose challenges for investors who are trying to diversify their portfolios. Being heavily exposed to a single, cyclical company, even one as dominant as TSMC, can increase risk, especially during periods of high market volatility. This is where the benefits of small-cap equities come into play.

We believe that small-cap stocks offer a unique mix of growth potential and diversification. While the MSCI EM Index is heavily weighted toward large-cap tech giants like TSMC, Tencent, Samsung, Alibaba and SK Hynix, the MSCI EM Small Cap Index provides a more balanced exposure. As of July 2024, no single constituent represented more than 0.5% of the total weight. More than 350 companies from Taiwan accounted for 21.4% of the MSCI EM Small Cap Index. This broad distribution reduces the risk associated with any single company, making small-cap equities an attractive choice for those looking to diversify while still tapping into Taiwan’s economic strengths.

Nien Made is a perfect example of the opportunities available in Taiwan beyond the technology sector. Founded in 1974, Nien Made has become one of the world’s largest manufacturers of window coverings, including blinds, shutters and shades. The company has successfully harnessed Taiwan’s advanced manufacturing and commitment to innovation to maintain its global competitive edge. Nien Made has invested heavily in production automation, allowing the company to achieve significant cost efficiencies while upholding the highest quality standards. Nien Made has developed proprietary machines used in its production process, further enhancing its operational efficiency and product consistency. Another key factor in Nien Made’s success is its high level of vertical integration, with 90% of window covering components produced in-house.

Nien Made’s success is also driven by its strong portfolio of brands, each recognized for quality and innovation in the window coverings industry. The company’s flagship brands, including Norman and Veneta, cater to diverse market segments ranging from premium, custom-made products sold primarily through professional designers to more affordable, ready-made options available at big-box retailers like Home Depot and Walmart. These brands have helped Nien Made establish a significant presence in markets across North America, Europe and Asia. Operations outside of Taiwan account for more than 95% of Nien Made’s business, underscoring its global reach.

Innovation is a core element of Nien Made’s growth strategy. The company continuously invests in research and development to enhance its product offering and improve production efficiency. Nien Made has been a pioneer in developing motorized window coverings catering to the growing demand for smart home solutions. These products offer the convenience of automation while preserving the familiar look of traditional window coverings. One of Nien Made’s most significant innovations is the development of cordless window coverings. This initiative was driven by new US regulations aimed at improving child safety by eliminating cords in window coverings, which pose a danger to young children. Nien Made’s proactive response to these regulations not only ensured compliance with safety standards but also strengthened its reputation as an industry leader.

Nien Made’s ability to navigate global challenges has further solidified its market position. The COVID-19 pandemic, geopolitical tensions, rising raw material costs and global supply chain disruptions have all presented significant operating challenges. However, Nien Made’s strategic investments in expanding production capacity in Vietnam, Cambodia, Mexico and the US have enabled it to navigate these challenges, ensuring undisrupted customer satisfaction and product quality and availability.

The company’s commitment to sustainability and corporate responsibility enhances its investment appeal. It has implemented environmentally friendly practices in its manufacturing processes, reducing waste and lowering its carbon footprint.

We appreciate Nien Made’s product quality, competitive lead times, extensive service network, cost advantages and broad client reach. All these factors contribute to its high level of profitability, with net profit margins exceeding 20% and returns on capital ranging from 20% to 30%. Nien Made is run by the second generation of the founding family, who maintain substantial ownership in the company. The management team demonstrates a prudent capital allocation strategy, supported by a strong balance sheet with a net cash position, allowing it to weather economic cycles over time.

For investors looking for opportunities in Taiwan, Nien Made offers a compelling case. While the technology sector remains a major driver of Taiwan’s economy, companies like Nien Made offer a less conventional path to capitalize on the island’s broader success story. With its competitive advantages, clear growth strategy, robust financial position and capable management team, we believe that Nien Made stands out as an attractive investment opportunity.

Global six-month real narrow money momentum is estimated to have moved sideways for a fourth month in July at a weak level by historical standards – see chart 1.

Chart 1

The baseline scenario here remains that global economic momentum – proxied by the global manufacturing PMI new orders index – will move down into late 2024, echoing a fall in real money momentum into September last year. Based on more recent monetary data, a subsequent recovery may prove limited, with weakness persisting well into H1 2025.

The unchanged July global real money momentum reading conceals a rise in the US offset by further weakness in China. The E7 ex. China component also cooled, while G7 ex. US momentum remained negative, moving sideways – chart 2.

Chart 2

The Chinese series incorporates an adjustment* for a recent portfolio shift by non-financial enterprises from demand to time deposits in response to a regulatory change (a clampdown on payment of supplementary interest by banks). Chinese momentum would be significantly more negative without this adjustment, while the global series would be at its weakest level since February. (The adjustment may, however, underestimate the negative distortion to Chinese narrow money.)

Chart 3 shows additional DM detail. Real narrow money momentum is relatively strong in Canada and Australia as well as the US.

Chart 3

Japan moved deeper into negative territory but recent weakness partly reflects f/x intervention, so may abate.

Real money momentum is higher in the UK than the Eurozone but the difference is small, with both still negative. Recent UK economic outperformance is unlikely to last.

The pick-up in US real narrow money momentum suggests improving economic prospects but confirmation is required and lags should be respected.

The US July reading was boosted by a favourable base effect – narrow money contracted by 0.6% month-on-month in January. The base effect remains favourable for August but turns significantly negative in September / October.

Six-month growth of US broad money is weaker than for narrow and has edged lower since May, though hasn’t yet fallen to the extent suggested by a contractionary shift in the joint influence of Treasury financing operations and Fed QT, discussed previously. The latest Treasury financing projections imply that this influence will turn expansionary again in Q4.

For perspective, US six-month real narrow money momentum had recovered to the current level in September 2008 as the financial crisis was reaching a crescendo with the recession having nine more months to run. In the prior 2001 recession, the current level was reached three months before the economy hit bottom. In both cases, the NBER business cycle dating committee had yet to determine that a recession had begun.

*The adjustment assumes that the share of demand deposits in total bank deposits of non-financial enterprises would have been stable at its March level in the absence of the regulatory change. The adjustment does not take into account any shift from bank deposits to non-monetary instruments (e.g. wealth management products) or effects on other money-holders.

Les investisseurs sont depuis longtemps attirés par les actions des marchés émergents en raison de leur potentiel de croissance et des occasions uniques de placement qu’elles offrent. Toutefois, cette prise en compte est moins courante lorsqu’il s’agit des occasions de placement dans des titres à revenu fixe des marchés émergents. Vous pourriez être surpris par les arguments en faveur des titres de créance des marchés émergents et par la façon dont ils pourraient contribuer à la diversification de votre portefeuille et à l’amélioration des rendements, comme le décrit le présent article.

Les titres de créance des marchés émergents désignent les titres d’emprunt émis par des sociétés et des entités souveraines domiciliées dans des économies émergentes. La dette est libellée dans la monnaie locale de l’émetteur ou dans la monnaie d’un marché développé, comme le dollar américain, et est appelée titre de créance en monnaie externe ou en « monnaie forte ». À l’instar de leurs homologues des marchés développés, une note de crédit est attribuée pour faire la distinction entre les titres de créance de premier ordre et les titres de créance de qualité inférieure (à rendement élevé).

Voici quelques-unes des principales caractéristiques des marchés émergents :

Catégorie d’actif importante et diversifiée : la valeur marchande combinée des émetteurs souverains et des sociétés des marchés émergents libellée en monnaies locales et externes est supérieure à celle du marché des obligations du Trésor américain.
Rendements plus élevés : les marchés émergents peuvent offrir une prime de rendement par rapport aux titres comparables des marchés développés.
Endettement moins élevé : les emprunteurs sont généralement moins endettés que les emprunteurs des marchés développés ayant une cote de crédit similaire.
Taux de défaillance inférieur : le taux de défaillance est inférieur à celui des titres comparables des marchés développés.
Avantages de la diversification : la faible corrélation avec les titres de créance des marchés développés, due aux différences de cycles économiques et de conjoncture par rapport aux marchés développés, procure des avantages sur le plan de la diversification.

