Global Investing

Record year for global bond markets in 2012

How good was 2012 for bond markets? Very good, by the look of the many records broken.

2012  was the strongest year for global high yield and investment grade debt on record, new issuance of corporate debt from emerging markets issuers was also the strongest since records began in 1980 and activity on global debt capital markets were overall up 10 percent from 2011, Thomson Reuters data shows.

Euro-denominated international corporate debt increased 69.5 percent, making 2012 issuance the second largest on record behind 2009.

According to Thomson Reuters’ report on debt capital markets in 2012:

Overall global debt capital markets activity totaled US$5.6 trillion during full year 2012, a 10% increase from the comparable period in 2011 and the strongest annual period for global debt capital markets activity since 2009.

The volume of global high yield corporate debt reached US$389.0 billion during full year 2012, a 38% increase compared to full year 2011 and the strongest annual period for high yield debt activity since records began in 1980. High yield issuance during the fourth quarter of 2012 totaled US$113.2 billion, narrowly surpassing the third quarter of 2012 and setting an all-time quarterly record.

$1trillion of euro zone bonds to snap up in 2013

Investors keen to wade deeper into the euro zone’s quieter waters  will have 765 billion euros,  or just over $1  trillion, worth of fresh government bonds offered to them this year, nearly 8 percent less than in 2012,  Deutsche Bank writes in a report.

With the debt crisis quieting down, euro zone assets are among the top 2013 picks for many leading investors, with the likes of Societe Generale and AXA Investment Managers advising to head for the periphery with Spanish and Italian sovereign debt.

Deutsche Bank writes in its Eurozone 2013 supply outlook report, based on the bloc’s ten biggest bond issuers:

Weekly Radar: From fiscal cliff to fiscal tiff…

The new year starts with a markets ‘whoosh’, thanks to some form of detente in DC — though this one was already motoring in 2012. The New Year’s Eve rally was the biggest final day gain in the S&P500 since 1974, for what it’s worth.  And for investment almanac obsessives, Wednesday’s 2%+ gains are a good start to so-called “five-day-rule”, where net gains in the S&P500 over the first five trading days of the year have led to a positive year for equity year overall on 87 percent of 62 years since 1950.

So do we have a fiscal green light stateside for global investors? Or does it just lead us all to another precipice in two months time? Well, markets seem to have voted loudly for the former so far. And to the extent that at least some bi-partisan progress reduces the risk of policy accident and renewed recession, then that’s justified. And Wall St’s relief went global and viral, with eurostocks up almost 3% and emerging markets up over 2% on Wednesday. Even the febrile bond markets sat up and took notice, with core US and German yields jumping higher while riskier Italian and Spanish yields skidded to their lowest in several months.

So is all that New Year euphoria premature given we will likely be back in  the political trenches again next month?  Maybe, but there’s good reason to retain last year’s optimism for a number of basic reasons. As seasoned euro crisis watchers know well, the world doesn’t end at self-imposed deadlines. The worst that tends to happen is they are extended and there is even a chance of – Shock! Horror! – a compromise. Never rule out a disastrous policy accident completely, but it’s wise not to make it a central scenario either. In short, markets seem to be getting a bit smarter at parsing politics. Tactical volatility or headline-based trading wasn’t terribly lucrative last year, where are fundamental and value based investing fared better.  And the big issue about the cliff is that the wrangling has sidelined a lot of corporate planning and investment due to the uncertainties about new tax codes as much as any specific measures. While there’s still some considerable fog around that, a little of the horizon can now be seen and political winds seem less daunting than they once did. If even a little of that pent up business spending does start to come through, it will arrive the slipstream of a decent cyclical upswing.  China is moving in tandem meantime. The euro zone remains stuck in a funk but will also likely be stabilised at least by U.S. and Chinese  over the coming months. Global factory activity expanded again in December for the first time since May.

Russian equity sales: disappointing

Investment banks have been dismayed this year by the slump in first-time share listings across emerging markets, the area they had hoped would yield the most growth (and fees). But as we pointed out in this story, emerging IPO volumes fell 40 percent this year. And equity bankers have seen lucrative IPO fees dry up – they almost halved this year from 2011  and are a third of 2007 levels.

One market that has possibly disappointed investors most is Russia.  Its plan a few years ago to privatise large swathes of state-run companies via share sales had bankers salivating — estimates for the proceeds ranged from $30-$50 billion. The pipeline is still alluring, with all manner of companies up for privatisation, including shipping company Sovcomflot and the Russian Railways monopoly.  The Kremlin did raise $5 billion this year by selling a 7.6 percent stake in Sberbank, the banking giant, but not much else has come to pass.  In fact, 2012 saw the state tighten its grip on the energy sector, as government-controlled Rosneft bought oil producer TNK off BP, forking out $12.3 billion and some equity.

Sberbank analyst Chris Weafer estimates Russian companies raised $2.5 billion this year via IPOs, including a $1.8 billion offering from mobile operator Megafon- that’s almost half last year’s levels. Actually, the picture is not that dismal. Weafer points out that total equity issuance to the market, including strategic stake sales by shareholders, came to  $12.8 billion (the total was bumped up by the $5 billion Sberbank deal) and that is up from last year’s total of $9.9 billion.

