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.
Russsian stocks have done well since the start of 2012, primarily due to the risk appetite rebound worldwide and high oil prices. All recent data has also been buoyant, indicating the economy likely grew by an above-target 4.5 percent last year. Subdued inflation and strong consumption is buoying industrial production.
Renaissance calculates that poor infrastructure causes a drag of 2 percentage points a year on Russia’s economic growth. And it argues that the mass protests following December parliament election are ample proof the government simply cannot afford to put off investments. Tchertchian notes that Russia’s GDP growth has slowed to around 3-4 percent a year from the average 5-6 percent it enjoyed in the years before 2008. She adds:
Emerging market local bond rally has more legs
Just a month and half into 2012, emerging local currency bonds have already returned 9 percent, one of best performing asset classes. But the rally has further to go, says J.P. Morgan which runs the most widely used emerging debt indices. The bank is now predicting its benchmark local currency debt index, the GBI-EM, to end the year with returns of 16 percent, upping its original expectation for 11.9 percent.
There are several reasons for this bullishnesss. JPM’s latest client survey reveals investors’ positioning is still neutral, meaning there is potential for more gains. Cash inflows to EM local debt have been dwarfed this year by investments into dollar bonds, considered a safer, albeit lower-yielding asset than locally issued bonds. So when (and if) euro zone uncertainties abate, some of this cash is likely to make the switch.
Many emerging countries are still cutting interest rates, which will push down yields on short-dated bonds. Other countries may tolerate some more currency appreciation to dampen inflation, benefiting the currency side of the EM local bond trade. Above all, with all developed central banks intent on quantitative easing (Japan announced a surprise $130 billion worth of extra QE this week), the yield premium offered by emerging markets — the carry — is irresistible. On average the GBI-EM index offers a 4.5 percent yield pick up on U.S. Treasuries, JPM notes:
From an EM perspective there is little reason to fight the rising tide of monetary policy support in the near term. Comparisons to the 2009 global carry trade are unavoidable given the scope of G-4 central bank balance sheet expansion.
So far, around 70 percent of the gains posted by the GBI-EM index have been down to currency appreciation (see here). That could change going forward as some central banks may act to slow FX appreciation. That’s already been happening in Brazil. Gains from the duration trade — derived from interest rate cuts — are also more or less done, analysts reckon, because emerging central banks are more likely from here to keep interest rates on hold than to cut. J.P. Morgan adds:
While we look for approximately 7 percent in additional returns in the GBI-EM for the remainder of the year, the majority of this is due to carry (5 percent) while spiot FX returns should be muted at 1.9 percent and duration returns flat.
How green is your investment?
Is your investment green enough?
A survey by consultancy firm Mercer, carbon data provider Trucost and environmental organisation WWF finds that greenhouse gas emissions from 118 UK-based investment management firms, with 206 billion pounds in assets under management, range from 209 to 1,487 tonnes per million pounds invested.
The report showed that the funds hold investment to 1.4 percent of the market capitalisation of 2,380 companies, which accounts for approximately 134 million tonnes of carbon emissions. These equate to 22 percent of UK greenhouse gas emissions.
Nine of the 10 main contributors to the overall carbon footprint of the portfolios are in the utilities and oil and gas sectors. The research includes in-depth analysis of the increasingly negative effects that carbon costs could have on carbon-intensive utilities and oil and gas companies.
“Asset managers could dramatically reduce the carbon footprints of their funds through stock selection without the need to alter sector weightings or their overall investment strategy,” the report says.
“Asset owners could take (actions) such as incorporating climate change criteria into their investment policies, encouraging fund managers to actively manage the carbon risk in their investment portfolios, looking for new investment opportunities and supporting mandatory emission disclosure initiatives.”
Unfortunately the investors don’t give a rats behind about how green a portfolio is, the religion was, is and probably always be return on investment. If going green means less revenue or lower returns then the investors quickly choose a different favourite colour.
