Global Investing

Turkish savers hang onto dollars

As in many countries with memories of hyperinflation and currency collapse, Turkey’s middle class have tended to hold at least part of their savings in hard currency. But unlike in Russia and Argentina, Turkish savers’ propensity to save in dollars has on occasion proved helpful to companies and the central bank. That’s because many Turks, rather than just accumulating dollars, have evolved into savvy players of exchange rate swings and often use sharp falls in the lira to sell their dollars and buy back the local currency. Hence Turks’ hard currency bank deposits, estimated at between $70-$100 billion –  on a par with central bank reserves — have acted as a buffer of sorts, stabilising the lira when it falls past a certain level.

But back in 2011, when the lira was in the eye of another emerging markets storm, we noticed how some Turks had become strangely reluctant to sell dollars. And during this year’s bout of lira weakness too, Turkish savers have not stepped up to help out the central bank, research by Barclays finds. Instead they are accumulating dollars — “rather than being contrarian, their behaviour now seems aligned with global capital flows,” Barclays  analysts write. While the lira has weakened to record lows this year, data from UBS shows that the dollarisation ratio, the percentage of bank deposits in foreign currency, has actually crept up to 37.6 percent from 34.5 percent at the start of the year. Here’s a Barclays graphic that illustrates the shift.

What are the reasons for the turnaround? In the past, those selling dollars to buy back cheap lira could be confident they would not be out of pocket because the central bank would support the lira with higher interest rates.  But ever since end-2010, when the bank embarked on a policy of determinedly keeping interest rates low, they no longer have this assurance. Barclays write:

Households’ past experience in the post-2001 floating lira regime had been that after a periods of sharp sell-offs, lira would typically enter a phase of re-appreciation. However, this changed since the central bank announced its policy shift in late 2010… Since then lira has been trending weaker against the dollar, which over time may signal to Turkish households that buying lira into weakness is no longer a profitable strategy.

Record low lira deposit rates of just over 6 percent, well below inflation, makes it unattractive to hold lira. There are worrying implications to all this. Non-financial Turkish companies had a net short dollar position of $165 billion or 20 percent of GDP as of July. In the past households’ willingness to sell their dollar savings helped to meet corporates’ hard currency needs.   As Barclays notes, households’  long dollar positions mitigated the pain for ‘short FX’ corporates:

Value or growth? The dichotomy of emerging market shares

Investors in emerging markets are facing a tough choice. Should one buy cheap shares in the hope that poor corporate governance and profitability will improve some day? Or is it better to close one’s eyes and buy into expensively valued companies that sell mobile telephones, holidays and handbags — all the things high-spending emerging market consumers hanker after?

At the moment, investors are plumping for the latter, growth-at-any price investment strategy. Result: a lopsided emerging equity index in which consumer discretionary shares are up more than 5 percent this year, energy shares have lost 7 percent while MSCI’s benchmark emerging equity index is down 3 percent.

All markets have their share of cheap and expensive. But the dichotomy in emerging markets is especially stark. Analysis by Bank of America/Merrill Lynch of the biggest 100 emerging market companies revealed last week that the 20 most expensive stocks in this bucket are trading 11 times book value and 31 times earnings (both on trailing basis) while forward earnings-per-share (EPS) is seen at almost 30 percent. The top-20 companies all belong to the private sector and most are in the consumer-facing industries.  This year they have gained more than 50 percent.

Private equity stakes out Africa

Many private equity firms are adamant that Africa is the next hot spot for the industry as its burgeoning middle class continues to bloom, but the pension and endowment funds who invest in private equity funds are more cautious.

Over the past five years, private equity firms have invested nearly $12 billion in Africa and raised almost $10 billion, according to a study by Ernst & Young and the African Private Equity & Venture Capital Association (AVCA).

It is not hard to see what has attracted them to the continent. Over the last ten years, Africa’s economic output has increased threefold to $2 trillion and six African countries have been among the fastest-growing economies in the world.

Bond market liberalisation — good or bad for India?

Many investors have greeted with enthusiasm India’s plans to get its debt included in international indices such as those run by JPMorgan and Barclays. JPM’s local debt indices, known as the GBI-EM,  were tracked by almost $200 billion at the end of 2012.  So even very small weightings in such indices will give India a welcome slice of investment from funds tracking them.

At present India has a $30 billion cap on the volume of rupee bonds that foreign institutional investors can buy, a tiny proportion of the market. Barclays analysts calculate that Indian rupee bonds could comprise up to a tenth of various market capitalisation-based local-currency bond indices. That implies potential flows of $20 billion in the first six months after inclusion, they say — equivalent to India’s latest quarterly current account deficit. After that, a $10 billion annual inflow is realistic, according to Barclays. Another bank, Standard Chartered, estimates $20-$40 billion could flow in as a result of index inclusion.

All that is clearly good news, above all for the country’s chronic balance of payments deficit. The investments could ease the high borrowing costs that have put a brake on growth, and kick-start the local corporate bond market, provided more safeguards are put in. Indian banks that have traditionally held a huge amount of government bonds, would at least in theory be pushed into lending more to the real economy.