The Watanabes are coming

With Shinzo Abe’s new government intent on prodding the Bank of Japan into unlimited monetary easing, it is hardly surprising that the yen has slumped to two-year lows against the dollar. This could lead to even more flows into overseas markets from Japanese investors seeking higher-yield homes for their money.

Japanese mom-and-pop investors — known collectively as Mrs Watanabe -  have for years been canny players of currency and interest rate arbitrage. In recent years they have stepped away from old favourites, New Zealand and Australia, in favour of emerging markets such as Brazil, South Africa and Turkey. (See here  to read Global Investing’s take on Mrs Watanabe’s foray into Turkey). Flows from Japan stalled somewhat in the wake of the 2010 earthquake but EM-dedicated Japanese investment trusts, known as toshin, remain a mighty force, with estimated assets of over $64 billion.  Analysts at JP Morgan noted back in October that with the U.S. Fed’s QE3 in full swing, more Japanese cash had started to flow out.

That trickle shows signs of  becoming a flood. Nikko Asset Management, the country’s third  biggest money manager, said this week that retail investors had poured $2.3 billion into a mutual fund that invests in overseas shares — the biggest  subscription since October 2006. This fund’s model portfolio has a 64 percent weighting to U.S. shares, 14 percent to Mexico and 10 percent to Canada while the rest is split between Latin American countries.

After bumper 2012, more gains for emerging Europe debt?

By Alice Baghdjian

Interest rate cuts in emerging markets, credit ratings upgrades and above all the tidal wave of liquidity from Western central banks have sent almost $90 billion into emerging bond markets this year (estimate from JP Morgan). Much of this cash has flowed to locally-traded emerging currency debt, pushing yields in many markets to record lows again and again. Local currency bonds are among this year’s star asset classes, returning over 15 percent, Thomson Reuters data shows.

But the pick up in global growth widely expected in 2013 may put the brakes on the bond rally in many countries – for instance rate hikes are expected in Brazil, Mexico and Chile. One area where rate rises are firmly off the agenda however is emerging Europe and South Africa, where economic growth remains weak. That is leading to some expectations that these markets could outperform in 2013.

There have already been big rallies. Since the start of the year, Turkey’s 10 year bond has rallied by 300 basis points; Hungary’s by almost 400 bps; and Poland’s by 200 bps. So is there room for more.

Fitch’s Xmas gift for Hungary leaves analysts agog

Hungary’s outlook upgrade to stable from positive by Fitch was greeted with incredulity by many analysts. Benoit Anne at Societe Generale wonders if the decision had anything to do with the Mayan prophecy that proclaiming the end of the world on Dec. 21:

What is the last crazy thing you would do on the last day of the world? Well, the guys at Fitch could not find anything better to do than upgrading Hungary’s rating outlook to stable. Now, that really makes me scared.

A bit brutal maybe but the point Anne wants to make is valid — nothing fundamental has changed in Hungary — its GDP growth and debt numbers are looking as dire as before and the central bank is still subject to political interference.

Hungary’s forint and rate cut expectations

A rate cut in Hungary is considered a done deal today. But a sharp downward move in the forint  is making future policy outlook a bit more interesting.

The forint fell 1.5 percent against the euro on Monday to the lowest level since July and has lost 2.6 percent this month. Monday’s loss was driven by a rumour that the central bank planned to stop accepting bids for two week T-bills. That would effectively have eliminated the main way investors buy into forint in the short term.   The rumour was denied but the forint continues to weaken.

Analysts are not too worried, attributing it to year-end position squaring. Benoit Anne, head of EM strategy at Societe Generale, points out the forint is the world’s best performing emerging currency of 2012 (up  11.3 percent against the dollar). Given the state of the economy (recession) and falling inflation, the forint move will not deter the central bank from a rate cut, he says.

Emerging Policy-More interest rate cuts

A big week for central bank meetings looms and the doves are likely to be in full flight.

Take the Reserve Bank of India, the arch-hawk of emerging markets. It meets on Tuesday and some, such as Goldman Sachs, are predicting a rate cut as a nod to the government’s reform efforts. That call is a rare one, yet it may have gained some traction after data last week showed inflation at a 10-month low, while growth languishes at the lowest in a decade. Goldman’s Tushar Poddar tells clients:

With both growth and inflation surprising on the downside relative to the RBI’s forecast, there is a reason for the central bank to move earlier than its previous guidance.

The BBB credit ratings traffic jam

Adversity is a great leveller. Just look at the way sovereign credit ratings in the developed and emerging world have been converging ever since the credit crisis erupted five years ago. JPMorgan  has crunched a few numbers.

Few were surprised last week by S&P’s decision to cut the outlook on Britain’s AAA rating to negative. That gold-plated rating is becoming increasingly rare — according to JP Morgan, just 15 percent of global GDP now rates AAA with a stable outlook — a whopping comedown from 50 percent in 2007. Only 13 developed economies are now rated AAA, compared to 21 before the crisis. And only one, Australia, now has a higher rating (AAA) than in 2007 — 16 of its peers have suffered a total of 129 downgrades in this period.  With 20 rich countries on negative outlook, more downgrades are likely.

Emerging sovereigns, on the other hand, have enjoyed 189 upgrades (43 percent of these were moves into investment grade). That has caused what JPM dubs “a traffic jam”  in the triple B ratings area, with 20 percent of world GDP now rated at this level, compared to 8 percent in 2009.