Global Investing

It’s been a pretty miserable 2011 for India and Tuesday’s collapse of the rupee to record lows beyond 52 per dollar will probably make things worse. Foreigners, facing a fast-falling currency, have pulled out $500 million from the stock market in just the last five trading sessions.   That means net inflows this year are less than $300 million, raising concerns that India will have trouble financing its current account gap.  The weaker currency also bodes ill for the country’s stubbornly high inflation.

Why is the rupee suffering so much? First of all, it is a casualty of the general exodus from emerging markets. As a deficit economy, India is bound to suffer more than say Brazil, Korea or Malaysia.  And 18 months of interest rate rises have taken a toll on growth.

UBS analysts  proffer another explanation. They point out a steady deterioration in India’s net reserve coverage since the 2008 crisis. The reserve buffer — foreign-exchange reserves plus the annual current account balance, minus short-term external debt — stands at 9 percent of GDP, down from 14 percent in 2008.  Within emerging markets, only Egypt, Venezuela and Belarus saw bigger declines in net reserve coverage than India.

“What it really means for the present, in our view, is that the rupee is now joining the ranks of higher beta “risk” currencies,” UBS said.

Still not everyone is overly perturbed. Some expect the rupee to rebound as the global picture improves. One reason is that the rupee is generally seen as undervalued in nominal terms, as well as on purchasing power parity (PPP) basis, more so than most emerging currencies. The latter is the rate at which one currency would convert to another to buy the same amount of goods and services in each country. On that basis the Indian rupee would equate to 20 to the dollar, data from the World Bank/IMF shows.  Given the strong underlying story, investors are more likely to buy back the rupee than say the South African rand when risk appetite improves.

Even for an American who's not wealthy, Geneva has a reputation as a global centre for wealth management - the place the world's rich come to stash their money and (they hope) make it grow.

    But you don't necessarily expect it to be so aggressive -- after all, the rich tend to be demure when it comes to their banking.

    Imagine one reporter's surprise, then, on arriving in the airport in Geneva and seeing bank ads everywhere. Think of the casino adds in Las Vegas's McCarron Airport or the technology ads in San Jose's Mineta Airport: it's the exactly the same in Geneva, only with wealth managers.

They keep telling us that the recession is over so maybe now’s the time to start worrying about inflation. That’s the view many wealthy investors are already taking, reasoning that a little bit of the yellow shiny stuff will provide some comfort as we start piling our cash into wheelbarrows to do the weekly groceries shop.

It is gold exchange traded commodities (ETCs) that have seen the biggest investor inflows this year so perhaps it’s not surprising that the gold price broke through $1,000 an ounce this week.

“Investors are concerned about sovereign risk, quantitative easing, government deficits and the outlook for the US dollar,” said Nicholas Brooks, head of research and investment strategy at ETF Securities, at a Dow Jones Indexes commodities briefing on Tuesday. “They are using gold as an insurance policy.”

When Switzerland sold its stake in the country's largest bank at the top end of its price range, it made a hefty profit on compensation for interest lost from shedding the mandatory convertible notes it held in the bank early. It's not as if it didn't deserve a big payoff, having gone to the mat with the mighty U.S. government to defend UBS over allegations that it aided and abetted wealthy American tax dodgers.

Our source says the Swiss sold 332 million shares at 16.50 Swiss francs each, at the top end of a 16 to 16.50 francs price range, with books being three to five times oversubscribed. That gives government 5.5 billion Swiss francs ($5.1 billion), plus 1.8 billion francs in compensation, making a profit on the 6 billion francs it shelled out in its rescue attempt last October.

Has the U.S. regulatory offensive poked so many holes in the Swiss banking system as to rob it of its best asset? While UBS is starting to pay its dues, it could be taking on fresh liability by complying with the order to hand over the names of thousands of UBS's rich American clients to Washington. This could result in fresh provisions for big legal bills, as outed clients sue UBS for breaking that same Swiss banking secrecy law that had been so important to the wealth management bank for so long.

A bull(ish) note from growing investment banking group Jefferies Putnam Lovell predicting "a steady flow of M&A activity in the global asset management industry" for the second half of 2009.

Jefferies is basing its view on the following factors:

divestitures by larger financial groups shoring up their capital base  pure-play asset managers looking to bulk up private equity firms drawn not least by lower capital requirements

And the firm is putting its money where its mouth is. It has recently been hiring scores of senior bankers from rival firms as it seeks to build itself a major presence.

This hasn't been without its problems. UBS filed a claim against Jefferies after the mid-sized investment bank lured away nearly three dozen of the Swiss bank's healthcare bankers.

Hardly suprising that investment funds want their clients to cough up some money. It is, after all, how they get paid. So an appeal to pension funds from UBS Global Asset Management to stop sitting on the fence is not entirely pro bono. Nonetheless, a new note from the firm that trustees are actually risking things by hanging on to large cash reserves is worth a run through.

First, it says, there is the danger that they will lose out on any market recovery. UBS reckons stocks are well priced with high expected returns. It did not say so, but people sitting on cash in late November to early January missed a more than 25 percent rally in world stocks.

Second, UBS reckons hanging on to cash is not a good move given the amount of higher-yielding low-risk investments currently available. Some investment grade corporate bonds are trading at 10 percent-plus yields.

Some more bits and bobs to capture the current mood among investors:

– Some stock indexes have started to fall below their 2008 lows, meaning the turn-of-the-year rally has petered out. Dead cat bounce?

– Analysts are becoming increasingly downbeat about corporate earnings. Seven of the 10 sectors in the S&P 500 are looking at a year-on-year decline in earnings, according to Thomson Reuters proprietary research. That’s the highest number of sectors in negative territory since Q4 2001.

– UBS economists have sharply revised down estimates for 2009 growth in Japan, China, much of the rest of Asia, and the euro zone. They now expect world GDP to grow a paltry 0.4 percent this year.

It is now official — Swiss bank UBS has ditched its much-cherished “One Bank” strategy.

The bank said it would split its business in three autonomous units, after taking yet another credit hit and posting a worse-than-expected second-quarter loss.

The news will spark further talk the bank may hive off business units such as its embattled investment bank. UBS in a conference call would not rule out divestments further down the line, though it said it was not now working on such plans.