Global Investing

Investors are wondering how much longer the rally in South Africa’s local bond markets will last.

The market has received inflows of over $7.5 billion year-to-date, having benefited hugely from Citi’s April announcement that it would include South Africa in its elite World Government Bond Index (WGBI).  But like many other emerging markets, South Africa has also gained from international investors’ hunger for higher-yielding bonds. And the central bank’s surprise rate cut last week was the icing on the cake, sending 5-year yields plunging another 30 basis points.

There are some headwinds however. First positioning. Around a third of government bonds are already estimated to be in foreigners’ hands. Second, markets may be pricing in too much policy easing (Forward rate agreements are assigning a 77  percent probability of another 50 bps rate cut within the next six months).  That’s especially so given local wheat and maize prices have been hitting record highs in recent weeks.

For these reasons, UBS analysts say it is time to book profits.  They note that the 2026 bond they recommended buying on June 15 has already rallied more than 100 bps.  Analysts at the bank write:

We did not anticipate the global grab for duration to be as intense as it has been. Yields have come in a lot and we think it is now time to get out of this trade.

The dust has settled on a scintillating first quarter for emerging markets but the cross-asset rally of the first three months has already run out of steam. A survey by Societe Generale of 69 EM investors shows that over half are bearish — at least for the near-term.

This marks quite a turn-around from the March survey, when 80 percent of investors declared themselves bullish on emerging markets. What’s more, investors are currently running very little risk and 47 percent of hedge fund respondents (these make up half the survey) feel they are over-invested in EM.  (The following graphic shows the findings — click on it to enlarge)

Almost a quarter of the hedge fund and real money investors are neutral tactically on the market, compared to just 4.5 percent last month. Serious optimism has dried up, SocGen commented:

Some bets are not for the faint-hearted. Risky punts are even less so following a sovereign debt crisis, one that has riddled European debt markets for two years. Barclays Capital, however, recommends a particularly unusual bet, one that your parents might baulk at.

It will be of little surprise that Barcap is bullish on the year, advising towards assets that will perform well in an environment of US-led global growth, easy monetary policy and tight oil supplies following reduced tail-risks in Europe curbed by cheap money from the European Central Bank.

Now that the rush of the addictive LTRO money is over and the dust is settling on central banks’ balance sheets, Barcap is brave enough to recommend an unlikely candidate and one of the recent targets of financial markets — Portugal.

Could it be that equity and bond investors are living in the best of all worlds at the moment?

Tim Bond, head of global asset allocation at Barclays Capital, has hinted that they might be. He says that history shows current conditions to be the best for both assets.

 Since 1925, we find that in those years in which GDP was above trend and inflation below trend, U.S. equities have delivered an average 10.6 percent real return, with 20-year Treasuries delivering a 5.2 percent real return. 

It's hard to imagine that a banker who represents multimillionaires would be anything but professional - but a top executive at a leading global bank thinks that's precisely the wealth management industry's problem.

"There is so much mediocrity in the industry we have to raise the bar here," said Gerard Aquilina, vice chairman of Barclays Wealth, at the Reuters Global Wealth Management Summit in Geneva.

    To Aquilina's way of thinking, private bankers need the same "institutional rigor" as investment bankers in the way they operate. To this end the bank is looking to pursue only top-quality hires.

More good news for equity bulls from Crispin Odey.

Odey, who called the possible start of the bull market earlier this year, says technically there is "every reason to be hopeful that a major correction will not happen before September".

And, having profited handsomely from his position in Barclays, which is now a 16.3 percent holding in his European fund, he sees the best opportunities in companies that were once unable to refinance but now can get credit, rather than safe-haven stocks.

"I still find myself coming out of meetings with companies whose share price is up fivefold since January and wanting to fill my boots. But it is quite a narrow field.

What price freedom? Or at least freedom from government interference?

Barclays needs to answer that question after selling big stakes to Middle East investors rather than tap taxpayer funds. The bank is effectively paying 13 percent annual interest for at least a decade, whereas it could have paid the UK Treasury 12 percent for a few years. Add in a whopping 300 million pounds in fees and the deal could cost shareholders as much as 3.2 billion pounds extra, Merrill Lynch reckons.

Barclays shares have lost almost 20 percent in two days and many investors aren’t happy about the cost and the bank riding roughshod over shareholders.

But it looks like a price worth paying. Sure, it’s more than Barclays had expected to pay, but sovereign wealth funds are in the box seat. All banks want SWF money so the investors can get good long-term deals. “Long-term” works both ways as well, and the deal should leave Barclays with a commercial advantage over rivals. Not constrained by government it can poach top staff, pick-up asset bargains and lend how and where it wants. Shareholders should start getting dividends by Q3 2009, long before semi-nationalised rivals.