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.

Weekly Radar: Q1 earnings test as the herd scatters

US Q1 EARNINGS START/DUBLIN EURO GROUP MEETING/US T-SECRETARY LEW IN BERLIN-PARIS/US-FRANCE-ITALY GOVT BOND AUCTIONS/FRANCE NATL ASSEMBLY VOTES ON LABOUR REFORM/VENEZUELA ELECTIONS

World markets have started the second quarter in an oddly indecisive mood given that Q1 turned out to be yet another bumper start to the year, looking to extend record stock market highs on Wall St but lacking the juice of new information to make a decisive break while Europe splutters and emerging markets and commodities head south. Two important pieces of the U.S. jigsaw will likely emerge over the coming week  with this Friday’s US employment report and the start of the Q1 corporate earnings season next week.

But there’s clearly been a more general rethink further afield among global investors given the breakdown in cross-asset and cross-border correlations – meaning it’s no longer enough to just get Wall St right and adjust your global risk button accordingly. It looks much harder work to get regional or asset allocations and positioning right. As Wall St flirts with new highs and US and Japanese equity funds continue draw hefty inflows, there’s been a pullback from all things Europe surrounding the Cyprus saga and parallel growth disappointments across the region and EPFR data last week showed redemptions from euro stock, bond and money funds continued.

Rich investors betting on emerging equities

By Philip Baillie

Emerging equities may have significantly underperformed their richer peers so far this year (they are about 4 percent in the red compared with gains of more than 6 percent for their MSCI’s index of developed stocks) , but almost a third of high net-worth individuals are betting on a rebound in coming months.

A survey of more than 1,000 high net-worth investors by J.P. Morgan Private Bank reveals that 28 percent of respondents expect emerging market equities to perform best in the next 12 months, outstripping the 24 per cent that bet their money on U.S. stocks.

That gels with the findings of recent Reuters polls where a majority of the 450 analysts surveyed said they expect emerging equities to end 2013 with double-digit returns.

Emerging earnings: a lot of misses

It’s not shaping up to be a good year for emerging equities. They are almost 3 percent in the red while their developed world counterparts have gained more than 7 percent and Wall Street is at record highs. When we explored this topic last month, what stood out was the deepening profit squeeze and  steep falls in return-on-equity (ROE).  The latest earnings season provides fresh proof of this trend and is handily summarized in a Morgan Stanley note which crunches the earnings numbers for the last 2012 quarter.

The analysts found that:

–With 84 percent of emerging market companies having already reported last quarter earnings, consensus estimates have been missed by around 6 percent. A third of companies that have already reported results have beaten estimates while almost half have missed.

– Singapore, Turkey and Hong Kong top the list of countries where earnings beat expectations while earnings in Hungary, Korea and Egypt have mostly underwhelmed. Consumer durables companies recorded the biggest number and magnitude of misses at 82 percent.

A Plan B for Argentina

What’s Argentina’s Plan B?

President Cristina Fernandez de Kirchner has said she will sell the presidential palace in Buenos Aires, if need be, to keep paying creditors who agreed to restructure the country’s debts.  But it may not come to that. Warning: this is a complicated saga with very interesting twists.

A pair of hedge fund litigants demanding $1.3 billion in payments and a New York court are making it hard for Kirchner to keep paying international bondholders. But she might contemplate asking those existing creditors to swap into Argentine law bonds, to which the writ of the New York court will not extend.

First some background. Argentina is due to pay bond coupons this week and in June. Looks like the hedge funds will decline the payment proposal Argentina made last week; this could lead to a default.

European banks: slow progress

The Cypriot crisis, stemming essentially from a banking malaise, reminds us that Europe’s banking woes are far from over. In fact, Stephen Jen and Alexandra Dreisin at SLJ Macro Partners posit in a note on Monday that five years into the crisis, European banks have barely carried out any deleveraging. A look at their loan-to-deposit ratios  (a measure of a bank’s liquidity, calculated by dividing total outstanding loans by total deposits) remain at an elevated 1.15. That’s 60 percent higher than U.S. banks which went into the crisis with a similar LTD ratio but which have since slashed it to 0.7.

It follows therefore that if bank deleveraging really gets underway in Europe, lending will be curtailed further, notwithstanding central bankers’ easing efforts. So the economic recession is likely to be prolonged further. Jen and Dreisin write:

We hope that European banks can do this sooner rather than later, but fear that bank deleveraging in Europe is unavoidable and will pose a powerful headwind for the economy… Assuming that European banks, over the coming years, reduce their LTD ratio from the current level of 1.15 to the level in the U.S. of 0.72, there would be a 60% reduction in cross-border lending, assuming deposits don’t rise… This would translate into total cuts in loans of some $7.3 trillion.

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.

Rand: the only way is south

Any hopes of policy support for the rand from the South African Reserve Bank (SARB) have vanished.  The currency fell 1 percent after yesterday’s SARB meeting where  Governor Gill Marcus made it clear she would not be standing in the way of the rand’s move south. It is now trading at 9.32 per dollar.

More losses look likely, especially if foreign bond investors throw in the towel, a move which analysts at Societe Generale liken to “the market equivalent of a volcanic eruption”. Foreigners, after all, own more than 36 percent of the 1 trillion-rand market in local currency sovereign bonds.

Bearishness appears to have escalated since a Reuters poll of 32 analysts conducted in early-March.  Back then the mean forecast for the rand’s exchange rate in a month’s time was 8.94 per dollar, the poll found.  The 12-month mean forecast was for 8.787.