Global Investing

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.

In other words, emerging market expansion creates growing environmental problems and thus a desire from emerging market economies for sustainable investments.

Emerging market countries are also most vulnerable geographically to climate change, said the bank.  It’s targetting its investment in industries including education, water, waste, mobile phone banking, microfinance and clean transport.  Among others, it likes Nine Dragons, a Chinese waste paper company and SABSEP, a Brazilian state owned sewage and water utility.

What worries the BRICs

Some fascinating data about the growing power of emerging markets, particularly the BRICs, was on display at the OECD‘s annual investment conference in Paris this week. Not the least of it came from MIGA, the World Bank’s Multilateral Investment Guarantee Agency, which tries to help protect foreign direct investors from various forms of political risk.

MIGA has mainly focused on encouraging investment into developing countries, but a lot of its latest work is about investment from emerging economies.

This has been exploding over the past decade. Net outward investment from developing countries reached $198 billion in 2008 from around $20 billion in 2000. The 2008 figure was only 10.8 percent of global FDI, but it was just 1.4 percent in 2000.

Time to kick Russia out of the BRICs?

It may end up sounding like a famous ball-point pen maker, but an argument is being made that Goldman Sach’s famous marketing device, the BRICs, should really be the BICs. Does Russia really deserve to be a BRIC, asks Anders Åslund, senior fellow at the Peterson Institute for International Economics, in an article for Foreign Policy.

Åslund, who is also co-author with Andrew Kuchins of “The Russian Balance Sheet”, reckons the Russia of Putin and Medvedev is just not worthy of inclusion alongside Brazil, India and China  in the list of blue-chip economic powerhouses. He writes:

The country’s economic performance has plummeted to such a dismal level that one must ask whether it is entitled to have any say at all on the global economy, compared with the other, more functional members of its cohort.

Another nail in the Malthusian coffin?

All the talk of addressing the global imbalances throws a spotlight on contrasting demographic trends in the world’s two most populous nations — China and India.

Prior to the financial crisis, India’s annual growth rate of about 9 percent seemed positively moribund next to China’s double-digit economic expansion. But purely on demographics, the dimming power of the US consumer could give India an edge over its neighbour in the longer run.

That’s what India’s trade minister Anand Sharma seemed to suggest last week when he reminded the audience at a London conference that the country had “20 percent of the world’s children”:

The Big Five: themes for the week ahead

Five things to think about this week:

Q3 – CLUES AND CUES
- Global equity markets started the quarter positioned for economic stabilisation after a strong Q2 performance but, even so, EPFR data shows less than a third of the cash that flooded into money market funds in 2008 has exited in the year to date. The Q2 reporting season, which is about to kick off (Alcoa out this week), will show whether there are reasons for investors to draw down their cash holdings further. The U.S. data that came out before the long July 4 weekend held more negative surprises than positive ones, and macroeconomic confirmation of recovery will be needed to tempt more wary investors into equities.

BOND YIELDS
- Benchmark U.S. and euro zone bond yields broke lower after the U.S. non-farm payroll data but the VIX hit some of its lowest levels post-Lehman and a recent compression of intra-euro zone spreads has yet to go markedly into reverse. Which of these trends turns out to be sustainable will become more evident in the next few weeks, particularly as U.S. supply resumes this week with TIPS, 3, 10, and 30 year auctions.

L’AQUILA SUMMIT
- The slow-burning international reserve currency debate could pop up at the G8/G8+5 big emerging powers summit in Italy this week. China’s public stance is that it is not pushing the issue but Beijing also reckons a debate on this would be normal at such a forum. It is unclear if any final statement will mention it in a way that would rattle FX markets. But sideline comments on the debate will be closely watched and particular focus will be on which countries, if any, would be willing to join China, Brazil and Russia in their commitment to buying the IMF SDR notes — for which crucial groundwork was laid down this week.

from MacroScope:

The Big Five: themes for the week ahead

Five things to think about this week:

BOND YIELDS 
- Nominal bond yields have risen across the curve, while term premiums and fixed income volatility are higher in an environment of uncertainty about how central banks will exit from quantitative easing policies once recovery takes hold. Bonds have turned into the worst-performing asset class this year according to Citi and none of the factors which markets have blamed for this are about to disappear. Curve steepening seen in April/May has started to reverse and whether it continues is being viewed as a more open question than whether yields head higher still.

RATTLING EQUITIES? 
- World stocks' are struggling to extend the near-50 percent gains seen since March 9 but they have yet to succumb to gravity despite a back up in government bond yields. Citigroup analysts reckon global equity markets can rally as long as Treasury yields stay below 5-6 percent but it might be the speed of yield moves that determines whether equities get rattled or keep looking past higher borrowing costs to the recovery story. 

INFLATION EXPECTATIONS 
-  Increases in the prices of oil and other commodities have seen the CRB index rise about 30 percent in less than four months and sustained gains will risk filtering through to prices and price expectations. Inflation reports are due out on both sides of the Atlantic next week but markets are looking further out and starting to price in the risks of a pick up in price pressures. Breakevens have turned positive all along the U.S. yield curve for the first time since autumn and euro zone breakevens have risen. Also, a Bank of England survey indicates public price expectations are up. Bid/cover ratios and tails at inflation-linked bond auctions will tell their own story on extent of demand for inflation hedges.

The Big Five: themes for the week ahead

Five things to think about this week:
    
PUTTING THE RALLY TO THE TEST
- The surge in risk markets has tapered off as investors take stock of recent weeks’ rally and the data flow injects a dose of sobriety. The scale and duration of any market pullback will be the test of how much sentiment has really changed. Sluggish April U.S. retail sales were the biggest cause for pause and this week’s flash PMIs will give more Q2 information.

FX FOCUS
- A pause in the recent recovery in relatively risky markets is shifting attention to the changing FX environment. Clear-cut correlations between moves in major FX rates and swings in risk appetite could be in the process of being eroded and some in the financial markets are wondering if and when relative economic performance will replace risk appetite as a driver for exchange rates. Investment flows will be affected if the dollar looks like it might resume a long-term downtrend.

QE EXIT STRATEGY
ECB, BOE, Fed officials are making reassuring noises about QE exit strategies but no clear mechanism or timeframe has yet emerged and all indications are that balance sheet expansion is still the order of the day. Yield moves suggest bond markets are more enthused in the short term by signs they will kept on the QE drip feed than by concern about the potential price problems down the road. Central bankers have yet to address the back up in yields that would be seen if they were they to exit the market at a time when debt issuance is continuing to flood the market – as it will for some time to come.

2009 preview… from Goldman

Goldman Sachs is previewing the 2009 outlook from a light hearted perspective. “We hope readers take these thoughts in the spirit that they are meant and don’t take any offence at any of the contents,” reads the disclaimer.

The year starts with an interesting twist in the UK, where Chelsea Football Club releases a letter written to incoming US Treasury Secretary, Tim Geithner, asking whether if they signed David Beckham, would it make them eligible for TARP funds?

In February, Russian Prime Minister Putin declares that the American word recession would not be translated into Russian.