Global Investing

EM dollar bond investors feeling Treasuries heat

The recent, steady upward creep in U.S. Treasury yields is starting to have an effect on appetite for high-yield credit, investors’ favourite for over a year.

Emerging dollar bond funds have suffered capital outflows for the first time since June 2012, waving goodbye to around $300 million in the week to Feb 6, according to EPFR Global, the Boston-based fund tracker.  Global  high-yield bond funds saw net outflows of $1.33 billion, and according to another set of data from JPMorgan, emerging market hard currency ETFs (exchange traded funds)  saw net outflows of $550 million.  JPMorgan notes:

Amid U.S. Treasury volatility, EM credit has suffered both on total returns as well as fund flows.

Assets like emerging market debt tend to suffer when Treasury yields, the so-called risk-free rate, rise. Ten-year U.S. yields recently broke over 2 percent for the first time since last April, having risen more than 30 basis points since early December. They have since eased to 1.94 percent but many reckon that signs of economic recovery as well as some inflation fears will lead to a further selloff in Treasuries. JPMorgan for instance expects the 10-year yield to reach 2.25 percent this year.

Emerging dollar bonds which returned 18.5 percent last year are in the red this year with losses of 1.6 percent while last week alone they lost 0.6 percent, JPM data shows.

Waking up to sustainability karma

By Dasha Afanasieva

Management consultants often urge their clients to view setbacks or difficulties as opportunities. The cost of reducing environmental impacts are often cited as one such “opportunity”.

But a global study from consultancy BCG and MIT Sloan Management Review has shown that companies are increasingly putting this advice into practice and succeeding in getting the returns.

The study is based on a survey of 2,600 executives and managers from companies around the world and found that the number of companies achieving a profit from introducing changes aimed at making their business more sustainable rose 23 percent last year, to 37 percent of the total.

Weekly Radar: Currency warriors meet in Moscow

G20/EUROGROUP/EURO Q4 GDP/STATE OF THE UNION/BOJ/UST, GILT AND ITALY BOND AUCTIONS/EUROPEAN EARNINGS

Hiccup. February has so far certainly brought a more sober, if healthier, perspective to world markets. Global stocks are off about half a percent this week, letting the air out gently from January’s over-inflated 5 percent surge. The focus is back on Europe, where the threat of a euro FX overshoot (in the face of LTRO paybacks and rising euro interest rates alongside stepped-up “global currency wars”) has fused with a plethora of unresolved national debt conundrums and a stream of ‘event risks’ on the region’s calendar. Euro stocks have retreated to December levels as the currency move and fresh political angst has taken the wind out of earnings and growth projections after such a steep rally over the past six months. Name anything you want – the tightening race for this month’s Italian elections and Monte di Paschi scnadal there, a delayed Cyprus bailout and elections there this month, the Irish promissory note standoff with the ECB etc etc – when things turn, they all these get amplified again even if none really are likely to be systemic threats in the way we’d become used to over the past two years. The slight backup in Italian/Spanish yields to December levels shows sentiment turns still pack a punch, the European earnings season has been mixed so far, there are political murmurs about capping the euro and the political calendar over the next six weeks is a bit of a minefield for nervy markets. All the issues still look resolvable – the tricky Irish bank debt rejig looks on the verge of a resolution; few still believe Berlusconi be the next Italian PM (only 5 percent on betting website Intrade think so, for example); and Cyprus is expected by most to get bailed out eventually. Today’s ECB will be critical to most of those issues, but next week’s euro group gets a chance to update everyone on its role in them aswell). The issue likely to gnaw deepest at investors is the regional growth outlook  and,  in that respect, the euro surge is about as welcome as a kick in the teeth at this juncture. (Euro Q4 GDPs out next week). The French clearly want to rein in the currency but don’t have the tools or the German backing. Draghi and the ECB will likely have to come to rescue again, though he will not admit to euro targeting and so may drag his feet on this one until the move starts to burn. Interesting times ahead and interesting G20 finance meeting in Moscow next week as a result.

To keep this week’s market wobble  in Europe in perspective, however Wall St still continues to hover close to record highs as the Q4 GDP shock was probably correctly dismissed as a red herring; Japan’s TOPIX is now up 35% in three months (well, about 15% in euro terms), and Shanghai is up 18% in just two months. It’s curious to note that Shanghai was the top pick of the year when Reuters polled global forecasters in December and average gains for the whole of 2013 were expected to be… 17 percent. So, stick with the growth and the currency printing regions for now it seems – even if you do get whacked on the exchange rate.

Clearing a way to Russian bonds

Russian debt finally became Euroclearable today.

What that means is foreign investors buying Russian domestic rouble bonds will be able to process them through Belgian clearing house Euroclear, 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. Euroclear’s links with correspondent banks in more than 40 countries means buying Russian bonds suddenly becomes easier.And safer too in theory because the title to the security receives asset protection under Belgian law. That should bring a massive torrent of cash into the OFZs, as Russian rouble government bonds are known.

In a wide-ranging note entitled “License to Clear” sent yesterday, Barclays reckons previous predictions of some $20 billion in inflows from overseas to OFZ could be understated — it now estimates that $25 to $40 billion could flow into Russian OFZs during 2013-2o14. Around $9 billion already came last year ahead of the actual move, Barclays analysts say, but more conservative asset managers will have waited for the Euroclear signal before actually committing cash.

