Global Investing

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).

Similarly, while 45 percents of investors  consider European equities to be the most undervalued risk assets, as many as 69 percent of the Spanish polled held that view.

America Inc. share of GDP – 12 or 3 pct?

Wall Street has been doing pretty well in recent years. Just how well is illustrated by the steady rise in corporate profits as a share of the national economy. Look at the following graphic:

Of it, HSBC writes:

The profits share of GDP in the United States must rank as one of the most chilling charts in finance.

 
What this means is that around 12 percent of American gross domestic product is going to companies in the form of after-tax profits. A year ago that figure was just over 10 percent and in 2005 it was just 6 percent. In contrast, the share of wages and salaries in the U.S. GDP fell under 50 percent i n 2010 and continues to decline. Comparable figures for the UK or Europe are harder to come by but analysts reckon the profits’ share is within historical ranges.

10%-plus returns: only on emerging market debt

It’s turning out to be a great year for emerging debt. Returns on sovereign dollar bonds have topped 10 percent already this year on the benchmark EMBI Global index, compiled by JP Morgan.  That’s better than any other fixed income or equity category, whether in emerging or developed markets. Total 2012 returns could be as much as 12 percent, JPM reckons.

Debt denominated in emerging currencies has done less well . Still, the main index for local debt, JPM’s GBI-EM index, has  racked up a very respectable 7.6 percent return year-to-date in dollar terms, rebounding from a fall to near zero at the start of June.  Take a look at the following graphic which shows EMBIG returns on top:

Fund flows to emerging fixed income have been robust. EPFR Global says the sector took in  $16.2 billion year to date.  JPM, which tracks a broader investor set including Japanese investment trusts, estimates the total at $43 billion, not far off its forecast of $50-60 billion for the whole of 2012.

What would a benign dictator do with the euro?

The idea of a “benign dictator” may well be an oxymoron but as a thought exercise it goes a way to explaining why giant global fund manager Blackrock thinks the chances of a euro zone collapse remains less than 20 percent.  When push comes to shove, in other words, Europe can sort this mess out. Speaking at an event showcasing the latest investment outlook from Blackrock Investment Institute, the strategy hub of the investment firm with a staggering $3.7 trillion of assets under management,  Richard Urwin said the problem in trying to second-guess the outcome of the euro crisis was the extent to which domestic political priorities were working against a resolution of the three-year old crisis.

“The thing is if you could imagine a benign dictator, then the problems are all solvable and could be fixed in a matter of weeks,” said Urwin, who is Head of Investments at Blackrock’s Fiduciary Mandate Investment Team.  Playing with the idea, Urwin said parts of a workable plan may involve debt rescheduling or restructuring for the existing bailout countries Greece, Portugal and Ireland; a buildup of a sufficiently large liquidity fund to help the larger countries such as Spain and Italy; a euro banking union with deposit guarantees and single supervisor to ring-fence and close insolvent banks that will never function properly; the creation of a central finance ministry and the issuance of jointly-guaranteed euro bonds etc etc.

Urwin’s point of course was not to advocate a dictator for the euro zone — although he acknowledged the euro was not exactly a child of European electorates to begin with–  rather that euro members have the ability if not the willingness yet to solve the crisis and that global investors looking for signposts in the saga needed to watch closely the runes of political cooperation and leadership instead of the economics and debt dynamics alone.  Where exactly that turns is hard to guess, but but it may well be that the process that has to wait until the German elections next year, he added.

More EM central banks join the easing crew

Taiwan and Philippines have joined the easing crew. Taiwan cut interbank lending rates for the first time in 33 months on Friday while Philippines lowered the rate it pays banks on short-term special deposits. Hardly surprising. Given South Koreas’s shock rate cut on Thursday, its first in over three years, and China’s two rate cuts in quick succession, the spread of monetary easing across Asia looks inevitable. Markets are now betting the Reserve Bank of India will also cut rates in July.

And not just in Asia. Brazil last week cut rates for the eighth straight time  and Russia’s central bank, while holding rates steady,  amended its language to signal it was amenable to changing its policy stance if required.

Worries about a growth collapse are clearly gathering pace. So how much room do central banks have to cut rates? Compared with Europe or the United States, certainly a lot.  And with the exception of Indonesia and Philippines, interest rates in most countries are well above 2009 crisis lows.  But Deutsche Bank analysts, who applied a variation of the Taylor rule (a monetary policy parameter stipulating how much nominal interest rates can be changed relative to inflation or output), conclude that in Asia, only Vietnam and Thailand have much room to cut rates. Malaysia and China have less scope to do so and the others not at all (Their model did not work well for India).

“Juice is gone” on Portuguese bonds?

Portuguese bonds staged an impressive rebound on the back of the European Central Bank’s cheap loan money flood in the first half of the year. The bailed-out country has managed the rare feat of being one of the best performing sovereign bond markets of the year so far with returns of over 40 percent for 10-year government bonds.

