Global Investing

Without real sign of rate cuts, Indian equity rally still fragile

Indian equities are among the best emerging markets performers this year, with the Mumbai market having posted its best January rise since 1994. That’s quite a reversal from last year’s 24 percent slump. The bet is faltering economic growth will force the central bank to cut interest rates from a crippling 8.5 percent. So, how safe is the rally?

Some conditions are already in place. Valuations look decent after last year’s drop. There has been a surge in global investors’ appetite for emerging market assets. So Apurva Shah, who helps manage $600 million at the BNP Paribas Mutual Fund in Mumbai, expects positive returns from Indian stocks this year. But for a decent rally to be sustained, interest rates have to fall in order to kickstart faltering growth, he says.

The risk is really the assumption that interest rates and inflation are actually on the way down. We’ve seen the first leg of that happening, but it’s just the beginning. Rates are still way too high. To trigger off any real revival in economic growth they need to fall a lot more.

The market may be pricing Indian interest rates to fall between 75 to 100 basis points this year but there is little indication this will actually happen. The central bank, the most hawkish in the developing world, has cut reserve requirements and voiced concern about growth. But a senior central bank official has made clear only a sustained fall in inflation will prompt a rate cut.

Inflation is indeed easing but elevated food prices, infrastructure bottlenecks, and the government’s seeming inability to cut back on budget spending mean the battle is not over yet.  Shah says that for the time being he is sticking to long positions in consumer stocks with a domestic focus, including consumer banking companies, and shying away from rate-sensitive stocks such as state-controlled wholesale banks. That will change if rates actually start to fall.

Brazil-style tax may not work for South Africa

Traders in South African securities woke to a nasty surprise this morning — media reports that the ruling ANC party is considering slapping a tax on “short-term” financial market flows, possibly similar to the 2 percent tax Brazil brought in last October.  Luckily for them,  it may not happen.

Like Brazil, South Africa is worried about the strength of its currency, the rand, which rose almost 30 percent last year against the dollar and has firmed a further 1.5 percent this year to trade near 7.25 per dollar. Analysts like Elisabeth Gruie at BNP Paribas reckon fair value would be around 9 per dollar.  South Africa, like Brazil, is a commodity exporter so needs a fairly valued currency. Hence the call for capital controls to keep out foreign speculative cash.

But the similarities stop there.

Investors may not have cheered the Brazilian tax but few have pulled their cash from the country, betting the returns on offer make the 2 percent levy worthwhile. But South Africa may have a harder time.  Its economy may grow this year by 3 percent compared to Brazil’s 7.6 percent. Johannesburg stocks, especially those of multinational precious metals firms are attractive but they are not cheap — they trade at 11.5 times forward earnings while Brazil’s are at 10.6 times. And the domestic consumption story is still weak in South Africa which makes its companies more vulnerable to the global growth picture.

Sustainable investing in emerging markets?

jumpEmerging markets may not be the obvious destination for your ethical investment. Rapidly expanding economies are consuming a lot of energy, pumping CO2 in return. Many of these markets suffer from legal and political problems that keep investors on their guard.  BRIC legal systems have room for development.  Their financial disclosure is still patchy. 

However, BNP Paribas sees opportunities as it believes fast growth in these markets and increased inflows would create the need for a socially sustainable environment for investment.

“Our analysis has unearthed a number of particularly promising sustainable investment strategies in emerging markets. In each of these cases we see a real economic need linked to maintaining high growth rates, but also evidence that policymakers are recognising this need and are putting in place the necessary policy measures to facilitate this development,” the French bank said in its latest Sustainable and Responsible Investment (SRI) newsletter.

from MacroScope:

Transparency: a double edged sword for SWFs

Sovereign wealth funds, facing criticism from Western regulators and politicians for their opaqueness, are keen to open up their books.

While Norway is a leader in the SWF league of transparency, other countries like China have started publishing annual reports.

But is transparency all good for SWFs?

Gary Smith, head of  central banks, supranational institutions and sovereign wealth funds at BNP Paribas Investment Partners, says the pressure to open up has raised unseen consequences of having to face domestic pressures.

from MacroScope:

SDR bonds from the IMF?

Analysts are starting to wonder if the International Monetary Fund will issue bonds denominated in its currency, Special Drawing Rights (SDRs), to boost the international lender’s capital. 

G20 leaders meeting today are said to be ready to agree a tripling of the IMF’s resources, to $750 billion. One source at the summit said the IMF might also tap international capital markets. 

BNP Paribas analysts like the idea of SDR bonds that could be bought by central banks reallocating portfolios away from the dollar. “Increased IMF firepower and the IMF likely to issue SDR-denominated bonds later this year will allow equities to move significantly higher,” they say in a client note.

Phew! SocGen profits only slump 63%

socgen.jpgIt doesn’t seem much to cheer about but Societe Generale investors breathed a sigh of relief when second-quarter net profit only fell 63 percent.

The investment banking unit may have taken a 1.2 billion euro hit but higher profits from its international retail banking and consumer credit businesses offset the damage and kept the group in the black.

In today’s doom-laden markets that was something to celebrate – and the shares jumped more than 6 percent.