Global Investing

Clearing a way to Russian bonds

Russian debt finally became Euroclearable today.

What that means is foreign investors buying Russian domestic rouble bonds will be able to process them through Belgian clearing house Euroclear, which transfers securities from the seller’s securities account to the securities account of the buyer, while transferring cash from the account of the buyer to the account of the seller. Euroclear’s links with correspondent banks in more than 40 countries means buying Russian bonds suddenly becomes easier.And safer too in theory because the title to the security receives asset protection under Belgian law. That should bring a massive torrent of cash into the OFZs, as Russian rouble government bonds are known.

In a wide-ranging note entitled “License to Clear” sent yesterday, Barclays reckons previous predictions of some $20 billion in inflows from overseas to OFZ could be understated — it now estimates that $25 to $40 billion could flow into Russian OFZs during 2013-2o14. Around $9 billion already came last year ahead of the actual move, Barclays analysts say, but more conservative asset managers will have waited for the Euroclear signal before actually committing cash.

Foreigners’  increased interest will have several consequences.  Their share of Russian local bond markets, currently only 14 percent, should go up. The inflows are also likely to significantly drive down yields, cutting borrowing costs for the sovereign, and ultimately corporates. Already, falling OFZ yields have been driving local bank investment out of that market and into corporate bonds (Barclays estimates their share of the OFZ market has dropped more than 15 percentage points since early-2011).  And the increased foreign inflows should act as a catalyst for rouble appreciation.

Each of these points in a bit more detail:

a) Foreigners’ share of the Russian bond market is among the lowest of major emerging markets.  Compare that to Hungary, where non-residents own over 40 percent, or South Africa and Mexico, where foreigners’ share of local paper is over 30 percent.

b) Foreign buying last year compressed Russian yields sharply, eventually pushing down 10-year yields by 130 basis points over the year as foreigners moved further along an increasingly flattening curve.  But Russian 10-year yields around 6.5 percent will remain attractive to foreigners, comparing favourably with most other emerging markets.  And at home, falling government bond yields will benefit the economy as a whole as local banks change their focus. Barclays write:

Emerging Policy-Doves reign

Rate cuts are still coming thick and fast in emerging markets — in some cases because of falling inflation and in others to deter the gush of speculative international capital.

Arguably the biggest event in emerging markets is tomorrow’s Reserve Bank of India (RBI) meeting which is expected to yield an interest rate cut for the first time in nine months.

India’s inflation, while still sticky, eased last month to a three-year low of around 7 percent. And a quarter point rate cut to 7.75 percent will in effect be a nod from the RBI to the government’s recent reform efforts.  In anticipation of a rate cut, Indian 10-year bond yields have dropped 50 basis points since the start of the year.  But the RBI, probably the world’s most hawkish central bank at present, has warned that markets need not expect a 50 bps cut or even a sustained rate-cutting campaign. Governor Duvvuri Subbarao said last week inflation still remains too high for comfort, while on Monday the RBI said in a quarterly report that more reform was needed to make the central bank turn its focus on growth.

Zara not Prada to tempt emerging market shoppers

By Dasha Afanasieva

Markets got a fright today when luxury goods maker Richemont reported stagnant Asian sales in the last three months of 2012.  Richemont shares as well as those in its rivals such as LVMH (maker of Louis Vuitton handbags and Hennessy cognac) tanked after the news.

Like many of its peers in the west, Richemont the maker of Cartier watches, looks to China to drive its growth as the United States and Europe face the stark prospect of stagnation.

But the fastest growing class of the world’s fastest growing economy will probably not be Cartier-clad.

Emerging debt vs equity: to rotate or not

Emerging bonds have got off to a flying start in 2013, with debt funds taking in over $2 billion this past week, the second highest weekly inflow ever, according to fund tracker EPFR Global. Issuance is strong -  Turkey for instance this week borrowed cash repayable in 10 years for just 3.47 percent, its lowest yield ever in the dollar market.

Yet not everyone is optimistic and most analysts see last year’s returns of 16-18 percent EM debt returns as out of reach. The consensus instead seems to be for 5-8 percent as  tight spreads and low yields leave little room for further ralliesaverage yields on the EMBI Global sovereign debt index is just 4.4 percent.    Domestic bonds meanwhile could suffer if inflation turns problematic. (see here for our story on emerging bond sales and returns).

Now take a look at U.S. Treasury yields which are near 8-month highs. and could pose a headwind for emerging debt. Higher U.S. yields are not necessarily a bad thing for emerging markets provided the rise is down to a healthier economic outlook.  But that scenario could induce investors to turn their attention to equities and  indeed this is already happening. EPFR data shows emerging equity funds outstripped their bond counterparts last week, taking in $7.45 billion, the highest ever weekly inflow.

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.

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: