Global Investing Insights behind the investment headlines Thu, 28 May 2015 18:31:20 +0000 en-US hourly 1 The Best Emerging Market Investment? Wed, 27 May 2015 21:47:33 +0000 I have to admit, I was a little surprised. The invitation to a book signing came from an emerging markets investment firm by one of their investment professionals and on the face of it didn’t really excite me. But I do have a lot of respect for the individuals at the firm and there was a quality to the invitation, one that didn’t say hard sell, that compelled me to go and see.

Nice new offices, tastefully decorated with soft earth tones, wonderful old world maps and a style that gives the impression this firm is filled with thinkers, talkers, and doers.

The African music greeted guests stepping off the elevator and right away this wasn’t typical, even for emerging market investors.

The second element that said this was going to be a different gathering were the kids running around, laughing and smiling, and of course there was some crying too, as they ran through the sea of adult legs.

Caitlin and Martin give a brief reading from their book. The party with family, friends and a few reporters was held in April at Greylock Capital Management, the emerging market specialist investment firm Martin joined.

Caitlin and Martin give a brief reading from their book. The party with family, friends and a few reporters was held in April at Greylock Capital Management, the emerging market specialist investment firm Martin joined.

But in the midst of this book signing and a reading from “I Will Always Write Back, How One Letter Changed Two Lives” I think I may have, arguably, stumbled across one of the best emerging market investments ever made… and it didn’t happen on Wall Street. But I’m not going to spoil the story for you.

This wasn’t about balance sheet profits and losses. It wasn’t about senior debt financing with a complicated call option and covenants that called into question just what rights were held by creditors.

Instead it was about two people, who now stood in the middle of an elegant and understated conference room with windows looking up at the Empire State Building. They were two people from opposite ends of the earth, literally, figuratively, politically, and financially. One a tall, attractive white American woman with flowing blonde hair and a relaxed manner. The other a shorter, dapper African man with friendly eyes, big smile, and a humble self-confidence.

What they share is common decency, love and respect for each other.

Caitlin Alifirenka is now an emergency room nurse from Pennsylvania, married to a Belarusian. When this story begins she is just a bubbly middle school kid from Hatfield, PA interested in boys and shopping.

Martin Ganda is an associate at Greylock Capital Management, the New York-based emerging market investment firm, where he is responsible for finding opportunities to invest in Africa.

At the start of his side of the story, he’s just a smart as a whip dirt poor kid from Mutare, Zimbabwe, keen to take advantage of every  opportunity to get an education. There wasn’t much else to tempt him in Mutare, an eastern city hard up against the border with Mozambique.

Hatfield and Mutare are 7,983 miles away from each other. When the story begins in September 1997, these two kids were pulled together through fate to become pen-pals, the old fashioned way with pen, paper, and stamps.

Caitlin and Martin lived 7,983 miles apart (according to Google). That number became more and more meaningless as they grew up together through their letter writing.

Caitlin and Martin lived 7,983 miles apart (according to Google). That number became more and more meaningless as they grew up together through their letter writing.

“She is like my sister and I am like her brother,” said Ganda, who spoke with me about his relationship and some of the hopes he has for Zimbabwe now that he is in America, working in finance, a universe away from where he grew up and where most of his family still live.

Caitlin and her family quite literally saved Martin and his family from abject poverty and hunger. And he brought to them the realities of life outside the world’s biggest economy where the people still tend to look inward rather than outward.

“He changed my life, opened me up to the perspective of what goes on beyond my world in Hatfield,” Caitlin said off to the side of the book party.

Ganda’s journey to Wall Street is worth reading about, especially for young people. The story is told fluidly by the writer Liz Welch, who benefited from the meticulous record keeping of Caitlin’s mother Anne Neville. It will, much like Caitlin was awakened by her experience, get kids thinking about life beyond their immediate sphere of friends and family. It may even put to better use those smart phones they find glued to their hands.

Without giving away too much, Ganda has started a not-for-profit charity, Seeds of Africa, that is meant to send money to schools in Zimbabwe.

“I want to pay it forward, like what Caitlin did for me,” he said.

“Paying school fees of $20 a year can make all the difference to start. This is a very cheap investment,” Ganda said.

“Coming here inspires me, that you can build big things, like the Rockefellers or Vanderbilts. Something that will continue to provide service for the community years after we are gone. Human capital, I think that is the best impact you can have. The best gift you can give anyone, by empowering them to build industries and culture,” said Ganda.

At 32 he’s sticking with New York for now, making his way in finance and trying to do right by his family by helping support them back in Mutare.

Less than a year ago Ganda joined Greylock, having worked at Deutsche Bank and Goldman Sachs after completing his MBA at Duke.

“I wanted to work in finance and also in Africa and this was really ideal, that I would get an opportunity to deploy capital. Most firms are not as engaged in real emerging markets. This firm, you get an opportunity to get on the ground and evaluate opportunities and see the impact,” he said, describing what drew him to Greylock.

He has plans to bring some of his siblings to New York because “just coming to America is like a winning lottery ticket.”

What surprises him still about America, a place he has called home since 2003?

“The pet culture here is very fascinating for me. They have dogs wearing clothes, treated like people. Stores for pets, shopping, take a dog to a spa!” he laughs before becoming a little more serious: “The main thing that still surprises me is that the standard of life is so good or that if you want a job, it is available. People back home are so hungry for opportunity,” Ganda said.

They are also just simply hungry.

Zimbabwe, once known as Africa’s breadbasket, is suffering from hyperinflation. In southwest Zimbabwe, the worst regional drought in nearly a decade and the failure of nearby crops have left people hungry and on the edge of existence.

The drought is likely to damage harvests across southern Africa – from southern Angola to Botswana, Lesotho, Malawi, Mozambique and Namibia, the World Food Programme (WFP) says.

The impact is looking particularly serious for Zimbabwe, where the economy has been struggling for five years to recover from a catastrophic recession that was marked by billion percent hyperinflation and widespread food shortages, my Reuters colleague MacDonald Dzirutwe writes.

International donors have been distributing food in Zimbabwe since 2004 despite broad economic sanctions imposed by the West after the seizure of thousands of white-owned farms from 2000 and a violent election in 2002.

The government, for the first time in a decade, asked for financial support from the West earlier this month. Zimbabwean government officials met with Western ambassadors and representatives from the International Monetary fund, World Bank and African Development Bank to discuss budgetary support.

Western nations, who accuse President Robert Mugabe’s government of election rigging and human rights abuses, have restricted funding to charities since 2002.

The IMF in April said Zimbabwe has made progress in implementing their macroeconomic and structural reform programs, despite economic and financial difficulties. But they also say the economic prospects remain “difficult.”

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Counting Pennies In Venezuela Wed, 12 Nov 2014 22:13:56 +0000 It was a gloomy, rainy night in Boston last week where emerging market analysts and portfolio managers huddled together before an audience of 75+ people to discuss an equally gloomy situation in Venezuela, specifically whether or not the nation, with the biggest proven oil reserves in the world, is on the precipice of defaulting on its debt.

Trying to figure out what economic and fiscal policies the administration of President Nicolas Maduro will follow to alleviate rampant inflation and shortages is akin to trying to read tea leaves. But a panel put together by EMTA laid out the scenarios and discussed the implications of any potential default. The talk of default really kicked off Sept. 5, 2014 after an article published by former Venezuelan planning minister Ricardo Hausmann and Harvard research fellow Miguel Angel Santos asked whether or not Venezuela should default.

Maduro is the hand-picked successor of former President Hugh Chavez, who launched and nurtured his leftist Bolivarian Revolution with government subsidies for food, health, education, fuel and more out of the oil receipts of the national oil company Petroleos de Venezuela (PDVSA). In the process Venezuela has run up an increasing debt load to help pay for his vision even as oil production started to slip.

But Venezuela has a reputation for being a consistent and strong payer of its debts, earning Wall Street’s confidence even when the now deceased Chavez was rattling his sword, denouncing the United States and capitalism in general. Maduro insisted that the country has no intention of defaulting on its debt and that’s been recognized by the market.

“The government has been pretty adamant about its intention to service its debt since they appear to believe very strongly that to do otherwise, to default, would really compromise their ability not just to export oil but to also import goods. I think they see the downsides to a default as quite significant,” said Matt Ryan, portfolio manager at MFS Investment Management.

Chavez arranged for subsidized oil to be sent to Cuba in return for doctors and created Petrocaribe in 2005 where member states buy oil and fuel on favorable terms. But the price of that oil is plunging on world markets. West Texas Light Sweet Crude prices are down 21 percent year-to-date, and trading below $80 a barrel since late October at four-year lows. One panelist cited the lost revenue at $770 million for every $1 drop in the price of oil.

Walking past the Boston Tea Party museum on the way to the panel discussion, I couldn’t help but be reminded of the timing between the dumping of the tea into Boston Harbor and the official start of the American Revolution. It might be a stretch to equate that to what’s happening in Venezuela but in purely time-terms, there could be something to it. The Colonists threw the tea overboard in December 1773 and the start to the War of Independence was marked in April 1775, roughly 16 months of skirmishes, wrangling, shouting, and hand wringing.

Boat 1

(Boston Tea Party Museum, Nov. 6, 2014 – Photo by Daniel Bases)

“Analyzing Venezuela has become an exercise in counting pennies and trying to figure out the behavior aspects of the administration when the only thing we really know for sure is that preserving the revolution is paramount in the objective function of the policymakers,” said the moderator Carl Ross, who works in fixed income research at asset manager GMO.

So far it has been five months since investors really started to dump Venezuelan debt, sending it to levels normally associated with default. The yield on the benchmark 2027 Venezuelan sovereign bond is around 18 percent, almost double the coupon on the bond when it was issued of 9.25 percent.

The yield on the Venezuelan 2027 Global Bond is up to nearly 18.40 percent. The bond was issued in 1997 with a coupon of 9.25 pct.

The yield on the Venezuelan 2027 Global Bond is up to nearly 18.40 percent. The bond was issued in 1997 with a coupon of 9.25 pct.

Most of the analysts and portfolio managers at the Boston meeting gave Venezuela at least another 12+ months before they consider default with a high level of probability. They all pointed out the subjective nature of such a prediction and all asked not to be cited directly to any specific number because they were fearful of it being taken out of context.

