Global Investing

Bleak investment outlook sours mood at Russia forum

By Alexander Winning

What are the chances that Western investors will rush back to Russia if a shaky ceasefire in Ukraine leads to a more lasting peace? Pretty slim, judging by a keynote speech at a recent Russia-focused investment conference in London.

Dmitri Trenin, director of the Carnegie Moscow Centre, told the conference organised by Sberbank CIB, the investment-banking arm of Russia’s top state-controlled lender, there was little prospect of significant Western investment in Russia over the next 5 years:

I would be surprised if much foreign direct investment flowed into Russia from Germany and other Western countries. But there will be more investment coming from China.

That can hardly have made pleasant listening for his hosts at Sberbank who had billed the event as a chance for European fund managers and companies to meet their Russian counterparts and explore investment opportunities.  Russia desperately needs overseas capital – wealthy Russians and companies are prone to moving their cash overseas and there is some $150 billion worth of corporate  debt due for repayment over the coming year. But sanctions imposed by the West over the Kremlin’s role in Ukraine are deterring even those who have seen Russia merely as a tactical, short-term way of making money.

Until last year, the picture was not too bleak in terms of bricks-and-mortar foreign direct investment (FDI)  - into factories, real estate and mines. United Nations data show the FDI stock in Russia at almost $600 billion, a 100-fold rise from 1995 levels. That includes big-ticket investments by companies such as consumer goods giant PepsiCo and Danone as well as car makers Ford and Volkswagen. New commitments, however, are scarce as sanctions bite and Russia’s economy heads for a deep-freeze.

The people buying emerging markets

We’ve written (most recently here) about all the buying interest that emerging markets have been getting from once-conservative investors such as pension funds and central banks. Last year’s taper tantrum, caused by Fed hints about ending bond buying, did not apparently deter these investors . In fact, as mom-and-pop holders of mutual funds rushed for the exits,  there is some evidence pension and sovereign  wealth  funds actually upped emerging allocations, say fund managers. And requests-for-proposals (RFPs) from these deep-pocketed investors are still flooding in,  says Peter Marber, head of emerging market investments at Loomis Sayles.

The reasoning is yield, of course, but also recognition that there is a whole new investable universe out there, Marber says:

There has been so much yield compression that to get the returns investors are accustomed to, they have to either go down in credit quality or look overseas. Investors have been globalizing their equity portfolios for 25 years but the bond portfolios still have a home bias. We are starting to see more and more institutional investors gain exposure to emerging markets, and a large number of recent RFPs highlight more sophisticated mandates than a decade ago.

Emerging markets; turning a corner

Emerging markets have been attracting healthy investment flows into their stock and bond markets for much of this year and now data compiled by consultancy CrossBorder Capital shows the sector may be on the cusp of decisively turning the corner.

CrossBorder and its managing director Michael Howell say their Global Liquidity Index (GLI) — a measure of money flows through world markets — showed the sharpest improvement in almost three years in June across emerging markets. That was down to substantially looser policy by central banks in India, China and others that Howell says has moved these economies “into a rebound phase”.

This is important because the GLI, which has been around since the 1980s, has been a fairly accurate leading indicator, leading asset prices by 6-9 months and future economic activity by 12-15 months, Howell says:

It’s not end of the world at the Fragile Five

Despite all the doom and gloom surrounding capital-hungry Fragile Five countries, real money managers have not abandoned the ship at all.

Aberdeen Asset Management has overweight equity positions in Indonesia, India, Turkey and Brazil — that’s already 4 of the five countries that have come under market pressure because of their funding deficits.  The fund is also positive on Thailand and the Philippines.

Devan Kaloo, head of global emerging markets at Aberdeen, says these economies have well-run companies that are well positioned to adjust and enjoy slightly higher return on equity (ROE) than their developed counterparts. He says:

Steroids, punch bowls and the music still playing: stocks dance into 2014

Four years into the stock market party fueled by a punch bowl overflowing with trillions of dollars of central bank liquidity, you’d think a hangover might be looming.

But almost all of the fund managers attending the London leg of the Reuters Global Investment Summit this week – with some $4 trillion of assets under management – say the party will continue into 2014.

Pascal Blanque, chief investment officer at Amundi Asset Management with over $1 trillion of assets under management, reckons markets are in a “sweet spot … largely on steroids with the backing of the central banks.”

Emerging equities: out of the doghouse

Emerging stocks, in the doghouse for months and months, haven’t done too badly of late. The main EM index,  has rallied more than 11 percent since its end-August troughs, outgunning the S&P 500′s 3 percent rise in this period. Bank of America/Merrill Lynch strategist Michael Hartnett reminds us of the extreme underweight positioning in emerging stocks last month, as revealed by his bank’s monthly investor survey.  Anyone putting on a long EM-short UK equities trade back then would have been in the money with returns of 540 basis points, he says.

Undoubtedly, the postponement of the Fed taper is the main reason for the rally.  Another big inducement is that valuations look very cheap (forward P/E is around 9.9 versus a 10-year average of 10.8) .

According to Mouhammed Choukeir, CIO , Kleinwort Benson:

Looking at valuations we think emerging markets are in an attractively valued zone, hence we think it’s a good investment. EMs are in negative momentum trend but have good valuations. We’re sitting on the positions we’ve built but if it hits a positive (momentum) trend we will add on it…. You wait for value and value will translate into returns over time.

Bernanke Put for emerging markets? Not really

The Fed’s unexpectedly dovish position last week has sparked a rally in emerging markets — not only did the U.S. central bank’s all-powerful boss Ben Bernanke keep his $85 billion-a-month money printing programme in place, he also mentioned emerging markets in his post-meeting news conference, noting the potential impact of Fed policy on the developing world. All that, along with the likelihood of the dovish Janet Yellen succeeding Bernanke was described by Commerzbank analysts as “a triple whammy for EM.” A positive triple whammy, presumably.

Now it may be going too far to conclude there is some kind of Bernanke Put for emerging markets of the sort the U.S. stock market is said to enjoy — the assumption, dating back to Alan Greenspan’s days, that things cant go too wrong for markets because the Fed boss will wade in with lower rates to right things. But the fact remains that global pressure on the Fed has been mounting to avoid any kind of violent disruption to the flow of cheap money — remember the cacophony at this month’s G20 summit? Second, the spike in U.S. yields may have been the main motivation for standing pat but the Treasury selloff was at least partly driven by emerging central banks which have needed to dip into their reserve stash to defend their own currencies. According to IMF estimates, developing countries hold some $3.5 trillion worth of Treasuries, of which just under half is in China. (See here for my colleague Mike Dolan’s June 12 article on the EM-Fed linkages)

David Spegel, head of emerging debt at ING Bank in New York says the decision reflects “an appreciation for today’s globalised world”:

Banks lead the equity sector flows

Banks and financials stocks have had a pretty good year. The Thomson Reuters Global Financials index is up by more than 20% in the last 12 months, and although the detritus of the financial crisis still offers the occasional sting, investors are starting to see brighter spots for the industry.

That confidence is increasingly obvious in the fund flows.

Our corporate cousins at Lipper track more than 7,000 mutual funds and ETFs which are dedicated to specific industry sectors. Dig a little into the data in this subset of funds, and you start to get a pretty good picture of where the biggest bets have been placed.

Just shy of 500 of these funds are focused entirely on banks & financials. Together they hold more than $46 billion in assets.

‘Peace-ing’ together the world…

If only it were this easy.

 

The United Nations General Assembly begins its annual meeting next week with the overhang of chemical weapons diplomacy in Syria and a diplomatic dance over Iran’s nuclear aspirations (and the distrust by much of the West of Tehran’s intentions). That creates a tantalizing prospect of the two, U.S. President Barack Obama and Iranian President Hassan Rouhani, taking a face-to-face spin together on the global stage.

But it was all about getting down to business on Friday at the Grand Hyatt hotel in New York where the UN Global Compact and the LEGO Foundation unveiled a 1.65 meter tall replica of the UN headquarters. UN Secretary-General Ban Ki-moon playfully pointed out his office. He was joined by LEGO Foundation chairman Kjeld Kirk Kristiansen and its chief executive officer Dr. Randa Grob-Zakhary, who want the way children play to be re-defined and the learning process to be re-imagined.

 

 

Ban placed the final piece into the model, which took around 500 hours and more than 90,000 pieces to construct.

Russian stocks: big overweight

Emerging stocks are not much in favour these days — Bank of America/Merrill Lynch’s survey of global fund managers finds that in August just a net 18 percent of investors were overweight emerging markets, among the lowest since 2001. Within the sector though, there are some outright winners and quite a few losers. Russian stocks are back in favour, the survey found, with a whopping 92 percent of fund managers overweight. Allocations to Russia doubled from last month (possibly at the expense of South African where underweight positions are now at 100 percent, making it the most unloved market of all) See below for graphic:

BofA points out its analyst Michael Harris recently turned bullish on Russian stocks advising clients to go for a “Big Overweight” on a market that he reckons is best positioned to benefit from the recovery in global growth.

Russia may not be anyone’s favourite market but in a world with plenty of cyclical headwinds, Russia looks a clear place for relative outperformance with upside risk if markets turn… we are overweight the entire market as we like domestic Russia, oil policy changes and beaten-up metals’ leverage to any global uplift.