Global Investing

There’s cash in that trash

There’s cash in that trash.

Analysts at Bank of America/Merrill Lynch are expounding opportunities to profit from the burgeoning waste disposal industry, which it estimates at $1 trillion at present but says could double within the next decade. They have compiled a list of more than 80 companies which may benefit most from the push for recycling waste, generating energy from biomass and building facilities to process or reduce waste. It’s an industry that is likely to grow exponentially as incomes rise, especially in emerging economies, BofA/ML says in a note:

We believe that the global dynamics of waste volumes mean that waste management offers numerous opportunities for those with exposure to the value chain. We see opportunities across waste management, industrial treatment, waste-to-energy, wastewater & sewage,…recycling, and sustainable packaging among other areas.

There is no denying there is a problem. Around 11.2 billion tonnes of solid waste are produced by the world’s six billion people every day and 70 percent of this goes to landfill. In some emerging economies, over 90 percent is landfilled.  And the waste mountain is growing. By 2050, the earth’s population will reach 9 billion, while global per capita GDP is projected to quadruple. So waste production will double by 2025 and again from 2025 to 2050, United Nations agencies estimate.

And in emerging markets, challenges and opportunities are both enormous, BofA/ML says. Just Brazil for instance needs investments of $180 billion in this sector. For one, recycling is less widespread. Second, as countries grow richer they produce more rubbish. Third, all big emerging countries have multi-billion dollar plans to improve waste disposal.

Lets look at some of the opportunities BofA/ML has identified:

– Disposal and recycling of municipal solid waste (rubbish, in common parlance) is currently worth $400 billion but over the next decade,  $87 billion in investments are expected in this sector.

Emerging markets’ export problem

Taiwan’s forecast-beating export data today came as a pleasant surprise amid the general emerging markets economic gloom.  In a raft of developing countries, from South Korea to Brazil, from Malaysia to the Czech Republic, export data has disappointed. HSBC’s monthly PMI index showed this month that recovery remains subdued.

With Europe still in the doldrums, this is not totally unsurprising. But economists are growing increasingly concerned because the lack of export growth coindides with a nascent U.S. recovery. Clearly EM is failing to ride the US coattails.

Does all this confirm the gloomy prediction made last month by Morgan Stanley’s chief emerging markets economist, Manoj Pradhan. Pradhan reckons that a U.S. economy in recovery would be a competitor rather than a client for emerging markets, as  the world’s biggest economy tries to reinvent itself as a manufacturing power and shifts away from consumption-led growth. It is the latter that helped underwrite the export-led emerging market boom of the past decade.

New frontiers to outpace emerging markets

Fund managers searching for yield are increasing exposure to frontier markets (FM) as a diversification from emerging markets (EM), as the latter have been offering negative relative returns since January, according to MSCI data.

Barings Asset Management  said on Monday it plans to launch a frontier markets fund in coming weeks, with a projected 70 percent exposure to frontier markets such as Nigeria, Saudi Arabia, the UAE, Sri Lanka and Ukraine.

Emerging markets indices posted relative negative returns compared to developed and frontier markets in the first quarter, index compiler MSCI’s 2013 quarterly survey showed. The main emerging benchmark returned a negative 2.14 percent for the quarter, with the BRIC index also posting a loss, though a better performance of Latin American markets offered some promising signs  with a 0.48 percent increase.

Asia’s credit explosion

Whatever is happening to all those Asian savers? Apparently they are turning into big time borrowers.

RBS contends in a note today that in a swathe of Asian countries (they exclude China and South Korea) bank deposits are not keeping pace with credit which has expanded in the past three years by up to 40 percent.

Some of this clearly is down to slowing exports and a greater focus on the domestic consumer.  Credit levels are also rising overall in these economies because of borrowing for big infrastructure projects.  But there are signs too that credit conditions are too loose.

After disappointing start to 2013, how will hedge funds catch up?

Despite the early-year rally in equity markets, some hedge funds seem to have had a disappointing start… yet again.

JP Morgan notes that the industry’s benchmark HFRI index was up 2.8% by end-February,  well below the 4.6% for MSCI All-Country index.

Some 4.2 percent of hedge funds suffered losses of at least 5% in the first two months of year, compared with 3.3% in the same period in 2012. Still, this is better than 2008/2009, when losses of this magnitude were seen at more than one in five of hedge funds. According to JP Morgan:

Weekly Radar: Dollar building steam?

