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Money managers under the microscope
from Global Investing:
Emerging markets facing current account pain
Emerging markets may yet pay dearly for the sins of their richer cousins. While recent financial crises have been rooted in the United States and euro zone, analysts at Credit Agricole are questioning whether a full-fledged emerging markets crisis could be on the horizon, the first since the series of crashes from Argentina to Turkey over a decade ago. The concern stems from the worsening balance of payments picture across the developing world and the need to plug big funding shortfalls.
The above chart from Credit Agricole shows that as recently as 2006, the 34 big emerging economies ran a cumulative current account surplus of 5.2 percent of GDP. By end-2011 that had dwindled to 1.7 percent of GDP. More worrying yet is the position of "deficit" economies. The current account gap here has widened to 4 percent of GDP, more than double 2006 levels and the biggest since the 1980s. The difficulties are unlikely to disappear this year, Credit Agricole says, predicting India, Turkey, Morocco, Tunisia, Vietnam, Poland and Romania to run current account deficits of over 4 percent this year.
Some fiscally profligate countries such as India may have mainly themselves to blame for their plight. But in general, emerging nations after the Lehman crisis were forced to embark on massive spending to buck up domestic consumption and offset the collapse of Western export markets. For this reason, many were unable to raise interest rates or did so too late. As the woes of the Turkish lira and Indian rupee showed last year, the yawning funding gap leaves many countries horribly exposed to the vagaries of global risk appetite.
There are some supportive factors however. The Fed's signal this week that U.S. interest rates are unlikely to rise before 2014 shows that central banks in Europe and the United States will continue to gush money for now. So there should be enough cash available to plug the gaps in emerging nations' balance sheets. Second, as growth eases, so will the deficits. For these reasons, Credit Agricole says the market will be forgiving of large current account deficits this year. But it warned:
What will happen once (developed market) rates are raised is another story, and emerging markets would better have fixed their main imbalances when the global monetary normalisation begins.
from Global Investing:
EM growth is passport out of West’s mess but has a price, says “Mr BRIC”
Anyone worried about Greece and the potential impact of the euro debt crisis on the world economy should have a chat with Jim O'Neill. O'Neill, the head of Goldman Sachs Asset Management ten years ago coined the BRIC acronym to describe the four biggest emerging economies and perhaps understandably, he is not too perturbed by the outcome of the Greek crisis. Speaking at a recent conference, the man who is often called Mr BRIC, pointed out that China's economy is growing by $1 trillion a year and that means it is adding the equivalent of a Greece every 4 months. And what if the market turns its guns on Italy, a far larger economy than Greece? Italy's economy was surpassed in size last year by Brazil, another of the BRICs, O'Neill counters, adding:
"How Italy plays out will be important but people should not exaggerate its global importance. In the next 12 months the four BRICs will create the equivalent of another Italy."
Emerging economies are cooling now after years of turbo-charged growth. But according to O'Neill, even then they are growing enough to allow the global economy to expand at 4-4.5 percent, a faster clip than much of the past 30 years. Trade data for last year will soon show that Germany for the first time exported more goods to the four BRICs than to neighbouring France, he said.
"Post-crisis, these countries will be our passport out of this mess."
But there has to be a payoff for this kind of increased financial clout, he warns. Developing countries are increasingly disgruntled about the the richer world's strangehold on global policies via the International Monetary Fund and the World Bank and most have responded coolly to the call for additional funds for the IMF which is fighting to stem the euro zone malaise. An attempt last year to install a representative of the developing world at the helm of the IMF for the first time ever fell apart, with Europe retaining the position. But emerging countries could make a bid for the World Bank chief's position this year, a position traditionally held by a U.S. citizen. O'Neill said the West had to bow to the new reality:
"You can't have it both ways...This game of 'You have the IMF and I have the World Bank' has to stop or these institutions are going to lose their relevance."
He is also dismissive of fears China is headed for a so-called hard landing, a sharp slowdown of growth, potentially leading to unemployment, a property crash and social unrest in the world's No. 2 economy. "A lot of people (in the West) want China to have a hard landing, " he said. "And that's because it isnt us."
GLG: Italy and Greece deserve a central bank
Guest contributors Bart Turtelboom and Karim Abdel-Motaal run the Emerging Market strategy at Man GLG. The views expressed are their own.
History is written by the victors. That is what emerging markets discovered after their currency crises of the 1990s, and it is what will happen when the annals of the euro crisis are compiled. Treatment of this crisis has varied, but in all its forms the basic premise is already set: Germany and the world are the undeserving victims of Peripheral European excess. The Periphery spent and borrowed too much causing the current crisis. Add to this the cultural imagery of Greek pensioners retiring at the tender age of 55 on exotic Aegean islands at German savers’ expense and the colourful chapter on this historical saga is written.
If Emerging Markets is any guide, the problem with this narrative is not just that it is wrong, but downright dangerous in its policy implications. The tyrannical hold of this perspective on European policy making is pushing the continent down the path of a historic pro-cyclical fiscal contraction almost as the be all and end all of crisis response. There is already a mountain of evidence that this has not worked, whatever the merits of debt reduction and ideological divisions on its pace and timing. The missing ingredient has always been and remains today, quite different. Italy and Greece lack a central bank. More importantly, they deserve one, desperately.
For an economy where paper money is the medium of exchange and fractional reserve banking exists where a bank transforms a unit of deposits into a multiple of that in loans, a central bank is essential. This is as true of Switzerland as it is of Greece. It performs a function of lender of last resort to prevent a rapid run on an otherwise solvent bank (a liquidity crisis) from turning into a solvency one for that bank or for the entire banking system. When Italy and Greece signed onto the Euro, they had a legitimate right to expect that the Central Banks they were giving up would be replaced by a common Eurozone one, which would in effect perform the same function for their economies. What they got instead was a Central Bank which is constrained by mandate, and German objection to its modification, from performing that function for anyone but Germany.
In the Eurozone, not only are the ECB’s clients the member state banks, but also the sovereigns. We are in the advanced stages of a full blown and contagious run on both, with the ECB for all intents and purposes on the sidelines. Whatever support it has provided so far in the guise of purchases of distressed member state debt and bank liquidity provision has been trivial in relation to the size of the run, and communicated in such a tentative way as to aggravate it, by signalling impotence. The ECB’s absence, whatever its legal justifications, has effectively reduced Italy and Greece, not to mention the Eurozone, to the status of a barter economy.
Italians and Greeks can and should justifiably ask for redress. They did not give up their Liras and Drachmas to be put through a fiscal vice as the cost of the most basic central banking services being provided them, any more than U.S. states did for the same service from the Federal Reserve. The lender of last resort function is a relatively uncontroversial one, which has little to do with ideological debates about the desirability or effectiveness of active monetary policy or with Weimer Republic-induced phobias of hyperinflation and money printing. The idea, that in the middle of a full-blown bank/sovereign run, a central bank’s intervention would be made conditional on preceding actions, fiscal or otherwise, that are subject to political vagaries, is extraordinary and dangerous.
A confidence crisis is precisely that; it cannot wait and must be dealt with decisively and conclusively if the vicious cycle is to be arrested. This is not to say that the fiscal and debt problems which challenged confidence to begin with should not be addressed; they should. However, in this European version of the Emerging Markets archetype, we are in now well beyond the phase where a medium term fiscal adjustment announced by technocratic governments in Greece or Italy will have any effect. It maybe part of the solution, but it is certainly not sufficient, or the most urgent issue. The ECB needs to act and act big.
I agree completely! This is a fantastic article. If only policy-makers in Europe would listen. Unfortunately, we can be pretty sure they won’t. Now that Europe is ruled entirely by right-wing governments, fiscal responsibility is not really in the cards.
Morning Line-up: Investors get picky with emerging markets, BlackRock sets sights on U.S. retail
News and views on the asset management industry from Reuters and elsewhere:
Warier investors seek specialized emerging market funds – Wall Street Journal
from MacroScope:
What emerging animal are you?
Ever since Goldman Sach's Jim O'Neill came up with the idea of BRICs as an investment universe, competitors have been indulging in a global game of acronyms. Why not add Korea to Brazil, Russia, India and China and get a proper BRICK? Or include South Africa, as it wants, to properly upper case the "s" - BRICS or BRICKS?
Completely new lists have also been compiled -- HSBC chief Michael Geoghegan has championed CIVETS to describe Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa (ignoring the fact, as Reuters' Sebastian Tong points out here, that a civet is a skunk-like animal blamed for the spread of the deadly SARS outbreak in Asia).
Fun though some of this is -- and no one can argue that BRICs has not had an impact -- there is a danger that the acronym could become more relevant than the actual countries involved. For example, imagine Mexico, Uruguay, Panama, Philippines, Egypt, Turkey and Sierre Leone being lumped together because they spell MUPPETS.
