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from Global Investing:

It’s not end of the world at the Fragile Five

Despite all the doom and gloom surrounding capital-hungry Fragile Five countries, real money managers have not abandoned the ship at all.

Aberdeen Asset Management has overweight equity positions in Indonesia, India, Turkey and Brazil -- that's already 4 of the five countries that have come under market pressure because of their funding deficits.  The fund is also positive on Thailand and the Philippines.

Devan Kaloo, head of global emerging markets at Aberdeen, says these economies have well-run companies that are well positioned to adjust and enjoy slightly higher return on equity (ROE) than their developed counterparts. He says:

The current shakeout is forcing companies to focus on margins and cut costs, which would bring benefits in the long term. Corporates are more profitable than DM... If you are brave, Turkey has some fabulously run companies.

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.

from Global Investing:

South Africa’s perfect storm

Of all the emerging currency and bond markets that are feeling the heat from the dollar's rise, none is suffering more than South Africa. A series of horrific economic data prints at home, the prospect of more labour unrest and the slump in metals prices are making this a perfect storm for the country's financial markets.

Some worrying data from the Johannesburg Stock Exchange this morning shows that foreigners sold almost 5 billion rand (more than $500 million) worth of bonds during yesterday's session alone. Over the past 10 days, non-resident selling amounted to 10.7 billion rand. They have also yanked out 1.2 billion rand from South African equities in this time. And at the root of this exodus lies the rand, which has fallen almost 15 percent against the dollar this year. Now apparently headed for the 10-per-dollar mark, the rand's weakness has eaten into investors' total return, tipping it into negative return for the year.

from Global Investing:

Quiet CDS creep highlights China risk

As credit default swaps (CDS) for many euro zone sovereigns have zoomed to ever new record highs this year, Chinese CDS too have been quietly creeping higher. Five-year CDS are around 135 bps today, meaning it costs $135,000 a year to insure exposure to $10 million of Chinese risk over a five-year period. According to this graphic from data provider Markit, they are up almost 45 basis points in the past six weeks.  In fact they are double the levels seen a year ago.

That looks modest given some of the numbers in Europe. But worries over China, while not in

from Financial Regulatory Forum:

JPMorgan may tip Wall Street’s hand on ploys to beat Volcker

By Rachel Wolcott

NEW YORK, May 14 (Thomson Reuters Accelus) - JPMorgan Chase & Co's revelation that it had trading losses of at least $2 billion on a failed hedging strategy may have tipped the hand to one way Wall Street executives plan to get around the Volcker Rule.

The incident shows how firms could use the pending rule's hedging exemption to do proprietary trades and still technically be compliant with Volcker. It could allow firms to keep some proprietary trading desks, but portray them to regulators as something else, such as portfolio hedging."What does this say about the long-term effectiveness of the Volcker Rule? For all we know, these JPMorgan trades could have been in compliance with the hedging exemption," said Jeff Berman, a partner at Clifford Chance in New York.

from Global Investing:

GUEST BLOG: A warning on global bonds

This is a guest post from Douglas J. Peebles, Head of Fixed Income at AllianceBernstein. The piece reflects his own opinion and is not endorsed by Reuters. The views expressed  do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.


More and more, global bonds are being used as core portfolios for investors seeking an anchor to windward for their stock investments. While this is generally a good thing, some investors are discovering that the decision to go global can have unintended consequences: certain global bond portfolios have much higher volatility than is usually associated with core portfolios.

from Global Investing:

Pension funds’ hedging dilemma

Pension funds have no shortage of concerns: their funding deficits are rapidly growing in the current low-return environment, and ageing populations are stretching their liabilities.

But a recent survey of pension funds trustees by French business school EDHEC has found that their biggest worry, cited by nearly 77% of the respondents, is the risk that their sponsor -- the entity or employer that administers the  pension plan for employees -- could go bust. Yet 84% of respondents fail to manage the sponsor risk.

from Global Investing:

Currency hedging — should we bother?

Currency hedging -- should we bother?

Maybe not as much as you think, if we are talking purely from a equity return point of view -- according to the new research that analysed 112 years of the financial assets history released by Credit Suisse and London Business School this week.

Exchange rates are volatile and can significantly impact portfolios -- but one can never predict if currency moves erode or enhance returns. Moreover, hedging costs (think about FX overlay managers, transaction costs, etcetc).

from Financial Regulatory Forum:

COLUMN – Rogue traders, delta trading and exchange-traded funds

By Helen Parry, the views expressed are her own.

LONDON, Oct. 7 (Thomson Reuters Accelus) - There are many common features in cases of rogue or unauthorised trading, including the use by ostensibly riskless arbitrage traders of fictitious trades on internal systems to mask their unhedged positions. One obvious feature that is present in many rogue trader cases has been a failure in trade confirmation systems and controls. This feature frequently appears conterminously with the fact that a trader has intimate knowledge of and/or power and influence over middle and back office systems.

Nick Leeson and Toshihide Iguchi were in positions of total control, while John Rusnak and Jerome Kerviel managed to respectively bully or charm back office staff into doing their bidding. Kerviel, for example, was reported to have promised bottles of champagne to back office supervisors, to have taken out all the young women from the support desk, and to have been one of the few traders who spoke to them politely. One commentator on the Kerviel episode remarked that, as long as treasury organisations failed to recognise the importance of the women in the back office, and glorified only their male traders, they would be failing in support of their first line of defence against rogue traders.

from Reuters Money:

Why market-neutral funds may come up short

A trader works on the floor at the New York Stock Exchange, March 21, 2011.  REUTERS/Brendan McDermidDoes the prospect of inflation, higher oil prices and double-dip housing recession keep you up at night? Long-short or market-neutral funds seem ideal for nervous nellies. They attempt to blunt your downside risk by "shorting" stocks while giving you a piece of the upside.

Brokers are aggressively hawking these funds -- sometimes referred to as "alternative investments" -- to conservative investors as a way to blunt market risk.

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