FOMC/FRANCO-GERMAN SUMMIT/GERMAN-FRENCH-SPAIN AUCTIONS/GLOBAL FLASH PMIS FOR MARCH/UK BUDGET-JOBS-CPI-BOE MINS/ICC HEARING ON KENYATTA/SAFRICA RATES

       The revved-up U.S. dollar – whose trade-weighted index is now up almost 5 percent in just six weeks – could well develop into one of the financial market stories of the year as the cyclical jump the United States has over the rest of G10 combines with growing attention being paid to the country’s potential “re-industrialisation”. As with all things FX, there’s a zillion ‘ifs’ and ‘buts’ to the argument. Chief among them is many people’s assumption the Fed will be printing greenbacks well after this expansion takes hold as it targets a much lower jobless rate. Others doubt the much-vaunted return of the US Inc. back down the value chain into metal-bashing and manufacturing, while some feel the cheaper energy from the shale revolution and the lower structural trade deficits that promises will be short-lived as others catch up. However, with the dollar already super competitive (it’s down 30-40 percent on the Fed’s inflation-adjusted index over the past 10 years) the first set of arguments are more tempting. Even if you see the merits in both sides, the bull case clearly has not yet been discounted and may have further to go just to match the balance of risks.  With Fed printing presses still on full throttle, this has been a slow burner to date and it may be a while yet before it gets up a head of steam — many feel it’s still more of a 2nd half of 2013 story and the dollar index needs to get above last year’s highs to get people excited. But if it does keep motoring, it has a potentially dramatic impact on the investment landscape and not necessarily a benign one, even if shifting correlations and the broader macro landscape show this is not the ‘stress trade’ of the short-lived dollar bounces of the past five years.

Commodities priced in dollars could well feel the heat from a steady dollar uptrend. And if gold’s spiral higher over the past six years has been in part due to the “dollar debasement” trade, then its recent sharp retreat may be less puzzling . Emerging market currencies pegged to the dollar will also feel the pressure as well as countries and companies who’ve borrowed heavily in greenbacks. The prospect of a higher dollar also has a major impact on domestic US investors willingness to go overseas, casting questions on countries with big current account gaps. As the dominant world reserve currency, a rising dollar effectively tightens financial conditions for everyone else and we’ve been used to a weakening one for a very long time.

Turning water into gold in China

By Stephen Eisenhammer

Rivers of gold? Maybe not, but there can be money to be made in Chinese water systems.

With the world’s largest population rapidly moving from the countryside to the city, Chinese water supplies are becoming horribly polluted and the companies wading in to clean and purify them are set to benefit.

Investors are taking an interest in water cleaning companies which are supported by the Chinese government as the country attempts to avoid a dawning crisis.

Of snakes, dragons and fund managers

The Year of the Snake is considered one of the less auspicious in the 12-year Chinese zodiac cycle. And 2013 is the year of the Black Water Snake, which comes around once every 60 years and is seen as the least fortuitous. How China’s stock markets turn out after years of poor performance remains to be seen but the snake is providing banks and asset managers with plenty of food for thought. Many of them have been gazing into the crystal ball to see what 2013 may hold for Chinese markets.

Fidelity Worldwide investments highlights the ‘Snakes and Ladders’ that could influence Chinese equities this year. (They have a great accompanying illustration)

Fidelity’s Raymond Ma reckons  there are six ‘R’s’ that could act as ‘ladders’ to buoy Chinese equity markets this year: recovery, reverse, reform, reflation, re-rating and rally. Under snakes he names inflation, a continued depreciation of the Japanese yen, excessive corporate debt/equity issuance,  a prolonged euro zone crisis and an earlier-than-expected end to quantitative easing in the United States.

