Global Investing

When the banks won’t lend you money, head for the international debt markets.

Western European banks have been withdrawing funds from emerging Europe because of capital issues at home for the past few years, alarming international lenders so much that they formed the Vienna Initiative to help the region.

But those corporates that couldn’t borrow have been making use of the red-hot emerging corporate bond market instead.

Panellists speaking at the Emerging Market Traders’ Association annual corporate debt forum yesterday said emerging corporates will still rush to the debt markets this year, after record levels of issuance last year, even though the pace may be a little more subdued.

According to Polina Kurdyavko, fund manager at BlueBay Asset Management, caution in the financial sector means that:

Does the money match the story?

Perhaps the biggest investment theme of the year so far has been the extent to which long-term investors may now slowly migrate back to under-owned and under-priced equities from super-expensive safe haven bunkers such as ‘core’ government bonds, yen, Swiss francs etc to which they herded at each new gale of the 5-year-old credit storm.

Indeed, some go further and say asset allocation mixes of the big institutional pension and insurance funds are – for a variety of regulatory and demographic reasons – now at such historical extremes in favour of bonds that they may now need rethinking in what some dub The Great Rotation.

All this has played into a new year whoosh in equity and other risk markets, as ebbing tail risks from the euro zone, US budget and China combine with signs of a decent cyclical turn in the world economy into 2013. Wall St’s S&P500, for example, has climbed 5.5% in January so far and closed above 1500 for the first time in more than five years last week following its longest winning streak (8-days) in eight years.

Rate cuts are still coming thick and fast in emerging markets — in some cases because of falling inflation and in others to deter the gush of speculative international capital.

Arguably the biggest event in emerging markets is tomorrow’s Reserve Bank of India (RBI) meeting which is expected to yield an interest rate cut for the first time in nine months.

India’s inflation, while still sticky, eased last month to a three-year low of around 7 percent. And a quarter point rate cut to 7.75 percent will in effect be a nod from the RBI to the government’s recent reform efforts.  In anticipation of a rate cut, Indian 10-year bond yields have dropped 50 basis points since the start of the year.  But the RBI, probably the world’s most hawkish central bank at present, has warned that markets need not expect a 50 bps cut or even a sustained rate-cutting campaign. Governor Duvvuri Subbarao said last week inflation still remains too high for comfort, while on Monday the RBI said in a quarterly report that more reform was needed to make the central bank turn its focus on growth.

There’s not too much one can do when a government minister marches into your office and essentially tells you to get lost. On April 16, 2012, the normal Monday morning routines unfolded with greater tension in the Buenos Aires offices of Spanish energy company Repsol’s YPF subsidiary. As top planning executive Carlos Jiminez and his colleagues were watching President Christina Fernandez unveil plans to seize control of YPF and nationalize Argentina’s leading energy producer, the unthinkable happened.

“About 30 minutes before she finished her speech, the undersecretary of planning and the state representative on the (YPF) board, Roberto Baratta, marched in and said the business relationship was ended,” Jiminez recalled after a luncheon in New York this week.

“All they said was ‘We need the office’, and that was that. We had 10 minutes to get our stuff and get out. Our e-mails and phones were cut off within 15 minutes of their arrival. It was a shock. Simply, that the relationship was finished. I never thought this would happen,” said Jiminez.

By Dasha Afanasieva

Central European markets have studied hard to impress investors, says Angela Merkel, but have they passed the test?

In Davos on Thursday, the German chancellor urged business leaders to head for the region:

I’m saying this to investors who are pondering investment in Europe: Central and Eastern Europe has done, almost flying below the radar, a lot of reforms… Look at the investment climate in Europe; it has changed for the better.

The issue of the falling yen is focusing many minds these days, nowhere more than in South Korea where exporters of goods such as cars and electronics often compete closely with their Japanese counterparts. These companies got a powerful reminder today of the danger in which they stand — quarterly profits from Hyundai fell sharply in the last quarter of 2012.  (See here to read what we wrote about this topic last week)

Korea’s won currency has been strong against the dollar too, gaining 8 percent to the greenback last year. In the meantime the yen fell 16 percent against the dollar in 2012 and is expected to weaken further. Analysts at Morgan Stanley pointed out in a recent note that since June 2012, Korean stocks have underperformed Japan, corresponding to the yen’s 22 percent depreciation in this period. Their graphic below shows that the biggest underperformers were consumer discretionary stocks (a category which includes auto and electronics manufacturers). Incidentally, Hyundai along with Samsung, makes up a fifth of the Seoul market’s capitalisation.

