Global Investing

Eyes off the prize?

It’s starting to look like investors in Britain’s top companies have reverted to type.

Reuters ran the numbers on voting at FTSE 100 annual general meetings (AGM) last week and you would be forgiven for thinking the ‘shareholder spring’ had never happened. The average vote against executive pay deals at the 71 top companies which have so far held their AGM was down 18 percent from the result for the full FTSE 100 in 2011. The raw number has to be viewed with caution; investors claim victory in forcing companies to engage, cut absolute pay and tweak bonus arrangements, even though there is little direct evidence so far of pay moderation in absolute terms.

The protest vote fell or stayed put at 58 percent of companies and there was little other evidence of acrimony when you look beyond pay votes. If we exclude a clutch of votes over the rather arcane issue of notice periods for general meetings, then more than two thirds of companies suffered no protest vote of 10 percent or more on any other AGM resolution.

Of course, there have been exceptions. Easyjet stands out as the focus of investor ire, drawing more than double the protest vote of the next company and after suffering similar last year. But the revolt here has been very much driven by the objections of founder and now largest shareholder Stelios Haji-Ioannou. Glencore too, the second most robust protest, had its own very particular narrative driving the voting this year.

There are others who have seen the protest steadily increase over the last two years. Anglo American saw the vote against its remuneration report rise from 3.25 percent in 2010, to 5.3 in 2011, 13.2 in 2012 and finally to 21 percent this year. That kind of pressure, steadily ratcheting up as more investors join in, may well signal a time for some changes in the way the mining group pays its bosses.

The downside of investment inflows? Outflows

What goes in, can come out. And the more that goes in, the more than can come out. That’s what emerging economies have been finding out in recent weeks as capital flees their stock and bond markets.

Take the case of Russia. It’s decision last year to allow foreigners to access its domestic bonds more easily led to a boom in its OFZ or rouble debt, market, with many analysts reckoning OFZs could receive inflows of almost $50 billion in 2013-2014.

Analysts at RBS calculate some $24 billion was received in the past 18 months by OFZs but in the words of outgoing central bank Governor  Sergei Ignatyev, recent outflows have been “very heavy”. Yields on Russia’s 10-year bond have jumped 120 bps since early June.RBS analysts write

When Japan was an emerging country

Recent wild swings in Japan’s financial markets — stocks, bonds and the yen — make Japan look almost like an emerging country.

Back in the 19th century, Japan was an emerging country, with its feudal society based largely on farming.

According to a paper by U.S. based researchers Chiaki Moriguchi and Emmanuel Saez, Japan’s GDP per capita in 1890 was at the level of U.S. GDP per capita in 1790, or about $1,200 in 2004 dollars. According to them, this is roughly comparable to the GDP per capita of the less developed countries today.

Russians and the city: consumer led growth

Speculation is growing that new central bank governor Elvira Nabiullina will cut rates to help stimulate faltering growth soon after takes up her job later this month, but the resilience of the Russian consumer may be another important factor in giving the economy a lift.

Retail sales figures have been lower than expected for the first quarter of 2013, leading economists to revise downwards their prediction for this driver of growth, though performance in the construction and cement sectors is improving, according to Morgan Stanley research:

Overall, we estimate that household consumption growth has accounted for 65 percent of Russian growth over the last decade.

Weekly Radar: A ‘sudden stop’ in emerging markets?

Turkey’s lira, South Africa’s rand and South Korea’s won have all lunged, local currency debt yields have suddenly surged, there’s an intense investor focus on domestic political risks again and governments like Brazil who were taxing what they feared were excessive foreign investment over the past couple of years have U-turned as those flows evaporate. 

What some have feared for many months may well be materializing – a ‘sudden stop’ in financing flows to emerging markets as the makings of a perfect storm gathers. With the Fed mulling some reduction in the amount of dollars it’s pumping into the world, the prospect of a rare and protracted rise in the dollar and U.S. Treasury yields potentially changes entire EM investment metrics for U.S. funds (who make up almost half of the world’s private institutional investors) and from markets which have willingly or not been some of the biggest beneficiaries of QE in recent years but also to where where , by some estimates, nearly $8 trillion of FDI and portfolio flows have flowed over the past decade. It doesn’t even have to mean a reversal of capital already in emerging markets, but even a sudden stop in new flows there could seriously undermine the currency and debt markets of countries heavily dependent on rolling foreign financing – those with large current account gaps to finance. As emerging and global economic growth has eased and return on equity sinks, emerging equity markets have already underperformed for three years now. But the biggest wave of recent investment in EM had been into its bond markets, most recently to higher-yielding local-currency debt markets. And it’s these flows that could dry up rather quickly and shockingly, with all the attendant pressure on currency rates and vice versa. For context, a record of more than $410 billion new sovereign and corporate bonds from emerging economies were sold last year alone, according to JPMorgan, and Morgan Stanley estimates show emerging companies alone have sold some $130 billion worth of new debt so far this year – up 30 percent on last year and more than twice the same period in 2011.
               Already we’re seeing big hits to big current account deficit countries Turkey and South Africa in this region and, as is so often the case in emerging markets, the withdrawal of capital leads to an intense focus on domestic and political risks. These are two of the five biggest destination for bond flows over the past four years, a list –measured on flows as share of GDP – also includes Poland and Czech Republic. Mexico is top of the list, but many see its geographic and financial proximity to the US insulating it.

