Global Investing

Our colleagues at Lipper have put together some eye-catching data on developments in the ETF industry. You can read the slides here.

Most intriguing is the idea of a slumbering cohort of 241 exchange-traded funds forming what Lipper calls a ‘Death List’; ETFs which are more than three years old, but which have failed to drive assets up to the 100 million euro-mark.

Detlef Glow, Lipper’s head of Research for EMEA, notes these funds might well be thought to be under review by their promoters, but he hasn’t spotted any particular trend towards consolidation. Why?

Well, Glow reckons the question of whether an ETF is proving profitable doesn’t quite come down to a simple volume/management fee play; creation fees and redemption fees play their part too. And promoters like a full stable. Even if an ETF isn’t pulling in punters by the cart-load, they see value in presenting clients with an impressively exhaustive product suite.

All that means Glow isn’t convinced this group is as ripe for consolidation as it might seem. Maybe ‘Death List’ starts to look a bit melodramatic, but successfully marketing ETF data takes some creative gumption. And it’s in the headline to this post, so who am I to judge?

Investors with exposure to Argentina will have been dismayed in recent weeks by the surging cost of insuring that investment — Argentine 5-year credit default swaps have risen more than 300 basis points since mid-May to the highest levels since 2009. That means one must stump up close to $1.5 million to insure $10 million worth of Argentine debt against default for a five year period, data from Markit shows.

The rise coincides with growing fears that President Cristina Fernandez Kirchner is getting ready to crack down on people’s dollar holdings. Fears of forcible de-dollarisation have sent Argentine savers scurrying to the banks to withdraw their hard currency and stash it under mattresses. That has widened the gap between the official and the “black market” exchange rate. (see the graphic below from Capital Economics)

While government officials have denied there is such a move afoot, Fernandez has not helped matters by exhorting people to “think in pesos”.  That will be hard for Argentines, most of whom have vivid memories of hyperinflation, default and devaluation. Unsurprisingly, most prefer to save in dollars. 

Our team at Lipper spent much of the first quarter handing out awards to fund managers round the world who have delivered exceptional performance to their investors. Since then, I’ve had time to take a step back and assess just how good the wider European industry has been at outperforming over the longer term.

Active fund managers’ ability to out-perform their benchmarks sits near the heart of any discussion on the relative merits of active versus passive. In broad terms the argument against investing in an actively-managed fund is that one takes on the additional risk that the fund will significantly under-perform the index, a risk that is exacerbated over time by the additional costs associated with such a fund.

The argument against passive is that one not only misses out on the possibility of superior, but also that, in principle, one is guaranteed to under-perform the index.

Just how miserable a month May was for global equity markets is summed up by index provider S&P which notes that every one of the 46 markets included in its world index (BMI)  fell last month, and of these 35 posted double-digit declines. Overall, the index slumped more than 9 percent.

With Greece’s anti-austerity May 6 election result responsible for much of the red ink, it was perhaps fitting that Athens was May’s worst performer, losing almost 30 percent (it’s down 65 percent so far this year).  With euro zone growth steadily deteriorating, even German stocks fell almost 15 percent in May while Portugal, Spain and Italy were the worst performing developed markets  (along with Finland).

The best of the bunch (at least in the developed world) was the United States which fell only 6.5 percent in May and is clinging to 2012 gains of around 5 percent. S&P analyst Howard Silverblatt writes:

Indian markets are rallying this week as they price in an interest rate cut at the Reserve Bank’s June 18 meeting.  With the country still in shock after last week’s 5.3 percent first quarter GDP growth print, it is easy to understand the clamour for rate cuts. After all, first quarter growth just a year ago was 9.2 percent.

Yet,  there may be little the RBI can do to kickstart growth and investment.  Many would argue the growth slowdown is not caused by tight monetary conditions but is down to supply constraints and macroeconomic risks –the government’s inability to lift a raft of crippling subsidies has swollen the fiscal deficit to almost 6 percent while inhibitions on foreign investment in food processing and retail keep food prices volatile.  

The other side of the problem is of course the rupee which has plunged to record lows amid the global turmoil. Lower interest rates could  leave the currency vulnerable to further losses.

