Global Investing

Argentina back in court

Argentina squares off today in a U.S. Appeals court with the so-called holdout creditors who are demanding $1.3 billion in payments on defaulted bonds. A decision will probably take a few days but supporters of both sides have been mustering.

Emails have been pouring into journalists’ inboxes thick and fast from the Argentine Task Force, a lobby group that wants Argentina to settle with bondholders and identifies its goal as “pursuing a fair reconciliation of of the Argentine debt default”.  And yesterday, a noisy pots-and-pans protest was held outside the London offices of Elliot Associates (the parent company of one of the two hedge fund litigants)  by groups supporting Argentina in its battle against those it terms “vulture funds”.  Nick Dearden, director of the Jubilee Debt Campaign, a group that calls for cancelling poor countries’ debts, says:

If the vulture funds are allowed to extract their pound of flesh from Argentina today, we will see a proliferation of vulture funds in Europe tomorrow.

Meanwhile, market jitters are also mounting. Argentine dollar bond yields have risen steadily since the start of the year, with the country’s 2017  dollar bond now yielding 15.5 percent, 400 basis points up from early January (it’s still off the 20 percent record high hit in November when a technical default looked imminent).

Debt insurance costs too have surged. The annual cost of insuring one year of exposure to $10 million of Argentine debt via CDS has risen to around $5 million, according to Markit. That is double the level of one-year CDS at the start of 2013.

Time running out for Hungarian bonds?

Could Hungary’s run of good luck be about to end?

Despite controversial policies, things have gone the country’s way in recent months — the easing euro crisis and abundant global liquidity saw investors flock to high-yield emerging markets such as Hungary and also allowed it to tap international capital for a $3.25 billion bond. It has slashed interest rates seven times straight, cutting them this week to a record low 5.25 percent. The result is an increased reliance on international bond investors. Foreigners’ share of the Budapest bond market  is almost 50 percent, among the highest percentages in emerging markets.

But analysts at Unicredit write that both markets and economic data had validated rate cuts in 2012, which may not be the case any more. Annual headline inflation fell from 6.6% in September 2012 to 3.7% in January 2013 while the economy contracted 1.7% last year. As a result, net foreign buying of Hungarian bonds rose  in the second half of 2012 to 837 billion forints (an average daily rate of almost 6 billion forints), they note.  Markets are pricing at least 3 more cuts, that will take the rate to 4.5 percent.

But support from foreigners is ebbing. Since the beginning of the year, Unicredit points out, foreign investors have cut holdings of government bonds by 236.8 billion forints (average daily outflow of 6.1 billion forints). Moreover, the most recent rate cuts have failed to fully translate into bond yield corrections, they say.  While the short-dated 2-5 year segment of the curve dropped 23-40 basis points, the belly (the middle) of the curve dipped by only 9-24 bps and longer-dated yields over 10 years have risen by around 18 bps. And the fall in inflation too could be a thing of the past if the government resorts to tax hikes in order to meet the deficit target of 2.7% of GDP  — that would persuade the European Union to lift the excessive deficit procedure it has triggered against Hungary for repeated budget deficit overshoots.

Twenty years of emerging bonds

Happy birthday EMBI! The index group, the main benchmark for emerging market bond investors, turns 20 this year.  When officially launched on Dec 31 1993, the world was a different place. The Mexican, Asian and Russian financial crises were still ahead, as was Argentina’s $100 billion debt default. The euro zone didn’t exist, let alone its debt crisis. Emerging debt was something only the most reckless investors dabbled in.

To mark the upcoming anniversary, JPMorgan – the owner of the indices – has published some interesting data that shows how the asset class has been transformed in the past two decades.  In 1993:
- The emerging debt universe was worth just $422 billion, the EMBI Global had 14 sovereign bonds in it with a market capitalisation of $112 billion.
- The average credit rating on the index was BB.
- Public debt-to-GDP was almost 100 percent back then for emerging markets, compared to 69 percent for developed markets.
- Forex reserves for EMBI countries stood at $116 billion
- Per capita annual GDP for index countries was less than $3000.
Now fast forward 20 years:
- The emerging debt universe is close to $10 trillion, there are 55 countries in the EMBIG index and the market capitalisation of the three main JPM indices has swollen to $2.7 trillion.
- The EMBIG has an average Baa3 credit rating (investment grade) with 62 percent of its market cap investment-grade rated.
- Public debt is now 34 percent of GDP on average in emerging markets, while developed world debt ratios have ballooned to 119 percent of GDP.
- Forex reserves for EMBIG members stand at $6.1 trillion
- Per capita annual income has risen 2.5 times to $7,373.