               So, is this a 1997/1998 redux? That’s certainly a big fear. The similarities are obvious – building dollar strength, higher US Treasury yields and a repatriation of US investment to a domestic ‘emerging market’ (Silicone Valley and the dot.coms in the late 1990s); a sharp drop in Japan’s yen which upset the competitive landscape in Asia; narrowing global growth differentials; some signs of excessive monetary easing in emerging economies and concern about credit bubbles in China and elsewhere; the sudden magnifying of domestic political, social and policy risks etc etc.

Guarding against the inflation dog in emerging markets

The dog that didn’t bark was how the IMF described inflation. But might the fall in emerging market currencies reverse the current picture of largely benign inflation?

Nick Shearn, a portfolio manager at BlueBay Asset Management, sees the rise in inflation as not an if but a when, which makes inflation-linked bonds (linkers in common parlance) a good idea. These would hedge not only against EM but also G7 inflation — he calculates the correlation between the two at around 0.8 percent. He says linkers outperform as inflation uncertainty increases, hence:

As a result of the loose monetary policies of recent years that have been implemented to promote growth within emerging market economies, we believe rising as well as persistent inflation should become a trend….. Currently we are seeing the early signs of an inflation dynamic in isolated countries such as in Brazil. But, as inflation begins to rise across the region, inflation uncertainty will also begin to rise and consequently inflation-linked bonds should perform well.

No more currency war. Mantega dumps the IOF

Brazil’s finance minister Guido Mantega, one of the most shrill critics of Western money-printing, has decided to repeal the so-called IOF tax, he imposed almost three years ago as a measure to fend off  hot money flows.

Well, circumstances alter cases, Mantega might say. And the world is a very different place today compared to 2010. Back then, the Fed was cranking up its printing presses and the currency war (in Mantega’s words) was raging; today the U.S. central bank is indicating it may start tapering off the stimulus it has been delivering. Nor is investors enthusiasm for emerging markets what it used to be.  Brazil’s currency, the real, is plumbing four-year lows against the dollar and local bond yields have risen 30 basis points since the start of May. Brazil’s balance of payments situation meanwhile, is deteriorating, which means it needs all the foreign capital  it can get, hot money or otherwise. And currency weakness spells inflation — bad news for Brazil’s government which faces voters next year.

The IOF did work — Brazil’s local debt markets received just over $10 billion last year, Bank of America/Merrill Lynch calculates — a third of 2010 levels, and much of the cash that was already invested, preferred to stay put (given the IOF is paid upon exiting the country).

Emerging local debt: hedges needed

The fierce sell-off that hit emerging market local currency debt last month was possibly down to low levels of currency hedging by investors, JPMorgan says.

Analysts at the bank compare the rout with the one May 2012, caused by exactly the same reason — higher U.S. yields. There was a difference though — back then EM currencies dropped more than 8% on the month but EM local bonds, unlike last month, were little changed.

Gauging hedging levels is usually a tricky business. But JPM uses the results of its monthly client surveys to analyse the differing moves:

The Sub-Saharan frontier: future generations

As growth in Sub-Saharan Africa is set to post a steady 5-6 percent per annum to 2017 according to IMF estimates,  investors will be taking notes on the region’s growth story not least with the financial sector.

Growth projections have rebounded from forecasts of around a 3 percent rise in 2009 after falling commodity prices have hit one of the region’s main revenue sources. Yet, according to the World Bank’s recent Global Development Finance report, stronger commodities will firm growth prospects in the coming years. In recent weeks, commodities have dipped, dampening the outlook for some resource-rich countries, but as 76 percent of the region’s population do not have access to a bank account, lenders are set to grow their presence in the region.

Julius Baer notes the region’s market potential:

Since 2002, resource-hungry China has swept across a by-and-large grateful African continent, taking oil and minerals in exchange for debt relief, low-interest loans, or much needed infrastructure, such as roads, ports and housing.

Cheer up Morocco, frontier markets are hot

Morocco fears its stock market is on the verge of being re-classified as a frontier market when  index provider MSCI announces its annual rejig of equity indices this month.

Maybe it should pray for relegation instead. A report at the end of last week by Citi notes the boom in frontier market equities — they have risen 15 percent since the start of this year, a stark contrast to their better known, more liquid emerging market cousins which have fallen around 5 percent so far this year. In fact the performance of the frontiers — comprising less liquid, smaller markets from Kenya to Kazakhstan — has been more akin to the U.S. or Japanese equity markets which have earned investors double-digit returns this year.

Citi notes that the seven best returning markets in the world this year are all in the so-called frontiers, while the nine worst laggards are from the emerging world. Check out the graphic below. It shows how markets such as Kenya, Bulgaria and the United Arab Emirates have rallied more than 40 percent this year.