As the discussion moved along from outlining policy prescriptions to the political landscape to default scenarios to recovery values, there were consistencies between the panelists, including the recognition that Venezuela’s economy is in a shambles.

“I don’t think it is a stretch… to say that Venezuela is probably the worst managed economy in the world right now, and I’m taking into account Zimbabwe,” said Ryan.

Reuters was unable to obtain comment from the Venezuelan Finance Ministry on its debt position.

The economic situation in Venezuela grows more and more dire as financing is getting tighter, the availability of U.S. dollars is becoming scarcer as the value of the local currency, the bolivar, plummets against the greenback and causes a severe cash crunch for everyone, whether they be the man on the street or a business trying to conduct operations.

Venezuela now has three official exchange rates. The strongest rate is 6.3 bolivars per U.S. dollar. The black-market rate is over 100 bolivars to the dollar.

So I rang up Mark Weisbrot, the co-director of the liberal-leaning Center for Economic and Policy Research, based in Washington, D.C. He’s not shy about criticizing media coverage of Venezuela, including how Reuters covers the nation. He believes there will be no default on Venezuelan debt because the nation doesn’t have a balance of payments problem.

“When you get past the ideology and you look at why would they default, it doesn’t seem there would be a reason for it. It is not like they cannot make their debt service payments,” Weisbrot said from Washington.

Instead, he said the country needs to address its “dysfunctional exchange rate system.” In other words, let the currency float and switch to a unified exchange rate system. 

Venezuela annualized inflation rate reached 63.4 percent in August, with consumer prices rising by 3.9 percent that month, according to the latest data from the central bank. The minimum wage was raised 15 percent earlier this month, and takes effect in December. 

Maduro blames outsiders for Venezuela’s economic problems while critics say he is doing nothing to reverse the problems caused by 15 years of socialist economic policies that were started by Chavez and collectively referred to as Chavismo.

The panelists agreed the government needed to make real economic changes in order to halt a crisis, but when asked if there was a chance of some positive policy moves taking place, without fail the five speakers all said it was highly unlikely that would happen.

A short list of actions included devaluing the currency, selling state assets such as U.S.-based refineries and the retail gasoline operation, Citgo. Other ideas included cutting fuel subsidies, reducing the Petrocaribe subsidy, combating the smuggling of subsidized fuel over the borders to neighboring countries, and changing the investment climate for foreigners who have been largely driven out of the country through nationalizations.

Venezuelan Finance Minister Rodolfo Marco said in an interview broadcast a few days after the panel that Venezuela is not planning to devalue its currency or make changes to the existing foreign exchange system.

One example of the deteriorating conditions is in air travel. Major international airlines have severely reduced the number of flights in or out of the country because currency controls have prevented them from repatriating ticket revenue. The International Air Transport Association this year has said airlines have some $4 billion trapped in Venezuela because they cannot exchange enough of the bolivars used to pay for seats into U.S. dollars .

“I’ll believe it when I see it,” Cem Karacadag, portfolio manager at Babson Capital, said in summing up what the other panelists felt about fundamental economic reforms being implemented by the Maduro administration.

“Some of the fixes we talked about… exchange rate devaluation, for example. They can do that with a stroke of a pen. It is so easy to do. Why is it not happening? That’s the depressing part of all of this, is it is not happening because clearly the vested interests are not making it happen, which means the system has to break,” Karacadag said.

So if a default were to come, in what form would it appear and could investors expect a high recovery value?

“The cost of default? Obviously loss of confidence, more capital flight than they already have, risk of attachment of offshore refineries, risk of attachment of oil delivery…. It seems the obvious conclusion is the case against default is very strong or the case for default for this government doesn’t look good,” said Karacadag.

Ben Ramsey, who heads economic coverage and sovereign debt strategy for the Andean region at JPMorgan pointed out that lower oil prices going into 2015 will make debt servicing even more difficult, limiting their ability to find financing sources.

“In my mind the type of scenario in which Venezuela is going to default is going to be one in which we have a governability crisis. It could also certainly coincide with a dollar liquidity crisis,” Ramsey said, adding: “In terms of whether they would be hostile and how low recovery would be, I certainly think if you have a default under conditions of chaos and disarray and lack of governability, bonds are going to trade much lower.”

Ramsey said he believed if there were a default, whoever was in charge would attempt to address it quickly rather than imposing a big cut in principal for investors because they don’t want to have the situation drag on for years as is the case in Argentina. Buenos Aires is still fighting investors in the U.S. courts since its default in early 2002.

Siobhan Morden, head of Latin America strategy at Jefferies highlighted that the economy has never been so bad, but that politics will be critical with national assembly elections coming in 2015. 

“The polls, Maduro, and the party have never looked so bad. So what’s really at stake is how far they will break the rules. I don’t think they will accept losing a branch of the government,” Morden said, referring to Maduro and the Chavista movement. “I don’t expect real economy reform under Chavismo. I think that is clear. I also don’t expect a true democratic transition either,” she said.

Morden argues that Venezuela is not heavily leveraged from a debt servicing standpoint. Between the sovereign and PDVSA, there is roughly a notional $67 billion in U.S. dollar denominated debt with debt servicing costs of about $10 billion a year for the next year or two.

“When you look at their balance sheet in terms of their external accounts, they are not heavily leveraged on debt. What is their leverage? It is import leverage, capital flight leverage…. So what do you benefit from the default? You have to reach a point where you are so desperate. I think this oil price shock hits them hard. It is sacrificing about $17 billion in revenues and they don’t have any extra cash to adopt import populism,” she said. Import populism is another way of saying the government floods the market with cheap consumable goods.

“I don’t see it as being an accidental default. I think the problem with Venezuela and the Venezuelan’s know this, PDVSA is so integrated with global financial markets, that naturally they would want to assess the legal risks first,” Morden said.

Recovery values would be dependent upon what kind of default occurs, the panelists said. If a default occurs in a haphazard way, perhaps due to political infighting or because there has been a breakdown in governability, then recovery values could be higher. The reasoning being the government may not have gone through the methodical process of selling off assets ahead of time to raise capital to meet its financing needs. If they have done those sales, then in the event of default, investors will have fewer assets available to go after as they attempt to recover their investment.

The government has been running hot and cold on selling off Citgo, its U.S. refining unit. It put the business, which has 3 refineries, on the auction block in September only to withdraw it in October with one source telling Reuters the bids were well below the $10 billion asking prices.

MFS’s Ryan said he does not expect the government to undertake any coherent macroeconomic adjustment program.

“What we are likely to see is a piecemeal approach by a weak and somewhat radicalized government that is really scrambling to plug holes in a sinking ship.”

(I’d like to thank my Caracas-based colleague Brian Ellsworth for his input on this blog post)

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China economic reforms may result in $14.4 trillion GDP, growth at 6 percent – Asia Society report Thu, 23 Oct 2014 14:55:44 +0000 Sweeping economic reform initiated by China President Xi Jinping in November 2013 marked a turning point for the world's second biggest economy. If implemented fully, China's potential GDP growth can be sustained at 6 percent through 2020. One risk: Falling short of that growth rate could result in growth at half that projection, or worse, leading to a new economic crisis, according to a new study.

Dan Rosen, founding partner, Rhodium Group

Dan Rosen, founding partner, Rhodium Group

Dan Rosen, author of a report for the Asia Society Policy Institute, argues that China's growth model is no longer working. The drivers that contributed to China's post-1978 growth are weakening, with existing investments showing diminished returns and overall total-factor productivity, or TFP, falling. TFP is an economic term that broadly measures efficiency using input factors such as labor and capital. "Demographic dividends propelled China through the 1980s, 1990s, and 2000s, but the labor force is now at its largest and is poised to shrink," he writes.

Yet Rosen said China has not exhausted its growth potential. He forecasts decades of solid growth if President Xi can pull off bold economic reform. No small task.

"We conclude that the overhaul is well conceived and showing movement, and that if fully implemented can sustain growth at 6% through 2020," Rosen told the Global Markets Forum. "Keeping GDP at or above 6% though 2020 delivers a $14.4 trillion Chinese GDP, which supports $10 trillion in two-way financial flows and a Chinese trade deficit thanks to greater imports. That's great for the region and great for the global outlook."

Rosen has been analyzing China's economy for about two decades, first at the Peterson Institute, then at the White House/National Security Council and most recently at the Rhodium Group, a research and advisory group he co-founded.

"On the important elements, first is to streamline responsibility for implementing reform in the president's hands -- in Xi Jinping's, " he said. "The previous, committee approach was no longer working," he said. China's leadership also needs "to redefine what functions government should and should not by playing."

Rosen also identified three main drivers of past growth: capital stock deepening, labor growth and increases for total-factor productivity. "Capital growth can no longer deliver more than 4% annual boost today and 3% in 2020 at best. Labor force growth can't do better than 0% in 2020. That leaves TFP. With reform, they can eke out another 3% in 2020 -- so 6% potential GDP growth total," he said.






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Strong dollar, weak oil and emerging markets growth Fri, 17 Oct 2014 12:00:55 +0000 Many emerging economies have been banking on weaker currencies to revitalise economic growth.  Oil’s 25 percent fall in dollar terms this year should also help. The problem however is the dollar’s strength which is leading to a general tightening of monetary conditions worldwide, more so in countries where central banks are intervening to prevent their currencies from falling too much.

Michael Howell, managing director of the CrossBorder Capital consultancy estimates the negative effect of the stronger dollar on global liquidity (in simple terms, the amount of capital available for investment and spending) outweighs the positives from falling oil prices by a ratio of 10 to 1. Not only does it raise funding costs for non-U.S. banks and companies, it also usually forces other central banks to keep monetary policy tight, especially in countries with high inflation or external debt levels. Howell says:

If you get a strong dollar and intervention by EM cbanks what it means is monetary tightening…The big decision is: do they allow currencies to devalue or do they defend them? But when they use reserves to protect their currencies, there is an implicit policy tightening.

