Well sprung?
We’ve just witnessed a stirring spectacle of shareholder empowerment during the British AGM season. Haven’t we?
Well…. I’ve pulled together some numbers on remuneration resolutions from the 61 FTSE100 AGMs we’ve seen so far this year which shows that the average protest vote against pay did indeed go up from 2011 to 2012….
…by 0.2%.
Not quite the man-the-barricades spirit evoked by talk of a ‘Shareholder Spring’.
The average vote against executives’ pay deals was 8.2% compared to 8.0% last year for the companies that now make up the FTSE100.
That raw number doesn’t tell the whole story, of course. The British shareholder base is not particularly diverse and it smacks of a strategic call by big investment houses to pick their battles carefully.
After all, one picture of a rueful Andrew Moss on the front page of the Telegraph might have a more telling effect on boardroom greed than a modest uptick in protest votes across the board. And in the wake of shareholder-spring headlines, it was notable that Tesco boss Philip Clarke passed up an annual bonus of about 372,000 pounds, maybe heading off a potential outcry over UK sales at the supermarket group.
South African bond rush
It’s been a great year so far for South African bonds. But can it get better?
Ever since Citi announced on April 16 that South African government bonds would join its World Government Bond Index (WGBI), almost 20 billion rand (over $2.5 billion ) in foreign cash has flooded to the local debt markets in Johannesburg, bringing year-to-date inflows to over 37 billion rand. Last year’s total was 48 billion. Michael Grobler, bond analyst at Johannesburg-based brokerage Afrifocus Securities predicts total 2012 inflows at over 60 billion rand, surpassing the previous 56 billion rand record set in 2o1o:
The assumption..is based on the fact that South Africa will have a much larger and diversified investor base following inclusion in the WGBI expanding beyond the EM debt asset class
Currently South African bonds are restricted to emerging local bond indices. The most-widely used, JPMorgan’s GBI-EM, has less than $200 billion benchmarked to it and South Africa’s weighting is 10 percent. But the WGBI is a different matter altogether — around $2 trillion is estimated to track this index which currently includes just 22 countries, only three of them emerging markets. An expected 0.44 percent weighting for South Africa implies inflows of $5-$9 billion, analysts estimate.
Some of that cash has already come. How much more could roll in this year? Optimists point to Mexico – foreign ownership of the local debt market there rose to 31 percent from 24 percent over 2010, the year the country joined the WGBI, with $11 billion flowing in. But the picture in South Africa is in fact not that rosy. Inflows will undoubtedly pick up, benefiting both bonds and the rand but many reckon positioning in South African bonds is already pretty crowded – about a third of the market is in foreign hands already, analysts at Morgan Stanley reckon. Worse, the country faces a possible credit ratings downgrade this year (all three rating agencies have cut its ratings outlook to negative in recent months).
Kieran Curtis, a fund manager at Aviva Investors upped his holdings of South African local bonds after the WGBI news but is reluctant to go overweight, betting the market will benefit less than Mexico did two years ago. He cites two reasons — first South Africa’s budget deficit has been creeping higher and it follows that debt issuance will too. Second, the external backdrop is less supportive today than two years ago when the Fed was in full money-printing mode:
I wouldnt say I detect a very strong commitment in South Africa to restoring the budget to balance and those debt numbers can rise quickly when you have a 5-6 percent deficit. Also Mexico’s inclusion came at a time when U.S. Treasury yields were falling fairly quickly but now, with Treasury yields rising we may not get the same support for South Africa.
Pay vote wrinkles
We don’t know the full story around Andrew Moss’ departure from Aviva on the back of a hefty protest vote from investors over his pay deal. It may well be that major shareholders made it very clear behind closed doors that they expected to see him go, with the vote acting as a public demonstration that they were serious about private demands. Perhaps the board found the advisory vote to be useful lever to remove an underperformer who had brought some troublesome baggage to the role.
But whatever the truth of the matter, the story exposes a wrinkle in the debate over executive pay.
Investors have been cast in the role of white knights as politicians and boardrooms joust over remuneration. There is a hope that this disparate posse will save us all from sky-high pay deals and the burgeoning gap between corporate leaders and their workers. But the Moss case raises questions over how effective they can be.
After all, the objection about Aviva, as is generally the case in revolts like this, was that the CEO failed to justify his pay; but the response has not been to moderate pay. The vote was about him, and not the contents of his wage packet.
Indeed, it’s difficult to imagine a situation where serious investor concerns over poor executive performance would result in a reduction in pay, rather than a goodbye kiss for the hapless CEO. It’s even harder to imagine that being repeated across the FTSE 250.
There are examples of bosses temporarily forgoing bonuses or salary increases when things are really dire, but of course that doesn’t have too much effect on the overall picture over the medium term, and, it has been argued could even lead to higher basic pay by way of compensation (no pun intended).
Remuneration committees might well become more wary of investors in the wake of Moss’ departure (let’s hope investors don’t retreat into their shells having witnessed the awesome extent of their power), but it is still hard to see how the disconnect displayed in the below graphic might be properly addressed.
Hungary’s plan to get some cash in the bank
Hungary says it might borrow money from global bond markets before it lands a long-awaited aid deal with the International Monetary Fund. That pretty much seems to suggest Budapest has given up hope of getting the IMF cash any time soon. Given the fund has already said it won’t visit Hungary in April, that view would seem correct.
There is some logic to the plan.
Hungary desperately needs the cash — it must find over 4 billion euros just to repay external debt this year.
It is also an attractive time to sell debt. Appetite for emerging market debt remains strong. Emerging bond yield premiums over U.S. Treasuries have contracted sharply this year and stand near seven-month lows. Moreover, U.S. Treasury yields may rise, potentially making debt issuance more costly in coming months.
For Hungary’s government , the idea of a successful bond sale is particularly attractive as this will at a stroke improve its bargaining position with the IMF. That’s bad news, says Tim Ash, RBS head of emerging European research:
The problem is that getting cash in the bank may actually reduce the likelihood of the government actually finally cutting a deal with the IMF, so arguably increases market risk over the slightly longer term.
He concedes however:
Corporate bonds in sweet spot
Anticipation is running high for the ECB’s LTRO 2.0 due on Feb 29.
The first such operation in December has largely benefited peripheral bonds even though estimates show banks used a bulk of their borrowing (seen at just 150-190 bln euros on a net basis) to repay their debt, as the graphic below shows.
At the second LTRO, banks are expected to use the proceeds to pay down their debt further. That is a good news for non-bank corporate credit because banks — busy deleveraging — are more likely to repay existing debt than roll over and existing holders of bank debt will need to look elsewhere to allocate their assets.
“Apart from the shrinking size of (European bank bonds) some investors might want to get out of them anyway and allocate assets somewhere else… Credit spreads are pricing in a very pessimistic scenario. There’s a very good value in non-banking credit,” says Didier Saint-Georges, member of the investment committee at French asset manager Carmignac Gestion.
Iran looms larger on Gulf radar screens
Tensions over Iran may be helping to push up oil prices as traders worry about a widespread embargo on the country’s crude oil but markets in neighbouring Gulf energy-rich economies are not benefiting.
One year after the Arab Spring started in Tunisia, investors remain sensitive to political risk in the Middle East.
Debt insurance costs have risen sharply this month for gas exporter Qatar and oil giant Saudi Arabia, just as global worries appear to be easing about the euro zone crisis.
In Qatar, five-year credit default swaps have jumped 30 basis points in the past 10 days to 150 bps, according to Markit — their highest since July 2009. Saudi CDS have had a similar upward trajectory, while CDS in Israel have reached two-month highs.
Traders say some of this move is just a switching of earlier positions, as Gulf markets performed relatively well at the back end of last year, due to their perceived insulation from euro zone worries.
But as Chavan Bhogaita, head of the markets strategy unit at National Bank of Abu Dhabi, notes:
It has nothing to do with the fundamentals or the credit quality of these sovereigns, but simply about investors getting nervous due to the Iran situation. By buying protection through sovereign CDS, investors are trying to protect themselves against any possible sell-off in the event of an escalation in geopolitical tensions.
from MacroScope:
When the euro shorts take off
Currency speculators boosted bets against the euro to a record high in the latest week of data (to end December 27) and built up the biggest long dollar position since mid-2010, according to the Commodity Futures Trading Commission. Here -- courtesy of Reuters' graphics whiz Scott Barber, is what happens to the euro when shorts build up:
Can Eastern Europe “sweat” it?
Interesting to see that Poland wants to squeeze out more income from its state-owned enterprise (SOE) sector in the face of slowing economic growth and financing pressures.
Warsaw wants to double next year’s dividends from stakes in firms ranging from copper mines to utility providers to banks.
Fellow euro zone aspirant Lithuania has also embarked on reforms aimed at increasing dividends sixfold from what UBS has dubbed “the forgotten side of the government balance sheet”. It wants to emulate countries such as Sweden and Singapore where such companies are managed at arm’s length from the state and run along strict corporate standards to consistently grow profits.
The impetus isn’t entirely ideological. Poland and Lithuania are desperately trying to balance their books and under European Commission rules, privatisation proceeds cannot be taken into account when calculating the budget deficit but SOE dividends can.
But “sweating” government assets to yield higher profits doesn’t always come easy for central and eastern Europe. After all, this is a region where state ownership has been synonymous with inefficiency and stagnation.
Even so, the track record of emerging European governments on privatisation is mixed.
The haste at which state resources were sold off following the collapse of the Soviet Union had disastrous repercussions for economies such as Russia and Croatia. Recent efforts at state divestment from Poland to the Czech Republic to Romania have run aground on unrealistic price expectations, corruption or regulatory obstruction.
