Global Investing

Emerging Policy-surprises all round

A cut was expected, but not there. Israel sliced rates to 2 percent on Monday, surprising even the central bank’s own economists, who forecast steady rates till the end of next year. India’s central bank, meanwhile, kept rates steady earlier today, even though the country’s government had been pushing for a trim.

Emerging economies continue to grapple over whether it’s better to tackle growth or to fight inflation. For the Reserve Bank of India, which left rates at 8 percent but chopped banks’ cash reserve ratios, an inflation rate of nearly 8 percent in September was enough to cause alarm.

A sop to the government though, which has called for a rate cut to boost flagging growth – the central bank said it might take the hatchet to rates early next year.

For Israel, the issue appeared to be the export-draining strength of the shekel, which has soared 7 percent against the dollar since the end of July, when European Central Bank chief Mario Draghi said he would do whatever it took to preserve the euro.

According to Citi emerging market strategist David Lubin:

It is possible that the Bank of Israel would like its rate to be as low as possible to discourage foreigners from developing an appetite for the shekel.

Emerging Policy-Philippines cuts, Mexico to hold steady?

Emerging market economies continue their trend to spur on growth rather than fight possible QE-induced inflation, with the Philippines cutting rates earlier today.

The Philippines’ central bank cut overnight rates by 25 bps to a new low of 3.5 percent for the borrowing window and 5.50 percent for the lending facility, a move helped by annual inflation at the lower end of the country’s 3 to 5 percent target band.

In fact, analysts and even central bankers in Asia appear less worried about the possible effects of the easy money sloshing around the world just now than regions like Latin America.

Weekly Radar: Earnings wobble as payrolls, BOJ, G20 eyed

Easy come, easy go. A choppy October prepares to exit on a downer – just like it arrived. World equities lost about 3 percent over the past seven, mostly on Tuesday, and reversed the previous week’s surge to slither back to early September levels. Just for the record, Tuesday was a poor imitation of the lunge this week 25 years ago – it only the worst single-day percentage loss since July and only the 10th biggest drop of the past year alone. But it was a reminder how fragile sentiment remains despite an unusually bullish, if policy-driven year.

Why the wobble? t’s hard to square the still fairly rum, or at best equivocal, incoming macro data and earnings numbers alongside year-to-date western stock market gains of 10-25%. There’s more than enough room to pare back some more of that and still leave a fairly decent year given the macro activity backdrop and we now only have about 6 full trading weeks left of 2012. So it will likely remain bumpy – not least with U.S. and Chinese leadership changes into the mix as mood music. The sheer weight of a gloomy Q3 earnings season seems to have hit home this week, with revenue declines or downgraded outlooks  – particularly in “real economy” firms such as Caterpillar, Dupont,  Intel and IBM etc – worrying many despite more decent bottom line earnings. As some investors pointed out, earnings can’t continue to beat expectations if revenues continue to wither and there are still precious few signs of an convincing economic turnaround worldwide to draw a line under the latter.

The policy-driven equity boom of the past couple of months has also been suspect to many strategists given the lack of rotation from defensive stocks to cyclicals, showing little conviction in central bank reflation policies succeeding soon even though ever more ZIRP/QE has seen something of an indiscriminate dash to any fixed income yields you care to mention – from junk to ailing sovs and now even CLOs! The bond rush has swept up an awful lot of odd stuff –  not least 10-year dollar debt from countries such as Bolivia and Zambia, whatever about Spain, and corporate junk with CCC ratings and current default rates of almost 30%! As some other funds have pointed out, another weird aspect of this has been the appetite for long duration – which doesn’t fit with any belief that reflationary policies will work on a reasonable timeframe. So, is that it? Central banks will continue to wrap everything in cotton wool for the next decade without ever succeeding in boosting growth or even inflation? Hmmm. The various U.S. growth signals are not ultra-convincing, not yet at least, but they’re not to be ignored either. Thursday’s news of a bounceback in the UK economy in Q3 also shows the prevailing stagnation narrative is not without question. And everyone seems convinced Chinese growth has troughed in Q3 –and  just look at the 66% rise in Baltic Freight prices in little over a month. The rebound in super-low equity volatility in the U.S. and Europe this week is also worth watching – though it has to be said, these gauges remain historically low about 20%.

Pricing ‘new brooms’ at White House and Fed

With less than two weeks left to the U.S. presidential elections and all three televised debates done and dusted, investors are at last squaring up to the detailed financial market impact of the event itself and the column inches in newsprint and research reports lengthen by the day.

