Global Investing

Pakistan, Nigeria, Bulgaria… the cash keeps coming

The frontier markets juggernaut continues. Here’s a great graphic from Bank of America/Merrill Lynch showing the diverging fund flow dynamic into frontier and emerging equity markets.

What it shows, according to BofA/ML  is:

Frontier market funds with year-to-date inflows of $1.5 billion have decoupled from emerging markets ($2.1 billion outflows year-to-date)

In other words, frontier fund inflows since January equate to 44 percent of their assets under management (AUM), the bank says.

In terms of market returns, frontier equities, comprised of some of the most esoteric and supposedly illiquid markets, are up 18 percent this year while MSCI’s broader emerging equity index has lost 9 percent. Some frontier markets such as the UAE, Bulgaria and Pakistan have returned over 50 percent this year in dollar terms. That takes some beating.

The reasons for the outperformance are known.  (Here’s an excellent piece on this subject by my colleague Carolyn Cohn)  In short, these stocks have attracted those long-haul, adventurous investors who are aware of the risks and are happy to park their money somewhere for a few years. Many of the countries are benefiting from relatively high commodity prices. Unlike in the big emerging economies, listed companies in Kenya or Pakistan tend to be true plays on the emerging market consumer.

Not everyone is “risk off”

Who would have thought it. As fears over the euro zone’s fate, Chinese economic growth and Middle Eastern politics drive investors toward safe-haven U.S. and German bonds, some have apparently been going the other way.  According to JPMorgan, bonds from so-called frontier economies such as Pakistan, Belarus and Jordan (usually considered high-risk assets) have performed exceptionally well, doing far better in fact than their peers from mainstream emerging markets.  The following graphic from JPM which runs the NEXGEM sub-index of frontier debt, shows that returns on many of these bonds are running well into the double digits.

NEXGEM returns of 8.4 percent  are on par with the S&P 500, writes JPMorgan and outstrip all other emerging bond categories. Clearly one reason is the lack of correlation with the mainstream asset classes, many of which have been selling off for weeks amid growth fears and in the run up to French and Greek elections.  Second, investors who tend to buy these bonds usually have a pretty high risk-tolerance anyway as they keep their eyes on the double-digit yields they offer.

So year-to-date returns on Ivory Coast’s defaulted debt are running at over 40 percent on hopes that the country will resume payments on its $2.3 billion bond after June. The underperformer is Belize whose bonds suffered from a default scare at the start of the year.

Urbanization sweet spots

It’s a hard slog sometimes looking for new and surprising sources of global economic growth that have not already be heavily discounted by global investors, especially in the uncertain world of 2012. It’s been as hard of late to find new arguments to invest in China and quite a few people suggesting the opposite.

But a Credit Suisse report out on Tuesday homed in on worldwide urbanization trends to find out where this well-tested driver of economic activity was likely to have most impact int he 21st century. For a start, the big aggregate numbers are as dramatic as you’d imagine. More than half  of the world’s population now lives in urban areas, crossing that milestone for the first time in 2009. And, accordingly to United Nations projections, urban dwellers will account for 70 percent of humanity by 2050. As recently as 1950, 70 percent of us were country folk.

CS economists Giles Keating and Stefano Natella crunch the numbers and reckon that, typically, a five percent rise in urban populations is associated with a 10 percent rise in per capita economic activity. Crunching them further, they find that there’s a “sweet spot” as the urban share of the population is moving from 30 percent to 50 percent and per capita GDP growth peaks. Emerging markets as a whole are currently about 45 percent, with non-Japan Asia and sun-Saharan Africa standing out. Developed economies are as high as 75 percent.

Buyer beware or beware the buyers?

Hundreds of Bangladeshi investors have rioted on the streets of Dhaka in recent days over stock prices that have plunged nearly 18 percent since the start of the year. Police used batons and tear gas to break up protests that blocked roads around the country’s main stock exchange.

If this sounds familiar, rewind back to 2008 to another part of the Indian subcontinent, when angry investors rampaged through the Karachi Stock Exchange after a series of precipitous share price falls.

In less developed markets, retail investors often bear the brunt of losses as they tend to account for the bulk of total investment rather than institutional players.

from MacroScope:

Argentina set for wheat windfall

Not everyone is upset about the 50 percent surge in wheat prices over the past month.

Wheat's rise to 2-year highs was caused first by heavy rains in Canada and now by a Russian export ban that was triggered by its worst drought in decades. There are floods in Pakistan, another major wheat grower. But while the wheat market shenanigans are triggering much hand-wringing across developing nations, Argentina, one of the world's top seven wheat exporters, may be set for a windfall.

Farmers there are increasing wheat plantings, the Buenos Aires Grains Exchange says. The South American country is expected to export around 8 million tonnes of wheat in the 2010-2011 year. With wheat futures on the Chicago Board of Trade at around $8 a bushel, a very simple calculation shows export revenues are going to very significant.

from Pakistan: Now or Never?:

“Plan C” – Pakistan turns to the IMF.

Pakistan has agreed with the International Monetary Fund (IMF) on a $7.6 billion emergency loan to stave off a balance of payments crisis. 

Shaukat Tarin, economic adviser to the prime minister, said the IMF had endorsed Pakistan's own strategy to bring about structural adjustments. The agreement is expected to encourage other potential donors, who are gathering in Abu Dhabi on Monday for a "Friends of Pakistan" conference.

The government had long delayed announcing its plans to turn to the IMF for help and President Asif Ali Zardari said in September the country did not want to seek IMF assistance. Tarin said in October that going to the IMF was "Plan C" if other lenders failed to come through.  "If we want to go to the IMF, we can ... but only as a backup," he said.