Poland, the lonely inflation targeter
Is the National Bank of Poland (NBP) the last inflation-targeting central bank still standing?
The bank shocked many today with a quarter point rate rise, naming stubbornly high inflation as the reason, and signalling that more tightening is on its way. The NBP has sounded hawkish in recent weeks but few had actually expected it to carry through its threat to raise rates. Economic indicators of late have been far from cheerful – just hours after the rate rise, data showed Polish car production slumped 30 percent in April from year-ago levels. PMI numbers last week pointed to further deterioration ahead for manufacturing. And sitting as it does on the euro zone’s doorstep, Poland will be far more vulnerable than Brazil or Russia to any new setback in Greece. Its action therefore deserves praise, says Benoit Anne, head of emerging markets strategy at Societe Generale.
(Poland’s central bank) is one of the last orthodox inflation-targeting central banks in the global emerging market central bank universe. They are taking action because they are seeing inflation creeping up and have decided to be proactive.
The rate rise is especially notable given many central banks in developing countries appear effectively to have surrendered their inflation-fighting mandate. Nowhere is the push for lower interest rates more pronounced than in Brazil where the government last week announced plans to scrap fixed-rate savings deposits in a move that is seen paving the way for more agressive rate cuts. Clearly there is tolerance here for higher inflation, which will still end 2012 well above target.
But many analysts such as Manik Narain at UBS consider Poland’s decision a high-risk one given the growth issues. Narain sees it possibly motivated by the need to signal Poland will not welcome further currency weakness (the zloty like most emerging currencies has shed much of its early-2012 gain) Therefore a prolonged monetary tightening cycle is unlikely, he says. Indeed many reckon the NBP may find itself, like the European Central Bank last year, reversing an ill-considered rate rise. Analysts at Capital Economics write:
If we are right in expecting growth and inflation to slow by more than most expect over the second half of this year then this may well be the NBP’s “ECB moment”. Recall that having hiked rates twice in the first half of 2011, the ECB was forced to start loosening policy once again by November as the economy weakened. In Poland’s case, we think there is a good chance that today’s rate hike will be reversed by the end of the year.
March bulls give way to April bears in emerging markets
The dust has settled on a scintillating first quarter for emerging markets but the cross-asset rally of the first three months has already run out of steam. A survey by Societe Generale of 69 EM investors shows that over half are bearish — at least for the near-term.
This marks quite a turn-around from the March survey, when 80 percent of investors declared themselves bullish on emerging markets. What’s more, investors are currently running very little risk and 47 percent of hedge fund respondents (these make up half the survey) feel they are over-invested in EM. (The following graphic shows the findings — click on it to enlarge)
Almost a quarter of the hedge fund and real money investors are neutral tactically on the market, compared to just 4.5 percent last month. Serious optimism has dried up, SocGen commented:
Looking at the distribution of answers, it is quite clear that the mega-bullish investor on EM has disappeared at this point.
The return of worries about the euro zone debt crisis, U.S. growth and a slowdown in China have all contributed to a higher degree of pessimism on financial markets. It’s not all gloom though. Looking at emerging markets over the next 3 months, sentiment does pick up, with 64 percent of investors bullish. So this falling out of love with EM could be a temporary blip.
Only 13 percent of investors were more bearish on a 3-month time horizon than over the next two weeks. That included 83 percent of real money investors that believed in an improvement in the GEM outlook from two weeks to three months.
The haves and have-nots of the (energy) world
Nothing like an oil price spike to bring out the differences between the haves and have-nots of this world. The ones who have oil and those who don’t.
With oil at $124 a barrel, the stock markets of big oil importers India and South Korea posted their first weekly loss of 2012 on Friday. But in Russia, where energy stocks make up 60 percent of the index, shares had their best day since November, rising more than 4 percent. The rouble’s exchange rate with the dollar jumped 1.5 percent but the lira in neighbouring Turkey (an oil importer) fell.
Emerging currencies and shares have performed exceptionally well this year. Some of last year’s laggards such as the Indian rupee have risen almost 10 percent and stocks have jumped 16-18 percent. But unless crude prices moderate soon, the 2012 rally in the stocks, bonds and currencies of oil-poor countries may have had its day. Societe Generale writes:
As oil prices are now flirting with $125 per barrel, it is reasonable to start thinking about the potential impact on global emerging markets of an oil price shock and the currencies likely to gain the most from elevated oil prices and those that won’t….Russia appears as the clear winner of a potential oil price shock, and the rouble is therefore the best hedge against this risk
The bank advises its clients to buy the rouble and sell the currencies of oil importing Israel and Hungary. In Asia it suggests selling the Korean won. It also recommended exiting long positions on the Turkish lira.
Russia is the clear winner. Revenues from the energy sector provide half the state’s income and according to the graphic below from SocGen, oil exports account for 15 percent of Russia’s economy. At the other end of the spectrum are Taiwan, Korea and Turkey where oil imports make up between 7-12 percent of GDP.
