Archive

Reuters blog archive

from Global Investing:

Strong dollar, weak oil and emerging markets growth

Many emerging economies have been banking on weaker currencies to revitalise economic growth.  Oil's 25 percent fall in dollar terms this year should also help. The problem however is the dollar's strength which is leading to a general tightening of monetary conditions worldwide, more so in countries where central banks are intervening to prevent their currencies from falling too much.

Michael Howell, managing director of the CrossBorder Capital consultancy estimates the negative effect of the stronger dollar on global liquidity (in simple terms, the amount of capital available for investment and spending) outweighs the positives from falling oil prices by a ratio of 10 to 1. Not only does it raise funding costs for non-U.S. banks and companies, it also usually forces other central banks to keep monetary policy tight, especially in countries with high inflation or external debt levels. Howell says:

If you get a strong dollar and intervention by EM cbanks what it means is monetary tightening...The big decision is: do they allow currencies to devalue or do they defend them? But when they use reserves to protect their currencies, there is an implicit policy tightening.

The tightening happens because central bank dollar sales tend to suck out supply of the local currency from markets, tightening liquidity.   That effectively drives up the cost of money, as banks and companies scramble for cash to meet their daily commitments.  Central banks can of course offset interventions via so-called sterilisations - for instance when they buy dollars to curb their currencies' strength, they can issue bonds to suck up the excess cash from the market. To ease the tight money supply problem they can in theory print more cash to supply banks.  But while many emerging central banks did sterilise interventions in the post-crisis years when their currencies were appreciating, they are less likely to do so when they are trying to stem depreciation, says UBS strategist Manik Narain.  So what is happening is that (according to Narain):

from Global Investing:

Measuring political risk in emerging markets

(Corrects to say EI Sturdza is UK investment firm, not Swiss)

Commerzbank analyst Simon Quijano-Evans recently analysed credit ratings for emerging market countries and concluded that there is a strong tendency to "under-rate" emerging economies - that is they are generally rated lower than developed market "equals" that have similar profiles of debt, investment or reform. The reason, according to Quijano-Evans, is that ratings assessments tend to be "blurred by political risk which is difficult to quantify and is usually higher in the developing world compared with richer peers.

However there are some efforts to measure political risks, and unfortunately for emerging economies, some of those metrics seem to indicate that such risk is on the rise. Risk consultancy Maplecroft which compiles a civil unrest index (CUI), says street protests, ethnic violence and labour unrest are factors that have increased chances of business disruption in emerging markets by 20 percent over the past three months. Such unrest as in Hong Kong recently, can be sudden, causing headaches for business and denting economic growth, Maplecroft says. Hong Kong where mass pro-democracy protests in the city-state's central business district which shuttered big banks and triggered a 7 percent stock market plunge last month.

from Global Investing:

Russia: There’s cheap and then there is “near-death” cheap

Russia's equity market has always been cheap, argues USAA's Wasif Latif, but at present levels it is just too cheap to ignore. Russia's economic decline, driven by not only falling oil prices, its main source of income, but also Western sanctions over its intervention in Ukraine has caused a major sell-off that Latif and other asset managers believe is an overshoot. This has brought Russia's benchmark dollar-denominated RTS stock index to its lowest level since March and before that, a level not seen since Sept. 2009.

"We're not looking for it to go way up, but looking for it to go up from its near-death cheap to its normal-cheap condition," said Latif, head of global multi-assets at USAA Investments.

from MacroScope:

Brazil set to release long-overdue jobless rate just as election race heats up

Workers at a General Motors vehicle factory listen during a meeting to discuss their reactions to an announcement of plans to put some 1,000 workers on paid leave, in Sao Jose dos CamposBrazil's unemployment rate has been a mystery for months: a strike in the country's statistics agency, ironically enough, disrupted its main job market survey. The numbers will finally come out in a few hours, less than two weeks before a tight presidential election, and will help voters understand just how bad the recently-confirmed recession has been.

