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Money managers under the microscope
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."
Gerard Fitzpatrick: Positive on global growth
Guest blogger Gerard Fitzpatrick is portfolio manager at Russell Investments, where he runs a $5 billion global bond fund.
The views expressed here are entirely the author’s own and do not constitute Reuters point of view.
The global economic outlook is positive overall, currently powered by China and America’s twin engines of growth. Questions have been asked about the level to which the Japanese disaster may slow down the world’s economic recovery, but in reality, it’s expected to have only a small negative effect on global growth this year.
Europe remains constrained by the Euro sovereign crisis, and we expect to see only low levels of European growth. Europe is moving in the right direction, but there are still lingering challenges. Despite Greece and Ireland remaining at risk of default, the economic outlook is moderately positive.
The Portuguese parliament has taken a striking gamble that will be acutely monitored by other European governments and bond investors. If they continue their refusal to accept harsher austerity measures, the outcome for Portugal could simply be binary, where either deeper support from the bailout providers will be made to balance the books or their refusal to accept such harsher austerity could push the already politically stretched bailout providers to breaking point. At an extreme, this could push Portugal into an abyss of confidence with bond investors and rating agencies.
Previously, the best stand-alone defence peripheral European governments held versus an ever increasingly sceptical bond market was a commitment to austerity measures to help stem the rising tide of indebtedness. If you take that defence away, the gambling peripheral country could drown.
The world has only just come out of a recessionary environment, and we expect inflation to remain relatively low in key global bond markets for several reasons.
Bond benchmarks go back to the drawing board
With the euro zone facing a fiscal deficit nightmare, passive bond investors have been forced to think hard about whether following a simple market cap-weighted benchmark is a good idea. Traditional bond indices have the biggest weighting to the largest borrower — so investors end up lending more money to those desperate to borrow it.
“Passive investing in a traditional sense in fixed income doesn’t make a lot of sense,” said Paul Abberley, CEO of Aviva Investors UK. “The market caps of equities broadly correlate with underlying economic growth but it doesn’t work that way with bonds. For example, you would have been steadily increasing your exposure to Greece as they borrowed more and more.”
To address this problem State Street Global Advisors recently launched an index weighted by fundamentals that uses financial and liquidity ratios to assess whether a company is using its debt wisely, and whether the turnover in the debt is compensated for by the return. Similarly, Lombard Odier Investment Managers (LOIM) has developed its own fundamentally weighted index for its Emerging Local Currencies and Bonds Fund.
This uses factors such as purchasing power-weighted GDP, gross debt to GDP ratio, and fiscal budget to ensure the bigger weights go to the healthier economies rather than the most indebted countries. When markets rally this fund will lag, but when markets dip the fund will fall less and should exhibit significantly less volatility overall, a spokesperson for LOIM said.
Passive giant Vanguard also recently announced a move to adopt float-adjusted benchmarks to ensure investors are tracking a benchmark that actually reflects the debt available to trade in the secondary market. “Non-float-adjusted indices misrepresent what is available in the investable universe,” said Didier Haenecour, fixed income manager, Vanguard Investments Europe. “The rest is locked away with institutions that have no intention of trading these bonds.”
The recent intervention by the European Central Bank (ECB) in euro zone bond markets has vindicated the decision, which was made some time ago. “It reinforces the argument –- we wouldn’t have considered this if it was going to be a short term thing,” Haencour said.
Thus far, the buying by the ECB has been small relative to the size of the market, but the Bank of England has taken over a third of gilts out of the market so there is uncertainty as to whether the ECB will undertake a concerted buying programme. “Central banks will be actors in the market for some time,” Haenecour maintained.
Morning Line-Up: Pru’s shareholders, Greek crisis, Goldman faces Senate
News and views on the funds sector from Reuters and elsewhere:
Pru faces shareholder revolt over Asian deal - Reuters
Greek crisis spills over to Europe - WSJ
Goldman Sachs traders face U.S. Senate - Telegraph
Morning line-up: Merkel on Greece, U.S. financial reform, hung parliament
News and views on the fund sector from Reuters and elsewhere:
Merkel tells Greece it must cut costs more to get German help – Reuters
Greece to welcome hedge funds?
Interesting report in the Telegraph that debt-laden Greece may have to turn to hedge funds for support in its next dollar bond issue.
Having effectively tried to exclude them from recent issues, a u-turn looks likely if it wants to raise anything like what it hopes, the paper says.
Such a report will no doubt be seized upon by the hedge fund lobby, who argue that hedge funds often step into markets as buyers when liquidity is scarce.
And it will be fascinating to hear any reaction from European politician Poul Nyrup Rasmussen, who in a visit to London last month accused hedge funds of raising Greece’s borrowing costs by 2.5 percent (a charge, it must be said, that was vigorously denied by the industry).
Rasmussen told a conference that “we cannot live with it (hedge fund speculation on CDS) anymore” and called for a ban or at least a limit, while a number of politicians have criticized hedge funds who buy the CDS without owning the underlying bond.
However, it seems unlikely that any purchase of the latest issue of Greek bonds would be driven by hedge funds’ willingness to comply with this…
Morning Line-Up: Greece and Geithner
News and views on the fund industry from Reuters and elsewhere:
Greece set for U-turn on hedge fund policy – Telegraph
Geithner urges Europe to treat U.S. funds equally – Reuters
Managers buoyed by first-quarter credit market surge – MarketWatch
Hedge funds: Greece is the word
This week’s Reuters Hedge Fund and Private Equity Summit gave us some new insights into how hedge funds are betting on Greece’s debt crisis and their attitude to talk that politicians and regulators may clamp down on their activities.
According to Cheyne Capital, for instance, buying Greek CDS is an “old trade” that many hedge funds have moved out of. Many have instead moved to short bets on the euro, as the single currency comes under pressure from the debt of some southern European countries.
Then again, two managers from GLG, ranked by Eurohedge this week as Europe’s 6th biggest hedge fund firm, said they are actually long the euro.
The rationale, according to fund manager Karim Abdel-Motaal, is that the euro is the least ugly major currency and hasn’t seen the same quantitative easing used elsewhere.
In addition, the strength of France and Germany’s economies coming out of recession means interest rates could rise sooner than expected, boosting the single currency.
They were also quick to dismiss the idea that banning or limiting CDS would somehow improve the situation.
“Let’s assume you ban credit default swaps, and Greek spreads automatically go to the same level as German spreads … Would you rather hold a German bond at a spread of 1 percent or a Greek bond at a spread of 1 percent? You’ve just made Greek debt unfinanceable.”
The perks of Greece have simply gone away,
Their money’s down the drain,
It’s such a crying shame.
The EU nations now just turn their face,
With nothing good to say,
The friends of yesterday,
Greece is the word.
Not long ago the youth groups ruled the streets,
Hurt cops and then they ran wild,
Just like an angry child.
The Reds took government but nothing’s changed,
They whipped up quite a stir,
But things are still as they were,
Greece is the word.
Morning Line-up: Fink, Ucits, Greece
News and views on the hedge fund industry from Reuters and elsewhere:
Ex-chief of Man Group plans tie-up with Hite – FT
