Global Investing

No more “emerging markets” please

The crisis currently roiling the developing world has revived a debate in some circles about the very validity of the “emerging markets” concept. Used since the early 1980s as a convenient moniker grouping countries that were thought to be less developed — financially or infrastructure-wise or due to the size or liquidity of their financial markets — the widely varying performances of different countries during the turmoil has served to underscore the differences rather than similarities between them.  An analyst who traveled recently between several Latin American countries summed it up by writing that he had passed through three international airports during his trip but had not had a stamp in his passport that said “emerging market”.

Like this analyst, many reckon the day has come when fund managers, index providers and investors must stop and consider  if it makes sense to bucket wildly disparate countries together.  After all what does Venezuela, with its anti-market policies and 50 percent annual inflation, have in common with Chile, a free market economy with a high degree of transparency  and investor-friendliness?

Deutsche Bank analyst John-Paul Smith is one of many questioning current index-based investing models which he says essentially provide a free ride to the Russias and Venezuelas of this world, who may be undeserving of investor dollars.  Simply by virtue of inclusion in the emerging index, a country becomes a “default beneficiary” of passive investment flows — from funds that hug or track the benchmark — Smith says. In a note he calls for the abandonment of current index criteria such as market access, liquidity or per capita income in favour of a “substantive governance-based view of risk”
In other words:

The classification of what constitutes a mainstream emerging market should, in our view, be reworked to take account of the relationship between the state and minority investors in listed companies, with a particular emphasis on the level of transparency and the institutional backdrop.

Smith also argues in favour of changing investment rules to make funds less benchmark-constrained, giving them access to a broader investible universe. Managers should also be permitted to hold much higher levels of cash, he recommends, rather than  having to hold “least bad” stocks, as is currently the case.

Revitalised West knocks Brazil, Russia off global growth Top-30

By Shadi Bushra

Yet another sign of the growth convergence between developed and emerging markets. Two  of the “BRIC’ countries have dropped out of the Top-30 in a growth index compiled by political risk consultancy Maplecroft, while several Western powerhouses have nudged their way onto the list.

Maplecroft’s 2014 Growth Opportunities Atlas showed that Brazil and Russia — the B and R of the BRIC bloc — had dropped 26 and 41 places, respectively – due to slow economic reforms and diversification.  The United States, Australia and Germany meanwhile broke into the top 30 on the  index, which evaluates 173 countries on their growth prospects over the next 20 years.

The study’s results are indicative of the broader pattern this year of an emerging markets slowdown after years of robust growth fuelled by cheap money from the West and a decade of booming trade. But the two other BRIC countries — India and China — have retained their top spots, albeit with lower absolute scores. And India overtook China for first place due to its “catch-up growth potential,”  Maplecroft’s report said.

Brazil grinds out a result

The South Americans are dominating possession. And it’s not only on the football pitch.

Net flows at Brazilian equity mutual funds have been positive for 11 out of the 12 months to end-May, according to estimates from Lipper, leading to total net inflows over the period of about $13 billion. That stands in stark contrast to the other three BRIC emerging market powerhouses.

China equity funds have waved goodbye to almost £3 billion in that time, Russia a similar amount and India $4 billion. India equity funds have seen 12 straight months of net outflows, Russia 10 out of 12 and China nine out of 12. The graphic below makes the trend clear, with Brazil the only BRIC to show net inflows to equity funds in eight of the 12 months examined. (A brief note on India: the reporting timetable of locally-domiciled funds means that these numbers are largely from funds based outside the country, which account for about half of assets)

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.

China data: Lessons from Yongzheng

 Is China’s data reliable? With official figures showing the Chinese economy grew by 7.7 percent in the first quarter of 2013, a so-called slowdown or ‘soft patch’ in the Chinese economy has concerned some marketeers. Whether gross-domestic-product calculations involve macro data or micro data, the overall picture is not so clear, though some say a focus on regional numbers, cement, oil and gas usage would help complement official statistics. Kang Qu, assistant vice president of research at the Bank of China, said at a panel discussion earlier this week organised by the centre for the study of financial innovation, and supported by NowCasting, on calculating official Chinese data there is not so much government focus as in other countries on business confidence indicators but more on GDP prints, which are still under some doubt:
This is a reference when the People’s Bank of China makes big decisions.
Difficulty in collating accurate data is perhaps not so surprising, given the rapid urbanisation of the world’s second largest economy. Off-beat labour statistics (employing dissimilar methodology to the ILO) are partly skewed due to a large number of temporary registrants that slip the official statistics net. The solution? Jinny Lin at Standard Chartered, who thinks China’s real GDP level is more likely around 5.5 percent, suggested this could be taken from the history books. Emperor Yongzheng, China’s ruler in the late Qing dynasty, set up an independent body to look at data at the local level, and successfully stemmed tax evasion.

