Global Investing

Urbanization sweet spots

It’s a hard slog sometimes looking for new and surprising sources of global economic growth that have not already be heavily discounted by global investors, especially in the uncertain world of 2012. It’s been as hard of late to find new arguments to invest in China and quite a few people suggesting the opposite.

But a Credit Suisse report out on Tuesday homed in on worldwide urbanization trends to find out where this well-tested driver of economic activity was likely to have most impact int he 21st century. For a start, the big aggregate numbers are as dramatic as you’d imagine. More than half  of the world’s population now lives in urban areas, crossing that milestone for the first time in 2009. And, accordingly to United Nations projections, urban dwellers will account for 70 percent of humanity by 2050. As recently as 1950, 70 percent of us were country folk.

CS economists Giles Keating and Stefano Natella crunch the numbers and reckon that, typically, a five percent rise in urban populations is associated with a 10 percent rise in per capita economic activity. Crunching them further, they find that there’s a “sweet spot” as the urban share of the population is moving from 30 percent to 50 percent and per capita GDP growth peaks. Emerging markets as a whole are currently about 45 percent, with non-Japan Asia and sun-Saharan Africa standing out. Developed economies are as high as 75 percent.

Adding other variables to this “sweet spot” — such as overall population size, relatively equal income distributions, falling levels of corruption and capital market access — and CS come up with a list of favoured countries for those following this theme and they include China, Egypt, India, Indonesia, Nigeria, Pakistan, the Philippines, Thailand and Vietnam. Not the BRICs in terms of clever anagrams, but an interesting collection of hotspots that, significantly, still has both China and India as prominent.

We find that, as countries urbanize, there is typiclaly an associated incremental gain in the consumption share of GDP, which we argue is particulary relevant in the case of China

Asian bonds may suffer most if QE on ice

Bonds issued in emerging market currencies have been red-hot favourites with investors this year, garnering returns of 8.3 percent so far in 2012. But for some the happy days are drawing to a close — U.S. Treasury yields are nudging higher as the U.S. recovery gains a foothold and the Fed holds back from more money printing for now at least. That could spell trouble for emerging markets across the board (here’s something I wrote on this subject recently) but, according to JP Morgan, it is Asian bond markets that may bear the brunt.

Their graphic details weekly flows to local bond funds as measured by EPFR Global (in million US$). As on cue, these flows have tended to spike whenever central banks have pumped in cash. (Click the graphic to enlarge.)

Over the past several years,  inflows have driven local curves to very flat levels, but current levels of flatness are not sustainable if/when inflows begin to slow, let alone reverse.As there is a clear correlation between the Fed’s “QE periods” and large inflows into Asian markets, we think the next few months will be difficult for Asian bonds markets (JPM writes)

A Hungarian default?

More on Hungary. It’s not hard to find a Hungary bear but few are more bearish than William Jackson at Capital Economics.

Jackson argues in a note today that Hungary will ultimately opt to default on its  debt mountain as it has effectively exhausted all other mechanisms. Its economy has little prospect of  strong growth and most of its debt is in foreign currencies so cannot be inflated away. Austerity is the other way out but Hungary’s population has been reeling from spending cuts since 2007, he says, and is unlikely to put up with more.

How did other highly indebted countries cope? (lets leave out Greece for now). Jackson takes the example of  Indonesia and Thailand. Both countries opted for strict austerity after the 1997 Asian crisis and resolved the debt problem by running large current account surpluses. This worked because the Asian crisis was followed by a period of buoyant world growth, allowing these countries to boost exports. But Hungary’s key export markets are in the euro zone and are unlikely to recover anytime soon.

Interest rates in emerging markets – - harder to cut

Emerging market central banks and economic data are sending a message — interest rates will stay on hold for now.  There are exceptions of course.

Indonesia cut rates on Thursday but the move was unexpected and possibly the last for some time. Brazil has also signalled that rate cuts will continue.  But South Korea and Poland held rates steady this week and made hawkish noises. Peru and Chile will probably do the same.

The culprit that’s spoiling the party is of course inflation. Expectations that slowing growth will wipe out remaining price pressures have largely failed to materialise, leaving policymakers in a bind. Tensions over Iran could drive oil prices higher. Growth seems to be looking up in the United States.

Jean-Claude Trichet, EM c.bankers’ new friend

What a friend emerging central bankers have in Jean-Claude Trichet. Last month the ECB boss stopped euro bears in their tracks by unexpectedly signalling concern over inflation in the euro zone. Since then the euro has pushed steadily higher  — against the dollar of course, but also against emerging currencies. The bet now is that interest rates – and the yield on euro investments — will start rising some time this year, possibly as early as this summer.

