Reuters blog archive

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:

There has been so much yield compression that to get the returns investors are accustomed to, they have to either go down in credit quality or look overseas. Investors have been globalizing their equity portfolios for 25 years but the bond portfolios still have a home bias. We are starting to see more and more institutional investors gain exposure to emerging markets, and a large number of recent RFPs highlight more sophisticated mandates than a decade ago.

The allocation swing has been especially marked since the 2008 crisis and subsequent Fed money printing that flattened yields across developed markets - the IMF estimated earlier this year that of the half trillion dollars that flowed to emerging bonds between 2010-2013, 80 percent came from big institutional investors.

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.

from Global Investing:

Emerging markets; turning a corner

Emerging markets have been attracting healthy investment flows into their stock and bond markets for much of this year and now data compiled by consultancy CrossBorder Capital shows the sector may be on the cusp of decisively turning the corner.

CrossBorder and its managing director Michael Howell say their Global Liquidity Index (GLI) -- a measure of money flows through world markets -- showed the sharpest improvement in almost three years in June across emerging markets. That was down to substantially looser policy by central banks in India, China and others that Howell says has moved these economies "into a rebound phase".

from Counterparties:

World Cup waste

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A horrible semi-final loss to Germany isn’t the only depressing result to come out of the World Cup for Brazil. The economy isn’t doing so well, and the international soccer tournament doesn’t seem to be helping much. This wasn’t totally unexpected: a Moody’s report from the spring estimated that the World Cup would have exactly zero impact on Brazilian GDP. The report concludes that “while the event offers a potential reputational benefit, it could be marred by a reprise of the social unrest seen last June or if needed infrastructure was not ready.” So far, there’s not been a ton of unrest, but the infrastructure is incomplete.

Fusion’s James Young reports from Fortaleza that the promised light rail system for the host city lies unfinished, and “cars, buses, and motorbikes must bump over a wide, dusty patch of waste ground” to get to the stadium. Young’s story — worth reading in full — is about the middle class Brazilians, who are unlikely to get anywhere near the stadiums. In Brazil generally, Young writes, “while individual earnings and personal credit have grown ... the services provided by the state—housing, urban infrastructure, and sanitation, for example—have rarely kept up.” Matt Slaughter and Jaana Remeswrite at Project Syndicate that while Brazil is the world’s seventh-largest economy, it ranks 95th in per capita GDP. That’s largely because it ranks so low in connectedness: “flows of goods, services, finance, people, and data and communications.”

from Global Investing:

Ecuador: a successful emerging market?

A colleague of mine, Marius Zaharia (@MZaharia) interviewed Moritz Kraemer, Standard and Poor's head of sovereign ratings for Europe, Middle East and Africa. (you can read the interview here) Kraemer offered this piece of advice to the African governments who are busily tapping bond markets these days:

    What I want to tell all those governments in africa is that you are not a successful market participant when you've issued your first eurobond. You are a successful participant when you've paid it back for the first time.   

from Breakingviews:

Diagnosis of economic malaise lacks credible cure

By Peter Thal Larsen

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

Central bankers know what’s wrong with the world economy, but are struggling to come up with a cure. That, at least, is the message from the latest annual report from the Bank for International Settlements. It worries that global growth is feeble and financial markets are piling up risks. Yet its proposed remedies of tighter monetary policy and structural reform are far from convincing.

from Breakingviews:

Builder’s shaky foundations dent UAE’s credibility

By Una Galani

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

The shaky foundations of the most prominent builder in the United Arab Emirates have dented the country’s credibility. Shares in Dubai-based Arabtec, which helped erect the world’s tallest tower in the emirate, have more than halved since May 15, wiping almost $4.9 billion off its market value. The debacle is a warning to investors attracted by the UAE’s new emerging market status.

from Breakingviews:

Tranquil markets may lead emerging nations astray

By Andy Mukherjee 

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

The return of calm to global markets is not an unalloyed blessing for the developing world. In the year since investors freaked out about rising U.S. interest rates, JPMorgan’s emerging markets bond index has recovered almost all of its losses. That could tempt developing economies to abuse easy money and blow domestic asset bubbles.

from Breakingviews:

China hits bump on road to financial acceptance

By Peter Thal Larsen

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

China’s quest for financial respectability has hit a road bump. After a two-month review, MSCI has decided against including mainland-listed shares in its widely-followed emerging market index. Recent stock market reforms may help China fare better next time. Yet for all its growth, the country’s restricted capital flows are an obstacle to joining the global financial community.

from Global Investing:

Anticipating the fallout from South Africa’s ratings reviews

South Africa is due ratings reviews this Friday. Chances are that the Standard & Poor's agency will cut its BBB rating by one, or possibly even two notches.  Another agency Fitch has a stable outlook on the rating but could still choose to downgrade the rating rather than the outlook. What will be the damage?

There is undoubtedly a link between ratings and bond prices.  So a one-notch ratings downgrade tends to lead to roughly a 20 percent increase in bond yield spreads and credit default swaps (instruments that are used to hedge against default), according to calculations by JPMorgan. But in South Africa the lower credit rating may already be already reflected in asset prices -- Panama, Brazil, Colombia, Philippines, Uruguay, Indonesia, and Romania carry lower sovereign credit ratings but boast lower CDS and dollar bond yield premia over Treasuries.  Russia and Turkey have lower average ratings than South Africa but their debt and CDS spreads  are roughly on the same level.