If local data is reliable enough, we should use local data.

photo

Source: Flikr creative commons

Problems are found at a local level too, however. While the current system sets local government officials’ bonuses for better GDP growth, there is no penalty for supplying incorrect data, neither are local government officials assessed on the jobs they create but via a points system. Instead local governments have ‘soft’ and ‘hard’ targets to attain, according to the panellists, some of which include environmental targets.

Then there is the issue of language. Some say data is more detailed in the Chinese language than in English, though official translations help bridge this gap. Quandaries remain, the resolution is still far from clear.

It’s all adding up – emerging markets to drive global spending

The world’s leading ad agencies are positioning themselves  in Brazil, Russia and China — countries that are expected to provide almost a third of the growth in global advertising over the next three years. That’s according to a report by S&P Capital IQ Equity Research, a unit of publishing giant McGraw Hill.

Most major advertisers already have a foothold in these BRIC economies, where the advertising market is projected to grow by an average 10.7 percent  a year over the next three years — more than three times the growth rate in  the developed world.  Over the next 15 years,  big emerging markets will add $200 billion to the global ad spend, S&P Capital IQ reckons.

Hopes, unsurprisingly, are pinned on the soccer World Cup in 2014 and the 2016 Olympics, both hosted by Brazil. Russia hosts the 2014 Winter Games in Sochi and Football World cup in 2018 and both these events are expected to boost ad spending. The behemoths of the ad world have prepared for this, says Alex Wisch, an analyst at S&P Capital IQ:

BRIC banks reap ratings reward from government support

The ability of Brazil, Russia, India and China to support their leading banks is tightly correlated to the credit rating on the banks, according to ratings agency Moody’s. The agency compares the ratings of four of the biggest BRIC banks which it says are likely to enjoy sovereign support if they run into trouble.

China’s Industrial & Commercial Bank of China (ICBC) tops the list of BRIC lenders with a rating of (A1 stable)  thanks to the central bank’s $3 trillion plus reserve stash.

Brazil’s Banco do Brazil  (Baa2 positive) is in investment grade territory but it still fares better than the State Bank of India (SBI) (Baa3 stable) and Russia’s Sberbank (Baa3 stable) at one notch above junk status.

Carry currencies to tempt central banks

Central bankers as carry traders? Why not.

As we wrote here yesterday, FX reserves at global central banks may be starting to rise again. That’s a consequence of a pick up in portfolio investment flows in recent weeks and is likely to continue after the U.S. Fed’s announcement of its QE3 money-printing programme.

According to analysts at ING, the Fed’s decision to restart its printing presses will first of all increase liquidity (some of which will find its way into central bank coffers). Second, it also tends to depress volatility and lower volatility encourages the carry trade. Over the next 12 months these  two themes will combine as global reserve managers twin their efforts to keep their money safe and still try to make a return, ING predicts, dubbing it a positive carry story.

The first problem is that yields are abysmal on traditional reserve currencies. That means any reserve managers keen to boost returns will try to diversify from the  dollar, euro, sterling and yen that constitute 90 percent of global reserves. Back in the spring of 2009 when the Fed scaled up QE1, its move depressed the dollar and drove reserve managers towards the euro, which was the most liquid alternative at the time. ING writes:

No BRIC without China

Jim O’ Neill, creator of the BRIC investment concept, has been exasperated by repeated calls in the past to exclude one or another country from the quartet, based on either economic growth rates, equity performance or market structure. In the early years, Brazil’s eligibility for BRIC was often questioned due to its anaemic growth; then it was the turn of oil-dependent Russia. Over the past couple of years many turned their sights on India due to its reform stupor. They have suggested removing it and including Indonesia in its place.

All these detractors should focus on China.

China’s validity in BRIC has never been questioned. Aside from the fact that BRI does not really have a ring, that’s not surprising. China’s growth rates plus undoubted political and economic clout on the international stage put  it head and shoulders above the other three. And after all, it is Chinese demand which drives a large part of the Russian and Brazilian economies.

But its equity markets have not performed for years.

This year, Russian and Indian stocks are up around 20 percent in dollar terms while China has gained 9 percent and Brazil 3 percent. In local currency terms however China is among the worst performing emerging markets, down 5 percent. Brazil has risen 9 percent.

Olympic medal winners — and economies — dissected

The Olympic medals have all been handed out and the athletes are on their way home.  Which countries surpassed expectations and which ones did worse than expected? And did this have anything to do with the state of their economies?

An extensive Goldman Sachs report entitled Olympics and Economics  (a regular feature before each Olympic Games) predicted before the Games kicked off that the United States would top the tally with 36 gold medals. It also said the top 10 would include five G7 countries (the United States, Great Britain, France, Germany and Italy), two BRICs (China and Russia), one of the developing countries it dubs Next-11  (South Korea), and one additional developed and emerging market. These would be Australia and Ukraine, it said.

Close enough, except that Hungary took the place of Ukraine as the emerging economy in the Top 10 and the United States actually took 46 gold medals — more than Goldman had predicted.