Global Investing

Toxic trio turns tantalising

Dubbed the Toxic Trio earlier this year,  the high-yield bond markets of Argentina, Ukraine and Venezuela are starting to look a lot more appealing.

Argentina and Venezuela were the biggest beneficiaries of the recent rally in emerging market debt, according to data from JP Morgan, which says it has added an overweight Argentina position to its existing overweight in Venezuela, and has Ukraine at market-weight:

High spread and NEXGEM (frontier) countries have led the spread tightening since early February, making positions in these segments difficult to ignore

Argentina and Venezuelan spreads over U.S. Treasuries have tightened by more than 300 basis points over U.S. Treasuries, topping the league for performance in the JP Morgan Emerging Market Bond Index Global (EMBIG) and NEXGEM indices.

Argentina is paying coupons to investors while it tries to resolve a U.S. court case, but that won’t be resolved until next year, JPMorgan says. Meanwhile, the country has started focusing more on building up foreign exchange reserves, which is also positive, the bank adds.

Buying back into emerging markets

After almost a year of selling emerging markets, investors seem to be returning in force. The latest to turn positive on the asset class is asset and wealth manager Pictet Group (AUM: 265 billion pounds) which said on Tuesday its asset management division (clarifies division of Pictet) was starting to build positions on emerging equities and local currency debt. It has an overweight position on the latter for the first time since it went underweight last July.

Local emerging debt has been out of favour with investors because of how volatile currencies have been since last May, For an investor who is funding an emerging market investments from dollars or euros, a fast-falling rand can wipe out any gains he makes on a South African bond. But the rand and its peers such as the Turkish lira, Indian rupee, Indonesian rupiah and Brazilan real — at the forefront of last year’s selloff –  have stabilised from the lows hit in recent months.  According to Pictet Asset Management:

Valuations of emerging market currencies have fallen to a point where they are now starkly at odds with such economies’ fundamentals. Emerging currencies are, on average, trading at almost two standard deviations below their equilibrium level (which takes into account a country’s net foreign asset holdings, inflation rate and its relative productivity).

And the biggest loser was…Belgium

The largest downswing in the BlackRock Sovereign Risk Index over the past quarter was not Ukraine, despite the annexation of its Crimea region and Russian troops on its borders, but Belgium.

Belgium, part of the euro zone’s core, fell four points in the index to 31st place, due to the amount of debt due this year. BlackRock says:

Its debt is becoming front-loaded, with about 16 percent of GDP in principal and interest due this year.

Ukraine and the IMF: a sense of deja vu

The West has just agreed to stump up a load of cash for Ukraine but there is a distinct sense of deja vu around it all.

Let’s face it – Ukraine’s track record on how it manages ts economy and foreign affairs isn’t great. This is the third aid programme Kiev has signed with the International Monetary Fund in a decade and two of them have failed. The IMF has its fingers crossed that this one will not go the way of the past two. Reza Moghadam, the IMF’s top European official, tells Reuters in an interview:

They seem to be committed, they seem to own this reform programme and in that sense I am optimistic

Braving emerging stocks again

It’s a brave investor who will venture into emerging markets these days, let alone start a new fund. Data from Thomson Reuters company Lipper shows declining appetite for new emerging market funds – while almost 200 emerging debt and equity funds were launched in Europe back in 2011, the tally so far  this year is just 10.

But Shaw Wagener, a portfolio manager at U.S. investor American Funds has gone against the trend, launching an emerging growth and income fund earlier this month.

It’s a great time to launch a fund if you have a long-term focus in mind. Emerging markets trailed DM in terms of performance for a while, peaking at end of 2010 so we are 3-plus years into a down market and period of significant underperformance.

CORRECTED-Toothless or not, Western sanctions bite Russian bonds

(corrects last paragraph to show that Timchenko was Gunvor’s co-founder, not a former CEO)

Western sanctions against Russia lack bite, that’s the consensus. Yet the bonds of some Russian companies have taken a hit, especially the ones whose bosses have been targeted for visa- and asset freezes.

Take state-run Russian Raiways. Its chairman Vladimir Yakunin, a member of President Putin’s inner circle, was on the sanctions list. He said he was flattered to be targeted but investors in his company’s dollar bonds are likely to be less thrilled. Russian Railways’ 2022 bond is now the cheapest quasi-sovereign bond in the emerging markets universe relative to its sovereign, Barclays analysts point out. The bond trades now at a 158 bps premium to Russia’s 2022 issue while the one-year average premium has been 114 bps, Barclays note.

Asia’s path to prosperity and investment opportunities

Investors have been worried about the effect of a Chinese slowdown on Asian emerging markets, but the long-term growth story is still intact, according to specialist investment manager Matthews Asia.

Consumption is one of the key areas of growth. Illustrating the divergence of Asian economies and their path to prosperity, here’s an interesting chart from Matthews which shows the standard of living of various Asian countries, expressed by applying Geary-Khamis dollars — the concept of international dollars based on purchasing power parity — to today’s Japan.

For example, the living standards of North Korea and Mongolia are at around that of Japan in the 1890s — when Japan and China fought in the Sino-Japanese war and Wilhelm Rontgen discovered x-rays — while China’s is equivalent of an early 1970s Japan and Malaysia and Thailand are a step ahead at the mid-1970s.

Liquidity needs to pick up in EM

Emerging markets have seen heavy selling in the past few months, with political and economic crises hitting the region’s currencies and asset markets.

The obvious question now is: Is all the bad news in the price?

London-based CrossBorder Capital, who publishes monthly liquidity and risk appetite data for developed and emerging economies, thinks not.

“It is probably too early to buy the EM sector right now, certainly not until liquidity picks up again,” Michael Howell, CrossBorder’s managing director, says.

Russian investing: offshore or onshore

Nerves about the potential impact of sanctions on Russian banks and the orderly functioning of Russian markets are driving investors to trade Russian rouble forwards offshore rather than onshore, even though the central bank told Reuters today it will not impose capital controls

Several Russian companies are also trading at a higher price in the offshore (GDR/ADR) market than the local stock markets, according to research by Bank of America-Merrill Lynch. The price difference  in some cases such as Mobile Telesystems and Magnit is as big as 15-16 percent, BofA/ML notes.

But that differential could provide a buying opportunity in the local market, BoA-ML adds, as any sanctions would not hit retail or fund buyers of the local stocks, but the large banks who often buy the offshore shares.

Who shivers if Russia cuts off the gas?

Markets are fretting about the prospect of western sanctions on Russia but Europeans will also suffer heavily from any retaliatory trade embargoes from Moscow which supplies roughly a third of the continent’s gas needs  – 130 billion cubic metres in 2012.

After all, memories are still fresh of winter 2009 when Russia cut off gas exports through Ukraine because of Kiev’s failure to pay bills on time.  ING Bank analysts have put together a table showing which countries could be hardest hit if the Kremlin indeed turns off the taps.

So while Hungary and Slovakia depend on Moscow for over a third of their energy,  Germany imported less than 10 percent of its needs  from Russia while Ireland, Spain and the United Kingdom received none at all in 2012, ING’s graphic shows.  So while the main impetus for the sanctions comes from the G7 group of rich countries,  it is central and Eastern Europe who will be in the firing line.