What next? The thinking at JPM seems to be that the day is not far off when a country “graduates” from the EMBI and joins the developed world.  To be excluded from the EMBI group of indices, a country’s gross national income must exceed the bank’s “index income ceiling” (calculated using World Bank methodology) for three years in a row or have a sovereign credit rating of A3/A- for three consecutive years.

Mexico manufacturing its way to investors’ hearts

By Stephen Eisenhammer

Mexico appears to be the new Latin American darling for investors. With Brazil stalling, Latin America’s second largest economy is back in, after nearly two decades out in the cold.

Rising transport costs and higher wages in China are tipping manufacturing competitiveness  back in favour of Mexico for the first time since the Asian giant joined the World Trade Organisation in 2001.

Mexico’s new president, Enrique Pena Nieto of the PRI party which governed continuously for 71 years until 2000, appears serious about wringing necessary changes to the state-run oil company – Pemex, the education system, and the monopolised telecoms sector.

Emerging Policy-More cuts and a change of governors in Hungary

All eyes on the Hungarian central bank this week.  Not so much on tomorrow’s policy meeting (a 25 bps rate cut is almost a foregone conclusion) but on Friday’s nomination of a new governor by Prime Minister Viktor Orban.  Expectations are for Economy Minister Gyorgy Matolcsy to get the job, paving the way for an extended easing cycle. Swaps markets are currently pricing some 100 basis points of rate cuts over the coming six months in Hungary — the question is, could this go further? With tomorrow’s meeting to be the last by incumbent Andras Simor, clues over future policy are unlikely, but analysts canvassed by Reuters reckon interest rates could fall to 4.5 percent by the third quarter, compared to their prediction for a 5 percent trough in last month’s poll.

A rate cut is also possible in Israel later today, taking the interest rate to 1.5 percent. Recent data showed growth at a weaker-than-expected 2.5 percent in the last quarter of 2012 while inflation was 1.5 percent in January, at the bottom of the central bank’s target range.  But most importantly, according to Goldman Sachs, the shekel has been strengthening, having risen 7 percent against the dollar since November and 6.8 percent on a trade-weighted basis in this period. That could prompt a rate cut, though analysts polled by Reuters still think on balance that the BOI will keep rates unchanged while retaining a dovish bias. A possible reason could be that house prices — a sensitive issue in Israel — are still on the rise despite tougher regulations on mortgage lending.


Weekly Radar: Bernanke, Berlusconi and bumps on the road

Financial markets have had one of those weeks of frenetic activity when each asset class blames the other for driving direction, few agree on an overall driver and it’s hard to square relative moves.  What seems to be true is that idiosyncratic and locally-focussed factors are back in vogue – witness the lunge in sterling as the BoE nods at more QE and higher inflation, or the sudden dive in commodities even as global stock markets nudged 5-year highs. Micro or national issues are getting more play as the stress busting of recent months seems to have reduced cross-market correlations  that characterised every ebb and flow of the overarching ‘global crisis’ for years.

To be sure, the longer-range theme of global reflation, the return from “safe haven” bunkers, and a gradual rotation out of low-yielding bonds remains the big backdrop and has helped explain the buoyancy of stock markets to date, the relative weakness of sterling and the yen as persistent  money printers into the recovery, and the rise in core US/German/UK government borrowing rates alongside a sturdy bid for Italian and Spanish bonds.