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.
Despite tensions in the funding market (LIBOR dollar rates were up again and 3-month euro/dollar cross-currency basis swaps hit their widest since December 2008 at 134bps yesterday), money market funds especially in the United States are attracting safe-haven flows. According to flow data from the Investment Company Institute, total U.S. money market mutual funds increased by $6.41 billion to $2.645 trillion for the week ended Wednesday.
So it seems no “breaking the buck” fears are resurfacing just yet.
Money market funds are a very safe investment vehicle, and in fact are often looked at as simply high yield bank accounts. Of course, they don’t offer nearly the ROE as a typical stock might.
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Phew! Emerging from euro fog
Holding your breath for instant and comprehensive European Union policies solutions has never been terribly wise. And, as the past three months of summit-ology around the euro sovereign debt crisis attests, you’d be just a little blue in the face waiting for the ‘big bazooka’. And, no doubt, there will still be elements of this latest plan knocking around a year or more from now. Yet, the history of euro decision making also shows that Europe tends to deliver some sort of solution eventually and it typically has the firepower if not the automatic will to prevent systemic collapse. And here’s where most global investors stand following the “framework” euro stabilisation agreement reached late on Wednesday. It had the basic ingredients, even if the precise recipe still needs to be nailed down. The headline, box-ticking numbers — a 50% Greek debt writedown, agreement to leverage the euro rescue fund to more than a trillion euros and provisions for bank recapitalisation of more than 100 billion euros — were broadly what was called for, if not the “shock and awe” some demanded. Financial markets, who had fretted about the “tail risk” of a dysfunctional euro zone meltdown by yearend, have breathed a sigh of relief and equity and risk markets rose on Thursday. European bank stocks gained almost 6%, world equity indices and euro climbed to their highest in almost two months in an audible “Phew!”.
Credit Suisse economists gave a qualified but positive spin to the deal in a note to clients this morning:
It would be clearly premature to declare the euro crisis as fully resolved. Nevertheless, it is our impression that EU leaders have made significant progress on all fronts. This suggests that the rebound in risk assets that has been underway in recent days may well continue for some time.
So what exactly have investors and been doing while waiting for the fog to clear in Brussels? The truth on most benchmark prices and indices is “not very much” — at least not since world markets got the collywobbles in early August about US downgrades and debt ceilings, euro sovereign debt angst and double dip recession. Yet, since the European stocks nadir in late September prodded the Franco-German alliance into more serious action, there has been some impressive market gains of between 10 and 20% across most equity sectors and national indices. More broadly, after a year of intense political and financial turmoil across the globe, developed market equities are only down about 4% year-to-date — a 10 point outperformance on emerging markets, for example.
And the clearing of the euro fog now allows investors to start looking beyond the Brussels cauldron and review how the rest of the world is shaping up. What they find, surprisingly for those drowning in disaster commentaries, is‘not all that bad – especially, but not exclusively in the United States. There’s been a string of more positive economic data releases throughout October and these have continued through the back end of last week and early this week. The bellwether Philadelphia Fed industrial index rose to its highest in six months; U.S. durable goods orders (excluding volatile aircraft orders) rose at their fastest pace in six months in September; U.S. new home sales rose at their fastest in five months; business surveys show Chinese manufacturing is back expanding again in October for the first time in three months; U.S. power firms are reporting a pickup in industrial activity in H2, Ford has increased fourth quarter forecast for North American vehicle production. The U.S. Q3 earnings season hasn’t been half bad either – with a third of the S&P500 reported, some 70 percent beat forecasts and the main strength was in the industrial world. What’s more for markets, seasonal equity flows are typically in an updraft for the rest of the year, all things being equal. Fund managers already started rebuilding equity positions in September.
European business and consumer sentiment surveys have continued to push lower through the policy logjam, unsurprisingly, even if real data contradicts some of that anecdotal ‘evidence’. And this may well translate into the wider investment theme as the euro crisis ebbs. Europe may agree to adapt grudgingly to solve its immediate problem but tyhen pay the price in economic growth because it’s less worse than the alternative of financial chaos.
On the more immediate horizon, there may be groans from those hoping to escape summit mania as G20 leaders are set to meet in Cannes next Thursday and Friday — with a hoped-for endorsement of the euro plan and a specific interest in the EFSF/IMF/SPV idea that seems to be courting sovereign wealth funds from China and other emerging giants from the BRICs to use a special conduit to buy euro sovereign bonds. ECB rate cuts too may be firmly back in the frame on Thursday as Mario Draghi takes the helm of the central bank for the first time. The Federal Reserve’s Open Market Committee gives us its latest decision on Wednesday. US payrolls looms large on Friday, with a heavy European earnings sked including Barclays, BMW, ING, BNPP, Unilever, CS, ArcelorMittal, RBS, Commerzbank, and many more.