BRIC: Brilliant/Ridiculous Investment Concept
BRIC is Brazil, Russia, India, China — the acronym coined by Goldman Sachs banker Jim O’Neill 10 years back to describe the world’s biggest, fastest-growing and most important emerging markets. But according to Albert Edwards, Societe Generale‘s uber-bearish strategist, it also stands for Bloody Ridiculous Investment Concept. Some investors, licking their wounds due to BRIC markets’ underperformance in 2011 and 2010, might be inclined to agree — stocks in all four countries have performed worse this year than the broader emerging markets equity index, to say nothing of developed world equities.
For years, money has chased BRIC investments, tempted by the countries’ fast growth, huge populations and explosive consumer hunger for goods and services. But Edwards cites research showing little correlation between growth and investment returns. He points out that Chinese nominal GDP growth may have averaged 15.6 percent since 1993 but the compounded return on equity investments was minus 3.3 percent.
But economic growth — the BRIC holy grail – is also now slowing. Data showed this week that Brazil posted zero growth in the third quarter of 2011 compared to last year’s 7.5 percent. Indian growth is at the weakest in over two years. In Russia, rising discontent with the Kremlin — reflected in post-election protests — carries the risk of hitting the broader economy. And China, facing falling exports to a moribund Western world, is also bound to slow. Edwards goes a step further and flags a hard landing in China as the biggest potential investment shock of 2012. “Yet investors persist in the BRIC superior growth fantasy…If growth does matter to investors, they should be worried that things seem to be slowing sharply in the BRIC universe,” he writes.
Thomson Reuters data earlier this year appeared to show some disenchantment with the BRIC concept. After rising 1600-fold between 2003 and 2007, assets in BRIC funds had shrunk to $28 billion by August 2011, almost a quarter below 2007 peaks, a bigger fall in percentage terms than most other fund categories.
What of O’Neill, the man behind the moniker? He talks increasingly of Growth Markets, a broader grouping that also includes other promising emerging countries such as Turkey and Mexico. But at a Reuters investment summit this week O’Neill noted that the main reason for BRIC stocks’ underperformance has been a massive monetary policy tightening exercise in all four countries, prompted by rising inflation. With that at an end and valuations cheaper than they have been for a long time, he expects the BRIC markets, especiallly China, to do better next year despite slower growth. Time will tell.
What’s on your reading list?
If anyone needed a reminder that Christmas and NewYear holidays are almost here, Societe Generale has provided it. Analyst Dylan Grice has picked up the mantle of the departed James Montier to offer a seasonal reading list for those with a fixation about investment and economics.
True, some people might prefer to immerse themselves in a rollicking sea tale from Patrick O’Brian or a good old Sookie Stackhouse vampire mystery. But we know that Reuters blogs’ readers are a discriminating lot with a keen understanding of and passion for finance. So here is Dylan’s list of six must-reads:
1. Manias, Panics and Crashes, by Charles P. Kindleberger; 2. The Essays of Warren Buffet, edited by Richard Cunningham; 3. Reminiscences of a Stock Operator, by Edwin Lefevre; 4. Fooled by Randomness, by Nassim Taleb; 5. The Case against the Fed, by Murray Rothbard; 6. Judgement under Uncertainty: Heuristics and Biases, eds Kahneman, Slovic and Tversky.
So what is your reading list? Tell us what you would include and why.
It is always interesting to see a left or right slant in people’s non-fiction book lists.
Economy is just one of the aspects of social science we should be taking interest in.
My list, abbreviated”
1.)Any and all of Malcolm Gladwell’s books- “Blink”, “The Outliers”, and “The Tipping Point: How Little Things Can Make a Big Difference”
2.)”What’s the Matter With Kansas? How Conservatives Won the Heart of America” by Thomas Frank.
3.)”Guns, Germs, and Steel: the Fates of Human Societies” by Jared M. Diamond
4.)”From Poverty to Prosperity: Intangible Assets, Hidden Liabilities, and the Lasting Triumph Over Scarcity” by Arnold Kling and Nick Schulz
This short list covers what should be pertinent to the average American, relaxed and liberal in values, yet surviving hand to mouth under someone else’s thumb.
from MacroScope:
Crisis reading: What’s in the book bag?
Readers of MacroScope who live in the northern hemisphere will be gearing up for some summer reading.
James Montier, the market psychologist who is also an equity analyst at Societe Generale, has come up with his annual recomendations of what to read. The full list is here, but for the current economic and market crisis he has this to offer:
My favourite book in this category is Bill Fleckenstein’s ‘Greenspan’s Bubbles’ -- an excellent exposé of incompetence during Alan Greenspan's tenure as Fed Chairman. The next choice in this group is Whitney Tilson and Glen Tongue’s ‘More Mortgage Meltdown’. This book explains clearly how we ended up in this mess (and is based on the authors -- real time experience), and an added bonus is the insight into Tilson's investment process provided by the case studies. My final choice in this section is Jim Grant’s ‘Mr. Market Miscalculates’. I've mentioned this excellent book before, and I believe it deserves a place on all investors' bookshelves.
Montier got MacroScope thinking. There must be many more crisis books, or related ones, that are worthy of a read as the summer rolls in. How about John Kenneth Galbraith's 'The Great Crash, 1929' or Tom Wolfe's 'Bonfire of the Vanities', which still has one of the best descriptions ever of how bond traders make money.
So let's have your suggestions. What should you read to mark the crisis?
