Global Investing

Israel election cuts Iran risk

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.

Political risk analyst Alastair Newton at Nomura also thinks chances of a strike have diminished. He writes in a note today:

Although Israel’s stated policy on Iran is unlikely to shift significantly whatever the make-up of the next government, securing the necessary support in the security cabinet for a strike now looks like a much harder task than would have been the case had Mr Netanyahu won a clear majority.

What flows out, must flow in?

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.

Zara not Prada to tempt emerging market shoppers

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.

Emerging policy-One cut, two steady

What a varied bunch emerging markets have become. At last week’s monetary policy meetings, we saw one rate rise (Serbia) and differing messages from the rest. Mexico turned dovish while hitherto dovish Brazilian central bank finally mentioned the inflation problem. Russia meanwhile kept markets guessing, signalling it could either raise rates next month or cut them.

This week, a cut looks likely in Turkey while South Africa and the Philippines will almost certainly keep interest rates steady.

Turkey’s main policy rate – the one-week repo rate – and overnight lending rate are widely expected to stay on hold at 5.50 percent and 9 percent respectively on Tuesday. But some predict a cut in the overnight borrowing rate – the lower end of the interest rate corridor, motivated partly by the need to keep the currency in check.   The lira is trading near 10-month highs, thanks to buoyant inflows to Turkish capital markets.  That has helped lower inflation from last year’s double-digit levels.

Weekly Radar: Market stalemate sees volatility ebb further

Global markets have found themselves at an interesting juncture of underlying new year bullishness stalled by trepidation over several short-term headwinds (US debt debate, Q4 earnings, Italian elections etc etc) – the net result has been stalemate, something which has sunk volatility gauges even further. Not only did this week’s Merrill funds survey show investors overweight bank stocks for the first time since 2007, it also showed demand for protection against a sharp equity market drops over the next 3 months at lowest since at least 2008. The latter certainly tallies with the ever-ebbing VIX at its lowest since June 2007. Though some will of course now argue this is “cheap” – it’s a bit like comparing the cost of umbrellas even though you don’t think it’s going to rain.

Anyway, the year’s big investment theme – the prospect of a “Great Rotation” back into equity from bonds worldwide – has now even captured the sceptical eye of one of the market’s most persistent bears. SocGen’s Albert Edwards still assumes we’ll see carnage on biblical proportions first — of course — but even he says long-term investors with 10-year views would be mad not to pick up some of the best valuations in Europe and Japan they will likely ever see. “Unambiguously cheap” was his term – and that’s saying something from the forecaster of the New Ice Age.

For others, the very fact that Edwards has turned even mildly positive may be reason enough to get nervy! When the last bear turns bullish, and all that…

Korean exporters’ yen nightmare (corrected)

(corrects name of hedge fund in para 3 to Symphony Financial Partners)

Any doubt about the importance of a weaker yen in thawing the frozen Japanese economy will have been dispelled by the Nikkei’s surge to 32-month highs this week. Since early December, when it became clear an incoming Shinzo Abe administration would do its best to weaken the yen, the equity index has surged as the yen has fallen.

Those moves are giving sleepless nights to Japan’s neighbours who are watching their own currencies appreciate versus the yen. South Korean companies, in particular, from auto to electronics manufacturers, must be especially worried. They had a fine time in recent years  as the yen’s strength since 2008 allowed them to gain market share overseas. But since mid-2012, the won has appreciated 22 percent versus the yen.  In this period, MSCI Korea has lagged the performance of MSCI Japan by 20 percent. Check out the following graphic from my colleague Vincent Flasseur (@ReutersFlasseur)

David Baran, co-founder of Tokyo-based Symphony Financial Partners, notes the relative performance of Hyundai and Toyota (Hyundai shares have fallen 2.5 percent this year adding to 13.5 percent loss in the last quarter of 2012. Toyota on the other hand is up 5 percent so far in 2013 after gaining 31 percent in Oct-Dec last year). Baran says he has gone long the Nikkei and short the Seoul index (the Kospi) and (Hong Kong’s) Hang Seng, while taking a short position on the yen. He says:

What’s next? A U.S. downgrade or Spanish bailout?

What will happen first? A U.S. credit rating downgrade or the country’s unemployment falling below 7 percent?

Or Spain having no other option but to ask for a bailout?

Bank of America Merrill Lynch asked investors in its monthly fund manager survey what “surprises”  they saw coming up first this year.

And the result is: bad news will come first.

A U.S. debt downgrade got the top spot, with more than 35 percent of investors seeing that happen first, with crisis-hit Spain having to ask for more help a close second, at just over 30 percent.

Brazil’s inflation problem

When will Brazil’s central bank admit it has an inflation problem? Markets will be watching today’s rate-setting meeting for clues.

There is no doubt about the outcome of today’s meeting at the Banco Central do Brasil (BCB) — no one expects it to do anything but leave interest rates steady at the current 7.25 percent. But the BCB has been focused on growth for 18 months and has cut interest rates by 525 basis points in this time, its actions helping to drive the real 10 percent lower last year versus the dollar. The government meanwhile has unleashed huge doses of fiscal stimulus. The result, rather than a growth recovery, is a steady rise in inflation.

Goldman Sachs’ Latin America economist Alberto Ramos points out that Brazilian inflation came in above the 4.5 percent target for the third straight year in 2012 and the balance of inflation risks has deteriorated. Gasoline prices are to rise from next week and drought is making hydro-power generation more costly. Analysts polled by Reuters expect 2013 price growth at 5.53 percent. Ramos writes:

Mali risks in focus

The international focus is on  gold-producing country Mali after days of French air strikes on al-Qaeda-linked Islamist rebel strongholds in the north of the West African country. France expects Gulf Arab states will help an African campaign against the rebels,  and a meeting of donors for the Mali operation is due at the end of the month. West African defence chiefs are meeting today to approve plans to speed up the deployment of 3,300 regional troops.

Mali isn’t normally on the radar screens of international portfolio investors, with little external debt and no developed capital markets.

But it is Africa’s third biggest gold producer, with London-listed Randgold the biggest investor and other foreign firms such as Anglogold also having investments.

Rupiah decline – don’t worry

Indonesia has just given the go-ahead for another leg down in the rupiah. It has cut its forecasts for the exchange rate to 9,700 per dollar compared to the 9,200 level at which the central bank used to step in. The currency has duly weakened and nervous foreigners have rushed to hedge exposure — 3-month NDFs price the rupiah at almost 10,000 to the dollar. The  rupiah last week hit a three-year low, its weakness coming on top of a dismal 2012 which saw it fall 6 percent as the current account deficit worsened. Traders in Jakarta are reporting dollar hoarding by exporters.

All that is spooking foreigners who own more than 30 percent of the domestic bond market. The currency weakness hit them hard last year as Indonesian bonds returned just 6 percent, a third of the sector’s 16 percent average (see graphic).

The central bank does not seem perturbed by the currency weakness. Luckily for it, inflation rates are still benign, which means a weak currency will probably remain in favour.