Taille du marché

Le volume des émissions de titres de créance des marchés émergents pourrait surprendre de nombreux investisseurs, surtout si l’on tient compte du marché des obligations souveraines et des obligations de sociétés libellées en monnaies locales et externes, dont la valeur marchande est supérieure à celle des obligations du Trésor américain (figure 1).

Figure 1 – Principaux marchés des titres à revenu fixe

Principaux marchés des titres à revenu fixe	Occasions de placement (G$)
Obligations du Trésor américain	23 900 $
Titres souverains des autres marchés développés	14 700 $
Titres souverains des marchés émergents libellés en monnaies locales	11 100 $
Obligations de sociétés des marchés émergents libellées en monnaies locales	10 700 $
Titres adossés à des créances hypothécaires émis par des organismes des États‑Unis	8 400 $
Titres de créance de premier ordre des États‑Unis	7 800 $
Obligations de sociétés des marchés émergents libellées en monnaies externes	2 500 $
Titres souverains des marchés émergents libellés en monnaies externes	1 500 $
Obligations américaines à rendement élevé	1 400 $

Source : JP Morgan

Les obligations souveraines et de sociétés des marchés émergents libellées en monnaies locales présentent la plus forte valeur marchande. Du point de vue de l’emprunteur, l’émission de titres de créance libellés en monnaies locales signifie que si un pays est fortement endetté, par exemple en dollars américains, et que sa monnaie chute par rapport au dollar américain, le remboursement de la dette deviendra plus coûteux. Cependant, l’émission de titres de créance libellés en monnaies externes peut aider à diversifier les sources de financement en permettant aux pays émergents de profiter des marchés financiers internationaux.

Du point de vue du gestionnaire d’actifs, l’avantage supplémentaire d’investir dans des titres de créance des marchés émergents libellés en monnaies externes, tant d’entités souveraines que de sociétés, est que cela peut aider à gérer les risques associés aux fluctuations des taux de change locaux. De plus, les titres de créance des marchés émergents en monnaies externes sont généralement régis par le droit de New York ou du Royaume-Uni, tandis que les titres de créance des marchés émergents libellés en monnaies locales sont assujettis aux lois spécifiques du pays émetteur. Les titres de créance des marchés émergents libellés en monnaies externes offrent également un univers plus diversifié d’occasions de placement. Le reste du présent article portera donc sur les titres de créance des marchés émergents libellés en monnaies externes.

Transformation du contexte de placement

Le marché des titres de créance des marchés émergents a subi une importante transformation. Au début des années 1990, les indices se composaient de seulement 10 pays et privilégiaient fortement les économies d’Amérique latine. Aujourd’hui, l’univers des pays est beaucoup plus sain et, contrairement aux indices boursiers dont la capitalisation boursière est dominée par un petit nombre de pays, les indices des obligations souveraines et de sociétés sont beaucoup plus diversifiés sur le plan des pays (figure 2).

Figure 2 – Indice des obligations souveraines et de sociétés des marchés émergents*Indice JP Morgan EMBI Global Diversified **Indice JP Morgan CEMBI Broad Diversified

Source : JP Morgan, Bloomberg

Le volume annuel des titres de créance émis par les marchés émergents a également été vigoureux, les émissions de titres de créance de sociétés ayant tendance à être plus importantes que celles des titres de créance souverains (figure 3).

Figure 3 – Émission des titres de créance des marches émergents
Source : JP Morgan & FortWood Capital

Principaux avantages des titres de créance des marchés émergents

Rendement plus élevé : le marché des titres de créance des marchés émergents offre une prime de rendement par rapport aux marchés développés comparables en raison des risques plus élevés perçus. À l’heure actuelle, les marchés émergents offrent certains des taux les plus élevés depuis la crise financière mondiale (figure 4).

Figure 4 – Rendement des titres de créance des marchés émergents par rapport aux obligations du Trésor américain à 10 ans

Remarque : Indice des obligations souveraines des marchés émergents – EMBI Global Diversified, indice des obligations de sociétés des marchés émergents – CEMBI Broad Diversified
Source : JP Morgan, Bloomberg

Les marchés émergents sont souvent sensibles à la volatilité politique et économique. Les changements de gouvernement et de politique ainsi que les tensions géopolitiques peuvent avoir une incidence sur la solvabilité des émetteurs. Les titres de créance souverains ont aussi tendance à avoir une durée plus longue (sensibilité aux fluctuations des taux d’intérêt) et, lorsqu’ils sont combinés, ces facteurs font que les titres de créance souverains des marchés émergents offrent généralement des rendements plus élevés que les titres de créance de sociétés des marchés émergents.

Endettement moins élevé : le risque perçu lié aux titres de créance des marchés émergents n’est pas toujours justifié, malgré les taux de rendement plus élevés. Par exemple, les émetteurs d’obligations de sociétés des marchés émergents, qu’ils soient de premier ordre ou à rendement élevé, sont moins endettés par rapport à leur capacité de générer des flux de trésorerie pour rembourser cette dette et sont moins endettés que les emprunteurs des marchés développés ayant la même cote de crédit (figure 5). Malgré un endettement moindre, les obligations des marchés émergents ont généralement procuré aux investisseurs des taux de rendement plus élevés pour la même cote de crédit.

Figure 5 – Comparaison de l’endettement net
Source : JP Morgan (en date de 2023) et FortWood Capital

Taux de défaillance inférieur : le taux de défaillance des émetteurs des marchés émergents est historiquement plus bas que celui de leurs homologues des marchés développés possédant une cote comparable (figure 6). De nombreux marchés émergents affichent une solide croissance économique qui peut soutenir la solvabilité des émetteurs. Par exemple, une croissance économique plus forte peut accroître les revenus des sociétés, facilitant ainsi le remboursement de la dette.

Figure 6 – Le taux de défaillance des sociétés des marchés émergents est inférieur à celui des sociétés des marchés développés
Source : S&P Global Ratings Research et FortWood Capital

Avantages de la diversification : les cycles économiques et les conjonctures des marchés émergents diffèrent souvent de ceux des marchés développés. Cette expérience différente réduit la corrélation, offrant ainsi une source de diversification du portefeuille. Investir dans différents pays, secteurs et émetteurs peut réduire l’incidence des problèmes locaux et améliorer la résilience globale du portefeuille.

Facteurs à prendre en compte lors de la construction du portefeuille

Gestion des devises : pour permettre aux investisseurs canadiens de gérer toute incidence défavorable des fluctuations de change entre les titres de créance des marchés émergents libellés en dollars américains et le dollar canadien ($ CA), le portefeuille est habituellement couvert en dollars canadiens, ce qui procure des rendements plus prévisibles. Le gestionnaire de placement de la stratégie peut obtenir cette couverture de façon rentable en ayant recours à des contrats à terme sur le change ou à d’autres instruments de change.

Liquidité : les titres de créance des marchés émergents sont généralement une catégorie d’actifs liquides. Par exemple, la liquidité des obligations de sociétés des marchés émergents est généralement comparable à celle des obligations de sociétés des marchés développés dans des conditions normales de marché.

Gestion active : il existe de nombreux cycles économiques et politiques idiosyncrasiques dans les différents pays, qui peuvent contribuer à des occasions de valeur ajoutée pour les gestionnaires actifs. De plus, comme pour les actions des marchés émergents, le nombre de spécialistes de la recherche sur les titres de créance des marchés émergents est moins élevé que celui des titres de créance des marchés développés, ce qui crée des occasions de recherche indépendante. Les gestionnaires actifs compétents peuvent déceler les nuances du marché, repérer des occasions intéressantes et ajuster les placements en fonction de l’évolution des conditions.

Investissement responsable : malgré les problèmes politiques et sociaux liés aux pays émergents, les gouvernements et les sociétés reconnaissent de plus en plus l’importance des facteurs environnementaux, sociaux et de gouvernance (ESG).

Une occasion à saisir

Les titres de créance des marchés émergents offrent des occasions de placement intéressantes, avec un potentiel de taux plus élevés, des avantages sur le plan de la diversification et une exposition à des économies à forte croissance. Les titres de créance des marchés émergents peuvent constituer un ajout précieux à un portefeuille de placement bien équilibré.