Global Investing

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.

“Not that complicated. Yes, Lithuanians, they are a bit hawkish, as the other two Baltic neighbors, because of our tradition,” Nocius said.

He elaborated further: “We are close to Nordics and we think we have to be very prudent in financial issues. I would very much expect that the governor of the Bank of Lithuania, Vitas Vasiliauskas, he is likely to behave in a similar way as Estonia and Latvian counterparts. Definitely, they discuss a lot and meet quite often. I think this is a case where we can talk about cooperation. Also, our current president, she is a former minister of finance and former budget commissioner. I think it would be consistent to think that the governor of the bank of Lithuania is going to take a rather hawkish position.”

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.

A guide to North Korean “elections” – due in March

Investors are bracing themselves this year for elections in all of “Fragile Five” countries and a number of other emerging nations that are adding political concerns to those economies already vulnerable to capital flight risks.

Perhaps a lesser-known political event that is coming up in 2014 is in North Korea, which will hold “elections” for its parliament on March 9.

The polls will elect members of the country’s rubber-stamping Supreme People’s Assembly for the first time since 2009 and also for the first time since Kim Jong-Un — the third generation of his family to rule the Stalinist state — took leadership in 2011.

Market cap of EM debt indices still rising

It wasn’t a good year for emerging market bonds, with all three main debt benchmarks posting negative returns for the first time since 2008. But the benchmark indices run by JPMorgan nevertheless saw a modest increase in market capitalisation, and assets of the funds that benchmark to these indices also rose.

JPMorgan says its index family — comprising EMBI Global dollar bond indices, the CEMBI group listing corporate debt and the GBI-EM index of local currency emerging bonds — ended 2013 with a combined market cap of $2.8 trillion, a 2 percent increase from end-2012. Take a look at the following graphic which shows the rise in the market cap since 2001:

Last year’s rise was clearly much slower than during previous years.  It was driven mainly by the boom in corporate bonds, which witnessed record $350 billion-plus issuance last year, taking the market cap of the CEMBI to $716 billion compared to $620 billion at the end of 2012, JPM said.

BRIC-layer makes MINT

Former Goldman Sachs economist Jim O’Neill, deviser of the BRIC acronym uniting the emerging market giants of Brazil, Russia, India and China, has coined a new term – MINT.

In a series of BBC radio programmes starting today, O’Neill looks at the “next economic giants” of Mexico, Indonesia, Nigeria and Turkey. It’s a break-out of four of the countries from his previously-coined Next-11, which also included Bangladesh, Egypt, Iran, Pakistan, Philippines, South Korea and Vietnam.

O’Neill, who retired last year from his role as chairman of Goldman Sachs Asset Management (after spending too much time looking at Reuters), says on the BBC website that the MINT economies benefit from favourable geographical locations and, in some cases, reform-minded politicians: