Global Investing

A black swan in the desert

Just when investors were settling down to lock in a few of the year’s profits and put their feet up for the end of the year holidays, a black swan has come waddling out of the desert to put everything on edge.

The unwelcome cygnus atratus came in the form of Gulf emirate Dubai telling creditors of Dubai World and property group Nakheel that debt repayments would be delayed.  Fears of contagion spread widely, hitting world stocks, lifting the dollar out of its basement and driving demand for European debt so much that a roughly 6-month trading range for futures was breached.

It all may settle down soon. Dubai says the problem does not apply to its big international ports group.  Meanwhile, the emirate is a pretty leveraged place, but fellow emirates and neighbouring countries such as Abu Dhabi, Qatar and Saudi Arabia are pretty flush with cash. They could even step in to help as a matter of solidarity.

At least for now, though,  it is showing just how interlinked everything is.  Ok, of course, banks get hit when people worry about expsosure. But who would have thought that a European car company  would get clobbered by a debt problem in the Gulf?

The issue is those sovereign wealth funds that have been recycling their country surpluses into investments elsewhere. Qatar owns 10 percent of Porsche, Abu Dhabi and Kuwait own 17 percent of Daimler between them. So it is not just investors worrying about their money in the region, it is investors also worrying about where the region’s money is.

Good news and bad in investor confidence data

Good news and bad in the latest  investor confidence sounding from State Street. The overall index took a dive again — third month in a row — and is now barely above neutral. That’s the bad news if you are keen to see risk assets do well.

The good news is that despite three months of falling the index is still above 100, showing that risk appetite remains present among the U.S. financial services firm’s institutional investor cllients, albeit only just.

But add to that State Street’s findings that the fall in its global index was almost entirely due to Asian investors. The regional indices for North America and Europe both rose.

Credit rules, ok?

Equities may be the poster child for this year’s market recovery, but corporate bonds have been the runaway outperformer.

As the graphic below shows, corporate debt was less volatile and moer profitable over the past nearly three years of crisis and recovery — even “junk” bonds.

This year’s performance for corporate bonds has been stunning. In December last year, the spread between global large cap company debt and U.S. Treasuries was 155 basis points, according to Bank of America Merrill Lynch. It has now narrowed to around 52 basis points.

Pity Poor Pound

Britain’s pound has long been the whipping boy of notoriously fickle currency markets, but there are worrying signs that it’s not just hedge funds and speculators who have lost faith in sterling. Reuters FX columnist Neal Kimberley neatly illustrated yesterday just how poor sentiment toward sterling in the dealing rooms has become and the graphic below (on the sharp buildup of speculative ‘short’ positsions seen in U.S. Commodity Futures Trading Commission data) shows how deeply that negative view has become entrenched.              

 While the pound’s inexorable grind down to parity with the euro captures the popular headlines, the Bank of England’s index of sterling against a trade-weighted basket of world currencies shows that weakness is pervasive. The index has lost more than a quarter of its value in little over two years — by far the worst of the G4 (dollar, euro, sterling and yen) currencies over the financial crisis. The dollar’s equivalent index has shed only about a third of the pound’s losses since mid-2007, while the euro’s has jumped about 10% and the yen’s approximately 20% over that period.

There’s no shortage of negatives — Britain’s deep recession, recent housing bust, near zero interest rates and money printing, soaring government budget deficit (forecast at more than 12% pf GDP next year, it’s the highest of the G20) and looming general election in early 2010. In the relative world of currency traders, not all of these are necessarily bad for the pound — the country is emerging tentatively from recession, the dominant financial services sector is recovering rapidly and  short-term interest rates (3-month Libor at least) do offer better returns than the dollar, yen, Swiss franc or Canadian dollar. 

from DealZone:

Sovereign Funds sextuple down

They may be placing smaller bets, but sovereign wealth funds were back with a vengeance in the third quarter.

Global corporate mergers and acquisitions activity involving sovereign wealth funds jumped sixfold to nearly $22 billion in the quarter, with 37 deals completed. Global announced M&A volumes involving state investment vehicles stood at $21.8 billion, up from $3.6 billion in the second quarter, according to our data.

The number of deals more than doubled from 17 in the April-June period. Only two weeks into the fourth quarter, there were five pending or completed deals with a combined value of $164.7 million. At the height of the boom in the first quarter of 2006, sovereign wealth funds sealed 35 deals worth $45.7 billion.

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.

from MacroScope:

SWFs by the Caspian

The world's leading sovereign wealth funds are gathering in Baku, capital of Azerbaijan, for a two-day inaugural meeting which ends on Friday.

A year after adopting the Santiago Principles of best practice guidelines, they are meeting next to the Caspian sea to review investment activities and assess how regulation and efforts to open up are helping them gain wider acceptance in a still-sceptical world.

The participants include SWFs from China, Kuwait, Azerbaijan, Australia, Libya, Ireland, Singapore and New Zealand. The meeting is hosted by the State Oil Fund of Azerbaijan - which made a record (and rare for SWFs) profit last year thanks to a conservative investment strategy.  The $11-billion fund, which made a record profit of around $300 million, or 3.7-3.8 percent in 2008, has said it wants to add riskier assets back onto the portfolio gradually.

from Summit Notebook:

Tax evaders on the run

  By Neil Chatterjee
    The U.S. has promised it will hunt down tax evaders.
    And it seems tax evaders are on the run.
    DBS bank, based in the growing offshore financial centre of
Singapore, told Reuters it had been approached by U.S. citizens
asking for its private banking services. But when told they would
have to sign U.S. tax declaration forms, the potential clients
disappeared.  
    Swiss banks also approached DBS on the hope they could
offload troublesome U.S. clients to a location that so far has
not been reached by the strong arms of Washington or Brussels.
    DBS said no thanks. In fact many private banks and boutique
advisors now seem to be avoiding U.S. clients.
    Will this spread to other nationalities, as governments
invest in tax spies and tax havens invest in white paint?
    Is this the end of offshore private private banking?

Equities: risky assets or return assets?

Are equities risky assets, or return assets? Watch Mark Tinker, Fund manager of the AXA Framlington Global Opportunities Fund, who talks about how the market has more room for an upside now that distressed sellers are gone.

Sustainable investing and SWFs

Government-owned institutions are becoming big drivers of sustainable investing — or buying firms which are socially and environmentally responsible, or sectors which tackle climate change or resource scarcity.

Norway’s $400-billion-plus sovereign wealth fund, which is the world’s second largest, is a big advocate of “green” investing, naming and shaming companies which do not fit the investment guidelines set by the government.

The guidelines rule out holding investments in certain firms,  for instance those that produce nuclear arms or cluster munitions, or that damage the environment or abuse human rights.