But the week has thrown several curve balls into the mix. Fed minutes showed its policymakers musing yet again over when to wind down QE while euro area business surveys disappointed recovery hopes yet again in February. Commodities have retreated sharply on the perceived demand shock, with the dollar sharply higher on hopes the greenback presses will be turned off well before  sterling or yen equivalents at least. But it gets more difficult to square some of the rest – gold’s nosedive this week could be argued as a haven exit perhaps, but its inflation-hedge role seems at odds with Britain and Japan actively pumping up prices. A more hawish Fed and dollar rise might be a better guide. And the drop in oil, metals and world equities (latterly) seems to riff off that too, for all the coalface talk of fund liquidations, supply boosts and chart hoodoos etc. Yet if the Fed slows QE – which would slow its bond buying — then bonds should surely be falling too? Not so – 10-year Treasury yields have slipped back below 2 percent all of a sudden. So is the bond market getting a dollar boost or is it worried about demand slowdown from the risk of a March 1 sequestration? If it’s the latter and that’s justified, then you can expect Fed chairman Ben Bernanke to sound a very different tone at his congressional testimonies next week. But what then of the supposed demand shock from the FOMC minutes? hmmm. It all starts to get a bit circular.

Emerging Policy: Turkey bakes

Turkey took another step in the currency battle this week, cutting two of its three main interest rates to prevent speculative flows, yet also raising reserve requirements to cool domestic loan growth.

Policymakers in both the emerging and the developed worlds have been keeping monetary policy loose to stop their currencies rising to uncompetitive levels, even though G20 finance ministers last weekend said there would be no currency war, and made a commitment to refrain from competitive devaluations. The mood does appear to be softening, with the Fed’s minutes yesterday showing a number of officials think the central bank might have to slow or stop buying bonds.

The latest rate move by G20 member Turkey was largely expected, but it still took the lira to a low for 2013 on Thursday – aided by the Fed minutes – and took two-year Turkish bond yields close to record lows.

Deluxe growth as Chinese buy posh

By Stephen Eisenhammer

Luxury brands are set to grow further in 2013, as the sector continues to dodge the fallout from stalling European and U.S. economies by appealing to consumers in emerging markets such as Brazil, China and the Middle East.

The industry is set to grow 6-8 percent this year according to the Zurich-based asset management fund Swiss & Global, with 90 percent of that growth coming from consumers in emerging economies.

The global industry, which is estimated by luxury consultants Bain & Company to be worth more than $34 billion, has been a counter-intuitive success story of the past years of economic crisis and government austerity measures.

Bond investors’ pre-budget optimism in India

Ten-year Indian bond yields have fallen 30 basis points this year alone and many forecast the gains will extend further. It all depends on two things though — the Feb 28 budget of which great things are expected, and second, the March 19 central bank meeting. The latter potentially could see the RBI, arguably the world’s most hawkish central bank, finally turn dovish.

Barclays is advising clients to bid for quotas to buy Indian government and corporate bonds at this Wednesday’s foreigners’ quota auction (India’s securities exchange, SEBI, will auction around $12.3 billion in quotas for foreign investors to buy bonds). Analysts at the bank noted that this would be the last auction before the central bank meeting at which a quarter point rate cut is expected. Moreover the Reserve Bank of India will signal more to come, Barclays says, predicting 75 bps in total starting March.

That is likely to be driven first by recent data — inflation in January was at a three-year low while growth has slowed to a decade low.  Barclays notes:

Russian companies next stop for Euroclear

The excitement continues over Russian assets becoming Euroclearable.   Euroclear’s head confirmed last week to journalists in Moscow that corporate debt would be the next step, potentially becoming eligible for settlement within a month. Russian equities are set to follow from July 1, 2014.

What that means is foreign investors buying Russian domestic rouble bonds will be able to process them through the Belgium-based clearing house, which transfers securities from the seller’s securities account to the securities account of the buyer, while transferring cash from the account of the buyer to the account of the seller.

The Euroclear effect in terms of foreign inflows to Russian bonds could be as much $40 billion in the 2013-2014 period, analysts at Barclays estimated earlier this month.  Yields on Russian government OFZ bonds should compress a further 50-80 basis points this year, says Vladimir Pantyushin, the bank’s chief economist in Moscow, adding to the 130 bps rally in 2012. Foreigners’ share of the market should double to 25-30 percent Pantyushin says, putting Russia in line with the emerging markets average.