Global Investing

Emerging markets may not have all the technological know-how in civil aerospace, but from China across the world to Brazil, they do have the cash.

The civil aerospace sector performed well in 2013, according to Societe Generale data, trading at a 4 percent premium over the MSCI world index, while the defence sector has steadied, and in the medium to long term civil aerospace should be supported by strong orderbooks from emerging economies.

Research from PwC shows the global aviation industry is set to increase by 3.3 percent to 68 billion by 2022, driven by an increase in fleet size.

Last month China decided to ease a boycott of $11 billion in Airbus jet orders. A letter seen by Reuters gives a breakdown of the A330 orders, the details of which have been mostly kept secret awaiting final approval from the Chinese government.

They include 10 aircraft for Air China, 10 for Hainan Airlines, 10 for China Southern and 15 for China Eastern. The letter said first deliveries were tentatively scheduled for mid-2013.

Far from the rules of the dusty old investment almanac, it’s up, up and away in May after all. And judging by the latest batch of economic data, markets may well have had good reason to look beyond the global economic ‘soft patch’ – with US employment, Chinese trade and even German and British industry data all coming in with positive surprises since last Friday. Is QE gaining traction at last?

Well, it’s still hard to tell yet in the real economy that continues to disappont overall. But what’s certain is that monetary easing is contagious and not about to stop in the foreseeable future – whether there’s signs of a growth stabilisation or not. With the Fed, BoJ and BoE still on full throttle and the ECB cutting interest rates again last week, monetary easing is fanning out across the emerging markets too. South Korea was the latest to surprise with a rate cut on Thursday, in part to keep a lid on its won currency after Japan’s effective maxi devaluation over the past six months. But Poland too cut rates on Wednesday. And emerging markets, which slipped into the red for the year in February, have at last moved back into the black – even if still far behind year-to-date gains in developed market equities of about 16%!

Not only have we got new records on Wall St and fresh multi-year highs in Europe and Japan, there’s little sign that either this weekend’s meeting in London of G7 finance chiefs or next weekend’s G20 sherpas gathering in Moscow will want to signal a shift  in the monetary stance. If anything, they may codify the recent tilt toward easier austerity deadlines in Europe and elsewhere. But inevitably talk of unintended consequences of QE and bubbles will build again now as both equity and debt markets race ahead , even if the truth is that asset managers have been remarkably defensive so far this year in asset, sector and geographical choices …  one can only guess at what might happen if they did actually start to get aggressive! Perhaps the next pause will have to come from the Fed thinking aloud again about the longevity of its QE programme — so best watch those thought bubbles!

By Philip Baillie

Emerging equities may have significantly underperformed their richer peers so far this year (they are about 4 percent in the red compared with gains of more than 6 percent for their MSCI’s index of developed stocks) , but almost a third of high net-worth individuals are betting on a rebound in coming months.

A survey of more than 1,000 high net-worth investors by J.P. Morgan Private Bank reveals that 28 percent of respondents expect emerging market equities to perform best in the next 12 months, outstripping the 24 per cent that bet their money on U.S. stocks.

That gels with the findings of recent Reuters polls where a majority of the 450 analysts surveyed said they expect emerging equities to end 2013 with double-digit returns.

Sterling looks likely to be one of this year’s big G10 currency casualties (the other being  yen).  Having lost 7 percent against the dollar and 5.5 percent to the euro so far this year on fear of a British triple-dip recession, sterling probably has further to fall.  (see here for my colleague Anirban Nag’s take on sterling’s outlook).

Many see an opportunity here — as a convenient funding currency to invest in emerging markets. A funding currency requires low interest rates that can bankroll purchases of higher-yielding assets including stocks, other currencies, bonds and commodities. Sterling ticks those boxes.  A funding  currency must also not be subject to any appreciation risk for the duration of the trade. And here too, sterling appears to win, as the Bank of England’s remit widens to give it more leeway on monetary easing.

All in all, it’s a better option than the U.S. dollar, which was most used in recent years, or the pre-crisis favourite of the Swiss franc, says Bernd Berg, head of emerging FX strategy at Credit Suisse Private Bank.

Whoosh! The gloomy start to the final quarter seems to have been swept away again by the beginnings of a half decent earnings season stateside – at least against the backdrop of dire expectations – and a steady drip feed of economic data surprises from the United States and elsewhere. Moody’s not downgrading Spain to junk has helped enormously and the betting is now that the latter will now seek and get a precautionary credit line, which would not require any bailout monies up front but still unleash the ECB on its bonds should they ever even need to – and,  given Thursday’s successful sale of 4.6 billion euros of 3-, 5- and 10-year Spanish government bonds,  they clearly don’t at the moment (almost 90% of Spain’s  original 2012 borrowing target has now been raised). What’s more, Greek euro exit forecasts have been put back or reduced meantime by big euro zone debt bears such as Citi and others, again helping ease tensions and defuse perceived near-term euro tail risks. Obama’s bounceback in the presidential polls after the latest debate may be helping too by rolling back speculation that a clean sweep rather than a more likely gridlock was a possible outcome from Nov 6 polls. China Q3 GDP came in as expected with a marginal slowdown to 7.4% and signs of growth troughing — all adding to the picture of relative calm.

