Global Investing

Russian equity sales: disappointing

Investment banks have been dismayed this year by the slump in first-time share listings across emerging markets, the area they had hoped would yield the most growth (and fees). But as we pointed out in this story, emerging IPO volumes fell 40 percent this year. And equity bankers have seen lucrative IPO fees dry up – they almost halved this year from 2011  and are a third of 2007 levels.

One market that has possibly disappointed investors most is Russia.  Its plan a few years ago to privatise large swathes of state-run companies via share sales had bankers salivating — estimates for the proceeds ranged from $30-$50 billion. The pipeline is still alluring, with all manner of companies up for privatisation, including shipping company Sovcomflot and the Russian Railways monopoly.  The Kremlin did raise $5 billion this year by selling a 7.6 percent stake in Sberbank, the banking giant, but not much else has come to pass.  In fact, 2012 saw the state tighten its grip on the energy sector, as government-controlled Rosneft bought oil producer TNK off BP, forking out $12.3 billion and some equity.

Sberbank analyst Chris Weafer estimates Russian companies raised $2.5 billion this year via IPOs, including a $1.8 billion offering from mobile operator Megafon- that’s almost half last year’s levels. Actually, the picture is not that dismal. Weafer points out that total equity issuance to the market, including strategic stake sales by shareholders, came to  $12.8 billion (the total was bumped up by the $5 billion Sberbank deal) and that is up from last year’s total of $9.9 billion.

Clearly, the opportunity to issue new equity depends on prevailing market conditions and the level of investor optimism. It also depends on the willingness of existing controlling shareholders to sell equity at a valuation that is attractive to investors.

The Megafon deal for instance priced at the lower end of estimates. For 2013, Weafer predicts some $15 billion in Russian equity issuance.

Emerging Policy-More interest rate cuts

A big week for central bank meetings looms and the doves are likely to be in full flight.

Take the Reserve Bank of India, the arch-hawk of emerging markets. It meets on Tuesday and some, such as Goldman Sachs, are predicting a rate cut as a nod to the government’s reform efforts. That call is a rare one, yet it may have gained some traction after data last week showed inflation at a 10-month low, while growth languishes at the lowest in a decade. Goldman’s Tushar Poddar tells clients:

With both growth and inflation surprising on the downside relative to the RBI’s forecast, there is a reason for the central bank to move earlier than its previous guidance.

The BBB credit ratings traffic jam

Adversity is a great leveller. Just look at the way sovereign credit ratings in the developed and emerging world have been converging ever since the credit crisis erupted five years ago. JPMorgan  has crunched a few numbers.

Few were surprised last week by S&P’s decision to cut the outlook on Britain’s AAA rating to negative. That gold-plated rating is becoming increasingly rare — according to JP Morgan, just 15 percent of global GDP now rates AAA with a stable outlook — a whopping comedown from 50 percent in 2007. Only 13 developed economies are now rated AAA, compared to 21 before the crisis. And only one, Australia, now has a higher rating (AAA) than in 2007 — 16 of its peers have suffered a total of 129 downgrades in this period.  With 20 rich countries on negative outlook, more downgrades are likely.

Emerging sovereigns, on the other hand, have enjoyed 189 upgrades (43 percent of these were moves into investment grade). That has caused what JPM dubs “a traffic jam”  in the triple B ratings area, with 20 percent of world GDP now rated at this level, compared to 8 percent in 2009.

Golden days of the Turkey-Iran trade may be gone

Global Investing has discussed in the past what a golden opportunity the Iranian crisis has proved for Turkey. Between January and July 2012 it ratcheted up gold exports to Iran ten-fold compared to 2011 as inflation-hit Iranians clamoured for the precious metal. Since August exports appear to have been routed via the UAE, possibly to circumvent U.S. sanctions on trade with Teheran.

The trade has been a handy little earner. Evidence of that has shown up in Turkey’s data all year as its massive current account deficit has steadily shrunk. On Friday, official data showed the Turkish trade gap falling by a third in October from year-ago levels. And yes, precious metal exports (read gold) came in at $1.5 billion compared to $322.4 million last October. In short, a jump of 370 percent.

But the days of the lucrative trade may be numbered, according to Morgan Stanley analyst Tevfik Aksoy. Aksoy notes that the gold exports can at least partly be accounted for by the considerable amounts of lira deposits that Iran held in Turkish banks as payment for oil exports. (Yes, there’s an oil link to all this. Turkey buys oil from Iran but pays lira due to Western sanctions against paying Teheran hard currency. Iranian firms use liras to shop for Turkish gold. See here for detailed Reuters article). These deposits are being steadily converted into gold and repatriated, Aksoy says.

Moody’s takes some pressure off Turkey

Moody’s disappointed a lot of folks this week when it failed to raise Turkey’s credit rating to investment grade.

After Fitch upped Turkey on Nov 5 into the coveted top tier, hopes were high that Moody’s would do the same and soon. Being rated investment grade by at least two agencies has a lot of pluses .  But all the subsequent investment inflows have side effects and one of them is currency appreciation.  Check out these graphs. (click to enlarge)

The currency has been a headache for Turkey’s central bank for a while now. Back in 2010, lira appreciation was the motivation for embarking on an unorthodox monetary policy.  This year in nominal terms the lira has gained just over 5 percent against the dollar, as Turkish stocks and bonds, among the best performers in the world in 2012, have lured foreigners.

Emerging Policy-Data vindicates doves but not all are cutting

Rate decisions last week in emerging markets well anticipated this week’s crop of economic data.

Russia for instance not only kept rates on hold last Friday (after raising them at its previous meeting) but struck a less hawkish tone than expected. Voila, data this week showed growth in the third quarter was 2.9 percent compared to 4 percent in April-June.

We’ll have to wait for November 30 to see what Poland’s Q3 growth numbers look like but data today shows inflation eased to two-year lows in October. That appears to vindicate the central bank’s decision to cut interest rates last week. for the first time in three years.  Simon Quijano-Evans at ING Bank writes:

Emerging Policy-Hawkish Poland to join the doves

All eyes on Poland’s central bank this week to see if it will finally join the monetary easing trend underway in emerging markets. Chances are it will, with analysts polled by  Reuters unanimous in predicting a 25 basis point rate cut when the central bank meets on Wednesday. Data has been weak of late and signs are Poland will struggle even to achieve 2 percent GDP growth in 2013.

How far Polish rates will fall during this cycle is another matter altogether. Markets are betting on 100 basis points over the next 6 months but central bank board members will probably be cautious. Inflation is one reason  along with the  the danger of excessive zloty weakness that could hit holders of foreign currency mortgages. One source close the bank tells Reuters that 75 or even 50 bps would be appropriate, while another said:

“The council is very cautious and current market expectations for rate cuts are premature and excessive.”

Emerging Policy-the big easing continues

The big easing continues. A major surprise today from the Bank of Thailand, which cut interest rates by 25 basis points to 2.75 percent.  After repeated indications  from Governor Prasarn Trairatvorakul that policy would stay unchanged for now, few had expected the bank to deliver its first rate cut since January.  But given the decision was not unanimous, it appears that Prasarn was overruled.  As in South Korea last week,  the need to boost domestic demand dictated the BoT’s decision. The Thai central bank  noted:

The majority of MPC members deemed that monetary policy easing was warranted to shore up domestic demand in the period ahead and ward off the potential negative impact from the global economy which remained weak and fragile.

Thailand expects GDP to grow 5.7 percent this year and Prasarn has cited robust credit demand as the reason to keep rates on hold. But there have been ominous signs of late — exports and factory output have now fallen for three months straight, which probably dictated today’s rate cut.  Remember that exports, mainly of industrial goods, account for 60 percent of Thai GDP and the outlook is perilous — the BOT has already halved its export growth forecast for 2012 to 7 percent and has said it will cut this estimate further.

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.

Emerging Policy: Rate cuts proliferate

Emerging market central banks have clearly taken to heart the recent IMF warning that there is “an alarmingly high risk”  of a deeper global growth slump.

Two central banks have cut interest rates in the past 24 hours: Brazil  extended its year-long policy easing campaign with a quarter point cut to bring interest rates to a record low 7.25 percent and the Bank of Korea (BoK) also delivered a 25 basis point cut to 2.75 percent.  All eyes now are on Singapore which is expected to ease monetary policy on Friday while Turkey could do so next week and a Polish rate cut is looking a foregone conclusion for November.

South Africa, Hungary, Colombia, China and Turkey have eased policy in recent months while India has cut bank reserve ratios to spur lending.