TheChek News Flow

- Spain has stopped trying to narrow budget deficit

Last week, during which the S&P 500 was up 1.6%, BofAML clients were net sellers of US

stocks for the twelfth consecutive week, in the amount of $1.36bn. Sales were chiefly in

large caps, though all three size segments saw outflows. The pace of selling slowed for the

second week, but persistent sales suggest to us that clients continue to doubt the market

rally. Institutional clients continued to lead the selling, while private clients have the

longest selling streak (ten consecutive weeks). But after seven weeks of sales by all three

client groups, hedge funds were net buyers last week for their first time in nine weeks.

This follows record net sales of US stocks by hedge funds in 1Q (see chart below).

Buybacks by our corporate clients decelerated last week, but are in-line with what we

typically see in early April (a seasonally slow period for buybacks).

Clients were broad-based sellers of single stocks across all ten sectors last week, led by

the domestically-oriented cyclical sectors of Consumer Discretionary and Financials.

Stocks in defensive sectors (Utilities, Health Care, Staples and Telecom) saw the

smallest outflows last week. Any buying was entirely passive—only ETFs saw inflows.

Health Care—which has been hurt by a positioning unwind and political uncertainty in an

election year—continues to have the longest net selling streak at seven consecutive

weeks. Tech has seen the biggest outflows year-to-date, but sales have generally

levelled off since early March and have been relatively muted most weeks since then.

• ETFs saw net buying by institutional clients, hedge funds and private clients alike last

week. Energy, Health Care and Consumer Discretionary saw net sales by all three.

• Year-to-date, only the bond-proxy sectors of Telecom (led by private clients’ buying),

Utilities (led by hedge funds’ buying) and Materials (led by corporate buybacks) have

seen inflows from our clients.

• Pension fund clients were net buyers of US stocks, following a week of selling.

Buying was largely in ETFs, but Industrials stocks also saw large inflows. This group

remains a net buyer year-to-date. See Pension fund flows for details.

PARIS—French private-equity firm Ardian raised $10.8 billion to purchase private fund stakes, part of a growing pool of capital that enables investors to sell their private-equity holdings to secondhand buyers.

Separately, the French firm, which was spun off in 2013 from French insurer AXA SA, raised an additional $3.2 billion across several investment vehicles to back commitments to newly formed private-equity funds.

Purchases of secondhand stakes in private-equity funds, termed secondary deals, reached between $30 billion and $40 billion in 2015, according to various estimates from several intermediaries that track such deals. That is up from an estimated $20 billion to $30 billion in volume in 2013, those intermediaries estimated.

“Secondaries have come of age,” said Vincent Gombault, who leads Ardian’s secondary activities, among other leadership roles. “It’s no longer a market for distressed sellers or those that need to sell for regulatory [reasons]. We are offering liquidity to many large institutions.”

Ardian, which wrapped up its newest secondary fund, ASF VII, two years after closing the fund’s predecessor, said it has amassed a total of more than $27 billion to invest in secondary deals since 2011. It joins a small group of elite investors, including pension investor Canada Pension Plan Investment Board and fellow secondary firm Lexington Partners, with the financial firepower to underwrite $1 billion-plus deals on their own.

Capital available to invest in secondary transactions has ballooned in recent years, creating a competitive environment and driving up pricing for certain deals. Secondary firms in the U.S. and Europe raised $16.07 billion for new funds in 2015, on top of $25.27 billion raised for new funds in 2014, according to Dow Jones LP Source, a data provider owned by Dow Jones & Co.

Higher prices for assets combined with strong returns have helped attract to the market sellers that might not otherwise sell, according to Mr. Gombault.

“We want to offer liquidity to the seller, but our pricing has to match their assumptions,” he said. “If you want to price a $1 billion portfolio at a discount of 20%, you will have no sellers.”

Public market volatility during the latter part of 2015, however, put a slight damper on deal flow early this year and has only recently started to recover, according to intermediaries and sellers.

“You had buyers and sellers both sitting on the sidelines during the first quarter,” said Shawn R. Schestag, managing director and head of secondary advisory and co-investment at Sixpoint Partners, a global investment bank focused on the middle market. “But we think the second half [of 2016] could be very strong, because there’s a lot of pent-up demand.”