Falling on deaf ears
The European private equity industry today published its response to the proposed Alternative Investment Fund Managers directive that seeks to place controls on the industry.
In what it must hope will be seen as a carefully considered and constructed response to the European Commission’s hastily drafted and ill-thought-out proposed directive, the European Private Equity and Venture Capital Association — the voice for private equity in Europe — calls for the threshold for reporting on its companies’ activities to be lifted to 1 billion euros assets under management from 500 million.
It argues that private equity firms smaller than that specialise in managing small and medium-sized companies and should be subject to national legislation.
EVCA also wants a grandfathering clause introduced so firms existing funds that use no leverage and have no redemption rights (the vast majority of all unlisted private equity funds) would be exempt from the directive. It argues that failing to do this could result in termination of these funds “with disastrous consequences for the industry and its portfolio companies”.
The big question is who in Europe is listening?
Having already gained a surprise concession in the published draft, which lifted the reporting threshold to 500 million euros from an expected level of 250 million euros, private equity may be seen as pushing its luck by asking for further leeway.
While the Socialists lost ground to the Conservative right in the recent European Parliament elections, it would be a mistake to think that the left wing coalition leader Poul Nyrup Rasmussen will be any less strident in his call for stringent legislation on private equity and hedge funds alike. The right wing Governments in France and Germany have been just as loud in their demands for legislating of the industries.
Terminal problems
If Nigerian banks appear to have suffered disproportionately in the global financial crisis, maybe they have Heathrow Terminal 5 to blame.
Nigerian banks were advertising their services on billboards in Terminal 5 last year, and travelling investors felt it showed the banks were rashly trying to keep up with international investment banks in aiming for a global profile, causing many to sell, a banker specialising in Africa told journalists this morning over breakfast.
“Those adverts were a sign to sell Nigerian banks,” Luca del Conte, executive director in treasury and capital markets at Medicapital Bank said.
“We have about 100 institutional investors, and of 50 funds that we speak to actively, more than half mentioned this. Once capital markets started shaking, funds did not ask any more questions, they just sold.”
Medicapital says the banking sector represents over 60 percent of market capitalisation on the Nigerian Stock Exchange, but daily volumes on the exchange have dwindled to $10-15 million a day, suffering also from a fall in the oil price, compared with $100 million a year ago.
from Funds Hub:
Listen to LV’s Tom Caddick
Tom Caddick, fund of funds manager at LV= Asset Management, talks about his funds' allocation to equities and his positive outlook on corporate bonds.
Bah Humbug
Value managers and contrarian analysts long derided as permanent bears have been poking their heads out of the woods to bring some early Christmas cheer to delegates assembled at the CFA Institute’s European Conference in Amstedam.
James Montier, global strategist at SocGen, who likes to swim with sharks in his spare time, opened the conference on Tuesday by saying that he was more optimistic about equities than he had been for a long time, with the UK and European markets approaching bargain basement prices.
But on day two, Matt King, managing director, credit products strategy at Citigroup, rained all over this parade. “I have a message for equity investors,” he said. “It’s worse than you think!”
He argued that next year will be just as miserable as 2008, if not more so, for the majority of investors, as European bank deleveraging is only a third of the way through. “For credit investors it’s not as bad as we are still earning carry, but equity investors continue to amaze me with their over-optimism,” he said.
Citigroup’s equity strategists are forecasting 40 to 50 percent falls in EPS, and King foresees a weak recovery, more like that of the 1930s, as defaults have such a long way to go.
“Things have only stabilised because everything is on central bank life support – there has been no improvement in the underlying fundamentals,” he said. Because European banks are still unable to lend – due to regulation requiring further deleveraging – companies won’t be able to refinance, and will have to do everything they can to pay down their debt, or face liquidation, like UK retailer Woolworth’s. This will lead to cuts in capex and headcount, creating a strongly deflationary environment, spelling bad news for an equity market recovery.
Merry Christmas everyone.
One should duly note the stock market bottomed in July 1932, which was months before the banking system went into its death spiral … and years before the Great Depression ended.