The tightening happens because central bank dollar sales tend to suck out supply of the local currency from markets, tightening liquidity.   That effectively drives up the cost of money, as banks and companies scramble for cash to meet their daily commitments.  Central banks can of course offset interventions via so-called sterilisations – for instance when they buy dollars to curb their currencies’ strength, they can issue bonds to suck up the excess cash from the market. To ease the tight money supply problem they can in theory print more cash to supply banks.  But while many emerging central banks did sterilise interventions in the post-crisis years when their currencies were appreciating, they are less likely to do so when they are trying to stem depreciation, says UBS strategist Manik Narain.  So what is happening is that (according to Narain):

Markets are forcing central banks into supporting growth or the currency. You absolutely have to sacrifice growth as we have seen in places like Turkey where liquidity has impacted the growth profile

The silver  lining could yet be oil.

Despite a clear economic recovery in the United States, real wages remain below pre-crisis levels, meaning the U.S. consumer has so far been reluctant to open his wallet too wide. So developing countries have been unable to significantly boost exports of goods and services.  The falling oil price could change that as it will improve household budgets in the United States hugely – one study from Citi estimates the global windfall so far at $660 billion, which includes a  $600 per-household bonus in the United States.  A separate study from Deutsche Bank says every one-cent drop in oil prices means a $1 billion annual decline in energy spending by Americans.

That cash may be used on consumer goods, including those imported from the developing world. Some fund managers are betting on that to happen








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Measuring political risk in emerging markets Fri, 10 Oct 2014 07:51:16 +0000 (Corrects to say EI Sturdza is UK investment firm, not Swiss)

Commerzbank analyst Simon Quijano-Evans recently analysed credit ratings for emerging market countries and concluded that there is a strong tendency to “under-rate” emerging economies – that is they are generally rated lower than developed market “equals” that have similar profiles of debt, investment or reform. The reason, according to Quijano-Evans, is that ratings assessments tend to be “blurred by political risk which is difficult to quantify and is usually higher in the developing world compared with richer peers.

However there are some efforts to measure political risks, and unfortunately for emerging economies, some of those metrics seem to indicate that such risk is on the rise. Risk consultancy Maplecroft which compiles a civil unrest index (CUI), says street protests, ethnic violence and labour unrest are factors that have increased chances of business disruption in emerging markets by 20 percent over the past three months. Such unrest as in Hong Kong recently, can be sudden, causing headaches for business and denting economic growth, Maplecroft says. Hong Kong where mass pro-democracy protests in the city-state’s central business district which shuttered big banks and triggered a 7 percent stock market plunge last month.

As a result, Hong Kong jumped to 70th place in the index from a relatively safe 132nd place in the CUI which analyses governance, political and civil rights and the frequency and severity of incidents to assess the current and future civil unrest picture.

Hong Kong performs comparatively well in the economic, social and rights factors in the CUI, but performs poorly for democratic governance, Maplecroft says:

The scale of the protests, which has cost retailers upwards of $283 million, has seen Hong Kong move from the ‘medium risk’ category to ‘high risk’. Beijing’s response will be key to determining whether the situation deteriorates further.”

Disease, global warming, economic disparities can also boost political risk. Ebola-ravaged Liberia rose to 74th place in the CUI, up from 113th, Maplecroft said, while Guinea (25th) and Sierra Leone (58th) have also seen violent protests related to Ebola. Nigeria fell six places in the ranking to 24th, Maplecroft said, predicting more unrest before elections next February

What do investors think?  Few investors venture into the world’s most turbulent places such as Yemen or Syria of course. But companies and funds can be hard hit when problems erupt in financial centres such as Hong Kong or manufacturing hubs like Vietnam or Bangladesh as has happened this year. Mining companies such as African Minerals and London Mining, active in Ebola-hit West Africa, have seen share prices fall 80-90 percent this year. Still, most investors are confident about their ability to ride out the turbulence – possibly because they have seen it all before. Diana Layfield, Standard Chartered Chief Executive for Africa told a briefing:

In the medium term this is not something we think will affect the business in a negative way…I may be an optimist here, but I think in the medium to long-term this is something we will get collectively get a grip of.

And Lilian Co, portfolio manager at UK investment firm EI Sturdza, sees the Hong Kong protests as causing merely short-term volatility for stock markets:

This may potentially be a buying opportunity for investors.

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Russia: There’s cheap and then there is “near-death” cheap Sat, 04 Oct 2014 00:44:37 +0000 Russia’s equity market has always been cheap, argues USAA‘s Wasif Latif, but at present levels it is just too cheap to ignore. Russia’s economic decline, driven by not only falling oil prices, its main source of income, but also Western sanctions over its intervention in Ukraine has caused a major sell-off that Latif and other asset managers believe is an overshoot. This has brought Russia’s benchmark dollar-denominated RTS stock index to its lowest level since March and before that, a level not seen since Sept. 2009.

“We’re not looking for it to go way up, but looking for it to go up from its near-death cheap to its normal-cheap condition,” said Latif, head of global multi-assets at USAA Investments.

From a high in late June through Oct. 3, the RTS stock index is down over 23 percent. Its market cap is just over $418 billion while the price/earnings ratio is 6.45 with a dividend yield of 4.86 percent. 


The Russian benchmark stock index has dropped 23.15 percent from a recent high in June, 2014.

“Russia, with its warts and all such as its governance issues, poor capital allocations has always been cheap…. We’re buying it in small amounts and by no means are we backing up the truck and loading up on Russia. We are mindful of the risks and buying selectively. We’re more comfortable buying through the ETFs (exchange traded funds) such as the Van Eck Market Vectors Russia or the iShares MSCI Russia Capped fund,” Latif said.

As my colleagues Sujata Rao and Karin Strohecker wrote, the risks to investing in Russian stocks are tied up in a sharp decline in the value of the rouble, which is trading just under 40 to the dollar, a record low. In June it was around 33.60. For the investor looking for hard currency returns this can pose a problem, they explain.

Latif, who oversees $28 billion in mutual fund assets at San Antonio, Texas-based USAA, also notes that Chinese equities are cheap too, with a lot of room for consumer consumption to increase and boost earnings longer term.

For emerging market specialists at London-based Ashmore, Russia poses a challenge.

“There is definitely a lot of country risk associated with the sanctions,” said Julie Dickson, portfolio manager and head of equities for Ashmore. “The market has more than priced this into Russia. It is very cheap and hard to ignore. It is truly trading at trough levels,” Dickson said.

Ashmore has $6.1 billion in emerging market equities. Both Dickson and Latif believe emerging market small-cap stocks have the greatest upside potential looking in to 2015.

But it was back in May, when I wrote about Dickson and others holding fast in Russia, that a relief rally started, pulling the RTS index up 23 percent. Now, all of that move is gone and then some. The shooting down of Malaysian Air flight MH17 over eastern Ukraine on July 17 accelerated the Russian sell-off and exacerbated a situation whereby investors looked elsewhere to put their money. It also highlighted a big decline in corporate debt issuance from eastern Europe and Russia. Dickson still believes there will eventually be a political resolution rather than endless fighting in Ukraine.

The geopolitical risks that have roiled emerging markets seem to be taken more in stride, even as news of more beheadings by Islamist State militants brings a military bombardment from the air. 

“The Middle East is getting attention for all the wrong reasons. There are changes happening,” said Dickson.

In this case it is Saudi Arabia, she said, where investors are faced with attractive valuations when it is scheduled to open up to foreign investors in mid-2015.

“The market is attractively priced because it has been off the radar due to the difficulty in trying to ivnest and operate there,” Dickson said.

Banks make up the vast majority of the stocks on offer, according to Dickson, but she adds there is a growing diversification underway.

“Assets in the Saudi market are mostly financial, with both direct and indirect consumer sector access. Consumer spending is up 27 percent over the past 10 years, according to research we have seen. Less than 50 percent of the population is below the age of 30 years. That’s UN data. Health, education, housing, retail and discretionary spending are all growth areas in Saudi. 20 percent of our Middle East exposure is in Saudi Arabia,” she said.

Saudi Arabia’s benchmark stock index, the Tadawul FF index is up 27.11 percent so far this year. The market capitalization is hovering around $585 billion with a price-to-earnings ratio of 18.24 percent and a dividend yield of 3.22 percent. Since the announcement on July 22, market cap has risen by about $55 billion while the benchmark index has shot higher by 11.32 percent. In contrast, the U.S. benchmark Standard & Poor’s 500 stock index is trading with a p/e ratio of 18.36 percent and a dividend yield of 2.38 percent. It’s market capitalization is $18 trillion.


The Saudi Arabian benchmark stock index has gained 11.32 percent since July when the government announced foreigners could have direct ownership starting in mid-2015

So even as emerging market equities overall are now back to a slight negative performance on the year, Dickson is ever the optimist and perhaps just as in May when we last spoke, it will be the start of another rally.

“Emerging markets, yes, the sentiment has come off a bit but I’m not overly concerned. Fundamentals are still there. Valuations overshot and have returned, but I’m looking at a rebound,” she said.

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GMF @HedgeWorld West, World Bank/IMF and Financial & Risk Summit Toronto 2014 Fri, 03 Oct 2014 21:12:56 +0000 (Updates with guest photos and new links).

Join our special coverage Oct. 6-10 in the Global Markets Forum as we hit the road, from the West Coast to Washington to the Great White North.

GMF will be live next week from the HedgeWorld West conference in Half Moon Bay, California, where we’ll be blogging insight from speakers including Peter Thiel, former San Francisco 49ers great Steve Young and other panelists' viewpoints on the most important investment themes, allocation strategies, reputation risk management ideas and more.



Eric Burl, COO, Man Investments USA

Eric Burl, COO, Man Investments USA

Our LiveChat guests at HedgeWorld West include Jay Gould, founder of the California Hedge Fund Association, on Monday; Rachel Minard, CEO of Minard Capital on Tuesday; and Eric Burl, COO of Man Investments, on Wednesday discussing the evolving global investor. If you have questions for them, be sure to join us in the GMF to post your questions and comment.