Ardian has invested or committed about 25% of the money it raised for its latest secondary effort to six deals, using capital raised early in the fundraising process, Mr. Gombault said. In late 2015, for example, U.K.-based pension manager Universities Superannuation Scheme said it sold a roughly $940 million portfolio of 13 private-equity funds to Ardian as part of a shift in the pension system’s strategy toward direct investments.

Mr. Gombault added that the insight his firm has gained through backing new private-equity funds provides a window into how managers invest, as well as valuable information for pricing secondary transactions. The firm said it has backed about 1,200 funds representing about 10,000 underlying portfolio companies.

“Of course, we don’t want to pay too much, but if you pay huge discounts on bad assets, your discounts will never be enough,” he added.

PARIS—Publicis Groupe SA’s first-quarter sales growth beat analysts’ expectations on Tuesday, but the advertising company warned that a loss of key clients last year would erode revenue in the coming months.

Publicis said sales over the first three months of the year rose 8.9% to €2.3 billion ($2.6 billion) from the same period last year as the group benefited from a number of new account wins at the end of last year and strong performances in the U.S. and Europe.

Stripping out acquisitions, disposals and currency swings, sales grew 2.9%, exceeding analysts’ expectations of 0.3%, but still far away from the company’s historic growth levels.

“The next two quarters will be more difficult,” Publicis Chief Executive Maurice Lévy told reporters. “That’s when we’ll feel the full brunt of the account losses from last year.”

The French owner of agencies such as Saatchi & Saatchi had warned investors to expect “modest growth” in 2016 as the company focuses on an internal reorganization and the continued integration of Sapient Corp., the U.S.-based digital agency that it bought last year.

The company is straining to recover lost ground after being hard hit by a wave of big advertisers reviewing their agency contracts in 2015. Publicis was a net loser of the reviews as long-standing clients including Procter & Gamble Co. and Coca-Cola Co. switched their accounts to competitors.

Publicis said sales from its digital operations—now accounting for 55% of revenue—grew 7.6% in the first quarter. Mr. Lévy is betting that the recent addition of U.S.-based digital agency and consultancy Sapient to its roster of digital agencies will position the company at the vanguard of the digital transformation that is upending the ad industry and help the group return to faster growth.

Mr. Lévy said the “uncertain” global economic environment could cause some clients to withhold advertising spending, but he expects all of his company’s key financial indicators to expand this year, including revenue and earnings per share.

“We have made a promising start to 2016, both in terms of performance and our own transformation,” Mr. Lévy said.

Publicis’ shares have fallen 15% over the last 12 months and are trading at a significant discount compared with key rivals like WPP and Omnicom.

Top U.S. regulators are set to focus on borrowing by the hedge-fund industry, particularly large funds, as they assess potential risks in the asset-management sector.

The Financial Stability Oversight Council voted unanimously at a public meeting Monday to endorse a 27-page “update” of its more-than-two-year review of financial-stability risks tied to the asset-management industry.

Treasury Secretary Jacob Lew said the oversight council, a group of senior regulators that he heads, has found that leverage in the hedge-fund industry appears to be concentrated at larger funds, though he cautioned that “greater leverage does not necessarily imply greater risk or systemic risk” and more factors need to be considered.

“The need for further analysis or information sharing is clear,” Mr. Lew said. He added that the oversight council would form a working group to further study risks in hedge funds.

“We do not have a good metric for leverage in this context,” Commodity Futures Trading Commission Chairman Timothy Massad said at Monday’s meeting. “We have not yet connected the dots.”

“The aim should be to better assess potential systemic risks from these funds,” Federal Reserve Chairwoman Janet Yellen said of the working group.

Securities and Exchange Commission Chairman Mary Jo White said her agency, the fund industry’s primary regulator, supported the council’s joint statement Monday but the SEC would be making its own decisions about future rules. “We will consider and rely on our analysis of the input we receive from the public in the notice and comment process,” she said.

Ms. Yellen said she supported the SEC’s efforts to increase transparency and improve risk management in the investment-fund sector, though she added that some asset-management risks don’t fall “within the scope of any individual regulatory agency.”

A spokesman for the Managed Funds Association, a hedge-fund trade group, said the industry hopes to have a constructive dialogue with the new working group.

The council’s move Monday essentially ended for now the already-distant possibility that regulators would designate large asset-management firms such as BlackRock Inc. as “systemically important” companies that should face tougher rules, as they have done with a few huge insurance companies in recent years. Regulators had said in the summer of 2014 that they were focusing on the activities of asset managers, not large fund firms. The effort to label the insurers as systemically important prompted a backlash, culminating in a judge last month nullifying that designation for MetLife Inc.

The oversight council’s move is instead a call for further study of specific aspects of the asset-management sector, stopping short of recommending new rules but raising red flags that could lead to future regulatory actions.

The council said the working group would evaluate leverage in hedge funds based on available data, and examine which other data should be collected. The group is set to report back to the council in the fourth quarter of 2016.

Regulators didn’t say Monday which hedge-fund firms were in their focus.

Hedge funds represent myriad investing strategies that often involve betting on and against markets simultaneously. They typically use complicated trading instruments unavailable to the average investor.

While hedge funds have been around for decades, for much of their history they were both little-known and lightly regulated as they catered to a small group of wealthy individual backers.

But the industry’s assets have multiplied sixfold since 2000, according to researcher HFR Inc., as so-called institutional investors like pension funds and sovereign-wealth funds have poured billions of dollars into the space. Managers now oversee a combined $2.9 trillion, just shy of the roughly $3 trillion peak reached last year.

Hedge-fund managers are typically tight-lipped about the amount of leverage, or borrowed money, their trading requires. After the crisis, the SEC began requiring larger funds to publicly disclose their size including leverage. The figure showed that some firms inflate each dollar of client cash with $6 or more of borrowed money.

The council also took aim at investment funds that offer daily investor redemptions but invest in illiquid, or hard-to-sell, assets. Those funds have been a worry of global central bankers and economists for years as they have grown in size, even though the fund industry says they don’t pose a broad risk to the financial system.

The oversight council stopped short of saying any funds shouldn’t be available to retail investors. Instead, it mostly endorsed an agenda the SEC has laid out for dealing with liquidity risks, including establishing risk-management rules for funds.

Some parts of the report, such as the council’s statement that more disclosure about funds’ liquidity risk could be helpful, could put wind at the SEC’s back as it faces industry opposition in laying out its agenda.

The document released Monday said it wasn’t intended to comment specifically on the SEC’s rules, and the council promised to evaluate the rules once they are final.

The council also said it would study other topics, including whether asset managers rely too heavily on a handful of service providers that would be hard to replace if they were hacked or faced other operational issues.

It encouraged regulators to collect and share more data about securities lending, or funds’ lending out of securities they own to boost profit, but didn’t recommend any specific new rules.

“Our job is to ask questions which may or may not lead to the conclusion that action is required,” Mr. Lew said.

The UK is not going to vote to leave the European Union, according to Jeffrey Gundlach, the influential bond investor.

The founder of DoubleLine Capital, which manages more than $84bn of assets, added that any investors who are hedging themselves against such an outcome of the Brexit referendum are wasting their money.

In a freewheeling interview at Los Angeles headquarters of his firm, Mr Gundlach expounded on the UK and US political landscapes and on topics ranging from negative interest rates to collecting art.

Brexit

“It’s not going to happen,” Mr Gundlach says, definitively. “People like to complain, they like to say what’s wrong but then when it comes down to actually pulling the lever they sit there and they say, ‘what exactly am I doing here, what is going to happen?’ The devil you know is better than the devil you don’t know. Look at what happened with Scotland. People aren’t going to pull a lever for Brexit, so I don’t even think that’s worth considering in the present time.”

Look at what happened with Scotland. People aren’t going to pull a lever for Brexit

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The cost of buying protection against a fall in the value of sterling has this month surpassed the levels of the financial crisis, but Mr Gundlach says investors are being foolish.

“Remember all the tail risk insurance that pension plans put on in 2009? What a waste of money.” Same with Brexit insurance, he says. “The odds are less than what people have embedded into their protection so it’s likely to lose money. And nobody knows what would happen under a Brexit anyway; so often things go the opposite way from what people expect. Maybe your hedge is actually in the anti-hedge.”

Donald Trump

“Trump is the unconstrained bond fund of the political arena,” Mr Gundlach says, referring to the newly-popular kind of fund whose manager does not have to adhere to any bond market benchmark.

“Unconstrained bond funds became popular because traditional alternatives were deemed to be unattractive. With an unconstrained bond fund I have no idea what I’m going to get but it’s better than getting something I know I don’t like.”

Mr Gundlach recalls how he told DoubleLine’s traders, on the day that Mr Trump announced his candidacy to widespread derision, that “the greatest long in the entire world is Trump’s odds to win the presidency”. DoubleLine cannot play the political betting market, but Mr Gundlach predicts Trump will win the White House if his nomination is confirmed at the Republican convention, and reckons defence stocks will do well as a result.

“Trump is very squishy on ideas and offers different, even contradictory ideas week-to-week. But two things that he has said clearly and consistently are build a wall and build the defence. I think that Trump would have much higher deficit; he talks about leaving social security completely alone, cutting taxes and spending a lot of money. Donald Trump’s a debt guy, he knows about borrowing a lot of money.”

Negative interest rates

Expectations of low interest rates are so embedded in financial market assumptions that it smacks of “complacency”, Mr Gundlach reckons, and investors could get burnt if it becomes clear the Federal Reserve will not follow the lead of other central banks in considering negative rates as a cure for the next downturn.

“I think the odds are very low that the US will go to negative interest rates, not based on some great economic growth belief, but rather on the failure of negative interest rates in both Europe and Japan,” he says.

“Those central banks will have to get out of it, but what is the path out? Raising interest rates against the global economic backdrop seems hard to justify. So it’s like the old phrase: women, you can’t live with them, you can’t live without them.”

Terrorism

The one thing that Mr Gundlach concedes could shake his Brexit stance is if there is more terrorism that inflames concern about the free movement of people within the EU — but he says he takes a grim comfort from the fact that there have not been more deadly attacks.

“I am surprised how ineffective these guys are when they commit to these acts. They don’t optimise them very well. I am glad, and I’m glad that they are not really very good at strategising because if I was in that group, boy, I could tell you, I know how to cause real mayhem.

“I don’t talk about it because I don’t want to give them ideas. I know how to make incredible mayhem in the United States with only a few people and very little money; it’s really easy to do.”

Art

Mr Gundlach has long been a passionate collector of modern and contemporary art, adorning his home with works from the likes of Jasper Johns, Cy Twombly and Piet Mondrian — even naming his firm after Mondrian’s famous double lines — but just maybe he has bought his last painting.

“I have no desire to add any art to my house. You can’t have everything looking like a museum,” he says. In fact, an Andy Warhol car crash picture had to come down to make room for his last purchase, which was a painting by a pioneer of abstract expressionism, Clyfford Still.

Another reason the Still may be the final purchase? “As you get older you realise that you can’t will it to anybody because no one can afford the taxes. They would have to sell it. So you have to either sell it or give it away.”

AB InBev has accepted Japanese brewer Asahi’s $2.55bn offer for some of SABMiller’s beer brands including Peroni and Grolsch, as it looks to close its £70bn takeover of SABMiller.

The offer, initially submitted in February, has been approved by AB InBev “following completion of the relevant employee information and consultation processes applicable to the sale of these brands and businesses.”

If completed, this will be Asahi’s biggest acquisition and the largest Japanese deal in the beverage industry since Suntory’s $16bn takeover of US spirits maker Beam in 2014.

The deal underscores Japanese companies’ aggressive hunt for growth outside their home market, and the renewed urgency with which they have been moving to nail down prospective targets and avoid missing out on deals like they have in the past.

Examples of this include Japan Tobacco’s $5bn purchase of cigarette assets from US-rival Reynolds and Nikkei’s $1.3bn acquisition of the Financial Times from Pearson.

In this case, Asahi darted in ahead of rivals including Thai Beverage, the maker of Chang beer, and a handful of private equity buyers.

AB InBev said the deal

is conditional on the successful closing of the recommended acquisition of SABMiller by AB InBev as announced on 11 November 2015, which itself contains certain regulatory pre-conditions and conditions, and the approval by the European Commission of Asahi as a purchaser of the Business.