Emerging equities: out of the doghouse

Emerging stocks, in the doghouse for months and months, haven’t done too badly of late. The main EM index,  has rallied more than 11 percent since its end-August troughs, outgunning the S&P 500′s 3 percent rise in this period. Bank of America/Merrill Lynch strategist Michael Hartnett reminds us of the extreme underweight positioning in emerging stocks last month, as revealed by his bank’s monthly investor survey.  Anyone putting on a long EM-short UK equities trade back then would have been in the money with returns of 540 basis points, he says.

Undoubtedly, the postponement of the Fed taper is the main reason for the rally.  Another big inducement is that valuations look very cheap (forward P/E is around 9.9 versus a 10-year average of 10.8) .

According to Mouhammed Choukeir, CIO , Kleinwort Benson:

Looking at valuations we think emerging markets are in an attractively valued zone, hence we think it’s a good investment. EMs are in negative momentum trend but have good valuations. We’re sitting on the positions we’ve built but if it hits a positive (momentum) trend we will add on it…. You wait for value and value will translate into returns over time.

Frontier markets: past the high water-mark

By Julia Fioretti

Ethiopia’s plans to hit the Eurobond trail once it gets a credit rating are highlighting how fast frontier debt markets are growing.

IFR data shows that sub-Saharan Africa alone issued $4.2 billion of sovereign debt in the year to September, compared to $3.6 billion in the same 2012 period. And returns on frontier market bonds have outgunned their high-yield emerging sovereign peers this year.

JPMorgan, which runs the most-used emerging debt indices of which the frontier component is called NEXGEM, says the year-to-date return on NEXGEM is around 0.7 percent – while paltry, it’s well above corporate and sovereign emerging bonds.

The hit from China’s growth slowdown

China’s slowing economy is raising concern about the potential spillovers beyond its shores, in particular the impact on other emerging markets. Because developing countries have over the past decade significantly boosted exports to China to offset slow growth in the West and Japan, these countries are unquestionably vulnerable to a Chinese slowdown. But how big will the hit be?

Goldman Sachs analysts have crunched the numbers to show which markets and regions could be hardest hit. On the face of it non-Japan Asia should be most worried — exports to China account for almost 3 percent of GDP while in Latin America it is 2 percent and in emerging Europe, Middle East and Africa (CEEMEA) it is just 1.1 percent, their data shows.

But they warn that standard trade stats won’t tell the whole story. That’s because a high proportion of EM exports are re-processed in other countries before reaching China which in turn often re-works them for re-export to the developed world. In other words, exports to China from say, Taiwan, may be driven not so much by Chinese demand but by demand for goods in the United States or Europe. So gross trade data may actually be overstating a country’s vulnerability to a Chinese slowdown.

Picking and choosing African dollar debt

The end of the era of cheap money need not spell disaster for African governments looking to raise money at affordable levels. While an eventual scaling back of the Fed’s $85 billion-a-month bond-buying programme will spark a reshuffling in investors’ portfolios, it will not shut African governments out of the international debt market altogether.

But as investors adjust for a world with less stimulus, African governments will not be able to entice them with high yields alone, according to bankers meeting this week at a conference organised by Thomson Reuters news and markets information service IFR.

Alex von Sponeck, head of CEEMEA debt origination at Bank of America Merrill Lynch, said:

Vietnam stocks streak ahead in Asia

It’s been a good year for frontier markets, though some have done better than others. One success story has been Vietnam.

Hanoi’s domestic VNI equity index  is up 17 percent.  That compares well with stock markets in other Asian frontiers – Sri Lanka has gained only 3 percent,  Bangladesh is down 1 percent on the year and  Mongolia has plunged more than 20 percent, hurt by a restrictive foreign investment law.

Vietnam has also done well compared with more developed Asian markets, many of which have suffered both from talk of Fed tapering and from a slowdown in China. Thai and Indonesian stocks are up only 2-3 percent this year and Malaysia has risen 6 percent.

Bernanke Put for emerging markets? Not really

The Fed’s unexpectedly dovish position last week has sparked a rally in emerging markets — not only did the U.S. central bank’s all-powerful boss Ben Bernanke keep his $85 billion-a-month money printing programme in place, he also mentioned emerging markets in his post-meeting news conference, noting the potential impact of Fed policy on the developing world. All that, along with the likelihood of the dovish Janet Yellen succeeding Bernanke was described by Commerzbank analysts as “a triple whammy for EM.” A positive triple whammy, presumably.

Now it may be going too far to conclude there is some kind of Bernanke Put for emerging markets of the sort the U.S. stock market is said to enjoy — the assumption, dating back to Alan Greenspan’s days, that things cant go too wrong for markets because the Fed boss will wade in with lower rates to right things. But the fact remains that global pressure on the Fed has been mounting to avoid any kind of violent disruption to the flow of cheap money — remember the cacophony at this month’s G20 summit? Second, the spike in U.S. yields may have been the main motivation for standing pat but the Treasury selloff was at least partly driven by emerging central banks which have needed to dip into their reserve stash to defend their own currencies. According to IMF estimates, developing countries hold some $3.5 trillion worth of Treasuries, of which just under half is in China. (See here for my colleague Mike Dolan’s June 12 article on the EM-Fed linkages)

David Spegel, head of emerging debt at ING Bank in New York says the decision reflects “an appreciation for today’s globalised world”: