Global Investing

Mrs Watanabe in Istanbul

Japanese mom-and-pop investors’ penchant for seeking high-yield investments overseas is well known. Mrs Watanabe (as the canny player of currency and exchange rate arbitrage has come to be known) invests billions of yen overseas every year via  so-called uridashi bonds, debt denominated in currencies with high yields.  Data shows the lira has suddenly become the red-hot favourite with uridashi investors this year.

In a note entitled Welcome Mrs Watanabe, Barclays analysts estimate $2 billion in lira-based uridashi issuance this year, ahead of old favourite, the  Australian dollar.

So far, Japan’s exposure to Turkey is negligible at just 1.2 percent of their emerging market portfolio investments (Brazil is 4 percent, Korea 3 percent and Mexico 2 percent).  But Turkey’s high yields (almost 8 percent on one-year bonds) and the lira’s resilience mean the figure could rise to $5-$6 billion a year. That is almost half of total portfolio flows to Turkey in 2011, Barclays says.

Its analysts note that Brazil has fallen from favour with Mrs Watanabe as the central bank there has cut rates sharply, taxed foreign inflows and pushed the real down almost 10 percent to the dollar. In contrast,  the Turkish lira is up 5 percent this year.  The central bank has signalled it will not countenance a weaker lira and kept monetary policy tight.  It has also not stood in the way of flows to local bond markets which have received almost $8 billion this year from foreigners. Barclays write:

Turkey and some other high-yielding EM countries such as Russia may find themselves beneficiaries of investor interest previously directed at Brazil and the real….If Turkey succeeds in attracting more and more of these flows, the lira exchange rate is likely to benefit, as well as the Turkish bond market where these flows could end up.

Emerging market debt with silver pedigree

Guarantees on emerging market debt need to be silver-plated these days after the defaults of Ukraine’s state energy firm Naftogaz and Kazakhstan’s BTA bank in recent years show implied guarantees are not worth the paper that they weren’t even written on.

Tunisia must have taken that to heart as it issued a dollar bond this month guaranteed by the United States, still rated AAA by two major ratings agencies.

Tunisia was planning to launch a Eurobond before  the Arab Spring uprisings last year, but the bond was shelved and investors remain cautious about the country’s economic outlook. The country’s central bank governor was sacked a few weeks ago and its finance minister quit last week.

GUEST BLOG: The missing reform in the Kay Review

Simon Wong is partner at investment firm Governance for Owners, adjunct professor of law at Northwestern University School of Law, and visiting fellow at the London School of Economics. He can be found on Twitter at @SimonCYWong. The opinions expressed reflect his personal views only.

There is much to commend in the Kay Review final report. It contains a rigorous analysis of the causes of short-termism in the UK equity markets and wide-ranging, thoughtful recommendations on the way forward.  Yet, it is surprising that John Kay omitted one crucial reform that would materially affect of the achievability of several of his key recommendations – shortening the chain of intermediaries, eliminating the use of short-term performance metrics for asset managers, and adopting more concentrated portfolios.  What’s missing?  Reconfiguring the structure and governance of pension funds.

A major challenge facing pension funds in the UK and elsewhere is the lack of relevant expertise and knowledge at board and management levels.  Consequently, many rely heavily – some would argue excessively – on external advisers.  I have been told by one UK pensions expert that inadequate knowledge and skills within retirement funds means that  investment consultants are effectively running most small- to medium-sized pension schemes in Britain. Another admits that trustees, many of whom are ordinary lay people with limited investment experience, are often intimidated by asset managers.

Emerging debt default rates on the rise

Times are tough and unsurprisingly, default rates among emerging market companies are rising.

David Spegel, ING Bank’s head of emerging debt, has a note out, calculating that there have been $8.271 billion worth of defaults by 19 emerging market issuers so far this year — nearly double the total $4.28 billion witnessed during the whole of 2011.

And there is more to come — 208 bonds worth $75.7 billion are currently trading at yield levels classed as distressed (above 1000 basis points), Spegel says, while another 120 bonds worth $45 billion are at “stressed” levels (yields between 700 and 999 bps).   Over half of the “distressed” bonds are in Latin America (see graphic below).  His list suggests there could be $2.4 billion worth of additional defaults in 2012 which would bring the 2012 total to $10.7 billion. Spegel adds however that defaults would drop next year to $6.8 billion.

Risks loom for South Africa’s bond rally

Investors are wondering how much longer the rally in South Africa’s local bond markets will last.

The market has received inflows of over $7.5 billion year-to-date, having benefited hugely from Citi’s April announcement that it would include South Africa in its elite World Government Bond Index (WGBI).  But like many other emerging markets, South Africa has also gained from international investors’ hunger for higher-yielding bonds. And the central bank’s surprise rate cut last week was the icing on the cake, sending 5-year yields plunging another 30 basis points.

There are some headwinds however. First positioning. Around a third of government bonds are already estimated to be in foreigners’ hands. Second, markets may be pricing in too much policy easing (Forward rate agreements are assigning a 77  percent probability of another 50 bps rate cut within the next six months).  That’s especially so given local wheat and maize prices have been hitting record highs in recent weeks.

South Africa’s joins the rate cutting spree

Another central bank has caved in and cut interest rates — South Africa lowered its key rate to a record low of 5 percent at Thursday’s meeting. In doing so, the central bank noted growth was slowing further. ”Negative spillover effects (from the global economy)  likely to intensify,” it said.

Very few analysts had predicted this outcome, reckoning the central bank (or SARB as it’s known) would hold fire until its next meeting due to concerns over the currency and inflation.  But in fact, forward markets had guessed a cut was coming, especially after June inflation was lower than expected. And after all, even the conservative Bank of Korea cut rates last week to buck up domestic growth and compensate for slumping exports.  There have also been some policy easing in Taiwan and Philippines in the past week while earlier on Thursday, Turkey’s central bank unleashed more liquidity into the banking system. Kevin Lings, chief economist at Stanlib in Johannesburg says:

(South Africa’s rate cut) would suggest that the Reserve Bank feels they are a little bit behind the curve when they look at interest rate movements in other countries and hence the decision.

Iran air strike bets on the rise

Investors are placing larger bets on the chances of an Israeli or U.S. air strike on Iran by the end of the year after a bomb on a bus carrying Israeli tourists in Bulgaria  killed seven people yesterday.

Israel’s prime minister Benjamin Netanyahu said “All the signs lead to Iran”, though Defence Minister Ehud Barak sounded more restrained and Iran denied responsibility. Oil hit a seven-week high above $106 a barrel on supply concerns over tensions in the region.

Dublin-based online exchange intrade.com sees a 26.5 percent chance of an air strike on Iran by Dec 31, compared with 25 percent  a couple of days ago.

Yield-hungry funds lend $2bln to Ukraine

Investors just cannot get enough of emerging market bonds. Ukraine, possibly one of the weakest of the big economies in the developing world, this week returned to global capital markets for the first time in a year , selling $2 billion in 5-year dollar bonds.  Investors placed orders for seven times that amount, lured doubtless by the 9.25 percent yield on offer.

Ukraine’s problems are well known, with fears even that the country could default on debt this year.  The $2 billion will therefore come as a relief. But the dangers are not over yet, which might make its success on bond markets look all the more surprising.

Perhaps not. Emerging dollar debt is this year’s hot-ticket item, generating returns of over 10 percent so far in 2012. Yields in the so-called safe markets such as Germany and United States are negligible; short-term yields are even negative.  So a 9.25 percent yield may look too good to resist.

Doves to rule the roost in emerging markets

Interest rate meetings are coming up this week in Turkey,  South Africa and Mexico.  Most analysts expect no change to interest rates in any of the three countries.  But chances are, the worsening global growth picture will force policymakers to soften their tone from previous months; indeed forwards markets are actually pricing an 18-20 basis-point interest rate cut in South Africa.

Doves in South Africa will have been encouraged by today’s lower-than-expected inflation print, coming soon after data showing a growth deceleration in the second quarter of the year. Investors have flooded the bond markets, betting on rate cuts in coming months. In Turkey and Mexico, no policy change is priced but a few reckon the former, reliant on a policy of day-to-day tinkering with liquidity, may narrow the interest rate corridor in a nod to slowing growth.

For now, all three banks could be constrained from cutting rates by fear of currency volatility and the potential knock-on effect on inflation. Of South Africa, analysts at TD Securities write:

Optimism of the $5 mln+ in Spain, Ireland

Crisis, what crisis?

Wealthy investors across Europe are confident about the future of the euro zone and the efficiency of unpopular austerity policies, with the rich in bailed-out Ireland and Spain topping the list, according to a survey published by J.P. Morgan Private Bank on Wednesday. The study, conducted in May and June, said:

High Net Worth investors in Spain, Ireland and the UK were found to have the most optimistic outlook, with 92 per cent, 90 per cent and 85 per cent respectively believing the Eurozone will either manage to avert large defaults and is rewarded for stringent austerity, or one that survives but will look different than the current structure.

They were the most optimistic of the 325 individuals polled for the survey. Overall, over 75 percent for the investors had a positive view on the euro zone’s outlook.  Only six per cent said they expected a severe global depression.(The bank defines HNW investors as those with assets of over $5 million).