So, in the absence of the world ending in a puff of smoke – and the latest week of data, earnings and reports suggests not – we’re left with a view of a hobbled but stabilising world economy aided by hyper-easy monetary policy that is bolting core interest rates to zero. Tactical investors then, at least,  are being drawn into the considerable pricing anomalies/temptations across bond and credit markets as well as the giant equity risk premia and regional price skews.

The upshot has been a sharp bounceback of some 2.5% in world equities since last Wednesday, falling sovereign bond spreads in euroland and in credit and emerging markets, a higher euro and financial volatility gauges still rock bottom. Dax vol, for example, is at its lowest in well over a year. Year to date, developed market equities are now scaling 15-20%! Germany stands out with gains of some 25%, but the US too is homing in on 20%. These are extremely punchy numbers in any year, but are doubly remarkable in year of so much handringing about the future. So much so, you have to wonder if the remainder of the year will be remain so clement. That doesn’t mean another shock or run for the hills, but shaving off the extremes of that perhaps?

British investors are warming up to European equities, with the highest level of positive or rather positive views of the troubled bloc’s stocks in a year, an online survey by Baring Asset Management shows:

The biggest rise in sentiment was seen towards European equities, with over half (53%) of respondents saying they were now either ‘quite’ or ‘very’ favourable, up from 42% in the last survey and the most favourable they have been towards the European equity sector for a year.

UK investors remain more positive on stocks from emerging markets, the United States and Asia ex-Japan, but with ratings down from the previous poll three months ago, and UK equities are also viewed more favourably. The poll answered by just over 100 respondents between Aug 22-Sept 19 shows the euro zone crisis is still considered the biggest global economic challenge.

Wall Street has been doing pretty well in recent years. Just how well is illustrated by the steady rise in corporate profits as a share of the national economy. Look at the following graphic:

Of it, HSBC writes:

The profits share of GDP in the United States must rank as one of the most chilling charts in finance.

 
What this means is that around 12 percent of American gross domestic product is going to companies in the form of after-tax profits. A year ago that figure was just over 10 percent and in 2005 it was just 6 percent. In contrast, the share of wages and salaries in the U.S. GDP fell under 50 percent i n 2010 and continues to decline. Comparable figures for the UK or Europe are harder to come by but analysts reckon the profits’ share is within historical ranges.

Emerging central banks that sold billions of dollars over the summer in defence of their currencies might soon be forced to do the opposite. Japan’s massive currency intervention on Monday knocked the yen substantially lower not only versus the dollar but also against other Asian currencies.  The action is unlikely to sit well with other central banks struggling to boost economic growth and raises  the prospect of a fresh round of tit-for-tat currency depreciations. Already on Monday, central banks from South Korea and Singapore were suspected of wading into currency markets to buy dollars and push down their currencies which have recovered strongly from September’s selloff.  The won for instance is up 6.9 percent in October against the dollar — its biggest monthly gain since April 2009.  The Singapore dollar is up 4.5 percent, the result of a huge improvement in risk appetite.

Despite the interventions, the yen ended the session more than 2 percent lower against both the won and the Singapore dollar,  and most analysts reckon Japan’s latest intervention is by no means its last. That’s bad news for companies that compete with Japan on export markets and will keep neighbouring central banks watching for the BOJ’s next move. “Asian central banks are likely to play in the same game, and keep currencies competitive via regular interventions,” BNP Paribas analysts said.

But the race to the bottom has been underway for some time.  After all central banks in the West have cut rates, as in the euro zone, and embarked on more quantitative easing, as in the UK.  One bank, Switzerland’s, has gone as far as to effectively establish a ceiling for its currency.  And in Asia, Indonesia surprised markets with an interest rate cut this month while Singapore eased monetary policy. Many expect South Korea’s next move also to be a rate cut even though inflation is running well above target.  Analysts at Credit Agricole predicted this week’s G20 meeting to yield no fruitful discussion on what they termed “currency manipulation”. “This lack of co-ordinated policy could trigger an escalation in ongoing currency wars,” Credit Agricole analyst Adam Myers told clients. That would in turn lead to a renewed acceleration in central banks’ dollar reserves, he added.

If the life settlements market seems ghoulish, here’s a British scandal which isn’t doing the image of the business any favours. It’s one of the worst the country’s seen.

Around 30,000 mainly elderly investors in the UK put their money into a company called Keydata, hoping to make a little extra cash to fund their own retirement with the promise of a healthy return.

What they were buying sounded kosher, even if it did depend on how fast their wealthy American counterparts were dying. Of course, the investors may not have known that.

It suffered the collapse of its currency, economy and banking system so being invoked in a version of the notorious Nigerian email scam is one of the smaller humiliations endured by Iceland.

The confidence trick, which has roots in the 18th century, usually involves an email from someone claiming to be either a deposed African dictator or a Nigerian lawyer, promising a sum of money in return for help to access a substantial fortune.

But the latest spam email making its rounds purports to be from Iceland, one of the highest profile sovereign casualties of the global financial crisis. This version of the email is supposedly from a "devoted christian (sic)" from Iceland", a widow seeking help to access $6 million in a Canadian bank left to her by her husband who worked for an oil giant for 19 years.