Global Investing

Waiting for current account improvement in Turkey

The fall in Turkey’s lira to record lows is raising jitters among foreign investors who will have lost a good deal of money on the currency side of their stock and bond investments.  They are also worrying about the response of the central bank, which has effectively ruled out large rate hikes to stabilise the currency. But can the 20 percent lira depreciation seen since May 2013 help correct the country’s balance of payments gap?

Turkey’s current account deficit is its Achilles heel . Without a large domestic savings pool, that deficit tends to blow out whenever growth quickens and the lira strengthens . That leaves the country highly vulnerable to a withdrawal of foreign capital. Take a look at the following graphic (click on it to enlarge) :

In theory, a weaker Turkish lira should help cut the deficit which has expanded to over 7 percent of GDP.  Let us compare the picture with 2008 when the lira plunged around 25 percent against the dollar in the wake of the Lehman crisis. At the time the deficit was not far short of current levels at around 6 percent of GDP.  By September 2009 though, this gap had shrunk by two-thirds to around 2 percent of GDP.

An IMF paper at the time praised Turkey’s response, noting that allowing the lira to weaken had limited the country’s 2009 economic contraction to less than 5 percent compared to the 8 percent fall that would have been the case, had it held the lira stable.

That adjustment is yet to happen this time – the deficit stayed almost unchanged over 2013 despite the currency’s steady depreciation against the dollar. But perhaps these are early days.

The annus horribilis for emerging markets

Last year was one that most emerging market investors would probably like to forget.  MSCI’s main equity index fell 5 percent, bond returns were 6-8 percent in the red and some currencies lost up to 20 percent against the dollar.  Here are some flow numbers  from EPFR Global, the Boston-based agency that released some provisional  annual data to its clients late last week.

While funds dedicated to developed markets — equities and bonds –  received inflows amounting to over 7 percent of their assets under management (AUM), funds investing in emerging stocks lost more than 6 percent of their AUM.

In absolute terms, that amounted to a loss of $15.4 billion for emerging equity funds , banks said citing the EPFR data.

Less merging in emerging markets last year

Last year was not the best for mergers in emerging markets, according to Thomson Reuters data, which shows  mergers & acquisition activity down 4.6 percent from 2012 to $675.2 billion. The number of deals fell even more – by 11.3 percent to 12,748.

The drop-off in emerging M&A activity mirrors a 5 percent fall in the benchmark MSCI emerging stocks index last year, with investors more fearful about the emerging market growth outlook. But unlike stock market performance, emerging market deal activity outstripped the global total, which was down 6 percent from 2012 levels.

The biggest emerging market deal was Brazilian Grupo Oi’s $16 billion planned takeover over of Portugal Telecom,  Thomson Reuters said.

Ukraine aid may pay off for Kremlin

Ukraine said today it was issuing a $3 billion in two-year Eurobonds at a yield of 5 percent in what seems to the start of a bailout deal with Russia. That sounds like a good deal for Kiev — its Eurobond maturing next year is trading at at a yield of 8 percent and it could not reasonably expect to tap bond markets for less than that. In addition,  Ukraine is also  getting a gas price discount from Russia that will provide an annual saving of $2.6 billion or so.

But what about Russia? Whether the bailout was motivated by “brotherly love” as Putin claims or by geo-politics, it sounds like a rotten deal for Moscow. The credit will earn it 5 percent on what is at best a risky investment. What’s more the money will come out of its rainy day fund which had been earmarked to cover future pension deficits. State gas company Gazprom will have to stomach a 30 percent price cut, which according to Barclays analysts is “a reminder of the risks of Gazprom’s quasi-sovereign status.”

But there could be positives.

Putin is clearly playing a long game that aims not only at giving the Kremlin tighter political control over Ukraine but also to bring it back into the Russian gas sales orbit and eventually create a bigger trade bloc encompassing Russia, Kazakhstan and Ukraine, says Christopher Granville, managing director of consultancy Trusted Sources in London.

Watanabes shop for Brazilian real, Mexican peso

Are Mr and Mrs Watanabe preparing to return to emerging markets in a big way?

Mom and pop Japanese investors, collectively been dubbed the Watanabes, last month snapped up a large volume of uridashi bonds (bonds in foreign currencies marketed to small-time Japanese investors),  and sales of Brazilian real uridashi rose last month to the highest since July 2010, Barclays analysts say, citing official data.

Just to remind ourselves, the Watanabes have made a name for themselves as canny players of the interest rate arbitrage between the yen and various high-yield currencies. The real was a red-hot favourite and their frantic uridashi purchases in 2007 and 2009-2011 was partly behind Brazil’s decision to slap curbs on incoming capital. Their ardour has cooled in the past two years but the trade is far from dead.

With the Bank of Japan’s money-printing keeping the yen weak and pushing down yields on domestic bonds, it is no surprise that the Watanabes are buying more foreign assets. But if their favourites last year were euro zone bonds (France was an especially big winner)  they seem to be turning back towards emerging markets, lured possibly by the improvement in economic growth and the rising interest rates in some countries. And Brazil has removed those capital controls.

