Global Investing

Money in containers. Many see big bucks in Russia’s infrastructure push

A lot of things are wrong with Russia, one of them being its rickety infrastructure.

Many see this as an investment opportunity, however, reckoning the planned $1 trillion infrastructure upgrade plan will get going, especially with the 2014 Winter Olympics and 2018 soccer World Cup looming. Bets on infrastructure have also gathered pace as the Kremlin, seeking to placate a mutinous populace, has pledged reforms, privatisations and a general push to reduce Russia’s dependence on oil exports.

Takouhi Tchertchian at asset managers Renaissance says one sector – shipping containers — reflects the potential for gains from infrastructure improvements. Such containers, usually made of steel, can be loaded and transported over long distances, and transferred easily and cheaply from sea to road to rail.  But Russia has among the lowest levels of containerisation in the world, at around 4 percent compared to the emerging markets average of 15 percent, Tchertchian says. Even in India, almost 3o percent of goods travel by container while in a developed country like Britain, the figure is 40 percent.

Containerisation is a play on people getting richer and demanding more goods. Diversification of the economy will also push the containerisation rate higher. The more consumer demand is part of the economy, the more the demand for containers. If the containerisation rate goes to 6-8 percent, that will give you a doubling of profits. (Tchertchian says)

She favours logistics firms Sesco and Transcontainer. The latter holds 60 percent of the market and last month reported a quadrupling of nine-month profits. True, both companies trade at a premium of 20-25 percent to the broader Russian market but earnings growth is three times higher than the market average, she says.

Corporate bonds in sweet spot

Anticipation is running high for the ECB’s LTRO 2.0 due on Feb 29.

The first such operation in December has largely benefited peripheral bonds even though estimates show banks used a bulk of their borrowing (seen at  just 150-190 bln euros on a net basis) to repay their debt, as the graphic below shows.

 

 

At the second LTRO, banks are expected to use the proceeds to pay down their debt further. That is a good news for non-bank corporate credit because banks — busy deleveraging — are more likely to repay existing debt than roll over and existing holders of bank debt will need to look elsewhere to allocate their assets.

“Apart from the shrinking size of (European bank bonds) some investors might want to get out of them anyway and allocate assets somewhere else… Credit spreads are pricing in a very pessimistic scenario. There’s a very good value in non-banking credit,” says Didier Saint-Georges, member of the investment committee at French asset manager Carmignac Gestion.

Currency rally drives sizzling returns on emerging local debt

Emerging market bonds denominated in local currencies enjoyed a record January last month with JP Morgan’s GBI-EM Global index returning around 8 percent in dollar terms. Year-to-date, returns are over 9.5 percent.

 

 

This is mainly down to spectacular gains on emerging currencies such as the Mexican peso and Turkish lira which have surged 7-10 percent against the dollar and euro this year.  Analysts say the currency component of this year’s returns has been around 7 percent, meaning any portfolio hedged for currency risk would have garnered returns of just 2.5 percent.

The gains come as good news to investors licking their wounds after the index ended 2011 in negative territory. A mid-year rout on emerging markets pushed up local bond yields, often by hundreds of basis points and sent many currencies to multi-year lows.

Melancholia, social class and GDP forecasts in Turkey

An interesting take on GDP stats and those who make the predictions. An analysis of economic growth forecasts for several emerging markets over 2006-2010 has led Renaissance Capital economist Mert Yildiz to conclude that analysts of Turkish origin (and he is one) tend to be: 

a) far more pessimistic about their country’s economic growth outlook than the foreigners, and 

b) more pessimistic than economists from Poland, Russia, India or China are about their respective countries.

Can Turkey confound the pessimists again? The numbers say no

Doomsayers have been prophesying Turkey’s economic boom to deflate into bust for many months now. The recent revival in positive investor sentiment worldwide ar has helped silence some voices. Others say it is a matter of time. 

Data on Friday showed annual inflation accelerated from last year’s 3-year highs to 10.6 percent in January. It is likely to remain elevated at least until May, analysts predict. And trade data released this week indicate Turkey will likely have finished last year with a current account gap of around 10 percent of GDP last year — the biggest of any major developing economy. All this appears to indicate that the central bank will have to keep monetary policy tight and might even have to even raise rates, should the current resurgence in risk appetite fade. But rather optimistically, the government is still forecasting 4 percent growth this year. The IMF says 0.4 percent is more likely. A report today by Capital Economics, entitled “Turkish boom hits the buffers”, says recession is a cinch.

Neil Shearing, the report’s author, notes that imports of both consumer and capital goods have fallen by around $1 billion over a 12-month rolling period. That indicates a contraction in private consumption and fixed investment, he writes. Some of this could of course be down to the lira’s weakness last year, that aided some import substitution, Shearing acknowleges. But he says that all signs are that:

Hungary’s Orban and his central banker

“Will no one rid me of this turbulent central banker?”  Hungarian Prime Minister Viktor Orban may not have voiced this sentiment but since he took power last year he is likely to have thought it more than once.  Increasingly, the spat between Orban’s government and central bank governor Andras Simor brings to memory the quarrel England’s Henry II had with his Archbishop of Canterbury, Thomas Becket, over the rights and privileges of the Church almost 900 years ago. Simor stands accused of undermining economic growth by holding interest rates too high and resisting government demands for monetary stimulus.  The government’s efforts to sideline Simor are viewed as infringing on the central bank’s independence.

