Global Investing

Does the money match the story?

Perhaps the biggest investment theme of the year so far has been the extent to which long-term investors may now slowly migrate back to under-owned and under-priced equities from super-expensive safe haven bunkers such as ‘core’ government bonds, yen, Swiss francs etc to which they herded at each new gale of the 5-year-old credit storm.

Indeed, some go further and say asset allocation mixes of the big institutional pension and insurance funds are – for a variety of regulatory and demographic reasons – now at such historical extremes in favour of bonds that they may now need rethinking in what some dub The Great Rotation.

All this has played into a new year whoosh in equity and other risk markets, as ebbing tail risks from the euro zone, US budget and China combine with signs of a decent cyclical turn in the world economy into 2013. Wall St’s S&P500, for example, has climbed 5.5% in January so far and closed above 1500 for the first time in more than five years last week following its longest winning streak (8-days) in eight years.

But what sort of money is behind this price move? Well, new cash flowing into equity funds so far this year has been the highest on record at some $55 billion. Retail investors have certainly been big participants, with Lipper data showing new-year retail inflows to U.S.-based stock funds at their highest since 2001. HSBC points out that 9 consecutive weeks of net retail buying of equities is “longer and larger” that any of the sporadic bursts seen over the past two years and emerging market equity appears to be a clear favourite.

But what of the bigger behemoths?

An HSBC analysis on global fund holdings (based on data provided by fund tracker EPFR) reckons big international funds are far less pessimistic than they were six months but are still broadly neutral on equity overall. “We measure this by tracking the holdings of high and low beta sectors and it is now only marginally in favour of low beta sectors”

We’ve wondered before about the validity of the British ‘shareholder spring’ narrative. A few high-profile casualties gave the story drama, but as we showed back in the summer, evidence of a widespread change in thinking was hard to find. KPMG has arrived at a similar conclusion this week.

This morning, FairPensions, a British charity which aims to promote responsible investment, has dug deeper into the behaviour of major institutional investors during that supposedly febrile period, and among the nuggets it has produced is the chart below of voting on contentious pay reports at annual meetings.

There are some questions which crop up straight away. What did BlackRock and Standard Life like so much about the Barclays pay deal that no other investor could spot; why did BlackRock think Martin Sorrell’s potential 500% bonus was a goer; and given that, why did almost everyone think a maximum bonus award of 923% of BP CEO Bob Dudley’s salary was just dandy?

The International Monetary Fund this week painted yet another gloomy picture, cutting its 2012 forecast for Africa along with most other countries around the world. In its latest World Economic Outlook, the IMF shaved its 2012 projections for Africa to 5 percent from 5.4 percent.

But it’s not all gloomy for Africa, once called  ”the doomed continent” by the Economist. With its eyes set on next year, the IMF revised up its 2013 outlook to 5.7 percent from 5.3 percent.

Sharing this optimistic outlook for Africa’s future is Africa-focused Russian bank Renaissance Capital:

These are not the best of times for emerging markets but some investors don’t seem too perturbed. According to Societe Generale,  almost half the clients it surveys in its monthly snap poll of investors have turned bullish on emerging markets’ near-term prospects. That is a big shift from June, when only 33 percent were optimistic on the sector. And less than a third of folk are bearish for the near-term outlook over the next couple of weeks, a drop of 20 percentage points over the past month.

These findings are perhaps not so surprising, given most risky assets have rallied off the lows of May.  And a bailout of Spain’s banks seems to have averted, at least temporarily, an immediate debt and banking crunch in the euro zone. What is more interesting is that despite a cloudy growth picture in the developing world, especially in the four big BRIC economies,  almost two-thirds of the investors polled declared themselves bullish on emerging markets in the medium-term (the next 3 months) . That rose to almost 70 percent for real money investors. (the poll includes 46 real money accounts and 45 hedge funds from across the world).

See the graphics below (click to enlarge):

Signals are positive on positioning as well with 38.5 percent of investors reckoning they were under-invested in emerging markets, compared to a quarter who felt they were over-invested. Again, real-money investors appeared more keen on emerging markets, with over 40 percent seeing themselves as under-invested. SocGen analysts write:

Financial markets are odd sometimes. For weeks they have fretted about the outcome of the Greek election and its impact on the future of the euro zone as a whole. But today they appeared to dismiss the outcome despite a result that was about as positive as global investors fearful for euro zone stability could have hoped for.  So what gives?

The logic behind the weeks of trepidation was fairly simple and straightforward. After an inconclusive election on May 6, a second Greek poll on June 17 was due to give a definitive picture of whether Greeks wanted to stay in the euro and with all the budgetary conditions necessary to keep EU/IMF bailout funds in place.  If a victory for parties wanting to scrap the bailout agreement and austerity led to a halt of EU/IMF funds, the fear was that Greece would inevitably be forced out of the single currency bloc in time too. And if that unprecedented event happened, then a chain reaction would be hard to avoid.  If one country goes back to its domestic currency, despite all its debts being denominated in euros, investors would then find it impossible not to assume at least some element of euro exit risk for fellow-bailout recipients Portugal and Ireland and possibly even Spain and Italy, where doubts remain about their market access over time.

Extreme tail risk or not, this set the scene for the jittery markets that ensued during the Greek electoral hiatus of May 6- June 17. Athens stocks lost more than 17%;  Spanish 10-year government bonds lost more than 7% and the euro/dollar exchange rate was down almost 4%. etc. The fear of euro-wide contagion was so-great that the Spanish bank bailout in the interim had a little or no positive impact. And with the global economic growth picture weakening in tandem with, and partly because of, the euro mess, then prices reflecting world demand in general were hit hard by concerns that another shock to the European banking system could trigger a reversal of trillions of euros of European bank lending from around the globe. Crude oil dropped almost 14%, broad commodity prices and emerging market equities lost about 8%.

(This May 25 post has been updated to reflect AGMs which took place on Friday and to include graphics)

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 63 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….

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

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.

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.

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.