That’s ptrichetrovided some relief to central banks in the developing world who have struggled for months to stem the relentless rise in their currencies.

Being short euro versus emerging currencies was a popular investment theme at the start of 2011, partly because of EM strength but also because of the euro zone debt crisis. “What that also means is that people who were short euro against emerging currencies had to get out of those positions really fast,” says Manik Narain, a strategist at investment bank UBS. Check out the Turkish lira — that’s fallen around 5 percent against the euro since Trichet’s Jan 13 comments and is at the highest in over a year. South Africa’s rand is down 6 percent too. Moves in other crosses have been less dramatic but the euro’s star is definitely in the ascendant. The short EM trade versus the euro  has more room to run, Narain reckons.

from Davos Notebook:

Will Goldman’s new BRICwork stand up?

RTXWLHHJim O'Neill, the Goldman Sachs economist who coined the term BRICs back in 2001, is adding four new countries to the elite club of emerging market economies. But does his new edifice have the same solid foundations?

In future, the BRIC economies of Brazil, Russia, China and India will be merged with those of Mexico, Indonesia, Turkey and South Korea under the banner “growth markets,” O'Neill told the Financial Times.

Hmmm.  Doesn't quite grab you like BRICs, does it? The Guardian helpfully offers an amended branding banner of  "Bric 'n Mitsk" (geddit?). But which ever way you cut it, it's hard to see a flood of investment conferences and funds floating off under the new moniker.

Shock! Emerging capital controls may just be working

Do capital controls work?  After years of telling us that they do not, the IMF and World Bank reluctantly conceded last year they may not be all that bad and indeed in some cases they may actually help keep away some of the speculators who have in recent years been pouring into emerging markets.

Developing countries for the most part like foreign capital, indeed they rely on it for development. What they don’t like is hot money — short-term speculative flows which are widely blamed for causing past emerging market crises. So starting from October last year several of them slapped controls on some of this cash. There are signs these may be working.

Take the experience of two large emerging markets, Brazil and Indonesia. Brazil shocked forBRAZIL-MARKETS/eign investors last October with a 2 percent tax on all flows to stocks and bonds. Nine months on, investors are still putting their cash there and Brazil has raked in millions of dollars thanks to the tax. But many fund managers, like HSBC’s Jose Cuervo, who runs a $6 billion portfolio of Brazilian stocks, are buying American Depositary Receipts (ADRS) of Brazilian firms rather than stocks listed in Sao Paulo.  Because ADRs are in dollars and listed in New York, investors are getting exposure to Brazil but sidestepping the tax.  Brazilian firms continue to receive investment but Brazil’s currency is not appreciating  like it was last year. A win-win all around.

from FaithWorld:

Indonesia’s sharia push may scare investors, moderates

indoensia-shariaRecent moves in Indonesia, including plans by one province to stone adulterers to death, have raised concerns about the reputation of the world's most populous Muslin country as a beacon of moderate Islam.

The provincial assembly in the westernmost province of Aceh -- at the epicenter of the Indian Ocean tsunami that killed 170,000 people there nearly five years ago -- this week decreed the ancient Islamic penalty of stoning to death for adultery. (Photo: Indonesian Muslim women support sharia, 19 Sept 2006?Supri Supri)

The decision could still be overturned once Aceh's new parliament is sworn in next month. But many, including Aceh's governor, the central government in Jakarta, and local businessmen, are concerned about the impact a broadcast public execution by stoning could have on Indonesia's international reputation.

from Global News Journal:

Giving in to Ali Baba

I once paid a cop 30 ringgit (about $10 then) for making an apparently illegal left-hand turn in Kuala Lumpur. Scores of drivers in front of me were also handing over their "instant fines", discreetly enclosed within the policeman's ticketing folder. It was days ahead of a major holiday and the cops were collecting their holiday bonus from the public.

Malaysia opposition leader Anwar Ibrahim holds a disc he says contains evidence of judge-fixing in Malaysia 

I felt bad about this, of course. What I was doing was illegal, immoral and perpetuating an insidious culture that goes by many names in the East -- "baksheesh" in India, "Ali Baba" (and his 40 thieves) in Malaysia, "swap" in Indonesia (means "to feed").  But the policeman pointed out I would have to take off the good part of a day to go to court and pay 10 times as much to the judge. So I rationalised: "When in Rome..."