So far, attacks on Simor have ranged from alleging he has undisclosed overseas income to stripping him of his power to appoint some central bank board members. But  the government’s latest plan could be the last straw – proposed legislation that would effectively demote Simor or at least seriously dilute his influence. Simor says the government is trying to engineer a total takeover at the central bank.  “The new law brings the final elimination of the central bank’s independence dangerously close,” he said last week.  
 
The move is ill-timed however, coming exactly at a time when Hungary is trying to persuade the IMF and the European Union to give it billions of euros in aid. The lenders have expressed concern about the law and declined to proceed with the loan talks.  But the government says it will not bow to external pressure and plans to put the law to vote on Friday. That has sparked general indignation – Societe Generale analyst Benoit Anne calls the spat extremely damaging to investor confidence in Hungary. “I just hope the IMF will not let this go,” he writes.

Central banks and governments often fail to see eye to eye. But in Hungary, the government’s attacks on Simor, a respected figure in central banking and investment circles,  is hastening the downfall of the already fragile economy. For one, if IMF funds fail to come through, Hungary will need to find 4.7 billion euros next year just to repay maturing hard currency debt. That could be tough at a time when lots of borrowers — developed and emerging — will be competing for scarce funds.  Central European governments alone will be looking to raise 16 billion euros on bond markets, data from ING shows. So Orban will have to tone down his rhetoric if he is to avoid plunging his country into financial disaster.

from Anooja Debnath:

When it comes to recessions, 40 is the new 50

If it were about age, 40-somethings would cringe. But it seems a dead certainty that 40 now means 50 -- or even higher -- when it comes to predicting the chances of a recession taking place.

Going by past Reuters polls of economists, every time the probability hits 40 percent, the recession's already started or is perilously close to doing so.

After the brief recovery period from the Great Recession, Reuters once again started surveying economists several months ago on the chances of developed economies stumbling back into the muck.

Contemplating Italian debt restructuring

This week’s evaporation of confidence in the euro zone’s biggest government debt market — Italy’s 1.6 trillion euros of bonds and bills and the world’s third biggest — has opened a Pandora’s Box that may now force  investors to consider the possibility of a mega sovereign debt default or writedown and, or maybe as a result of,  a euro zone collapse.

Given the dynamics and politics of the euro zone, this is a chicken-or-egg situation where it’s not clear which would necessarily come first. Greece has already shown it’s possible for a “voluntary” creditor writedown of  the country’s debts to the tune of 50 percent without — immediately at least — a euro exit. On the other hand, leaving the euro and absorbing a maxi devaluation of a newly-minted domestic currency would instantly render most country’s euro-denominated debts unpayable in full.

But if a mega government default is now a realistic risk, the numbers on the “ifs” and “buts” are being being crunched.

Are global investors slow to move on euro break-up risk?

No longer an idle “what if” game, investors are actively debating the chance of a breakup of the euro as a creditor strike  in the zone’s largest government bond market sends  Italian debt yields into the stratosphere — or at least beyond the circa 7% levels where government funding is seen as sustainable over time.  Emergency funding for Italy, along the lines of bailouts for Greece, Ireland and Portugal over the past two years, may now be needed but no one’s sure there’s enough money available — in large part due to Germany’s refusal to contemplate either a bigger bailout fund or open-ended debt purchases from the European Central Bank as a lender of last resort.

So, if Germany doesn’t move significantly on any of those issues (or at least not without protracted, soul-searching domestic debates and/or tortuous EU Treaty changes), creditor strikes can reasonably be expected to spread elsewhere in the zone until some clarity is restored. The fog surrounding the functioning and makeup of the EFSF rescue fund and now Italian and Greek elections early next year  — not to mention the precise role of the ECB in all this going forward — just thickens. Why invest/lend to these countries now with all those imponderables.

Where it all pans out is now anyone’s guess, but an eventual collapse of the single currency can’t be ruled out now as at least one possible if not likely outcome. The global consequences, according to many economists, are almost incalculable. HSBC, for example, said in September that a euro break-up would lead to a shocking global depression.

Euro exit-ology

Whether or not it’s likely or even a good idea, talk of Greece leaving the euro is no longer taboo in either financial or political circles.  What is more, anxiety over the future of the  single currency has reached such a pitch since the infection of the giant Italian bond market that there are many investors talking openly of an unraveling of the entire bloc. But against such an amplified “tail risk”,  it’s remarkable how stable world financial markets have been over the past few turbulent weeks — at least outside the ailing sovereign debt markets in question.

Yet, focussing on the possible consequences for Greece of bankruptcy and euro exit has now become an inevitable part of investment reseach and analysis. In a note to clients on Tuesday entitled “Breaking Up is Hard to Do“, Bank of New York Mellon strategist Simon Derrick sketched some of the issues.

One issue he pointed out,  and one raised in the September Spiegel online report, was the chance of invoking Article 143 of the Treaty on the Functioning of the European Union, which permits certain countries to “take protective measures” and which could be used to allow restrictions on the movement of capital in order to prevent a flight of capital abroad.