Weekly Radar: Currency warriors meet in Moscow

G20/EUROGROUP/EURO Q4 GDP/STATE OF THE UNION/BOJ/UST, GILT AND ITALY BOND AUCTIONS/EUROPEAN EARNINGS

Hiccup. February has so far certainly brought a more sober, if healthier, perspective to world markets. Global stocks are off about half a percent this week, letting the air out gently from January’s over-inflated 5 percent surge. The focus is back on Europe, where the threat of a euro FX overshoot (in the face of LTRO paybacks and rising euro interest rates alongside stepped-up “global currency wars”) has fused with a plethora of unresolved national debt conundrums and a stream of ‘event risks’ on the region’s calendar. Euro stocks have retreated to December levels as the currency move and fresh political angst has taken the wind out of earnings and growth projections after such a steep rally over the past six months. Name anything you want – the tightening race for this month’s Italian elections and Monte di Paschi scnadal there, a delayed Cyprus bailout and elections there this month, the Irish promissory note standoff with the ECB etc etc – when things turn, they all these get amplified again even if none really are likely to be systemic threats in the way we’d become used to over the past two years. The slight backup in Italian/Spanish yields to December levels shows sentiment turns still pack a punch, the European earnings season has been mixed so far, there are political murmurs about capping the euro and the political calendar over the next six weeks is a bit of a minefield for nervy markets. All the issues still look resolvable – the tricky Irish bank debt rejig looks on the verge of a resolution; few still believe Berlusconi be the next Italian PM (only 5 percent on betting website Intrade think so, for example); and Cyprus is expected by most to get bailed out eventually. Today’s ECB will be critical to most of those issues, but next week’s euro group gets a chance to update everyone on its role in them aswell). The issue likely to gnaw deepest at investors is the regional growth outlook  and,  in that respect, the euro surge is about as welcome as a kick in the teeth at this juncture. (Euro Q4 GDPs out next week). The French clearly want to rein in the currency but don’t have the tools or the German backing. Draghi and the ECB will likely have to come to rescue again, though he will not admit to euro targeting and so may drag his feet on this one until the move starts to burn. Interesting times ahead and interesting G20 finance meeting in Moscow next week as a result.

To keep this week’s market wobble  in Europe in perspective, however Wall St still continues to hover close to record highs as the Q4 GDP shock was probably correctly dismissed as a red herring; Japan’s TOPIX is now up 35% in three months (well, about 15% in euro terms), and Shanghai is up 18% in just two months. It’s curious to note that Shanghai was the top pick of the year when Reuters polled global forecasters in December and average gains for the whole of 2013 were expected to be… 17 percent. So, stick with the growth and the currency printing regions for now it seems – even if you do get whacked on the exchange rate.

Weekly Radar: Glass still half-full?

ECB,BOE,RBA MEETINGS/ US-CHINA DEC TRADE DATA/CHINESE INFLATION/EU BUDGET SUMMIT/EUROPEAN EARNINGS/BUND AUCTION/SERVICES PMIS

Wednesday’s global markets were a pretty good illustration of the nature of new year rally. The largest economy in the world reported a shock contraction of activity in the final quarter of 2012 despite widespread expectations of 1%+ gain and this month’s bulled-up stock market barely blinked. Ok, the following FOMC decision and Friday’s latest US employment report probably helped keep a lid on things and there was plenty of good reason to be sceptical of the headline U.S. GDP number. Reasons for the big miss were hooked variously on an unexpectedly large drop in government defence spending, a widening of the trade gap (even though we don’t get December numbers til next week), a drawdown in inventories, fiscal cliff angst and “Sandy”. Final consumer demand looked fineand we know from the jobs numbers (and the January ADP report earlier) that the labour market remains relatively firm while housing continues to recovery. The inventory drop could presage a cranking up assembly lines into the new year given the “fiscal cliff” was dodged on Jan 1 and trade account distortions due to East Coast storms may unwind too. So, not only are we likely to see upward revisions to this advance data cut, there may well be significant “payback” in Q1 data and favourable base effects could now flatter 2013 numbers overall.

Yet as logical as any or all of those arguments may be,  the reaction to the shocker also tells you a lot about the prevalent “glass half full” view in the market right now and reveals how the flood of new money that’s been flowing to equity this year has not been doing so on the basis on one quarter of economic data. An awful lot of the investor flow to date is either simply correcting extremely defensive portfolios toward more “normal” times or reinvesting with a 3-5 year view in mind at least. There’s a similar story at play in Europe. Money has come back from the bunkers and there’s been a lock-step improvement in the “big picture” risks – we are no longer factoring in default risk into the major bond markets  at least and many are now happy to play the ebb and flow of economics and politics and market pricing within more reasonable parameters. There are no shortage of ghosts and ghouls still in the euro cupboard – dogged recession, bank legacy debt issue, Cyprus, Italian elections etc – but that all still seems more like more manageable country risk for many funds and a far cry from where we were over the past two years of potential systemic implosion. Never rule out a fresh lurch and the perceived lack of market crisis itself may take the pressure off Brussels and other EU capitals to keeping pushing hard to resolve the outstanding conundrums. But it would take an awful lot now to completely reverse the recent stabilisation, not least given the ECB has yet to fire a bullet of its new OMT intervention toolkit.