Global Investing

No more “emerging markets” please

The crisis currently roiling the developing world has revived a debate in some circles about the very validity of the “emerging markets” concept. Used since the early 1980s as a convenient moniker grouping countries that were thought to be less developed — financially or infrastructure-wise or due to the size or liquidity of their financial markets — the widely varying performances of different countries during the turmoil has served to underscore the differences rather than similarities between them.  An analyst who traveled recently between several Latin American countries summed it up by writing that he had passed through three international airports during his trip but had not had a stamp in his passport that said “emerging market”.

Like this analyst, many reckon the day has come when fund managers, index providers and investors must stop and consider  if it makes sense to bucket wildly disparate countries together.  After all what does Venezuela, with its anti-market policies and 50 percent annual inflation, have in common with Chile, a free market economy with a high degree of transparency  and investor-friendliness?

Deutsche Bank analyst John-Paul Smith is one of many questioning current index-based investing models which he says essentially provide a free ride to the Russias and Venezuelas of this world, who may be undeserving of investor dollars.  Simply by virtue of inclusion in the emerging index, a country becomes a “default beneficiary” of passive investment flows — from funds that hug or track the benchmark — Smith says. In a note he calls for the abandonment of current index criteria such as market access, liquidity or per capita income in favour of a “substantive governance-based view of risk”
In other words:

The classification of what constitutes a mainstream emerging market should, in our view, be reworked to take account of the relationship between the state and minority investors in listed companies, with a particular emphasis on the level of transparency and the institutional backdrop.

Smith also argues in favour of changing investment rules to make funds less benchmark-constrained, giving them access to a broader investible universe. Managers should also be permitted to hold much higher levels of cash, he recommends, rather than  having to hold “least bad” stocks, as is currently the case.

Indian shares: disappointment may lurk

Should Indian shares really be at record highs?

The index is up 3.6 percent this year. Foreign funds have been pouring money into Mumbai shares, betting that the opposition BJP, seen as more reform-friendly than the incumbent Congress, will form the next government. They purchased $420 million worth of Indian stocks last Friday, having bought $1.4 billion over the past 15 trading sessions.

There is also the fact that the rolling crisis in emerging markets, having smacked India during its first round last May, has now moved on and is ravaging places such as Russia and Nigeria instead. The rupee has firmed almost 2 percent this year to the dollar, as last year’s 6.5 percent/GDP current account deficit has contracted to just 0.9 percent of GDP.  Many international funds such as Blackrock and JPMorgan Asset Management have Indian stocks on overweight and Bank of America/Merrill Lynch’s monthly survey showed investors’  underweight on India was one of the smallest for emerging markets.

Indian company earnings may have beaten forecasts by around 5 percent so far in the season. But prospects can hardly be described as attractive. Indian economic growth is running at less than 5 percent. Valuations are in line with historical averages and at a 4 percent premium to global emerging markets on a book-value basis. But John-Paul Smith at Deutsche Bank says it is “the least bad” of the BRICs and is neutral to overweight.

More development = fewer violent deaths in India

A recent report highlights the importance of economic development for India and indeed for all developing countries. It also shows why we should worry about the slow pace of reform in India and how that has hit growth rates.

Bank of America/Merrill Lynch analysts have picked up a report from the Institute for Conflict Management, a New Delhi-based think tank, showing that terrorism-linked deaths in India last year were 6 times lower than in 2001, a development they ascribe to the rapid growth the country enjoyed in this period. The graphic below shows the link:

ICM data showed 885 people died last year in various conflicts around India – from cross-border skirmishes, North Eastern insurgency, Kashmir violence and Maoist attacks – compared with 5,839 back in 2001. And U.S. state department data shows the average number of people killed per attack in India at BofA/ML at 0.4 compared to a 1.6 global average in 2012.

Will Lithuania fly like a hawk or a dove at the ECB?

No one will really know how Lithuania will impact European Central Bank monetary policy until the country gets a seat at the table. That is expected to happen in 2015, provided the last of the three Baltic nations meets the criteria to become the euro zone’s 19th member. We’ll all find out in early June.

The ECB’s monetary policy remains at its loosest (main refinancing rate is just 0.25 pct) since the bank assumed central banking responsibilities for the euro area 15 years ago. My Frankfurt-based colleague, Eva Taylor, explained earlier this month that the addition of Lithuania will change the voting patterns of the ECB, curbing smaller members’ perceived influence and giving more weight to the center.

Here in New York, Lithuania’s Economy Minister Evaldas Gustas, along with Mantas Nocius, who heads up the ministry’s enterprise department, presented investors with an overview of the economy. When asked if Bank of Lithuania Governor Vitas Vasiliauskas would be a hawk or a dove should Lithuania join the euro zone in 2015, the answer, at least from Nocius, was as sharp as a claw.

Emerging markets coming off the turbulent boil?

Is it all over? Is the emerging market turmoil no longer a concern among investors, economists and academics? Measured at least in the last week, the market is recovering some lost ground. Maybe  January’s sell-off was enough and in the last week all boats seem to be rising once again. After all, there’s a new Fed Chair in Janet Yellen who has now officially taken over and the likelihood of easy monetary policy, tapering of asset purchases notwithstanding, isn’t expected to change.

MSCI’s emerging market benchmark stock index has rebounded 3.5 percent from a Feb. 4 low. The U.S. benchmark S&P 500 stock index has risen slightly more over the same period.

Taking the pulse of the market sentiment at the University of Delaware following a speech by Philadelphia Fed President Charles Plosser, it appears there’s less concern emerging market woes will take down the world. In a straw poll of the audience (rough estimate put the number at 350+ attendees), the message was upbeat.

Reforms changing the yin-yang of investing in China? – PODCAST

China’s influence on emerging markets, let alone the global economy, cannot be understated. Great strides have been made to build the economy over the past 30 years, but not without its casualties. In a conversation with Michelle Gibley, director of international research at Charles Schwab, I asked her about a new research paper she’s published on why, amid the angst and doubt on emerging markets, she has shifted her views. She’s turned positive on Chinese large-cap stocks and says the China of the past was running out of gas.

Click here to the interview. (My thanks to Freddie Joyner for helping get the audio into workable shape.)

Why New Reforms Make Chinese Stocks Attractive – Michelle Gibley, Director of International Research, Charl…

It’s not end of the world at the Fragile Five

Despite all the doom and gloom surrounding capital-hungry Fragile Five countries, real money managers have not abandoned the ship at all.

Aberdeen Asset Management has overweight equity positions in Indonesia, India, Turkey and Brazil — that’s already 4 of the five countries that have come under market pressure because of their funding deficits.  The fund is also positive on Thailand and the Philippines.

Devan Kaloo, head of global emerging markets at Aberdeen, says these economies have well-run companies that are well positioned to adjust and enjoy slightly higher return on equity (ROE) than their developed counterparts. He says:

“Dog-Eared” debt and the IMF’s sovereign restructuring ideas

Since April of last year, a small but growing cadre of lawyers, investors, regulators, and yes, even journalists, have been carrying around dog-eared copies of an International Monetary Fund paper (read: trial balloon) that revisits how the fund, the lender of last resort for many nations, might revamp its approach to sovereign debt restructurings.

 

The IMF prefaces its latest foray into sovereign restructurings by saying history shows official sector sovereign debt restructurings have been “too little too late” and when it gets involved, the public money used in a settlement too often just flows to private sector investors who take the cash out of the afflicted country.

 

The Fund tried this once before in 2002 under former First Deputy Managing Director Anne Krueger with the idea of establishing a Sovereign Debt Restructuring Mechanism (SDRM). This was two years after hedge fund Elliott Associates won a judgment against Peru in a case where it held out for better restructuring terms. It was a year after Argentina’s last and biggest sovereign debt default had occurred and progress in negotiating a deal with creditors was going nowhere. (That default was a sovereign record, only to be eclipsed by Greece in 2012.) The SDRM plan some 14 years ago died after the United States, the largest donor to the fund, decided against to withhold its support.

In Chile, what’s good for stocks will be good for bonds

 

Felipe Larrain, Chile’s finance minister is facing a new job come March when incoming center-left government of President-elect Michelle Bachelet takes over. An academic by profession, he intends to either make his way back into the cloistered lecture halls of a university, not necessarily in Chile, or work for some kind of international organization that is outside of the corporate or financial world.

Chile’s economy, one of the best run in Latin America, with the highest investment grade credit rating in the region, is however experiencing a soggy point in its economic cycle. Inflation has picked up. There is continued weak economic output and domestic demand is cooling down. The central bank is holding its benchmark interest rate at 4.5 percent and suggests more stimulus is to come in the months ahead. The currency has depreciated but that’s not a concern, Larrain said. He was more concerned when the peso was trading in the 430 per U.S. dollar range versus today’s 3-1/2 year low of 545, an area he describes as providing equilibrium.

But before departing from his ministerial duties, Larrain outlined some of the achievements of his four years in office. The latest is the passage of the ‘Ley Unica de Fondos’, or ‘Investment Funds Act’. In Chile’s fixed income market, foreign participation is a minuscule 1 percent versus 35-40 percent in equities. “What the laws have done to equities, this will do for fixed income,” Larrain said in an interview with Reuters.

Surprise winner in frontier debt last year

Which was the best performer in emerging bond markets last year?  The sector had a pretty torrid year overall, with sovereign dollar bonds finishing 2013 almost 7 percent in the red. But there were exceptions.

The best returns were to be had – hold your breath — in little-watched Belize, a member of JPMorgan’s NEXGEM frontier debt index. Someone who bought Belize debt at the start of last year would have been in the money, with gains of 50 percent, though the returns were in fact down to the restructuring of Belize debt early last year.

Second on the list was Argentina, despite court wranglings over hold-out funds from the country’s 2002 default.