With this in mind, the Spanish bank BBVA is now arguing that what is needed is a more dynamic concept, one that can remain in place acronymically, so to speak, but allow for new entrants without the need to rewrite everything. Enter BBVA's EAGLEs -- an Emerging And Growth-Leading Economy, defined by its incremental GDP rather than absolute size. The founding 10 are China, India, Brazil, Korea, Indonesia, Russia, Mexico, Turkey, Egypt and Taiwan.
But BBVA reckons that is not enough. It also has an EAGLE's nest, which included fledglings that might soon grow up to soar -- Nigeria, Poland, South Africa, Thailand, Colombia, Vietnam, Bangladesh, Malaysia, Argentina, Peru and the Philippines.
MacroScope likes the idea of animals coming to the aid of investors and economists. It would like to suggest FERRETs -- Fast Emerging, Relatively Robust Economic Treasures. But it encourages anyone who feels inspired to submit their own suggestions.
Why not just rummage around in the ATTIC? Top performing regional fund sectors this year: ASEAN, Thailand, Turkey, Indonesia, Chile. (we’ll conveniently ignore the fact the Philippines is actually at the very top)
Morning Line-Up: EM fundies make hay as buyers flock to Madoff sale
EM asset flows could lead to capital controls - FTfm
Cantab Capital Partners to launch quant-based UCITS fund - HedgeWeek
Index link switch puts pensions in limbo - FTfm
Auction of Madoff effects raises $2 mln - Reuters
New research finds big hedge funds more vulnerable - Reuters
Morning Line-Up: CQS, takeovers, emerging markets
News and views on the asset management industry from Reuters and elsewhere:
French funds of hedge funds struggle to recover from the crisis – Financial News
Hintze fund snaps up farm – The Land
Hedge funds ready for takeover surge – Financial News
How to play emerging markets – WSJ
Castlestone launches automated trading service for hedge funds – HedgeWeek
Morning Line-Up: Hedge funds, sterling shorting, rights issue consultation
Hedge funds see ‘trying’ year in 2010-survey – Reuters
Big fall in short selling of sterling since budget- Daily Telegraph
Fund managers throw down the gauntlet to banks on rights issue fees – Times
Money flows to bonds, emerging market stocks in first half - Reuters
Don’t all rush at once
Currency managers nurture the view that emerging market central banks need to diversify their holdings away from the US dollar but so far there seems to have been little movement in this direction. Ousmene Mandeng, head of public investment advisory at emerging markets specialist Ashmore, notes that historically central banks act unilaterally to reallocate their reserves, especially when they are concerned about a possible impairment due to devaluation.
The problem for central banks with very large US dollar reserves – such as China – is the lack of a viable alternative reserve currency. “For the inertia to be overcome we will need a common framework so that countries can get out of the dollar in an orderly fashion,” Mandeng says.
If the dollar weakens in a secular manner over the next decade, this will hit several percentage points of GDP in countries where it accounts for a large proportion of central bank FX reserves. “That’s a considerable impairment of public wealth – no-one wants a disorderly unwinding or greater forex market volatility,” says Mandeng.
In the absence of a common framework, however, a disorderly unwinding is what we are looking at. Michael Power, chief strategist at Investec Asset Management, believes that smaller central banks like Singapore will look for every opportunity to move before China. “There is plenty of evidence that the secondary and tertiary central banks are jumping the queue if they can.”
Countries like Russia, Qatar, Indonesia, Singapore, India, Korea and Sri Lanka are all thought to be quietly diversifying from US dollars, trying to avoid telegraphing what they are doing. “Everyone realises that they are going to lose a little bit of money on the way but over the medium term everyone recognises that it is the prudent thing do,” Power says.
Don’t all rush at once, now.
from Global Investing:
Time up for emerging markets?
Well, not in the long-run, no. You would be hard pressed to find an economist, investor or even politician who does not reckon the global shift in growth to Asia and Latin America is going to be the story of the coming decade, century etc.
But in the shorter term, strange things are happening. MSCI's benchmark emerging market stock index is barely in the black for the year. Even more surprising is that it is underperforming its developed market counterpart.
Many economists and investment strategists are still beating the drum for emerging markets and a Reuters European Funds Summit in Luxembourg this week heard numerous cases of retail investors beginning to move into the sector, joining their institutional brethren.
The problem is that all this demand can transform itself into too much money chasing too few assets. LGT Capital Management insists that we are not there yet, but used the "bubble" word during a meeting with Reuters reporters at the summit.
Again, no one is moving away from the story of emerging markets as a long-term growth theme -- indeed demand for emerging debt is holding up well. But the doubling of the MSCI stock index during last year's rally, plus general volatility and global economic uncertainty, might mean the sheen is off for a bit.
