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from Breakingviews:

Contemporary art becomes the gold of the new rich

By Richard Beales

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

Contemporary art is becoming the gold of the new rich. This week’s strong auction sales in New York brought record bids for Rothko, Klein, Lichtenstein and several other post-war artists. Scarcity is part of the allure, along with taste and the spending power of the global plutocracy. One thing to please at least the financiers among them is that contemporary art has inked good returns, too.

Mark Rothko’s “Orange, Red, Yellow” fetched nearly $87 million at Christie’s, topping the bill at the auctioneer’s $388 million sale, its biggest ever. That’s a sign that the Contemporary category - albeit increasingly not an accurate description - has the upper hand these days, even if the all-time record, set by Sotheby’s with Edvard Munch’s “The Scream” last week, was officially in the firm’s Impressionist and Modern sale.

That’s further underlined by the trajectory of prices. Artnet’s Contemporary 50 index is up more than five-fold since 2001, against a mere 60 percent gain for the Impressionist 25 benchmark - and that’s before this week’s sales. Contemporary art dipped in 2009 with the global financial crisis, but recovered by 2011.

Like, say, high-end London property, expensive art is now a global market - it’s not like the end of the 1980s when Japanese buyers, who dominated auctions for Impressionist works, suddenly disappeared. If European collectors are cautious - as might be expected with financial tremors still rumbling around the region - there are plenty of U.S., Middle-Eastern, South American, Russian and Asian buyers to take their place.

And the super-rich aren’t short of cash. In fact, some of them have the luxury of not knowing what to do with it all. The financially-minded may not admit it, but they like the idea of art that can hang on the wall (even, or especially, at the office) or stand in the courtyard for a few years and then be sold at a profit. With a few exceptions, the records set this week were largely for works by famous deceased artists with a tried and tested market - not by risky relative newcomers.

from Global Investing:

Where will the FDI flow?

For years the four mighty BRIC nations have grabbed increasing shares of world investment flows. But the coming years may not be so kind.  These countries bring up the bottom of the Economic Freedom Index (EFI) for 2012. Compiled by Washington D.C.-based think-tank The Heritage Foundation the EFI measures 10 freedoms --  from property rights to entrepreneurship -- and according to a note out today from RBS economists, there is a strong positive link between a country's EFI score and the amount of FDI (foreign direct investment) it can secure. So the more "free" a country, the more FDI inflows it can expect to receive -- that's what an RBS analysis of 2002-2008 investment flows shows.

So back to the BRICs. Or BRICS if you add in South Africa (part of the political grouping though not yet included in the BRIC investment concept used by fund managers). The following graphic shows Russia languishing at the bottom of the EFI, China just above Russia and India third from bottom.  Brazil is sixth from bottom while South Africa ranks two places higher.

At the other end of the spectrum is tiny Singapore. Its EFI score is double that of Russia and between 2002-2008 it attracted FDI equivalent to 50 percent of its economy. Russia in contrast saw negative net FDI (outflows exceeded inflows)

What comes next will be interesting. China grabbed the most FDI in absolute terms in the past decade (around $1.3 trillion or almost half the $2.1 trillion flows to the 21 leading EMs) but RBS notes this is slowing. That's because China's low-value manufacturing base is becoming less competitive relative to the rest of Asia and stringent restrictions remain in place in many sectors. Corruption, red tape and general business-unfriendliness prevail. "The decreasing allure of China from a manufacturing perspective means the country is at risk of suffering a decrease in FDI inflows in coming years," RBS writes. The bank also notes the nature of FDI into China is changing: half the 2011 flows went to real estate.

On the other BRICS:

from MacroScope:

Nigeria’s mighty economy

In a world of slowing growth (China), minimal growth (United States) and outright recession (Britain),  it is startling to hear that Nigeria's economy is likely to shoot up by 40 percent in the second quarter this year. Yep. Forty percent. Four - O.

An investigation by Reuters Lagos correspondent Chijioke Ohuocha came up with this staggering figure -- which if borne out will lift Nigeria close to continental rival South Africa and raise it about 10 places on the IMF's global list to around 3oth.

This mighty rise, however, is not actually because Nigeria has had a sudden spurt of growth. You can read Chijioke's exclusive story here, but the gist is that the country is changing the base year for its GDP calculation to 2009 from its current 1990.  One big reason is that data is better; another that it is more modern, taking in things like  mobile phones and the internet, for example. It is the latter, and things like it,  that have built up growth over thr years.

Nigeria's current annual growth is around 7 percent, which puts it on track to overtake slower growing South Africa as Africa's Number 1 economy.  That, in itself, should make the country more of a target for investment over the longer term. It is currently considered "frontier", which is a small pool when it comes to investment flows.

For now, though, it is as Chijioke writes: "The makeover may give the country financial bragging rights, but will change little for the millions trapped in poverty."

The percentage of Nigerians living in absolute poverty, unable to afford only the bare essentials of food, shelter and clothing,- has risen to around 60 percent even as growth -- rebased or not --  has risen.

from Global Investing:

Research Radar: Very 20th century

Wednesday's market commentaries are loaded with the buzz around another technical UK recession in Q1 (the first time Britain has suffered what many see as a 'double-dip' since the 1970s); guessing about Wednesday's FOMC outcome; and the European Commission letting Hungary off the hook about its controversial constitutional changes. In aggregate, and probably due to the looming FOMC,  markets are fairly stable - world equities, including euro stocks, emerging markets and even Britain's FTSE are all higher. The US dollar, Treasuries,  volatility gauges, gold and even peripheral euro government bond yields are all down a bit.

Following is a selection of some of Wednesday's interesting research ideas:

- Barclays' Barry Knapp reckons US and world equities face a dilemma from the endless distortion to multiples and risk premia from monetary intervention and QE that is artifically lowering the risk-free rate akin to the "financial repression" of the 1950s -- no one is sure now if equity is cheap or bonds just very expensive. He concludes that best thing for equities in the medium to long term is to avoid further QE but the problem is that stocks will almost certainly suffer in the short run if the Fed takes QE3 off the table. What's more, Wednesday's FOMC could be problem for markets initally if the Fed frets about the growth outlook, but a worsening of the economy might bring QE3 sooner than similar bouts in 2010 and 2011.

- ING's James Knightley says UK GDP numbers mask business survey improvements and better March data and expects the economy to return to growth in Q2 as well as upward revisions to Q1. Flagging up improving business sentiment in the April CBI survey, he says the Bank of England is unlikely to do more QE and reckons any post-GDP rally in gilts or fall in sterling should be short-lived.

- However, Citi's Michael Saunders is far gloomier in flagging " the worst recession/recovery cycle opf the last 100 years" and dismisses suggestions that the persistent weakness of the economy since 2008 can be blamed on things like quarterly construction swings. "We expect the economy will continue to underperform, given the headwinds from fiscal drag, high household debts, the EMU crisis and poor credit availability. A less-tight fiscal policy probably would not help significantly, given the likelihood that fiscal slippage would trigger market pressure. A lower pound would help, but the key policy lever is QE and we continue to expect extra QE."

- Standard Chartered reckons it's time to book profits on a short EUR/GBP position, as the market looks primed for a correction. "An unexpectedly weak UK GDP report for Q1 has tempered expectations the economy will outperform"

- Societe Generale's cross-asset team says it remains bullish on crude oil prices due to supply and capacity worries and geopolitical concerns and it targets $135 per barrel for Q3 -- a price they say is not priced into futures markets. They say portfolios should be hedged for the possibility that 20-year-high oil/equity correlations will drop sharply and there several ways to gain exposure to rising crude -- Brent Sept call option spreads, US 5-year inflation-protected TIPS, long global oil services stocks, long Russia's rouble and Mexico's peso and short Thailand's baht and Korea's won. Seperately, SG's Dylan Grice worries about Australia -- "What do you call a credit bubble built on a commodity bull market built on a much bigger Chinese credit bubble? Leveraged leverage? A CDO squared? No, it's Australia."