Russia’s people problem

President Vladimir Putin is generally fond of blaming the West for the ills besetting Russia. This week though, he admitted in his State of the Nation speech that the roots of Russia’s sluggish economy may lie at home rather than abroad.  The government expects the economy to expand a measly 1.4 percent this year (less than half of the growth the US is likely to see) and long-term growth estimates have been trimmed to 2.5 percent a year.

Much of that is down to the lack of reform which has left many big companies in the state’s (generally wasteful) hands, weak rule of law that deters investment and capital flight to the tune of tens of billions of dollars a year. Yet there is another factor that could be harder to fix — Russia’s poor demographic profile. The population started declining sharply in the early 1990s amid political and economic turmoil, falling by 3.4 million in the 2000-2010 decade, according to census data. The impact is set to be felt sharply from now on, exactly when children born in 1990s would have started entering the workforce.

The consequences are already being felt. Russia will close more than 700 schools this year for lack of pupils and the jobless rate has dipped to a record low of around 5 percent, not because the economy is booming but because the country is running out of people who can take the jobs.

from MacroScope:

Euro zone stock market investors: “Crisis? What crisis?”

European shares will be the best performers next year, according to the latest Reuters poll of more than 350 strategists, analysts and fund managers. Frankfurt’s DAX is already up nearly 20 percent this year and is forecast to rally another 10 percent in 2014.

But the experts in foreign exchange that Reuters surveys each month are also saying that the euro, just above $1.37, and not far off a two-year high against the dollar, will fall.

While both predicted outcomes may turn out to be true, the problem is that the flow of foreign money into European stocks is one of the reasons why the euro has remained so strong.

Banks cannot ease Ukraine’s reserve pain

The latest data from Ukraine shows its hard currency reserves fell $2 billion over November to $18.9 billion. That’s perilously low by any measure. (Check out this graphic showing how poorly Ukraine’s reserve adequacy ratios compare with other emerging markets: http://link.reuters.com/quq25v)

Central banks often have tricks to temporarily boost reserves, or at least, to give the impression that they are doing so. Turkey, for instance, allows commercial banks to keep some of their lira reserve requirements in hard currency and gold. Others may get friendly foreign central banks to deposit some cash. Yet another ploy is to issue T-bills in hard currency to mop up banks’ cash holdings. But it may be hard for Ukraine to do any of this says Exotix economist Gabriel Sterne, who has compared the Ukraine national bank’s plight with that of Egypt.

Ukraine and Egypt have both balked at signing up to IMF loan programmes because these  would require them to cut back on subsidies. But latest data shows Egypt’s reserves have risen to $17.8 billion from just over $10 billion in July, while Ukraine’s have declined from $22.9 billion. Egyptian import cover has also risen to 2.6 months while Ukraine now has enough cash to fund less than 2 months of imports (Back in July it was 3 months)
Sterne says:

The hryvnia is all right

The fate of Ukraine’s hryvnia currency hangs by a thread. Will that thread break?

The hryvnia’s crawling peg has so far held as the central bank has dipped steadily into its reserves to support it. But the reserves are dwindling and political unrest is growing. Forwards markets are therefore betting on quite a sizeable depreciation  (See graphic below from brokerage Exotix).

 

The thing to remember is that the key to avoiding a messy devaluation lies not with the central bank but with a country’s households. As countless emerging market crises over decades have shown, currency crises occur when people lose trust in their currency and leadership, withdraw their savings from banks and convert them into hard currency.  That is something no central bank can fight. Now Ukraine’s households hold over $50 billion in bank deposits, according to calculations by Exotix. Of this a third is in hard currency (that’s without counting deposits by companies).  But despite all the ruckus there is no sign of long queues outside banks or currency exchange points, scenes familiar to emerging market watchers.

Emerging stocks lose again in November

By Shadi Bushra

After years of basking in their reputation as high-return hot spots, 2013 could be the year emerging equity markets finally lost their magic touch. Last month continued the litany of losses — seventeen of the 20 emerging markets listed on S&P Dow Jones indices ended November in the red, the index provider says. Contrast that with developed markets’ fortunes last month– 18 of the markets listed by the index rose, while eight fell.

So last month’s scores: Emerging stocks – down 2 percent; Developed stocks – up 1.6 percent. And for 2013 as a whole, emerging stocks are down 3 percent while developed markets are up a whopping 22 percent, approaching their 2007 peaks, according to S&P Dow Jones.

While each of the emerging market countries has their own unique cauldron of political and economic issues affecting their stocks’ performance, there is common ground too – the expected tapering of U.S. monetary stimulus.  The hardest-hit emerging countries were those that have too much exposure to investors in developed countries, who may move their money from the developing world once the cheap money begins to dry up.  Worst off was Indonesia where equities fell nearly 13 percent in November, and on the year they are down more than 23 percent.