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from MacroScope:
Best days over for emerging market local currency bonds?
Local currency bonds in emerging markets, like most financial assets, have enjoyed a solid rally on the back of ample global central bank liquidity. But the good times may be coming to an end, according to a report from Capital Economics. That's because there's only so much boost the securities can get out of the monetary easing efforts of the Federal Reserve and other major central banks, the firm says.
Emerging market (EM) local currency government bond yields have fallen sharply in the past few years. Our GDP-weighted overall 10-year yield of a sample of 18 EM sovereign borrowers has dropped by 125 basis points since the start of 2011, to around 4.4% at the end of April.
Our calculations suggest that almost the entire decline in the yield has been due to a drop in the risk-free rate rather than in the credit spread. And since the risk-free rate reflects long-term expectations for monetary policy, this suggests that the fate of EM local currency bonds will depend to a large extent on how short-term rates evolve.
The recent trend has been for central banks to loosen monetary policy further and we generally expect policy rates to remain low throughout our forecast window. However, of the 18 countries in our sample, we forecast that by the end of next year the benchmark policy rate will actually be higher in 10 cases, the same in 5 cases, and lower in only 3 cases. We expect some rise in rates in the Emerging Asia and Latin America regions to be offset only partly by a drop in rates in Emerging Europe.
from Global Investing:
Emerging markets to fuel airline spending trajectory
Emerging markets may not have all the technological know-how in civil aerospace, but from China across the world to Brazil, they do have the cash.
The civil aerospace sector performed well in 2013, according to Societe Generale data, trading at a 4 percent premium over the MSCI world index, while the defence sector has steadied, and in the medium to long term civil aerospace should be supported by strong orderbooks from emerging economies.
from Global Investing:
Japan’s big-money investors still sitting tight
More on the subject of Japanese overseas investment.
As we said here and here, Japanese cash outflows to world markets have so far been limited to a trickle, almost all from retail mom-and-pop investors who like higher yields and are estimated to have 1500 trillion yen ($15.40 trillion) in savings. As for Japan's huge institutional investors -- the $730 billion mutual fund industry and $3.4 trillion life insurance sectors -- they are sitting tight.
If some are to be believed, the hype over outflows is misguided. Morgan Stanley for one reckons Japanese insurers' foreign bond buying may rise by just 2-3 percent in the next two years, amounting to $60-100 billion. Pension funds are even less likely to re-balance their portfolios given large cash flow needs, the bank said.
from Global Investing:
Show us the (Japanese) money
Where is the Japanese money? Mostly it has been heading back to home shores as we wrote here yesterday.
The assumption was that the Bank of Japan's huge money-printing campaign would push Japanese retail and institutional investors out in search of yield. Emerging markets were expected to capture at least part of a potentially huge outflow from Japan and also benefit from rising allocations from other international funds as a result. But almost a month after the BOJ announced its plans, the cash has not yet arrived.
from Global Investing:
There’s cash in that trash
There's cash in that trash.
Analysts at Bank of America/Merrill Lynch are expounding opportunities to profit from the burgeoning waste disposal industry, which it estimates at $1 trillion at present but says could double within the next decade. They have compiled a list of more than 80 companies which may benefit most from the push for recycling waste, generating energy from biomass and building facilities to process or reduce waste. It's an industry that is likely to grow exponentially as incomes rise, especially in emerging economies, BofA/ML says in a note:
We believe that the global dynamics of waste volumes mean that waste management offers numerous opportunities for those with exposure to the value chain. We see opportunities across waste management, industrial treatment, waste-to-energy, wastewater & sewage,...recycling, and sustainable packaging among other areas.
from Global Investing:
Less yen for carry this time
The Bank of Japan unleashed its full firepower this week, pushing the yen to 3-1/2 year lows of 97 per dollar. Year-to-date, the currency is down 11 percent to the dollar. But those hoping for a return to the carry trade boom of yesteryear may wait in vain.
The weaker yen of pre-crisis years was a strong plus for emerging assets, especially for high-yield currencies. Japanese savers chased rising overseas currencies by buying high-yield foreign bonds and as foreigners sold used cheap yen funding for interest rate carry trades. But there's been little sign of a repeat of that behaviour as the yen has fallen sharply again recently .
from Global Investing:
Emerging earnings: a lot of misses
It's not shaping up to be a good year for emerging equities. They are almost 3 percent in the red while their developed world counterparts have gained more than 7 percent and Wall Street is at record highs. When we explored this topic last month, what stood out was the deepening profit squeeze and steep falls in return-on-equity (ROE). The latest earnings season provides fresh proof of this trend and is handily summarized in a Morgan Stanley note which crunches the earnings numbers for the last 2012 quarter.
The analysts found that:
--With 84 percent of emerging market companies having already reported last quarter earnings, consensus estimates have been missed by around 6 percent. A third of companies that have already reported results have beaten estimates while almost half have missed.
from Global Investing:
A Plan B for Argentina
What's Argentina's Plan B?
President Cristina Fernandez de Kirchner has said she will sell the presidential palace in Buenos Aires, if need be, to keep paying creditors who agreed to restructure the country's debts. But it may not come to that. Warning: this is a complicated saga with very interesting twists.
A pair of hedge fund litigants demanding $1.3 billion in payments and a New York court are making it hard for Kirchner to keep paying international bondholders. But she might contemplate asking those existing creditors to swap into Argentine law bonds, to which the writ of the New York court will not extend.
from The Great Debate:
Post Chavez: Can U.S. rebuild Latin American ties?
The funeral of Venezuelan President Hugo Chavez earlier this month was a massive celebration of a vitriolic foe of the United States. This tribute should make Washington take a fresh look not only at its relations with Venezuela but also with all of Latin America.
Virtually every Latin American country sent a high-level delegation to show its esteem for Chavez, who, during his 14 years in office, regularly vilified the United States, disparaged its leaders and campaigned tirelessly to end the U.S. role in the region. The presidents of Latin America’s six largest nations — including the closest U.S. regional allies, Mexico, Colombia and Chile — traveled to Caracas for the burial ceremonies. Never in Latin America, as many commentators noted, has a deceased leader been given a grander memorial — not even Argentina’s adored Juan Domingo Peron back in 1974.
from Global Investing:
European banks: slow progress
The Cypriot crisis, stemming essentially from a banking malaise, reminds us that Europe's banking woes are far from over. In fact, Stephen Jen and Alexandra Dreisin at SLJ Macro Partners posit in a note on Monday that five years into the crisis, European banks have barely carried out any deleveraging. A look at their loan-to-deposit ratios (a measure of a bank's liquidity, calculated by dividing total outstanding loans by total deposits) remain at an elevated 1.15. That's 60 percent higher than U.S. banks which went into the crisis with a similar LTD ratio but which have since slashed it to 0.7.
It follows therefore that if bank deleveraging really gets underway in Europe, lending will be curtailed further, notwithstanding central bankers' easing efforts. So the economic recession is likely to be prolonged further. Jen and Dreisin write:
