Global Investing

Speculation is growing that new central bank governor Elvira Nabiullina will cut rates to help stimulate faltering growth soon after takes up her job later this month, but the resilience of the Russian consumer may be another important factor in giving the economy a lift.

Retail sales figures have been lower than expected for the first quarter of 2013, leading economists to revise downwards their prediction for this driver of growth, though performance in the construction and cement sectors is improving, according to Morgan Stanley research:

Overall, we estimate that household consumption growth has accounted for 65 percent of Russian growth over the last decade.

The source of this growth will come from incrementally rising incomes. Nominal wage growth has been in double digits since 2010,  according to the research, though once adjusted for inflation it fell last year by 4.2 percent versus a rise of 11.2 percent in April the previous year.

A tight labour market  is putting upward pressure on wages, though again this has been dampened due to high inflation (7.2 percent in April).

The South African rand has lost most ground amongst emerging market currencies, according to Reuters data, falling almost 10 percent so far this year to hit 4-year lows against the dollar.

That is perhaps not so surprising given the country’s high level of dependence on the minerals and mining sectors, which have been disrupted by labour strikes along the same lines evident in the summer of 2012. Lonmin, the world’s third largest producer of metal, said it stopped its production of its Marikana mine near Rustenburg following strikes over wages.

Net commodity exports – Morgan Stanley and UNCTAD

With the metals and mining sectors accounting for 60 percent of South Africa’s exports, the strong relationship between these sectors and the rand is not surprising. A falling currency has a knock-on effect of facilitating inflation, especially as imports grew faster than exports for the first quarter of 2013. Meanwhile platinum prices have been in a gradual downwards trend since February.

More on the subject of Japanese overseas investment.

As we said here and here, Japanese cash outflows to world markets have so far been limited to a trickle, almost all from retail mom-and-pop investors who like higher yields and are estimated to have 1500 trillion yen ($15.40 trillion) in savings. As for Japan’s huge institutional investors — the $730 billion mutual fund industry and $3.4 trillion life insurance sectors — they are sitting tight.

If some are to be believed, the hype over outflows is misguided. Morgan Stanley for one reckons Japanese insurers’ foreign bond buying may rise by just 2-3 percent in the next two years, amounting to $60-100 billion. Pension funds are even less likely to re-balance their portfolios given large cash flow needs, the bank said.

But a Reuters survey last week revealed several insurance companies are indeed considering boosting unhedged foreign bond holdings.  Insurers currently hold almost half their assets in Japanese government bonds and risk being crowded out of the JGB market as the central bank ramps up purchases.  A recent survey by Barclays also showed Japanese investors keen on overseas debt.

The jury may be out on whether Messrs. Abe and Kuroda will succeed in cajoling the Japanese economy from its decades-long funk but the cash is betting they will. Domestic and foreign investors have stampeded for Tokyo equities, and Morgan Stanley has been crunching the numbers.

Since 2005, Japanese investors built up a 14 trillion yen (over $140 billion) portfolio of foreign equities. But between January-March 2013, they offloaded a third of this — about $39 billion.  Going back to July 2012 when they first started bringing cash home, the Japanese have sold $53 billion in foreign equities, or 36 percent of equity holdings.

If one were to include all foreign portfolio investments, they sold a net $74 billion worth of assets in the first three months of 2013. Morgan Stanley says this is the the most since 2005. You can see their graphic below (click on it for a bigger version).

Indians have reacted to the latest gold prices falls by — buying more gold. And why not? Aside from Indians’ well known passion for the yellow metal (yours truly not excluded) gold has by and large served well as an investment: annual returns over the past five years have been around 17 percent, Morgan Stanley notes.

Now, gold’s near 20 percent plunge this year has wiped some $300 billion off Indians’ gold holdings, Morgan Stanley estimates in a note (households are believed to own about 15,000 metric tonnes of gold). So is the gold rush in India over?

Possibly. Indian gold imports have doubled to around 3 percent of GDP in the past five years. That rise is partly down to greater wealth which translates into more wedding jewellery purchases. But the more unpleasant side of the equation is India’s inflation problem. Look at the following charts from MS that shows how negative real interest rates have encouraged savings in gold rather than financial instruments:

Taiwan’s forecast-beating export data today came as a pleasant surprise amid the general emerging markets economic gloom.  In a raft of developing countries, from South Korea to Brazil, from Malaysia to the Czech Republic, export data has disappointed. HSBC’s monthly PMI index showed this month that recovery remains subdued.

With Europe still in the doldrums, this is not totally unsurprising. But economists are growing increasingly concerned because the lack of export growth coindides with a nascent U.S. recovery. Clearly EM is failing to ride the US coattails.

Does all this confirm the gloomy prediction made last month by Morgan Stanley’s chief emerging markets economist, Manoj Pradhan. Pradhan reckons that a U.S. economy in recovery would be a competitor rather than a client for emerging markets, as  the world’s biggest economy tries to reinvent itself as a manufacturing power and shifts away from consumption-led growth. It is the latter that helped underwrite the export-led emerging market boom of the past decade.

It’s not shaping up to be a good year for emerging equities. They are almost 3 percent in the red while their developed world counterparts have gained more than 7 percent and Wall Street is at record highs. When we explored this topic last month, what stood out was the deepening profit squeeze and  steep falls in return-on-equity (ROE).  The latest earnings season provides fresh proof of this trend and is handily summarized in a Morgan Stanley note which crunches the earnings numbers for the last 2012 quarter.

The analysts found that:

–With 84 percent of emerging market companies having already reported last quarter earnings, consensus estimates have been missed by around 6 percent. A third of companies that have already reported results have beaten estimates while almost half have missed.

– Singapore, Turkey and Hong Kong top the list of countries where earnings beat expectations while earnings in Hungary, Korea and Egypt have mostly underwhelmed. Consumer durables companies recorded the biggest number and magnitude of misses at 82 percent.

Emerging bond issuance and inflows have had a strong start to the year but can it last?

Data from JPMorgan shows that emerging market sovereigns sold hard currency bonds worth $9.6 billion last month while companies raised $51.2 billion (that compares with Jan 2012 issuance levels of $17.5 billion for sovereigns and $23.9 billion for corporates). Similarly, inflows into EM debt were well over $10 billion last month, very probably topping the previous monthly record,  according to JPM.

But U.S. Treasury yields are rising, typically an evil omen for equities and emerging markets. Ten- year U.S. yields, the underlying risk-free rate off which many other assets are priced,  rose this week to nine-month highs above 2 percent. That has brought losses on emerging hard currency debt on the EMBI Global index to  2 percent so far this year. (there is a similar picture across equities, where year-to-date returns are barely 1 percent despite inflows of around $24 billion). Historically, negative monthly returns caused by rising U.S. yields have tended to lead to outflows.

The issue of the falling yen is focusing many minds these days, nowhere more than in South Korea where exporters of goods such as cars and electronics often compete closely with their Japanese counterparts. These companies got a powerful reminder today of the danger in which they stand — quarterly profits from Hyundai fell sharply in the last quarter of 2012.  (See here to read what we wrote about this topic last week)

Korea’s won currency has been strong against the dollar too, gaining 8 percent to the greenback last year. In the meantime the yen fell 16 percent against the dollar in 2012 and is expected to weaken further. Analysts at Morgan Stanley pointed out in a recent note that since June 2012, Korean stocks have underperformed Japan, corresponding to the yen’s 22 percent depreciation in this period. Their graphic below shows that the biggest underperformers were consumer discretionary stocks (a category which includes auto and electronics manufacturers). Incidentally, Hyundai along with Samsung, makes up a fifth of the Seoul market’s capitalisation.

Shares in Hyundai and its Korean peer Kia have fared worst among major global automakers for the past three months – down 5 percent and 18 percent, respectively.  Both companies expect sales this year to be the slowest in a decade. Toyota on the other hand has risen 30 percent and expects to reach the top spot in terms of world sales for the first time since 2010.

Global Investing has discussed in the past what a golden opportunity the Iranian crisis has proved for Turkey. Between January and July 2012 it ratcheted up gold exports to Iran ten-fold compared to 2011 as inflation-hit Iranians clamoured for the precious metal. Since August exports appear to have been routed via the UAE, possibly to circumvent U.S. sanctions on trade with Teheran.

The trade has been a handy little earner. Evidence of that has shown up in Turkey’s data all year as its massive current account deficit has steadily shrunk. On Friday, official data showed the Turkish trade gap falling by a third in October from year-ago levels. And yes, precious metal exports (read gold) came in at $1.5 billion compared to $322.4 million last October. In short, a jump of 370 percent.

But the days of the lucrative trade may be numbered, according to Morgan Stanley analyst Tevfik Aksoy. Aksoy notes that the gold exports can at least partly be accounted for by the considerable amounts of lira deposits that Iran held in Turkish banks as payment for oil exports. (Yes, there’s an oil link to all this. Turkey buys oil from Iran but pays lira due to Western sanctions against paying Teheran hard currency. Iranian firms use liras to shop for Turkish gold. See here for detailed Reuters article). These deposits are being steadily converted into gold and repatriated, Aksoy says.