Global Investing

Russia — the one-eyed emerging market among the blind

It’s difficult to find many investors who are enthusiastic about Russia these days. Yet it may be one of the few emerging markets  that is relatively safe from the effects of “sudden stops” in foreign investment flows.

Russia’s few fans always point to its cheap valuations –and these days Russian shares, on a price-book basis, are trading an astonishing 52 percent below their own 10-year history, Deutsche Bank data shows.  Deutsche is sticking to its underweight recommendation on Russia but notes that Russia has:

“become so unpopular with the investor community that it is a candidate for the ‘it’s so bad it’s good’ club as evidenced by the very cheap valuations and long-term  underperformance.

The real game changer however is outside financing needs. Quite simply, Russia runs a current account surplus and is therefore in a better position than India or Turkey which will face a funding crunch if foreign money stops coming in.

Analysts at Morgan Stanley reckon that out of 20 big emerging economies, Russia is the least vulnerable to the sudden stop syndrome. They point to the following factors:

Emerging markets funds shun Brazil, South Africa

Global emerging markets equity funds have cut average weightings to Brazil and South Africa for the fourth straight quarter, according to the latest allocations data from fund research firm Lipper.

You can see a full interactive graphic of the allocations data here or by clicking on the snapshot below.

The average allocation to Brazil has fallen by 1.75 percentage points over the past year to stand at 11.6 percent of portfolios by the end of the April-June 2013 quarter. South Africa’s average weighting has fallen to 6.0 percent from 7.3 percent in the second quarter of 2012.

Russia’s starting blocs – the EEU

The course is more than 20 million square kilometers, and covers 15 percent of the world’s land surface. It’s not a new event in next month’s IAAF World Championships in Moscow but a long-term project to better integrate emerging Eurasian economies.

The eventual aim of a new economic union for post-Soviet states, known as the Eurasian Economic Union (EEU), is to “substitute previously existing ones,” according to Tatiana Valovaya, Russia’s minister in charge of development of integration and macroeconomics, at a media briefing in London last week.

That means new laws and revamping regulation for “natural monopolies” in the member states, streamlined macroeconomic policy, shared currency policy, new rules on subsidies for the agricultural and rail sectors and the development of oil markets.

The world of sovereign bond guarantees

Just as Hungary is worrying foreign investors with a plan to help households laden with foreign currency mortgages – likely to prove expensive for its banks – its trade bank has come up with an interesting structure for a planned bond.

State-owned Eximbank has been holding a roadshow this week for a two-part bond, with one part of the bond guaranteed by the World Bank’s risk insurance arm, Miga.

It’s unusual for Miga, which has been operating since 1988, to guarantee sovereign debt.

BRIC shares? At the right price

Is the price right? Many reckon that the sell off in emerging markets and growing disenchantment with the developing world’s growth story is lending fresh validity to the value-based investing model.

That’s especially so for the four BRIC economies, where shares have underperformed for years thanks either to an over-reliance on commodities, excessive valuations conferred by a perception of fast growth or simply dodgy corporate governance. Now with MSCI’s emerging equity index down 30 percent from 2007 peaks, prices are looking so beaten down that some players, even highly unlikely ones, are finding value.

Societe Generale’s perma-bear Albert Edwards is one. Okay, he still calls the bloc Bloody Ridiculous Investment Concept but he reckons that share valuations are inching into territory where some buying might just be justified. Edwards notes that it was ultra-cheap share valuations in the early 2000s that set the stage for the sector’s stellar gains over the following decade, rather than any turbo-charged economic growth rates. So if MSCI’s emerging equity index is trading around 10 times forward earnings, that’s a 30 percent discount to the developed index, the biggest in a very long time. And valuations are lower still in Russia and Brazil.

Josh Lyman and fund managers’ Gordian knot

“We got momentum, baby! We got the big mo!”

Josh Lyman in the TV series ‘The West Wing’ may have wanted it in a presidential election race, but what of fund management companies? Do asset managers want investors to buy and sell their products as the momentum of fund returns ebbs and flows?

I began wondering about this when faced with comments from two well-respected figures in the funds industry. First, Marcus Brookes, Head of Multi-Manager at Cazenove Capital, so no slouch when it comes to picking funds:

“Some fund managers’ and IFAs’ approach to picking funds is usually quantitative to begin with and it is obvious most guys begin with the stuff that has just done well. It also means you are discounting three-quarters of the sector.”

South Africa may need pre-emptive rate strike

Should South Africa’s central bank — the SARB – strike first with an interest rate hike before being forced into it?  Gill Marcus and her team started their two-day policy meeting today and no doubt have been keeping an eye on happenings in Turkey, a place where a pre-emptive rate hike (instead of blowing billions of dollars in reserves) might have saved the day.

The SARB is very different from Turkey’s central bank in that it is generally less concerned about currency weakness due to the competitiveness boost a weak rand gives the domestic mining sector. This time things might be a bit different. The bank is battling not only anaemic growth but also rising inflation that may soon bust the upper end of its 3-6 percent target band thanks to a rand that has weakened 15  percent to the dollar this year.

Interest rates of 5 percent, moreover, look too low in today’s world of higher borrowing costs  – real interest rates in South Africa are already negative while 10-year yields are around 2.5 percent (1.5 percent in the United States). So any rise in inflation from here will leave the currency dangerously exposed.

Fighting the flows

Sanjeev Shah, the Fidelity fund manager who took over the UK portion of Anthony Bolton’s storied Special Situations fund, must wonder what it will take to get clients back on side.

Shah, a 17-year Fidelity veteran, can claim to have turned round a soft patch in performance, and is now consistently outdoing fellow UK equity funds. But the money keeps heading out.

The fund has suffered net outflows in 34 out of the last 35 months, according to estimates from Lipper. Total net outflows over the last three years are put at 1.1 billion pounds. The chart below makes the trend pretty clear.

Chinese inflation – unreported retail

China’s inflation print for June at 2.7 percent, a four-month high, was higher than forecast, but part of the picture could be obfuscated by a lack of accounting for the ever-growing online retail sector.

Gross domestic product figures have been consistently revised down this year from 8 percent to around 7.4 percent by July, with significant doubt over the reliability of official data. Some analysts forecast the more likely GDP print is around 5 percent, given the lack of punishment for falsifying local data and incentives for better growth figures for regional prints.

With an increasing share of shopping carried out online through websites such as Taobao, Tmall and Paipai, there is an increasing argument for online retail numbers -which had lifted one metric of inflation  closer to 7 percent in April –  to be included in the headline CPI. That metric is the retail sector’s internet shopping price index (iSPI).

Route 312 – China’s Route 66

The world’s largest car market, China, with a population of 1.3 billion people and an emerging middle class, holds great potential for investors and consumers alike with annual growth rates in the auto sector expected to hold at around 23 percent to 2017, according to Alliance Bernstein Asset Managers.

Joint ventures (JV), the most popular structure for foreign firms investing in the automobile sector in the world’s largest car market, are set to capitalise on a growing consumer base in a country with 3.3 million kilometres of asphalt. Traversing the so-called ‘mother’ road 312 (China’s route 66) is becoming more of an attainable dream for the Chinese consumer.

VW has a JV with Changchun-based FAW, Dongfeng with Nissan, GAC with Toyota and  Honda. There are many investment opportunities, though a constantly changing sectoral environment and risks of mechanical recalls can cause sharp fluctuations as in any market, according to Bernstein Research, a subsidiary of Alliance Bernstein holdings.