But the rebound was illusory in some respects because Lisbon had suffered more than most at the end of last year when some feared, prematurely at least, that the logic of the Greek debt restructuring would be applied to Portugal too.
And even if Lisbon has been praised for its efforts to cut its deficit, it is still considered the euro zone’s second riskiest country in terms of bond yields.

Richard Batty, investment director at Standard Life Investments, says:

“At the moment the premium suggests a big credit risk associated with holding (Portuguese) assets. Many of our clients have asked us not to invest in Portugal because sovereign bonds in places like Portugal and Greece are not risk-free anymore.”

GUEST BLOG: Is Your Global Bond Fund Riskier than You Thought?

This is a guest post from Douglas J. Peebles, Head of Fixed Income at AllianceBernstein. The piece reflects his own opinion and is not endorsed by Reuters. The views expressed  do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.


Global bond funds continue to attract strong inflows as near-zero interest rates lead many investors to look abroad for assets with attractive yields. As we’ve argued before, global bonds provide many important benefits, but it’s crucial that investors select the right type of fund.

Not all global bond funds are cut from the same cloth. One key consideration that investors often overlook is the extent to which the fund elects to hedge its currency exposure. When a domestic currency depreciates – as it did for US-dollar–based investors during most of the period between 2002 and 2008 – foreign currency exposure can help boost returns from holding global bonds.

Food prices may feed monetary angst

Be it too much sun in the American Midwest, or too much water in the Russian Caucasus, food supply lines are being threatened, and food prices are surging again just as the world economy slips into the doldrums.

This week, Chicago corn prices rose for a second straight day, bringing its rise over the month to 45%, and floods on Russia’s Black Sea coast disrupted their grain exports.  Having trended lower for about nine-months to June, the surge in July means corn prices are now up about 14% year-on-year. And all of this after too little rain over the spring and winterkill meant Russia, Ukraine and Kazakhstan’s combined wheat crop would fall 22 percent to 78.9 million tonnes this year from 2011.

But as damaging as these disasters have been for local populations, their effects could be much more widely felt.

Next Week: Big Black Cloud

Following are notes from our weekly editorial planning meeting:

Not unlike this year’s British “summer”, the gloom is now all pervasive. Not panicky mind, just gloomy. And there is a significant difference where markets are concerned at least. The former involves surprise and being wrongfooted — but latter has been slow realisation that what were once extreme views on the depth of the credit swamp are fast becoming consensus thinking. The conclusion for many now is that we’re probably stuck in this mire for several more years – anywhere between 5 and 20 years, depending on your favoured doom-monger. Yet, the other thing is that markets also probably positioned in large part for that perma-funk — be it negative yields on core government debt or euro zone equities now with half the p/e ratios of US counterparts. In short, the herd has already  hunkered down and finds it hard to see any horizon. Those who can will resort to short-term tactical plays based on second-guessing government and central bank policy responses (there will likely be more QE or related actions stateside eventually despite hesitancy in the FOMC minutes  and Fed chief Bernanke will likely give a glimpse of that thinking in his congressional testimony next week); or hoping to surf mini econ cycles aided by things like cheaper energy; or hoping to spot one off corporate success stories like a new Apple or somesuch.

So has all hope been snuffed out? The reason for the relapse mid-year depression is only partly related to the political minefield frustrating a resolution of the euro crisis – in some ways, things there look more encouraging policywise than they did two months ago. It stems as much from a realization of just how broken the banks credit creation system remains – a system that had hinged heavily on extensive collateral chains that have now largely been broken or shortened and starved of acceptable high-quality collateral. Curiously, QE – by removing even more of the top quality collateral – may even be exaggerating the problem. Some even say the extreme shortage of this quality “collateral” may require more, not less, government debt in the US and UK and would also benefit from a pooling of euro debt  – but everyone knows how easy all that’s going to be politically.

Despite all this, global markets have remained fairly stable over the past week – in part due to policy hopes underpinning risk markets and in part because there’s not many places left to hide without losing money in “safe-haven” bunkers. World equities are down about 2 percent over the past week,  but still up more than 6 percent from early June. Risk measured by volatility indicesis a smidgen higher too. Oil has firmed back toward $100pb, disappointing everyone apart from oil exporters. Spanish and Italian 10-yr yields are a touch higher. And at least part of the caution everywhere is ae vigil ahead of Chinese Q2 GDP data on Friday – numbers that now almost rival the U.S.  monthly payrolls in global market impact.

Certain danger: Extreme investing in Africa

The Arab Spring, for all its democratic and political virtues,  put a big economic dent in the side of participating North African countries, particularly when it came to attracting foreign investment in 2011.

According to a recent UNCTAD report:

Sub-Saharan Africa drew FDI not only to its natural resources, but also to its emerging consumer markets as the growth outlook remained positive. Political uncertainty in North Africa deterred investment in that region.

So far, so logical. Except that simply can’t be all there is to it.

Why? Because plenty of African countries marred by political uncertainty have succeeded in attracting inward FDI.