from Global Investing:

Research Radar: Beyond Hollande and Holland…

Markets have been dominated this week so far by the fallout from Sunday's French presidential election, where Socialist Francois Hollande now looks set to beat incumbent conservative Nicolas Sarkozy in the May 6 runoff , and the collapse of the ruling Dutch coalition on Monday.  Public anxiety about budgetary austerity in Europe was further reinforced by news on Monday of a deepening of the euro zone private sector contraction in April. That said, euro equity, bond and currency prices have stabilised relatively quickly even if implied volatility has increased as investors brace for another month or so of political heat in the single currency bloc. The French runoff is now on the same day as the Greek elections and May 31 sees Ireland going to the polls to vote on the EU's new fiscal compact.  Wall St's volatility gauge, the ViX, is back up toward 20% -- better reflecting longer term averages -- and relatively risky assets such as emerging market equities remain on the back foot. The euro political heat and slightly slower Q2 world growth pulse will likely keep markets subdued and jittery until mid year at least. At that point, another cyclical upswing in world manufacturing together with the passing of the EBA's euro bank recapitalisation deadline as well as the introduction of the new European Stability Mechanism may well encourage investors to return at better levels.

Following are some interesting tips from Tuesday's bank and investment fund research notes:

- JPM economists reckon finding the reason behind the backup in US weekly initial jobless claims over the past couple of weeks is key to assessing whether a sub-par March payrolls report is repeated in April. It says it's possible the claims jump move is a seasonal factor as unadjusted claims are closely tracking 2007's pattern and Easter holidays fell on the same dates in both years. If 2007 was repeated, there would be a sizeable late April drop in claims and JPM looks for some of that on Thursday with a 14,000 forecast drop. (Reuters poll consensus is for a 11,000 drop)

- Following the surprise news last week that dovish Bank of England policy maker Adam Posen is no longer voting for more UK money printing, Barclays FX team said it's turning more positive on the UK economy and also says sticky inflation may mean the Bank of England's current monetary stance may be too accommodative. As a result, it lowered its euro/sterling 3-month forecast to 0.79 from 0.84. However, it cautioned about being short euro/sterling until after Wednesday's Q1 UK GDP report, which it said could come in weaker than expected due to temporary factors. (Reuters poll consensus is for a 0.1% rise Q/Q)

- As everyone watches the FOMC outcome on Wednesday, Bank of New York Mellon's Simon Derrick highlights widespread expectations of further Bank of Japan easing and asset purchases on Friday. He reckons the economic arguments for more easing in Japan may be sound but it's worth considering whether BoJ governor Masaaki Shirakawa may want to start facing down heavy political pressure for endless BoJ easing.

- Rabobank's emerging markets team flag their concern about Poland's zloty, which has been one of the best performing currencies of the year so far. They say the zloty is a high "Eurozone beta" play, seen in the correlation of the eur/pln rate with composite euro periphery sovereign CDS spreads, and as a result will suffer if euro tensions rise further over the next month or two.

from Global Investing:

March bulls give way to April bears in emerging markets

The dust has settled on a scintillating first quarter for emerging markets but the cross-asset rally of the first three months has already run out of steam. A survey by Societe Generale of 69 EM investors shows that over half are bearish -- at least for the near-term.

This marks quite a turn-around from the March survey, when 80 percent of investors declared themselves bullish on emerging markets. What’s more, investors are currently running very little risk and 47 percent of hedge fund respondents (these make up half the survey) feel they are over-invested in EM.  (The following graphic shows the findings -- click on it to enlarge)

Almost a quarter of the hedge fund and real money investors are neutral tactically on the market, compared to just 4.5 percent last month. Serious optimism has dried up, SocGen commented:

Looking at the distribution of answers, it is quite clear that the mega-bullish investor on EM has disappeared at this point.

The return of worries about the euro zone debt crisis, U.S. growth and a slowdown in China have all contributed to a higher degree of pessimism on financial markets. It's not all gloom though. Looking at emerging markets over the next 3 months, sentiment does pick up, with 64 percent of investors bullish. So this falling out of love with EM could be a temporary blip.

Only 13 percent of investors were more bearish on a 3-month time horizon than over the next two weeks. That included 83 percent of real money investors that believed in an improvement in the GEM outlook from two weeks to three months.

from Breakingviews:

Prestige and power fuel Qatar’s frantic shopping

By Una Galani

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

Investors searching for financial logic to Qatar’s raft of high profile foreign investments risk coming unstuck. Within recent weeks the tiny Gulf state’s sovereign fund has made moves on France’s Total, conglomerate Lagardere and luxury house LVMH. The Qataris’ rapidly expanding pick n’ mix portfolio has led bankers to compare the strategy to the one that led Dubai into crisis.

Unlike the debt-laden emirate, Qatar is investing at the bottom of the cycle and its cash is in search of a home. Hydrocarbons are forecast to generate revenue just shy of $100 billion in the 2012, according to a Reuters poll. The current account surplus is expected to hit 29 percent of GDP, or $54 billion. It’s not clear how much goes to the sovereign fund. But in a country with one of the highest GDP per capita in the world, the picture is one of plenty.

Qatar’s headline-grabbing punts are concentrated in western Europe. That, bankers say, reflects the top-down decision-making process of a still young sovereign fund where a small circle of individuals are focusing on a region they know well and in which they are welcome. Europe is the number one destination, both financial and touristic, for rich Arabs seeking to escape the hot sweltering summer months.

Aside from geography, the assets bear little in common. Some investments look opportunistic, like the bet in Barclays, others strategic like the recent move on European Goldfields. But it is hard to say what owning Harrods, live French domestic football rights, or shareholdings in floundering Greek banks bring to the state of Qatar beyond a sense of prestige and influence.

Tiny Qatar appears to want many conflicting things. To be seen as a reliable investor and energy partner, to be profitable as well as an influential regional power - alongside Saudi Arabia, Turkey and Egypt. Stakes in Europe’s big names - especially those that come with board seats - give Qatar direct access to key movers and policymakers. That might generate financial returns along the way but calling it a focused investment strategy would be overkill.

from Breakingviews:

Corporate cash surplus will be easy to misspend

By Chris Hughes

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

Everyone knows that companies worldwide are sitting on cash, generating cash, and have the capacity to borrow yet more. But where will it go? The optimistic answer would be into the real economy. The reality is probably into M&A and buybacks.

Apple’s $98 billion pile is emblematic of a growing corporate cash mountain. As of December, the 1,100 non-financial U.S. corporations rated by Moody’s were sitting on record gross cash balances of $1.24 trillion. The credit rating agency’s 360-strong universe of generally larger-cap European non-financial corporates had $872 billion of gross cash at June 2011, just shy of the 2010 record.

At the same time, gearing - net debt to equity - is modest. For European companies it is now at about 30 percent, a state of affairs not seen since the 1980s, according to Morgan Stanley. About one-third of Europe’s corporates are debt-free.

It’s not hard to see how this happened. Companies went into the crisis with relatively low leverage. When the banking sector froze, they cut borrowing further. Meanwhile, the downturn provided cover to slash operating costs and capex. With demand propped up by economic stimulus, record profit margins have followed. To cap it all, repressive monetary policy has squashed long-term interest rates, pushing yield-hungry investors into corporate bonds.

The upshot is that record profitability is not feeding into higher returns on equity, according to Barclays Capital. Even if memories of the crisis prompt companies to keep permanently bigger cash buffers, that’s not a situation that management or investors are likely to tolerate for long.

from Africa News blog:

Australia worse than Africa for mining? Yikes!: Clyde

By Clyde Russell The idea that Australia is a more dangerous place for mining investment than Mali might seem strange to most observers, but that's exactly the view of the boss of the world's third-biggest gold producer. Mark Cutifani, the chief executive officer of AngloGold Ashanti, said last week he was more concerned about government policies toward mining in Australia than about nationalism in Africa. On the face of it, this is an extraordinary comment that has gone largely unreported by both the Australian and international media. How can it possibly be that Australia, a stable Western democracy with rule of law, independent courts and a culture of vigorous debate, is a more risky place than countries like Mali, which had a military coup last month and is battling an insurgency by Tuareg separatists? Of course, it may be that Cutifani, an Australian-born mining engineer who has headed the Johannesburg-based company since October 2007, was ramping up the rhetoric to make a point when he talked to reporters on March 27 in Perth, capital of the resource-rich state of Western Australia. But this would appear to be at odds with his previous record of speaking sensibly about the gold-mining industry while remaining an advocate of the interests of his global company. The point Cutifani was probably trying to drive home is that the debate in Australia over its vast mineral resources appears to have veered off-track and descended into political point-scoring. "The politicians and we as industry leaders are missing each other," the Australian Associated Press quoted him as saying. "Somehow, we've got to land this discussion and stop the class warfare-type conversations and turn the conversations into constructive dialogue about the future of the country and the industry." To be fair, Cutifani has also lobbied against proposals for a resource rent tax in South Africa and moves to raise taxes in other African countries where AngloGold operates, such as Ghana and Mali. But for Australia, the background to his comments is an intensifying war of words between Wayne Swan, the treasurer in the Labor Party-led minority government, and mining magnates over the new Mineral Resource Rent Tax (MRRT) and the carbon tax. Both these taxes are due to start on July 1 and have raised the ire of many industries and the opposition Liberal Party.

The MRRT will impose a 30 percent levy on so-called super profits of large coal and iron ore, and doesn't yet include other producers such as gold miners. The carbon tax will impose a price of A$23 on the emissions of the top 500 polluters, to be phased in, while reducing income taxes for poorer households in order to offset the expected increase in energy costs. The Labor Party, which has slumped in opinion polls partly over public disquiet over the new taxes and a broken promise not to introduce a carbon tax by Prime Minister Julia Gillard, appears to be following the tactic of stoking the politics of envy as a distraction method. Since the financial crisis that sparked the global recession in 2008 it has been easy for politicians to attack the rich and blame untrammeled greed for the economic carnage. In Australia, the target is billionaire mining barons and Swan attacked iron ore magnates Gina Rinehart and Andrew Forrest as well as coal developer Clive Palmer in an essay published last month. Interestingly enough, Swan didn't attack BHP Billiton and Rio Tinto, the two global miners that led initial opposition to a stiffer resource tax that was watered down after Gillard deposed former prime minister Kevin Rudd in a party-room coup. Swan accused the billionaires of trying to use their wealth to "distort public policy," apparently without any sense of irony, given that he was using his position as the second-most powerful politician in Australia to do the same. It seems to me that Australia would benefit from a more sensible debate on how to ensure the mineral wealth is developed in a way that rewards the owners of capital that take the risks of developing projects as well the overall economy and citizens in general. Debate in Australia appears to be driven by short-term political cycles, with federal elections every three years leading politicians to focus more on spin than sound policies. Is the MRRT the best design that could have been implemented? Will it raise sufficient revenue without leading to less investment, and will it help ensure the long-term viability of mining? Should the revenue it raises be used to fund a one percentage point cut in the company tax rate, as Labor proposes, or would it be better put toward building a sovereign wealth fund? These are all valid points for debate, but aren't getting a hearing in Australia currently. Instead, as AngloGold's Cutifani pointed out, there is an unedifying mud-slinging match that does little to enhance the reputations of either Swan or his targets.

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.

So how do you hedge against such a risk?

You could buy credit default swaps of the sponsor company or buy out-of-the-money equity put derivatives to seek protection. But both options are costly and illiquid. Moreover, it might send a negative signal to the market: after all, if the company's pension fund is seen effectively shorting the company in an aggressive manner, investors may wonder "What do they know that we don't?"

Erwan Boscher, head of Liability-Driven Investing and Fiduciary Management at AXA Investment Managers, says:

"Using market instruments like CDS and out of the money equity puts were suggested as a way of hedging sponsor risks, but we seldom see them implemented because of the cost, liquidity or reputational risks for the sponsor."