Global Investing

In Chile, what’s good for stocks will be good for bonds

 

Felipe Larrain, Chile’s finance minister is facing a new job come March when incoming center-left government of President-elect Michelle Bachelet takes over. An academic by profession, he intends to either make his way back into the cloistered lecture halls of a university, not necessarily in Chile, or work for some kind of international organization that is outside of the corporate or financial world.

Chile’s economy, one of the best run in Latin America, with the highest investment grade credit rating in the region, is however experiencing a soggy point in its economic cycle. Inflation has picked up. There is continued weak economic output and domestic demand is cooling down. The central bank is holding its benchmark interest rate at 4.5 percent and suggests more stimulus is to come in the months ahead. The currency has depreciated but that’s not a concern, Larrain said. He was more concerned when the peso was trading in the 430 per U.S. dollar range versus today’s 3-1/2 year low of 545, an area he describes as providing equilibrium.

But before departing from his ministerial duties, Larrain outlined some of the achievements of his four years in office. The latest is the passage of the ‘Ley Unica de Fondos’, or ‘Investment Funds Act’. In Chile’s fixed income market, foreign participation is a minuscule 1 percent versus 35-40 percent in equities. “What the laws have done to equities, this will do for fixed income,” Larrain said in an interview with Reuters.

Listen in to this Reuters podcast to hear more about the law, which Larrain said has been described by independent financial analysts as the “most important regulatory change in Chilean financial markets since 2000/2001.”

You can listen to my interview with Larrain on SoundCloud here (about 8 minutes long).

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.

Survival of the fattest?

Is there room only for the biggest, most aggressively-marketed funds in crisis-hit Europe?

Europe’s ten best-selling funds have attracted nearly a third of net sales across bonds, equity and mixed assets so far this year, as the grey bars show in the following chart from Thomson Reuters’ fund research firm Lipper.

TEN MOST SUCCESSFUL FUNDS’ NET SALES AS A PROPORTION OF ALL SALES

The numbers — which exclude ETFs — are even more staggering if looking at at the concentration of sales into groups/companies, rather than at fund level.

GUEST BLOG: Is Your Global Bond Fund Riskier than You Thought?

This is a guest post from Douglas J. Peebles, Head of Fixed Income at AllianceBernstein. The piece reflects his own opinion and is not endorsed by Reuters. The views expressed  do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.


Global bond funds continue to attract strong inflows as near-zero interest rates lead many investors to look abroad for assets with attractive yields. As we’ve argued before, global bonds provide many important benefits, but it’s crucial that investors select the right type of fund.

Not all global bond funds are cut from the same cloth. One key consideration that investors often overlook is the extent to which the fund elects to hedge its currency exposure. When a domestic currency depreciates – as it did for US-dollar–based investors during most of the period between 2002 and 2008 – foreign currency exposure can help boost returns from holding global bonds.

Three snapshots for Friday

Although the focus has been on Spanish debt auctions this week as this chart shows Italy has much further to go in meeting this year’s funding needs.

German business sentiment rose unexpectedly for the fifth month in a row in March, moving in the opposite direction to the composite PMI:

Greg Harrison points out 82% of S&P 500 companies have beaten their Q1 earnings estimates so far. It  is early days but it it continues that would be the highest for at least five years. Is this a sign that the strength in corporate earnings in continuing? The chart below suggests as least part may be due to falling expectations coming into earnings season.

Credit rally: Bubble or not?

Corporate bonds are back in vogue this year but how sustainable is it?

Just to highlight how bullish people have become, see following comments from fund managers:

“We do see scope for 2012 to deliver narrower corporate credit spreads and that will be the major positive contributor to fixed income returns this year.” – Chris Iggo, CIO Fixed Income, AXA Investment Managers)

“Corporate bonds should be a major source of performance for the bond component of Carmignac Patrimoine (fund) in 2012.” – French asset manager Carmignac Gestion

Deutsche’s investment themes for 2012

We just finished our three-day Reuters 2012 Global Investment Outlook summit in London, New York and Hong Kong, where prominent money managers have discussed their outlook for next year. (For more click here)

Deutsche Bank Private Wealth Management (whose official was also a guest at the summit) is telling its clients the following 10 investment themes for next year.

1. Safe may not be safe Don’t react to uncertainty by automatically taking refuge in traditional safe havens such as cash, sovereign bonds, real estate or precious metals as they may prove less safe than they appear.

Healthy flows into money market funds

Despite concerns about contagion from the euro zone, investors injected fresh funds into U.S. mutual funds, including money market funds, latest weekly flow data from Lipper shows.

The week ended Nov 16 saw a net $10 billion inflow into mutual funds, including ETFs, while investors were net buyers of equity funds with flows at $2.8 billion. Equity funds, including ETFs, witnessed their fifth consecutive week of net inflows.

Reflecting jitters over the debt crisis however, investors injected $2.8 billion into taxable fixed income funds and for the second week in a row bought into money market funds to the tune of $2.9 billion.

Equities — an ‘even years’ curse?

Are global equity markets under an ‘Even Years Curse’ that sees them underperform bonds in even-numbered years but beat fixed-income returns in odd-numbered ones? After some number-crunching, Fidelity International’s’ director of asset allocation Trevor Greetham suspects so.

“It’s not just hocus-pocus but to do with global inventory levels,” he explained at a forum organised by the London-based investment house.

The inventory cycle typically lasts about two years. ‘Up’ years are good for company profits and equity prices with the inverse true when inventory levels are being drawn down. And over the last decade, Greetham notes, the ‘stocking up’ years have been odd-numbered calendar years while inventory draw-down years have been even-numbered ones.

from DealZone:

R.I.P. Salomon Brothers

It's official: Salomon Brothers has been completely picked apart.

Citigroup's agreement to sell Phibro, its profitable but controversial commodity trading business, to Occidental Petroleum today puts the finishing touches on a slow erosion of a once-dominant bond trading and investment banking firm.

When Sandy Weill (pictured left) staged his 1998 coup -- combining Citicorp and Travelers, Salomon Brothers was a strong albeit humbled investment banking and trading force. Yet little by little, a succession of financial crises, Wall Street fashion and regulatory intervention has whittled away at the once-dominant firm.

Not long after the Citigroup was formed, proprietary fixed income trading --  once the domain of John Meriwether, was shut down after the Asian debt crisis fueled losses that Weill could not stomach.