Shares in Hyundai and its Korean peer Kia have fared worst among major global automakers for the past three months – down 5 percent and 18 percent, respectively.  Both companies expect sales this year to be the slowest in a decade. Toyota on the other hand has risen 30 percent and expects to reach the top spot in terms of world sales for the first time since 2010.

With a week to go in January, global stock markets are up 3.8 percent – gently nudging higher after the new year burst and with a continued evaporation of volatility gauges toward new 5-year lows. That’s all warranted by a reappraisal of the global economy as well as murmurs about longer-term strategic shifts back to under-owned and cheaper equities. But, as ever, you can never draw a straight line. If we were to get this sort of move every month this year, then total returns for the year on the MCSI global index would be 50 percent – not impossible I guess, but highly unlikely. So, at some stage the market will pause, hestitate or even take a step back. Is now the time just three weeks into the year?

Well lots of the much-feared headwinds have not materialized. The looming US budget ceiling showdown keeps getting put back – it’s now May by the way, even if another mini-cliff of sorts is due in March — but you get can-kicking picture here already. The US earnings season looks fairly benign so far, even given the outsize reaction to Apple after hours on Wednesday. European sovereign funding worries have proven wide of the mark to date too as money floods to Spain and even Portugal again. And Chinese data confirms a decent cyclical rebound there at least from Q3′s trough. All seems like pretty smooth sailing – aside perhaps from the UK’s slightly perplexing decision to add rather than ease uncertainty about its economic future. So what can go wrong? Well there’s still an event calendar to keep an eye on – next month’s Italian elections for example. But even that’s stretching it as a major bogeyman the likely outcome.

In truth, the biggest hurdle is most likely to be the hoary old problem of over-inflated expectations. Just look at the US economic surprise index – it’s tipped into negative territory for the first time since late last summer. Yet incoming US data has not been that bad this year. What the index tells you more about has been the rising expectations. (The converse, incidentally, is true of the euro zone where you could say the gloom’s been overdone.) Yet without the fuel of positive “surprises” we’re depending more on a structural story to buoy equity and that is a multi-year, glacial shift rather than necessarily a 2013 yarn. The start of the earnings season too is also interesting with regard to expectations. With little over 10 percent of the S&P500 reported by last Friday, the numbers showed 58% had beaten the street. That’s not bad at first glance but a good bit lower than the 65% average of the past four quarters. On the other hand, it’s been top-line corporate revenues that have supposedly been terrifying everyone and it’s a different picture there. Of the 10% of firms out to date, 65 percent have reported Q4 revenues ahead of forecasts – far ahead of the 50% average of the past four quarters. Early days, but that’s relatively positive on the underlying economy at least.

Israeli markets cheered election results today, with stocks rising 1 percent and the shekel edging up towards recent nine-month highs. Right-wing prime minister Benjamin Netanyahu claimed victory, but his Likud party and ultra-nationalist allies Yisrael Beitenu lost ground to a new centrist party. Final results are expected tomorrow.

Voters seem to have concentrated on domestic issues, including the state of the economy, but foreign investors tend to look at the geopolitical risks, and these appear to have lessened.

Punters have been removing their bets on an air strike on Iran, particularly since the re-election of Barack Obama as U.S. President in November. The chance of a strike on Iran by the U.S. or Israel by the end of the year has fallen to 23.1 percent today, according to online exchange Intrade.com, compared with around 35 percent shortly after the U.S. election, and a high of 60 percent in October.

Much has been made of the flows into U.S. equities this month. Funds have rolled out the red carpet for a record $11.3 billion or so in net inflows over the first two weeks of the year, more when you factor in ETFs.

Just to cool the enthusiasm a little, it’s worth remembering that this comes after a torrid 2012.

Our graphic detailing Lipper’s latest estimated net flows in and out of various fund sectors shows combined outflows from U.S. equity funds and U.S. small cap funds reached a total of more than $150 billion last year. The fourth quarter alone contributed more than $50 billion of that.

By Dasha Afanasieva

Markets got a fright today when luxury goods maker Richemont reported stagnant Asian sales in the last three months of 2012.  Richemont shares as well as those in its rivals such as LVMH (maker of Louis Vuitton handbags and Hennessy cognac) tanked after the news.

Like many of its peers in the west, Richemont the maker of Cartier watches, looks to China to drive its growth as the United States and Europe face the stark prospect of stagnation.

But the fastest growing class of the world’s fastest growing economy will probably not be Cartier-clad.