Barclays interest rate strategists are one of the first to stick hard numbers on likely market outcomes in a report late Tuesday that dug deep into both the well-documented “fiscal cliff” but also into the less discussed uncertainty surrounding the medium-term direction of the Federal Reserve and its leadership.

With news reports suggesting Fed chief Ben Bernanke will not now choose to stand again for a third term at the helm of the U.S. central bank in 2014, some may argue Fed risk from the election has been neutered. But with monetary policy still the only game in town policy-wise for many asset managers – at least on the stimulus side — then even the slightest risk to the Fed’s mandate remains a significant market factor.

Forgive and forget in emerging debt?

If you’re an emerging market borrower, it seems like it’s a great time for sorting out those old troublesome debts as pumped-up yield appetite in the fixed income universe encourages another bout of selective amnesia among creditors and bond investors.

Serial defaulter Ivory Coast met investors in London this week, next stop New York later today, to discuss a new schedule for missed coupons on its $2.3 billion bond due 2032.

The West African country defaulted on the bond early last year during political unrest which later broke into civil war. That bond was launched only in 2010 as a restructuring of previous debt on which Ivory Coast defaulted in 2000. If that isn’t confusing enough, the 2000 default was of  U.S.-underwritten Brady debt, which  itself was a repackaging…

Easy business trend in emerging Europe

Polish central bank governor Marek Belka doesn’t apportion a lot of importance to the fact that Poland can boast the second biggest improvement in the latest World Bank’s ease of doing business index, after Kosovo.

“This year we have improved, but I don’t care too much about it,”  Belka said at a meeting in London today.

Others do see a significant trend emerging from the data around Poland which paints an optimistic picture for those wishing to start and do business in Europe, but not necessarily in the developed markets.

Baton passing to the emerging markets consumer

Is there a change of sector leadership underway within emerging markets?

For years, commodities and energy delivered world-beating returns to emerging market investors. Yet in recent years there are signs of a shift, says Todd Henry, equity portfolio specialist at T.Rowe Price.

With the China tailwind no longer as strong as before demand for oil and metals will not be as robust as in the past decade, Henry says. But in China as well as elsewhere, disposable incomes have risen as a result of the fast economic growth these countries experienced in the past decade.

Check out the following two graphics from T.Rowe Price.

The first figure shows that in the ten years to December 2007, just before the global financial crisis erupted, emerging equities returned 300 percent in dollar terms. The two sectors that won the returns race in this period were energy and commodities, with dollar-based returns of around 650 percent. This is not surprising, given the enormous surge in Chinese demand for all manner of commodities, from oil to steel, as it fired up its exporters’ factories and embarked on a frenzy of infrastructure improvements.

Survival of the fattest?

Is there room only for the biggest, most aggressively-marketed funds in crisis-hit Europe?

Europe’s ten best-selling funds have attracted nearly a third of net sales across bonds, equity and mixed assets so far this year, as the grey bars show in the following chart from Thomson Reuters’ fund research firm Lipper.

TEN MOST SUCCESSFUL FUNDS’ NET SALES AS A PROPORTION OF ALL SALES

The numbers — which exclude ETFs — are even more staggering if looking at at the concentration of sales into groups/companies, rather than at fund level.

Chaco signals warning for Argentina debt

A raft of Argentine provinces and municipalities suffered credit rating downgrades this week after one of their number, Chaco, in the north of the country, ran out of hard currency on the eve of a bond payment. Instead it paid creditors $260,000 in pesos. Now Chaco wants creditors to swap $30 million in dollar debt for peso bonds because it still cannot get its hands on any hard currency.

The episode is a frightening reminder of Argentina’s $100 billion debt default 10 years ago and unsurprisingly has triggered a surge in bond yields and credit default swaps (CDS). But broader questions also arise from it.

First, will debt “pesification” by some Argentine municipalities snowball to affect international bonds as well? And second, is municipal debt likely to become a problem for other emerging markets in coming months?

Ireland descends from risky debt heights

Good news for Europe as the cost for insuring sovereign debt against default fell in the third quarter of 2012, according to the CMA Global Sovereign Credit Risk report.

Ireland slipped out of the 10 most risky sovereigns for the first time since the first quarter of 2010 according to CMA, making space for Lebanon to enter the club of the world’s ten most risky sovereign debt issuers.

Although Irish 5-year credit default swap spreads tightened to 317 basis points from 554 basis points in the third quarter, there is still a 25 percent chance that Ireland will not be able to honour its debt or restructure it over the next five years.