Global Investing

INVESTMENT FOCUS-Bond-heavy overseas funds want Obama win

Overseas investors, many of whom are creditors to the highly-indebted U.S. government, reckon a re-election of President Barack Obama would be best for world markets even if U.S. counterparts say otherwise.

For the second month in a row, Reuters’ monthly survey of top fund managers around the world was evenly split when asked whether a win for incumbent Democrat Obama or Republican hopeful Mitt Romney in the Nov. 6 presidential poll would be good for global markets.

The split was clearly dependant on whether the asset manager was based in the United States or not. Domestic funds, by and large, tend to favour Romney; overseas investors Obama.

Given the outside perception of the contest in Europe at least, where surveys by pollster YouGov on Wednesday showed fewer than 10 percent of Europeans would vote for Romney if given the choice, that may not be terribly surprising. (Full Story)

But that shouldn’t necessarily explain why supposedly hard- nosed money managers would think an Obama re-election would be better for their portfolios.

Survival of the fattest?

Is there room only for the biggest, most aggressively-marketed funds in crisis-hit Europe?

Europe’s ten best-selling funds have attracted nearly a third of net sales across bonds, equity and mixed assets so far this year, as the grey bars show in the following chart from Thomson Reuters’ fund research firm Lipper.

TEN MOST SUCCESSFUL FUNDS’ NET SALES AS A PROPORTION OF ALL SALES

The numbers — which exclude ETFs — are even more staggering if looking at at the concentration of sales into groups/companies, rather than at fund level.

Chaco signals warning for Argentina debt

A raft of Argentine provinces and municipalities suffered credit rating downgrades this week after one of their number, Chaco, in the north of the country, ran out of hard currency on the eve of a bond payment. Instead it paid creditors $260,000 in pesos. Now Chaco wants creditors to swap $30 million in dollar debt for peso bonds because it still cannot get its hands on any hard currency.

The episode is a frightening reminder of Argentina’s $100 billion debt default 10 years ago and unsurprisingly has triggered a surge in bond yields and credit default swaps (CDS). But broader questions also arise from it.

First, will debt “pesification” by some Argentine municipalities snowball to affect international bonds as well? And second, is municipal debt likely to become a problem for other emerging markets in coming months?

Record year for emerging corporate bonds

The past 24 hours have brought news of more fund launches targeting emerging corporate debt;  Barings and HSBC have started a fund each while ING Investment Management said its fund launched late last year had crossed $100 million.  We have written about the seemingly insatiable demand  for corporate emerging bonds in recent months,  with the asset class last month surpassing the $1 trillion mark.  Data from Thomson Reuters shows today that a record $263 billion worth of EM corporate debt has already been underwritten this year by banks, more than a fifth higher than was issued in the same 2011 period (see graphic):

The biggest surge has come from Latin America, the data shows, with Brazilian companies accounting for one-fifth of the issuance. A $7 billion bond from Brazil’s state oil firm Petrobras was the second biggest global emerging market bond ever.

The top 10 EM corporate bonds of the year:  Petrobras issued the two biggest bonds of $7 billion and $3 billion, followed by Venezuela’s PDVSA and Indonesia’s Petramina. Brazil’s Santander Leasing was in fifth place, Mexican firms PEMEX and America Movil were sixth and seventh.  Chilean miner CODELCO, Brazil’s Banco do Brasil and  Russia’s Sberbank also entered the list.

Rollover risks rising on high-yield bonds

Emerging market corporate debt is in high demand, as we pointed out in this article yesterday.  But we noted headwinds too, not least the amount of debt that will fall due in coming years as a result of the current bond issuance bonanza.

David Spegel, head of emerging debt research at ING in New York is highlighting a new danger — that of the exponential increase in speculative grade debt, especially from developed markets, that is up for rollover in coming years. A swathe  of credit rating downgrades for European companies this year mean that many fund managers who bought high-grade assets, have now found themselves holding sub-investment grade paper.  He calculates in a note this week that $47 billion of “junk” rated European paper will find itself up for refinancing in the first half of next year, more than double the levels that were rolled over in the first half of 2012.

It gets worse. The big danger now is that as Spain and Italy tumble into the junk-rated category (Ratings agency S&P on Wednesday cut Spain to BBB-, just one notch above junk) their blue-chip companies may well have to follow suit.  Spegel estimates over $100 billion in Spanish and Italian BBB rated corporate bonds are due next year. If these slip into speculative grade, it would triple the amount  of high-yield paper that needs refinancing in the first six months of 2013.

Venezuelan yields make it hard to stay away

The 60-70 basis-point post-election surge in Venezuela’s benchmark foreign currency bond yields  is already starting to reverse.

Despite disappointment among many in the overseas investment world over a comfortable re-election in Venezuela of populist left-wing President Hugo Chavez  on Sunday there are quite a few who are already wading in to buy back the government’s dollar bonds.  Not surprising,  as Venezuelan sovereign bonds yield some 10 percentage points on average over U.S. Treasuries and 700 basis points more than the EMBIG sovereign emerging bond index.  It’s pretty hard to keep away from that sort of yield, especially when your pockets are full of cash, the U.S. Federal Reserve is pumping more in every month and Venezuela is full of expensive oil .

The feeling among investors clearly is that while a victory for opposition candidate Henrique Capriles would have been preferable, Chavez is not not a disaster either  given that his policies are helping maintain a steady supply of thse high-yield bonds. And with oil prices over $110 a barrel, it is highly unlikely he will shirk on repaying debt.

Election test for Venezuela bond fans

Investors who have been buying up Venezuelan bonds in hopes of an opposition victory in this weekend’s presidential election will be heartened by the results of a poll from Consultores 21 which shows Henrique Capriles having the edge on incumbent Hugo Chavez.  The survey shows the pro-market Capriles with 51.8 percent support among likely voters, an increase of 5.6 percentage points since a mid-September poll.

Venezuelan bonds have rallied hard ever since it became evident a few months back that Chavez, a socialist seeking a new six-year term, would face the toughest election battle of his 14-year rule. Year-to-date returns on Venezuelan debt are over 20 percent, or double the gains on the underlying bond index, JP Morgan’s EMBI Global. And the rally has taken yields on Venezuela’s most-traded 2027 dollar bond to around 10.5 percent, a drop of 250 basis points since the start of the year.

But Barclays analysts are advising clients to load up further by picking up long-tenor 2031 sovereign bonds or 2035 bonds issued by state oil firm PDVSA:

Emerging market FX reserves again on rise

One of the big stories of the past decade, that of staggering reserve accummulation by emerging market central banks, appeared to have ground to a halt as global trade and economic growth slumped. But according to Bank of America/Merrill Lynch, reserves are  starting to grow again for the first time since mid-2011.

The bank calculates that reserve accumulation by the top-50 emerging central banks should top $108 billion in September after strong inflows of around $13 billion in each of the first  two weeks. Look at the graphic below.

 

So what is the source of these inflows? As BoA/ML points out global trade balances are at their cyclical lows and that is reflected in the dwindling current account surpluses in the developing world. But as risk sentiment has improved in the past six weeks,  there has been a pick up in fixed income and equity investment flows to emerging markets, compared to the developed world.

No policy easing this week in Turkey and Chile

More and more emerging central banks have been embarking on the policy easing path in recent weeks. But Chile and Turkey which hold rate-setting meetings this Thursday are not expected to emulate them. Both are expected to hold interest rates steady for now.

In Chile, the interest rate futures market is pricing in that the central bank will keep interest rates steady at 5 percent for the seventh month in a row. Most local analysts surveyed by Reuters share that view. Chile’s economy, like most of its emerging peers is slowing, hit by a potential slowdown in its copper exports to Asia but it is still expected at a solid 4.6 percent in the third quarter. Inflation is running at 2.5 percent, close to the lower end of the central bank’s  percent target band.

Turkey is a bit more tricky. Here too, most analysts surveyed by Reuters expect no change to any of the central bank rates though some expect it to allow banks to hold more of their reserves in gold or hard currency. The Turkish policy rate has in fact become largely irrelevant as the central bank now tightens or loosens policy at will via daily liquidity auctions for banks. And for all its novelty, the policy appears to have worked — Turkey’s monstrous current account deficit has contracted sharply and data  this week showed the June deficit was the smallest since last August. Inflation too is well off its double-digit highs.

Shadow over Shekel

Israel’s financial markets had a torrid time on Monday as swirling rumours of an imminent air strike on Iran caused investors to flee. The shekel lost 1.4 percent, the Tel Aviv stock exchange fell 1.5 percent and credit default swaps, reflecting the cost of insuring exposure to a credit, surged almost 10 percent.

There has been a modest recovery today as the rumour mills wind down. But analysts reckon more weakness lies ahead for the shekel which is not far off three-year lows.  Political risks aside, the central bank has been cutting interest rates and is widely expected to take interest rates, currently at 2.25 percent, down to 1.75 percent by year-end. Societe Generale analysts are among the many recommending short shekel positions against the dollar. They say:

Expect the dovish stance of the Bank of Israel to remain well entrenched for now.