Equities may be the poster child for this year’s market recovery, but corporate bonds have been the runaway outperrfomer.

As the graphic below shows, corporate debt was less volatile and moer profitable over the past nearly three years of crisis and recovery — even “junk” bonds.

This year’s performance for corporate bonds has been stunning. In December last year, the spread between global large cap company debt and U.S. Treasuries was 155 basis points, according to Bank of America Merrill Lynch. It has now narrowed to around 52 basis points.

The performance of high-yield, or “junk” bonds, has been even better. From a spread of 2,193 basis points in December, the BoA-ML global high-yield index now registers 773.

And what now? Investors still like the asset class, but there is evidence that the degree of passion may be cooling.

(Graphic: Scott Barber)

While Japan took few direct hits in the global credit crisis, the aftershocks have been immense, and long-lasting. The United States and Europe may now be showing some signs of recovery, but the world's second-largest economy is still straggling behind and gasping for air.

Predictably, equity markets reflect Japan's wheezy struggle. The Nikkei 225 is the worst performer among the benchmark indexes of the G7 nations, up just 10 percent so far this year. (The best performer, by the way, is Toronto at nearly 27 percent. The Dow has posted a respectable 17 percent return.)

Some discrepancy between Japan and other advanced industrialised nations is to be expected. Tokyo's top companies are largely exporters reliant on the United States, where consumer spending has been whiplashed by the recession. A resurgent yen, which drives up the price of Japanese goods overseas, hasn't helped either.

Consumer spending in Japan -- which never convincingly recovered from the crash of the asset bubble in the early 1990s -- is only poised to get worse, thanks to the lethal demographic cocktail of an ageing population and a shrinking birthrate.

But the reasons behind the Nikkei's poor performance aren't exclusively economic. Talk to a frustrated fund manager in Tokyo (believe me, they are very easy to find these days) and they'll tell you that even with the lousy earnings and a grim economic outlook, the biggest problem now is a rush of capital raisings that will heavily dilute the holdings of current shareholders.

"This is the biggest factor why Japanese shares lag behind U.S. and European shares," says Takeshi Osawa, senior fund manager at Norinchukin Zenkyoren Asset Management, referring to the recent rush by Japanese companies to issue new equity.

Japanese firms have already raised $40 billion through issuing common stock and convertible bonds this year, tapping the modest stock rebound for much-needed cash to replenish their reserves, and it doesn't look like it's going to end.

On Monday, Hitachi said it will raise up to 416 billion yen in a share sale. Shares of Hitachi, Japan's biggest electronics firm by sales, suffered their biggest one-day slide in six months after sources told Reuters about the public issue.

Mitsubishi UFJ Financial Group, Japan's biggest bank, is likely to raise as much as 1 trillion yen by the end of the year, to meet stricter global capital regulations and increase lending in Asia, three sources said on Saturday.

Analysts expect that its smaller rivals Mizuho Financial Group and Sumitomo Mitsui Financial Group will eventually have to follow suit. Shares of Mizuho and Sumitomo Mitsui both fell after news of Mitsubishi UFJ's financial raising, even though the two smaller banks had posted consensus-beating second quarter results.

For investors, who watch in horror as their holdings sharply lose value, and Japan's recovery gets stalled, it is nothing short of infuriating.

Perhaps Koichi Ogawa, chief portfolio manager at Daiwa SB Investments, sums it up best. "I'm angry," Ogawa told me on Monday. "The world of investing isn't a charity."

Photo credit: REUTERS/Toru Hanai

Sierra Leone is holding an investment conference in London on Wednesday, showing even the world’s least developed countries can aspire to become emerging economies.

There are a few tentative signs of money going into the country, which was scarred by a 1991-2002 civil war.

CDC, the UK’s development finance arm, said last week it was investing $5 million in private equity in Sierra Leone, in small and medium-sized firms ranging from fishing to financial services.

Billionaire investor George Soros also said his economic development fund was making “significant commitments” to Sierra Leone.

Soros, Sierra Leone president Ernest Bai Koroma and former UK prime minister Tony Blair all feature at Wednesday’s conference.

Koroma has been in power for the last two years and investors see some stability, which is good for investment.

The government fired two senior ministers earlier this month in an attempt to improve its record on fighting corruption.

A consortium led by Anadarko Petroleum made an oil find off the Sierra Leone coast earlier this year, and the country has diamonds and gold, but analysts say there is little scope for investment outside the mining sector.

The country lacks the financial markets needed to attract investment flows, analysts say.

 ”It’s probably pre-pre-pre-emerging,” says one emerging market analyst.

But as investors start once more to chase higher returns around the world, could Sierra Leone yet become a “frontier” emerging market?

A lot of fuss is made about the dangers of speculators in commodity markets. But who is a speculator and who isn’t is based on a definition drawn up in the early part of the last century in the United States. The definition is no longer valid and anybody looking at those reports should be wary of drawing any firm conclusions.

For a start the word “speculator” with negative connotations is applied to pension funds, which invest over the long term to provide retirement income for many people around the world. Hedge funds are normally speculators but if they have hold the physical commodity then they can say they are commercial hedgers. Taking this theme a little further many natural resource companies run their Treasuries as profit making centres, which encourages them to trade the commodities they produce.

The London Metal Exchange has said it won’t go down the route the CFTC has and publish a weekly report detailing speculative long and short positions because there is no clear definition.

The CFTC bowing to popular pressure has continued to provide these weekly reports detailing long and short speculative positions, which ultimately could be misleading and make scapegoats of all investors whatever their ilk.

