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from Global Investing:

Indian shares: disappointment may lurk

Should Indian shares really be at record highs?

The index is up 3.6 percent this year. Foreign funds have been pouring money into Mumbai shares, betting that the opposition BJP, seen as more reform-friendly than the incumbent Congress, will form the next government. They purchased $420 million worth of Indian stocks last Friday, having bought $1.4 billion over the past 15 trading sessions.

There is also the fact that the rolling crisis in emerging markets, having smacked India during its first round last May, has now moved on and is ravaging places such as Russia and Nigeria instead. The rupee has firmed almost 2 percent this year to the dollar, as last year's 6.5 percent/GDP current account deficit has contracted to just 0.9 percent of GDP.  Many international funds such as Blackrock and JPMorgan Asset Management have Indian stocks on overweight and Bank of America/Merrill Lynch's monthly survey showed investors'  underweight on India was one of the smallest for emerging markets.

Indian company earnings may have beaten forecasts by around 5 percent so far in the season. But prospects can hardly be described as attractive. Indian economic growth is running at less than 5 percent. Valuations are in line with historical averages and at a 4 percent premium to global emerging markets on a book-value basis. But John-Paul Smith at Deutsche Bank says it is "the least bad" of the BRICs and is neutral to overweight.

You can see why money is going there, most of GEM looks grim. The question is to what extent a big win for the BJP is factored in. They seem to be moving towards the ability to put together a workable coalition but the outline of their economic policy is not clear. The other story of India is governments can pass laws but implementation is quite different.

from Global Investing:

Waiting for current account improvement in Turkey

The fall in Turkey's lira to record lows is raising jitters among foreign investors who will have lost a good deal of money on the currency side of their stock and bond investments.  They are also worrying about the response of the central bank, which has effectively ruled out large rate hikes to stabilise the currency. But can the 20 percent lira depreciation seen since May 2013 help correct the country's balance of payments gap?

Turkey's current account deficit is its Achilles heel . Without a large domestic savings pool, that deficit tends to blow out whenever growth quickens and the lira strengthens . That leaves the country highly vulnerable to a withdrawal of foreign capital. Take a look at the following graphic (click on it to enlarge) :

from Breakingviews:

The wrongs and rights of the euro banking union

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By George Hay 

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The euro zone banking union was always going to have a difficult birth. European governments finally agreed on Dec. 18 the second of three key milestones – a resolution directive establishing a common approach for dealing with struggling lenders. As with most EU compromises, it is an imperfect reform. It was criticized by European Central Bank officials, including president Mario Draghi, and doubts remain. But the euro zone at least has the beginning of a banking union.

from Global Investing:

Red year for emerging bonds

What a dire year for emerging debt. According to JPMorgan, which runs the most widely run emerging bond indices, 2013 is likely to be the first year since 2008 that all three main emerging bond benchmarks end the year in the red.

So far this year, the bank's EMBIG index of sovereign dollar bonds is down around 7 percent while local debt has fared even worse, with losses of around 8.5 percent, heading for only the third year of negative return since inception. JPMorgan's CEMBI index of emerging market corporate bonds is down 2 percent for the year.

from Global Investing:

Turkish savers hang onto dollars

As in many countries with memories of hyperinflation and currency collapse, Turkey's middle class have tended to hold at least part of their savings in hard currency. But unlike in Russia and Argentina, Turkish savers' propensity to save in dollars has on occasion proved helpful to companies and the central bank. That's because many Turks, rather than just accumulating dollars, have evolved into savvy players of exchange rate swings and often use sharp falls in the lira to sell their dollars and buy back the local currency. Hence Turks' hard currency bank deposits, estimated at between $70-$100 billion --  on a par with central bank reserves -- have acted as a buffer of sorts, stabilising the lira when it falls past a certain level.

But back in 2011, when the lira was in the eye of another emerging markets storm, we noticed how some Turks had become strangely reluctant to sell dollars. And during this year's bout of lira weakness too, Turkish savers have not stepped up to help out the central bank, research by Barclays finds. Instead they are accumulating dollars -- "rather than being contrarian, their behaviour now seems aligned with global capital flows," Barclays  analysts write. While the lira has weakened to record lows this year, data from UBS shows that the dollarisation ratio, the percentage of bank deposits in foreign currency, has actually crept up to 37.6 percent from 34.5 percent at the start of the year. Here's a Barclays graphic that illustrates the shift.

from Breakingviews:

China bank IPO shows rewards of financial alchemy

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By John Foley 

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Financial innovation is paying off for Bank of Chongqing, a small Chinese lender preparing for a $2 billion stock market listing in Hong Kong. What sets the bank apart isn’t its enviable 32 percent return on equity, but its copious use of what might be China’s most baffling securities.

from Breakingviews:

China’s debt molehills could turn into mountains

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By John Foley

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The mountains are high, and the shareholders are far away. China’s banks are reporting results that suggest their bad debts are under control and earnings healthy. But where investors don’t easily see them, risks are growing. It’s at the local level that the problems with China’s debt build-up could escalate most rapidly.

from Global Investing:

Pakistan, Nigeria, Bulgaria… the cash keeps coming

The frontier markets juggernaut continues. Here's a great graphic from Bank of America/Merrill Lynch showing the diverging fund flow dynamic into frontier and emerging equity markets.

What it shows, according to BofA/ML  is:

Frontier market funds with year-to-date inflows of $1.5 billion have decoupled from emerging markets ($2.1 billion outflows year-to-date)

from Global Investing:

No more currency war. Mantega dumps the IOF

Brazil's finance minister Guido Mantega, one of the most shrill critics of Western money-printing, has decided to repeal the so-called IOF tax, he imposed almost three years ago as a measure to fend off  hot money flows.

Well, circumstances alter cases, Mantega might say. And the world is a very different place today compared to 2010. Back then, the Fed was cranking up its printing presses and the currency war (in Mantega's words) was raging; today the U.S. central bank is indicating it may start tapering off the stimulus it has been delivering. Nor is investors enthusiasm for emerging markets what it used to be.  Brazil's currency, the real, is plumbing four-year lows against the dollar and local bond yields have risen 30 basis points since the start of May. Brazil's balance of payments situation meanwhile, is deteriorating, which means it needs all the foreign capital  it can get, hot money or otherwise. And currency weakness spells inflation -- bad news for Brazil's government which faces voters next year.

from Global Investing:

Emerging local debt: hedges needed

The fierce sell-off that hit emerging market local currency debt last month was possibly down to low levels of currency hedging by investors, JPMorgan says.

Analysts at the bank compare the rout with the one May 2012, caused by exactly the same reason -- higher U.S. yields. There was a difference though -- back then EM currencies dropped more than 8% on the month but EM local bonds, unlike last month, were little changed.

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