Follow GMF’s conference coverage and post questions live via our twitter feed @ReutersGMF as well, where we’ll post comments from other HedgeWorld panelists. They include: 

  • Peter Algert, Founder and CIO, Algert Global
  • Adrian Fairbourn, Managing Partner, Exception Capital
  • Nancy Davis, Founder & CIO, Quadratic Capital
  • R. Kipp deVeer, CEO, Ares Capital
  • Judy Posnikoff, Managing Partner, PAAMCO
  • Caroline Lovelace, Founding Partner, Pine Street Alternative Asset Management
  • Cleo Chang, Chief Investment Officer, Wilshire Funds Management
  • Brian Igoe, CIO, Rainin Group
  • Mark Guinney, Managing Partner, The Presidio Group

In a preview of the HedgeWorld West conference, Rachel Minard said what matters most to investors today is "not so much what something is

Rachel Minard, CEO of Minard Capital

Rachel Minard, CEO of Minard Capital

called but what is its behavior," she told the forum. "What investment instruments are being used -- what is the ROI relative to cost, liquidity, volatility, market exposure, price/rates and is this the most "efficient" method by which to achieve return. What's great from our perspective is the meritocracy of the business today -- the proof necessary to validate the effective and sustainable ROI of any fund or investment strategy."

Those topics, and more, will be on tap, as top global hedge fund managers and members of the California Hedge Fund Association gather this week. Meanwhile, the Annual Meetings of the International Monetary Fund (IMF) and the World Bank Group each year bring together central bankers, ministers of finance and development, private sector executives, civil society, and academics to discuss issues of global concern. The Reuters GMF editorial team will cover real-time interviews and blog throughout the event to highlight Reuters' best analysis and interviews. 

Thomas Caldwell, founder and chairman, Caldwell Securities

Thomas Caldwell, founder and chairman, Caldwell Securities


GMF also will kick off our Financial and Risk Summit in Toronto, starting on Monday, with a LiveChat with Thomas Caldwell, founder and chairman of Caldwell Securities on Canada and the global economy. The conference starts on Tuesday, with keynotes including Tom Kloet, TMX Group CEO; Luo Zhaohui, China's ambassador to Canada; Ron King, Scotiabank’s compliance head; and more to come.

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More volatility expected as Fed rate rise looms – Cumberland Advisors’ David Kotok Wed, 01 Oct 2014 17:54:58 +0000
David Kotok, Cumberland Advisors

David Kotok, Cumberland Advisors

A healthy dose of fear has re-entered financial markets in the final three months of the year. The Chicago Board Options Exchange VIX, a widely tracked measure of market volatility, rose to a two-month high on Wednesday.

Varying news reports offered threats from the Ebola virus and a stagnating European economy as tangential reasons. Perhaps another point is many investors view the U.S. Federal Reserve’s pending decision to raise interest rates as a rumbling train far off in the distance that they now hear headed their way. Closer to the horizon are headlines that can no longer lean on “Fed easing” to explain away rising asset prices and a rising stock market.

“We are in a new period of volatility and it's been developing for the last two or three months,” David Kotok, chairman and chief investment officer of investment advisory firm Cumberland Advisors told the Global Markets Forum on Wednesday. “When you suppress all interest rates to zero you dampen volatility and you distort asset pricing. Now the outlook for interest rates is changing so we are restoring volatility.”

The changes, he said, are evident in a rising U.S. dollar, falling commodity prices and the spread between the high yield and U.S. bond markets.

“These are examples of how things change when you return to more normal volatility and extract and stop monetary stimulus,” Kotok said.

Kotok, GMF moderator Jeanine Prezioso and Reuters Fed reporter Jonathan Spicer chat about bull and bear markets

Kotok, GMF moderator Jeanine Prezioso and Reuters Fed reporter Jonathan Spicer chat about bull and bear markets

Now comes a waiting game and a test of investors’ mettle to sift through the weeds as Fed policy moves closer to no longer supporting stock prices. The best stock pickers will resign themselves to flushing out those hit by a stronger dollar, those with exposure to commodities, as one example. The result of a stronger dollar on corporate earnings begin to show when companies report third quarter earnings, but more so in end-of-year earnings, Kotok said.

“We expect some downward guidance from companies that are seriously impacted by changes in the currency markets,” he told the GMF.

Kotok’s Cumberland has positioned itself in large cap stocks, which he says in his new book From Bear to Bull with ETFs  investors should seek out during bear markets while investing in small cap stocks in a bull run. The small cap Russell 2000 Index hit a five-month low on Wednesday.

Kotok in the Global Markets Forum

Kotok in the Global Markets Forum

“I am overweight large caps in my managed portfolios right now.”  Kotok said. “We are underweight small and midcaps, we have been for awhile. I have no way to know if we are in a corrective phase or if the bull market ended. But it's apparent that we have one of the two underway.”

Among other trades, Kotok looks at the VIX every day as well as the quarterly release of estimates of future interest rates assembled by the members of the Federal Open Market Committee.

“Look at the option markets which show the price of real money bets on the future of interest rates. They tell you every minute of every day what sophisticated investors collectively think an interest rate will be and when it will be there. That is a high frequency indicator that deserves continuous attention.”

Click here for the full transcript from the GMF interview: RTRS_David_Kotok_01102014

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Bleak investment outlook sours mood at Russia forum Wed, 10 Sep 2014 13:53:53 +0000 By Alexander Winning

What are the chances that Western investors will rush back to Russia if a shaky ceasefire in Ukraine leads to a more lasting peace? Pretty slim, judging by a keynote speech at a recent Russia-focused investment conference in London.

Dmitri Trenin, director of the Carnegie Moscow Centre, told the conference organised by Sberbank CIB, the investment-banking arm of Russia’s top state-controlled lender, there was little prospect of significant Western investment in Russia over the next 5 years:

I would be surprised if much foreign direct investment flowed into Russia from Germany and other Western countries. But there will be more investment coming from China.

That can hardly have made pleasant listening for his hosts at Sberbank who had billed the event as a chance for European fund managers and companies to meet their Russian counterparts and explore investment opportunities.  Russia desperately needs overseas capital – wealthy Russians and companies are prone to moving their cash overseas and there is some $150 billion worth of corporate  debt due for repayment over the coming year. But sanctions imposed by the West over the Kremlin’s role in Ukraine are deterring even those who have seen Russia merely as a tactical, short-term way of making money.

Until last year, the picture was not too bleak in terms of bricks-and-mortar foreign direct investment (FDI)  – into factories, real estate and mines. United Nations data show the FDI stock in Russia at almost $600 billion, a 100-fold rise from 1995 levels. That includes big-ticket investments by companies such as consumer goods giant PepsiCo and Danone as well as car makers Ford and Volkswagen. New commitments, however, are scarce as sanctions bite and Russia’s economy heads for a deep-freeze.

But Russia has trumpeted a pivot to Asia as a solution to its fraught relationship with the West. Western sanctions on key sectors of the Russian economy won’t hurt us because our friends in Beijing can always bail us out, so the Russian argument goes. Those backing the Asian pivot take Gazprom’s $400 billion gas supply deal with China that was sealed in May as evidence Russia isn’t reliant on the West.

Many analysts, however, question whether the terms of that deal were favourable to Moscow. Trenin in fact sees the China link as a negative for his country, which is already suffering from the state’s dominance in key sectors of the economy, corruption and weak rule of law.

If China helps you to sustain many of the ways that made you more inefficient, more corrupt than you need to be, then the crisis will have been partially wasted…I don’t think that Russia will become a dictatorship, but I see more economic nationalism, a partial rollback of globalisation, I see a strengthening of state capitalism.

Privately, some Russian executives attending the event agreed, calling Trenin’s assessment realistic. The organisers painted the conference as a success, citing a record 350 participants from 44 countries and more than 600 meetings.  Will fresh investment deals result? The jury may be out for a while.


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Betting on (expensive and over-owned) Indian equities Wed, 20 Aug 2014 14:27:36 +0000 How much juice is left in the Indian equity story? Mumbai’s share index has raced to successive record highs and has gained 24 percent so far this year in dollar terms as investors have bought into Prime Minister Narendra Modi’s reform promises.

Foreign investors have led the charge through this year, pouring billions of dollars into the market. Now locals are also joining the party – Indian retail investors who steered clear of the bourse for three years are trickling back in – they have been net investors for 3 months running and last month they purchased Rs 108 billion worth of shares, Citi analysts note. 

Foreigners meanwhile have been moving down the market cap scale, with their ownership of the top 100-500 ranked companies rising from 13% to 15% over the quarter. That’s behind the broader BSE500 index’s outperformance compared to the Nifty index, Citi said.

Citi earlier this month predicted another 3 percent gains for Indian stocks by year-end. Equity derivatives indicate that is feasible – stock exchange data shows foreign investors are loading up on call contracts on the Nifty index at the 8,000 point and 8,100 point levels -a call option gives its holder the right to buy the underlying cash shares.   The index is currently trading at 7,800 points.

Now people are starting to wonder how much further this has to run.

One problem with the Indian market is the valuation. Always expensive by emerging market standards, Indian shares are trading at more than 16 times forward earnings on average, a bit above its long-term average and the second priciest market in Asia. Growth is chugging along at below 6 percent and high inflation means interest rates may rise further. Investors’ positioning moreover is pretty heavy -India is the second biggest emerging market overweight among funds after China. HSBC analysts advise keeping India at marketweight in portfolios, arguing that market upside would be limited from here.

A lot depends on the ability of the Modi government to kick-start stalled infrastructure projects, the value of which is estimated at $134 billion.  Societe Generale is optimistic, predicting the Nifty to hit 10,500 points by end-2016.

Our base case scenario is that the government will be able to revive projects worth $60 billion. This should lead to a sustainable improvement in GDP growth and corporate earnings and to a structural rally in the Sensex. In India, capex is one of the most important data with a direct impact on the equities. We believe that if the government is able to revive the long-term investment cycle, the current bull run in Indian markets may well outlive the term of the current government in office (i.e. beyond 2019), and we can expect much higher GDP growth rates and Sensex targets.

Three months into his term, Modi has disappointed some by failing to unveil sweeping reforms.  But he appears to have done enough to keep the momentum alive — in his Independence Day speech last week, Modi didn’t unveil any big-bang reforms but vowed to fire up India’s sluggish bureaucracy, improve governance and boost manufacturing. For now, investors are giving him the benefit of the doubt.

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