China’s dominant position in the arena of rare earth metals used in new technology such as batteries for hybrid cars and magnetic motors could be eroded by an Australian listed company – Greenland Mineral and Energy. The company is planning to list in London next year, pending the resolution of a couple of issues.

Greenland Minerals and Energy thinks it probably has access to the world’s largest depositis of rare earth metals and uranium — used to make nuclear energy.

Global consumption of rare earths last year is estimated at 135,000 tonnes or $1.5-$2.0 billion in 2008. Demand is forecast to grow by 65 percent by 2012 from 2008 levels.

-Jane Foley is research director at Forex.com. The opinions expressed are her own.-

The discrediting of the efficient markets theory in the aftermath of the financial crisis appears to have been accompanied with growing support for the view that rather than efficient in nature, financial markets are predisposed towards the formation of bubbles.

A bubble can simply be defined as an occurrence that begins when the price of an asset has been driven significantly above it "fair" value. According to the efficient markets theory this would not happen.

If bubbles are a natural outcome of financial market activity it is relevant to ask whether the very loose fiscal and monetary policies of many central banks and governments are presently sowing the seeds of the next bubble.

Even though the real economies of the U.S., UK, Eurozone and Japan continue to be defined by expectations of rising unemployment and falling real wages, access to cheap money has already helped restore the profitability of many investment banks.

In turn, this has fed risk appetite which is evident in the rally in stocks since the spring, increased demand for "risky" currencies and a recovery in commodities prices. Brent oil has rallied by 128 percent from its 2009 low. The ability of oil to rally despite the existence of oil supplies well above the seasonal average suggests there is already speculative element in this market which could be in danger of driving prices above their fair value.

This week’s meetings of the Federal Reserve, the Bank of England and the European Central Bank have focussed attention not so much on rates, but on the extraordinary policy decisions taken by these central banks in the wake of the financial crisis and whether conditions are ripening in favour of a gradual withdrawal of some of these policies.

The Fed last week ended its $300 billion treasury bond purchasing plan, though it will carry on buying mortgage backed securities. The Bank of Japan last week announced that it will stop buying corporate bonds at year end. The Reserve Bank of India also removed emergency support measures last week.

This week there is speculation that the ECB could announce that it will hold no more 12-month cash tenders next year. By contrast the Bank of England is expected to increase quantitative easing at the November 5, Monetary Policy Committee meeting. Supporters of quantitative easing continue to stress that the lack of clear inflation pressures suggests there is room for these plans to be extended.

However, the lack of response in either money supply or inflation indices could equally be illustrating that these plans are not having a significant impact on the real economy and are therefore no longer appropriate. The paring back of these plans are likely to have an impact on the ability of some banks to turn an easy profit and thus should rein in risk appetite and limit speculative and "bubble" forming activity.

Unfortunately, a bubble can only be truly confirmed after it has burst; a characteristic with clear destabilising consequences. If bubbles are natural phenomena within financial markets, the need for tighter regulation and ongoing reviews of processes that oversee the financial system are absolutely necessary.

This conclusion, while in complete contrast to the implications of the efficient markets theory, ties in very well with the political desire to reform the banking regulatory framework in order to protect the tax payer from future hefty bank bail-out costs. The banking landscape, while already vastly different from just two years ago could continue its transformation for years.

researchEMEA@forrex.com

Last week was one of the worst for global equities in a long time. MSCI’s benchmark all-country index fell 4.3 percent, the most it has lost since the week ending March 8, just before this year’s stunning rally began. Emerging market stocks, meanwhile, dropped 5.6 percent in the week, the largest fall since mid- to late-February.

As if that was not enough, volatility soared. The VIX fear gauge leapt 37.8 percent in the week, nearly 30 percent alone on Friday. Cross-sectional volatility — volatility between stocks as opposed to just the index — is also rising as can be seen  (black line) in the graph to the right.

But might it all simply be a matter of timing? Credit Suisse estimates that 22 percent of mutual funds end their fiscal year at the end of October. So the big sell off could at least in part be due to managers ensuring their end of year profits look good.

(Graph: Scott Barber)

Claudia Parsons of Reuters and Calpers Chief Investment Officer Joe Dear discuss the pension fund’s appetite for risk on CNBC, after a Reuters investigation into how Calpers is delving further into alternative investments despite suffering heavy losses.

More on Calpers:

• Former Calpers CIO says did right thing
• FACTBOX-What is California pension fund Calpers?
• Can Calpers keep its promises?

Michael Chiu, senior investment manager at ING Investment Management, has China Mobile as its biggest holding, and is overweight the banks as it plays down the potential impact of NPLs.

Dubai returns to the fixed-income sphere for the first time in more than a year after raising about $2 billion from dirham and dollar-denominated Islamic bonds.

Confidence in the emirate had run aground earlier this year as investors bet on Dubai's state-linked entities not being able refinance debt. So far, this year it has met all its obligations and with the fresh issue booking about $6.5 billion from regional and international investors, Dubai's doomsday scenario appears to be vanishing. 

With much of the United Arab Emirates' oil coming from the largest of the emirates Abu Dhabi, investors have flocked to the capital this year as appetite for good emerging market debt revives. The spread between Abui Dhabi and Dubai widened at its peak to over 500 basis points in February, but Dubai government efforts to restore confidence -- kickstarted by the UAE central bank buying $10 billion of its bonds -- has helped spreads narrow to about 200 basis points.

Dubai still has a long way go. The next test will be property developer Nakheel resolving its $3.5 billion Islamic bond maturing on Dec. 14 and then a raft of debts in 2010.....but as Harold Wilson once said, "A week's long time in politics."