IBGE’s August unemployment report is important not only because it can tilt Brazil's election balance in favor of current President Dilma Rousseff or her opponent Marina Silva, but also because it will determine the starting point of the labor market for a much-anticipated adjustment in Brazil’s economic policy. Some kind of shift is expected after the October election regardless of who wins, to keep debt under control and avoid losing the investment grade in coming years.

from Global Investing:

Bleak investment outlook sours mood at Russia forum

By Alexander Winning

What are the chances that Western investors will rush back to Russia if a shaky ceasefire in Ukraine leads to a more lasting peace? Pretty slim, judging by a keynote speech at a recent Russia-focused investment conference in London.

Dmitri Trenin, director of the Carnegie Moscow Centre, told the conference organised by Sberbank CIB, the investment-banking arm of Russia's top state-controlled lender, there was little prospect of significant Western investment in Russia over the next 5 years:

from Breakingviews:

Global poverty needs a post-industrial definition

By Andy Mukherjee

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

Global poverty needs a new, post-industrial definition.

The $1-a-day threshold, the most-often cited marker of penury, is an anachronistic legacy from the time when being able to fill a human stomach could be reasonably equated with putting raw manpower to productive use in farms, factories and on construction sites.

from Global Investing:

Betting on (expensive and over-owned) Indian equities

How much juice is left in the Indian equity story? Mumbai's share index has raced to successive record highs and has gained 24 percent so far this year in dollar terms as investors have bought into Prime Minister Narendra Modi's reform promises.

Foreign investors have led the charge through this year, pouring billions of dollars into the market. Now locals are also joining the party - Indian retail investors who steered clear of the bourse for three years are trickling back in - they have been net investors for 3 months running and last month they purchased Rs 108 billion worth of shares, Citi analysts note. 

from Global Investing:

Sanctions bite Russia but some investors are fishing

By Andrew Winterbottom

Russian stocks are up today, for the fifth day in a row and at the highest level in two weeks. What's going on? As we wrote  here earlier in the week, foreign investors have been fleeing this market.  However it could be that some of them are starting to put aside concerns about the potential for further sanctions on Moscow and are scouring Russia's stock markets for contrarian buying opportunities.

Russian stocks, chronically undervalued, are trading now at a discount of more than 60 percent to broader emerging markets, and to China which by all accounts is the standout beneficiary of the Russian woes. Just how cheap Russian shares are can be gauged from the fact they trade at a discount event to turbulent Pakistan. Here is a link that compares Russian equity valuations with other emerging and developed markets:  http://link.reuters.com/guv77v

from Global Investing:

The people buying emerging markets

We've written (most recently here) about all the buying interest that emerging markets have been getting from once-conservative investors such as pension funds and central banks. Last year's taper tantrum, caused by Fed hints about ending bond buying, did not apparently deter these investors . In fact, as mom-and-pop holders of mutual funds rushed for the exits,  there is some evidence pension and sovereign  wealth  funds actually upped emerging allocations, say fund managers. And requests-for-proposals (RFPs) from these deep-pocketed investors are still flooding in,  says Peter Marber, head of emerging market investments at Loomis Sayles.

The reasoning is yield, of course, but also recognition that there is a whole new investable universe out there, Marber says:

from Data Dive:

House of BRICS

The BRICS nations are holding their annual summit this week in Fortaleza, Brazil, and the biggest item on the agenda is the creation of a joint development bank. While all five BRICS countries have pledged to contribute to the $100 billion development bank as well as a reserves fund, China and India are both gunning to be the nation that hosts the institution. Indian trade minister Nirmala Sitharaman made a strong push for his country, saying, “Any city in India has its natural advantages, English-speaking, very skilled manpower, and…India is very centrally located.” Still, there’s no doubt that one country is the real economic powerhouse in BRICS: China.

This Reuters graphic gives some insights into the BRICS numbers.

In terms of both GDP and total reserves, the chart shows that China is the only one of the five nations that has been on a consistent upward trend since 2005, with no dips for the global recession. Its GDP is over four times that of Brazil, the BRICS country with the next-highest GDP, and it has eight times as much reserve currency as Russia, its closest competitor. This has put it in a unique position to make deals and direct trade, according to Reuters, which also reported that China’s President Xi Jinping invited India to become a founding member of the Asian Infrastructure Investment Bank.

  •