Global Investing

Emerging markets funds shun Brazil, South Africa

Global emerging markets equity funds have cut average weightings to Brazil and South Africa for the fourth straight quarter, according to the latest allocations data from fund research firm Lipper.

You can see a full interactive graphic of the allocations data here or by clicking on the snapshot below.

The average allocation to Brazil has fallen by 1.75 percentage points over the past year to stand at 11.6 percent of portfolios by the end of the April-June 2013 quarter. South Africa’s average weighting has fallen to 6.0 percent from 7.3 percent in the second quarter of 2012.

The data comes from about 400 GEM funds for which Lipper has recent allocations data. At the last count they held combined assets of $175 billion. GEM funds offer a useful gauge of investor sentiment around emerging markets as they can generally allocate money across the sector.

China and India have seen the sharpest increase in average allocations during the year in percentage points terms, even as fears of a China slowdown have gathered momentum and stocks .MSCICN have barely eked out a gain. (Full Story)

Asia’s credit explosion

Whatever is happening to all those Asian savers? Apparently they are turning into big time borrowers.

RBS contends in a note today that in a swathe of Asian countries (they exclude China and South Korea) bank deposits are not keeping pace with credit which has expanded in the past three years by up to 40 percent.

Some of this clearly is down to slowing exports and a greater focus on the domestic consumer.  Credit levels are also rising overall in these economies because of borrowing for big infrastructure projects.  But there are signs too that credit conditions are too loose.

Emerging Policy-Doves reign

Rate cuts are still coming thick and fast in emerging markets — in some cases because of falling inflation and in others to deter the gush of speculative international capital.

Arguably the biggest event in emerging markets is tomorrow’s Reserve Bank of India (RBI) meeting which is expected to yield an interest rate cut for the first time in nine months.

India’s inflation, while still sticky, eased last month to a three-year low of around 7 percent. And a quarter point rate cut to 7.75 percent will in effect be a nod from the RBI to the government’s recent reform efforts.  In anticipation of a rate cut, Indian 10-year bond yields have dropped 50 basis points since the start of the year.  But the RBI, probably the world’s most hawkish central bank at present, has warned that markets need not expect a 50 bps cut or even a sustained rate-cutting campaign. Governor Duvvuri Subbarao said last week inflation still remains too high for comfort, while on Monday the RBI said in a quarterly report that more reform was needed to make the central bank turn its focus on growth.

Emerging Policy-Hawkish Poland to join the doves

All eyes on Poland’s central bank this week to see if it will finally join the monetary easing trend underway in emerging markets. Chances are it will, with analysts polled by  Reuters unanimous in predicting a 25 basis point rate cut when the central bank meets on Wednesday. Data has been weak of late and signs are Poland will struggle even to achieve 2 percent GDP growth in 2013.

How far Polish rates will fall during this cycle is another matter altogether. Markets are betting on 100 basis points over the next 6 months but central bank board members will probably be cautious. Inflation is one reason  along with the  the danger of excessive zloty weakness that could hit holders of foreign currency mortgages. One source close the bank tells Reuters that 75 or even 50 bps would be appropriate, while another said:

“The council is very cautious and current market expectations for rate cuts are premature and excessive.”

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)

from MacroScope:

The thin line between love and hate

The opinion on Turkey’s unorthodox monetary policy mix is turning as rapidly as global growth forecasts are being revised down.

Earlier this month, its central bank was the object of much finger-wagging after it defied market fears over an overheating economy by cutting its policy rate. It defended the move, arguing that weaker global demand posed a greater risk than inflationary pressures.

Investors were not persuaded. When I told one analyst about the Turkish rate move, he practically sputtered down the phone: "You're not kidding?!"

Islamic finance faces diversity crossroads

Is diversity of opinion boon or bane for Islamic finance?

Market participants gathered for a conference at Thomson Reuters’ London headquarters earlier this week discussed the need for more convergence in the industry estimated to be worth $1 trillion.

Of particular focus was the role of sharia scholars who rule on whether investment products are in line with Islamic teachings.

“Sharia scholars who sit as advisers have a crucial role to play in retaining public confidence,” Rifaat Ahmed Abdel Karim, secretary general of the Islamic Financial Services Board, an international standards-setting body for the industry, told the forum.

from Global News Journal:

Back to the future in Malaysia with Anwar sodomy trial II

By Barani Krishnan

A decade ago, Malaysia's former deputy prime minister Anwar Ibrahim was on trial for sodomy and corruption in a trial that exposed the seamy side of Malaysian justice and the anxieties of a young country grappling with a crushing financial crisis and civil unrest.

Anwar is Malaysia's best known political figure, courted in the U.S. and Europe and probably the only man who can topple the government that has led this Southeast Asian country for the past 51 years. Photo: Anwar Ibrahim, with a bruised eye, at court on Sept 30, 1998 during his his first trial. REUTERS/David Loh Now the leader of the opposition, will go on trial next week again charged with sodomising a 23-year old male aide. The trial once again looks likely to provide gory evidence and bringing some unwanted attention from the world's media on this Southeast Asian country of 27 million people. It could also embarrass the government and draw international criticism.

Anwar vowed in a recent interview to fight what he says are trumped up charges.

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..."