Global Investing

Myanmar – investing in a far frontier

Frontier investors have been excited by the opening up of Myanmar’s market since its quasi-civilian government came to power in 2011, after nearly half a century of military rule. But investors also complain that there is very little to invest in. This one is a deep frontier – there is no real stock market, and investors have tended not to go directly into local companies.

Myanmar is seen as ripe for business expansion, given only an estimated 30 percent of the population have access to electricity, for example. And the IMF predicts growth of 8.5 percent in the country this year, one of the fastest growth rates in the world, due partly to rising gas production.

London-listed All Asia Asset Capital recently increased its holding in a Myanmar and Thai-based power generation firm and is also invested in a Thai hospitality and gaming company which has a resort across the border in Myanmar.

Frontier investors across the globe look for annual double-digit returns in long-term investments such as private equity, though there can be transparency risks in these small, unlisted companies. In this new market of Myanmar, the returns could be especially attractive, says  Sri Hartati Kurniawan, All Asia Asset Capital’s CEO, who sees potential returns in Myanmar among the best in the region:

We are aiming for 20 percent a year – we are coming in early. We are taking into consideration we are investing in a frontier market, there are certain risks associated with that.

The people buying emerging markets

We’ve written (most recently here) about all the buying interest that emerging markets have been getting from once-conservative investors such as pension funds and central banks. Last year’s taper tantrum, caused by Fed hints about ending bond buying, did not apparently deter these investors . In fact, as mom-and-pop holders of mutual funds rushed for the exits,  there is some evidence pension and sovereign  wealth  funds actually upped emerging allocations, say fund managers. And requests-for-proposals (RFPs) from these deep-pocketed investors are still flooding in,  says Peter Marber, head of emerging market investments at Loomis Sayles.

The reasoning is yield, of course, but also recognition that there is a whole new investable universe out there, Marber says:

There has been so much yield compression that to get the returns investors are accustomed to, they have to either go down in credit quality or look overseas. Investors have been globalizing their equity portfolios for 25 years but the bond portfolios still have a home bias. We are starting to see more and more institutional investors gain exposure to emerging markets, and a large number of recent RFPs highlight more sophisticated mandates than a decade ago.

Emerging markets; turning a corner

Emerging markets have been attracting healthy investment flows into their stock and bond markets for much of this year and now data compiled by consultancy CrossBorder Capital shows the sector may be on the cusp of decisively turning the corner.

CrossBorder and its managing director Michael Howell say their Global Liquidity Index (GLI) — a measure of money flows through world markets — showed the sharpest improvement in almost three years in June across emerging markets. That was down to substantially looser policy by central banks in India, China and others that Howell says has moved these economies “into a rebound phase”.

This is important because the GLI, which has been around since the 1980s, has been a fairly accurate leading indicator, leading asset prices by 6-9 months and future economic activity by 12-15 months, Howell says:

Ecuador: a successful emerging market?

A colleague of mine, Marius Zaharia (@MZaharia) interviewed Moritz Kraemer, Standard and Poor’s head of sovereign ratings for Europe, Middle East and Africa. (you can read the interview here) Kraemer offered this piece of advice to the African governments who are busily tapping bond markets these days:

    What I want to tell all those governments in africa is that you are not a successful market participant when you’ve issued your first eurobond. You are a successful participant when you’ve paid it back for the first time.   

A sound piece of advice. But where does that leave Ecuador which has a frequent history of default spanning three centuries? One might argue in fact Ecuador’s market strategy has been highly successful — not only has it avoided repaying creditors, it also seems adept at persuading them to part with more cash at regular intervals.

Anticipating the fallout from South Africa’s ratings reviews

South Africa is due ratings reviews this Friday. Chances are that the Standard & Poor’s agency will cut its BBB rating by one, or possibly even two notches.  Another agency Fitch has a stable outlook on the rating but could still choose to downgrade the rating rather than the outlook. What will be the damage?

There is undoubtedly a link between ratings and bond prices.  So a one-notch ratings downgrade tends to lead to roughly a 20 percent increase in bond yield spreads and credit default swaps (instruments that are used to hedge against default), according to calculations by JPMorgan. But in South Africa the lower credit rating may already be already reflected in asset prices — Panama, Brazil, Colombia, Philippines, Uruguay, Indonesia, and Romania carry lower sovereign credit ratings but boast lower CDS and dollar bond yield premia over Treasuries.  Russia and Turkey have lower average ratings than South Africa but their debt and CDS spreads  are roughly on the same level.

So a ratings cut is unlikely to trigger huge outflows from South African debt markets, says JPMorgan, which runs the most widely used emerging bond indices. In Brazil for instance, a well-anticipated  downgrade back in March did not lead to significant cash outflows from its markets, JPM points out:

Discovering Pyongyang’s view with a North Korean diplomat

Last week I went to a very unique session on North Korea which featured a rare appearance of a North Korean diplomat, at London-based policy institute Chatham House.

A wide range of topics — from North-South relations, human rights, a potential nuclear test to a new generation of young diplomats — were discussed, but  under the so-called Chatham House rules (meaning I cannot reveal who said what).

Participants discussed how Pyongyang’s relationship with South Korea and the United States has been deteriorating as both sides exchange some pretty acrid verbal attacks. For instance earlier this month North Korea’s official KCNA called  South Korean President Park Geun-hye a “political prostitute” while it described U.S. President Barack Obama as a “wicked black monkey”.  South Korean Ministry of Defence spokesman Kim Min-seok for his part, had retorted that North Korea wasn’t a real country and that it existed solely to prop up a single person.

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

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