India’s first-quarter GDP growth report was a shocker this morning at +5.3 percent. Much as Western countries would dream of a print that good, it’s akin to a hard landing for a country only recently aspiring to double-digit expansions and, with little hope of any strong reform impetus from the current government, things might get worse if investment flows dry up. The rupee is at a new record low having fallen 7 percent in May alone against the dollar — bad news for companies with hard currency debt maturing this year (See here). So investors are likely to find themselves paying more and more to hedge exposure to India.

Credit default swaps for the State Bank of India (used as a proxy for the Indian sovereign) are trading at almost 400 basis points. More precisely, investors must pay $388,000  to insure $10 million of exposure for a five-year period, data from Markit shows. That is well above levels for the other countries in the BRIC quartet — Brazil, China and Russia. Check out the following graphic from Markit showing the contrast between Brazil and Indian risk perceptions.

At the end of 2010, investors paid a roughly 50 bps premium over Brazil to insure Indian risk via SBI CDS. That premium is now more than 200 bps.

By Cosmas Butunyi

The dust is finally settling on the storm that was kicked off in South Africa by a controversial painting of President Jacob Zuma with his genitals exposed.

The country that boasts one of the most liberal constitutions in the world and the only one on the African continent with a constitutional provision that protects and defends the rights of  gays and lesbians , had   its values put up to  the test  after an artist    ruffled feathers by a painting that questioned the moral values  of the ruling African National Congress . 

For weeks, the storm ignited by the painting  called  ‘The Spear’, raged on, sucking in Goodman Gallery that displayed it and City Press, a weekly newspaper that had published it on its website. The matter eventually found its way into the corridors of justice, where the ruling ANC sought redress against the two institutions. The party also mobilised its supporters to stage protests outside the courtroom when the case it filed came up for hearing. They also matched to the gallery and called for a boycott of City Press , regarded as one of the country's most authoritative newspapers. 

How are we looking? Fluid, very fluid!

In a classic case of call and response, the latest twist of the euro saga has seen the crisis escalate sharply in Spain and Italy (with the attempted cleanup of Bankia the latest trigger for a surge in government borrowing rates in both) only to see the European Commission today invoke major policy responses including the proposed use of the new European Stability Mechanism (ESM) to directly recapitalize euro banks, a single banking union, a euro-wide deposit protection system and even pushing back Spanish budget deadlines by a year.

It seems clear from this that they see Spain and Italy – which seem to be trading in tandem regardless of their differences – as the battleground for the survival of the euro. The gauntlet is down for next month’s summit, though the absence of a roadmap to Eurobonds per se will disappoint and markets are not going to sit quietly for a month. Moreover, the Grexit vigil has another fortnight to run before any clarity and the latest polls are not going in the direction other euro governments had hoped, with anti-bailout parties still in the lead. And we can only assume Ireland votes in favour of the now notional fiscal pact tomorrow as per opinion polls, though there’s always an outside chance of an upset.

So, seeing ahead even a month seems like an impossible task. A week ahead, however, points the spotlight firmly at the ECBs meeting on Wednesday and the chance the central bank eases again in some form to try and buy time for other developments to work through. But it will also be a moment of potential conflict, with its role in the Spanish bank bailout fraught with disagreements to date. Despite a two-day London market holiday, the week will be dominated by central banks at large – the BoE meeting and Bernanke’s testimony on Thursday being the other highlights. Is there a chance they act together again? And Italian/Spanish/French bond auctions next week certainly look precarious in the current environment.

Serving wine instead of beer at its annual rooftop soiree? Is this some kind of subliminal message specialist broker Auerbach Grayson is trying to send, ie: that emerging markets are mature and here’s the vino to prove it?

Or, is the message not in a bottle but in a case? Don’t limit your exposure to emerging markets but increase it for growth. Only a slight problem here in that emerging market stocks are underperforming developed markets so far this year. They underperformed in 2011 as well.

But don’t let facts get in the way of wine.

(more…)

Who says you can’t mix business and pleasure? Governments and company CEOs are planning to do just that – combining a bit of hurdles-watching with deal-fixing when the Olympics open in London in eight weeks’ time.

July and August are usually the dry season for newsworthy finance ministers and corporate managers, as the conference schedule clears and journalists and strategists have no excuse but to stay in the office and do some long-postponed paperwork.

But this year,  government officials are hoping that the positive news of Olympic medal-winning and the draw of visitors to London for the Games will enable them to attract investment.