Foreigners’  increased interest will have several consequences.  Their share of Russian local bond markets, currently only 14 percent, should go up. The inflows are also likely to significantly drive down yields, cutting borrowing costs for the sovereign, and ultimately corporates. Already, falling OFZ yields have been driving local bank investment out of that market and into corporate bonds (Barclays estimates their share of the OFZ market has dropped more than 15 percentage points since early-2011).  And the increased foreign inflows should act as a catalyst for rouble appreciation.

No Czech intervention but watch the crown

The Czech central bank surprised many this week after its policy meeting. Widely expected to announce the timing and extent of FX market interventions, Governor Miroslav Singer not only failed to do so, he effectively signalled that intervention was no longer on the cards — at least in the short term  In his words, looser monetary conditions were now “less urgent”.

What changed Singer’s mind? After all, data just hours earlier showed Czech industrial production plunging  12 percent year-on-year in December. The economy has not grown since mid-2011 and is likely to have contracted by more than 1 percent last year. Singer in fact predicts a second full year of recession. But some slightly upbeat-looking forward indicators could be cause for cheer. According to William Jackson at Capital Economics:

We think that the need for further policy loosening was tempered by the tentative pick-up in the most recent survey data as well as the fall in the crown (versus the euro) since the start of the year.

How contagious is the Malian conflict?

By Dasha Afanasieva

Security risks, shoddy governance and black markets have propelled West African countries up the risk rankings of consultancy Maplecroft’s annual Global Risks Atlas, released today.

As the French continue to battle Mali rebels in the Sahara, how big is the risk of the trouble spreading to Mali’s already fragile neighbours?

According to Maplecroft, Mali is an example of how

the security situation in one country can significantly increase the risk of violence and instability in the surrounding region, with implications for the operations of foreign firms

Emerging corporate bond boom stretches into 2013

The boom in emerging corporate debt is an ongoing theme that we have discussed often in the past, here on Global Investing as well as on the Reuters news wire. Many of us will therefore recall that outstanding debt volumes from emerging market companies crossed the $1 trillion milestone last October. This year could be shaping up to be another good one.

January was a month of record issuance for corporates, yielding $51 billion or more than double last January’s levels and after sales of $329 billion in the whole of 2012. (Some of this buoyancy is down to Asian firms rushing to get their fundraising done before the Chinese New Year starts this weekend). What’s more, despite all the new issuance, spreads on JPMorgan’s CEMBI corporate bond index tightened 21 basis points over Treasuries.

JPM say in a note today that assets benchmarked to the CEMBI have crossed $50.6 billion, having risen 60 percent year-over-year.  Interest in corporates is strong also among investors who don’t usually focus on this sector, the bank says, citing the results of its monthly client survey. One such example is asset manager Schroders. Skeptical a couple of years ago about the risk-reward trade-off in emerging debt, Schroders said last month it was seeing more opportunities in emerging corporates, noting:

From cycles to cell phones: tracking Africa’s middle classes

Mobile phone bills and beer consumption patterns are used by investors to assess how fast bank accounts are likely to grow in Africa, but what did investors count to gauge trends before there were mobile phones?

The answer? Cattle, bicycles, radios, founder of Zimbabwean telecoms company Econet Wireless Strive Masiyiwa told an Economist conference on Africa this afternoon. Masiyiwa said he researched ownership of these status items to assess the five-year demand for mobile phones in Botswana when he successfully bid for a mobile phone contract from Botswana’s government.

His forecasts, more optimistic than the other bidding operators’, still turned out to undershoot by hundreds of thousands, Masiyiwa said, adding that official data from organisations such as the World Bank also tend to underestimate Africa’s growth potential.

U.S. Treasury headwinds for emerging debt

Emerging bond issuance and inflows have had a strong start to the year but can it last?

Data from JPMorgan shows that emerging market sovereigns sold hard currency bonds worth $9.6 billion last month while companies raised $51.2 billion (that compares with Jan 2012 issuance levels of $17.5 billion for sovereigns and $23.9 billion for corporates). Similarly, inflows into EM debt were well over $10 billion last month, very probably topping the previous monthly record,  according to JPM.

But U.S. Treasury yields are rising, typically an evil omen for equities and emerging markets. Ten- year U.S. yields, the underlying risk-free rate off which many other assets are priced,  rose this week to nine-month highs above 2 percent. That has brought losses on emerging hard currency debt on the EMBI Global index to  2 percent so far this year. (there is a similar picture across equities, where year-to-date returns are barely 1 percent despite inflows of around $24 billion). Historically, negative monthly returns caused by rising U.S. yields have tended to lead to outflows.

Indian markets and the promise of reform

What a difference a few months have made for Indian markets.

The rupee is 8 percent up from last summer’s record lows. Foreigners have ploughed $17 billion into Indian stocks and bonds since Sept 2012 and foreign ownership of Indian shares is at a record high 22.7 percent, Morgan Stanley reckons.  And all it has taken to change the mood has been the announcement of a few reforms (allowing foreign direct investment into retail, some fuel and rail price hikes and raising FDI limits in some sectors). A controversial double taxation law has been pushed back.  The government has sold some stakes in state-run companies (it offloaded 10 percent of Oil India last week, netting $585 million).  If the measures continue, the central bank may cut interest rates further.

Above all, there have been promises-a-plenty on fiscal consolidation.

The promises are not new. Only this time, investors appear to believe Finance Minister P. Chidambaram.

Chidambaram who was on a four-city roadshow to promote India to investors, pledged in a Reuters interview last week not to cross the “red line” of a 5.3 percent deficit for this year in the Feb 28 budget. Standard Chartered, one of the banks that organised Chidambaram’s roadshow, sent out a note entitled: “The finance minister means business”.