Global Investing

Sanctions bite Russia but some investors are fishing

By Andrew Winterbottom

Russian stocks are up today, for the fifth day in a row and at the highest level in two weeks. What’s going on? As we wrote  here earlier in the week, foreign investors have been fleeing this market.  However it could be that some of them are starting to put aside concerns about the potential for further sanctions on Moscow and are scouring Russia’s stock markets for contrarian buying opportunities.

Russian stocks, chronically undervalued, are trading now at a discount of more than 60 percent to broader emerging markets, and to China which by all accounts is the standout beneficiary of the Russian woes. Just how cheap Russian shares are can be gauged from the fact they trade at a discount event to turbulent Pakistan. Here is a link that compares Russian equity valuations with other emerging and developed markets:  http://link.reuters.com/guv77v

While tensions between Russia and the West look to be only increasing, the risks of investing in Russia at present are obvious. But with greater risk comes greater potential reward, says Jonathan Bell, head of emerging market equities at Nomura Asset Management:

Even for the level of risk the market is extremely cheap… We’ve had price movements due to technical behaviour and short-term considerations that don’t necessarily reflect the underlying fundamentals.

Bell likes the IT and domestic brand name sectors – those not in danger of feeling the hit of further sanctions but that have fallen alongside companies that have been hit with Western sanctions, such as Sberbank and Gazprom.

The people buying emerging markets

We’ve written (most recently here) about all the buying interest that emerging markets have been getting from once-conservative investors such as pension funds and central banks. Last year’s taper tantrum, caused by Fed hints about ending bond buying, did not apparently deter these investors . In fact, as mom-and-pop holders of mutual funds rushed for the exits,  there is some evidence pension and sovereign  wealth  funds actually upped emerging allocations, say fund managers. And requests-for-proposals (RFPs) from these deep-pocketed investors are still flooding in,  says Peter Marber, head of emerging market investments at Loomis Sayles.

The reasoning is yield, of course, but also recognition that there is a whole new investable universe out there, Marber says:

There has been so much yield compression that to get the returns investors are accustomed to, they have to either go down in credit quality or look overseas. Investors have been globalizing their equity portfolios for 25 years but the bond portfolios still have a home bias. We are starting to see more and more institutional investors gain exposure to emerging markets, and a large number of recent RFPs highlight more sophisticated mandates than a decade ago.

Ukraine and the IMF: a sense of deja vu

The West has just agreed to stump up a load of cash for Ukraine but there is a distinct sense of deja vu around it all.

Let’s face it – Ukraine’s track record on how it manages ts economy and foreign affairs isn’t great. This is the third aid programme Kiev has signed with the International Monetary Fund in a decade and two of them have failed. The IMF has its fingers crossed that this one will not go the way of the past two. Reza Moghadam, the IMF’s top European official, tells Reuters in an interview:

They seem to be committed, they seem to own this reform programme and in that sense I am optimistic

Braving emerging stocks again

It’s a brave investor who will venture into emerging markets these days, let alone start a new fund. Data from Thomson Reuters company Lipper shows declining appetite for new emerging market funds – while almost 200 emerging debt and equity funds were launched in Europe back in 2011, the tally so far  this year is just 10.

But Shaw Wagener, a portfolio manager at U.S. investor American Funds has gone against the trend, launching an emerging growth and income fund earlier this month.

It’s a great time to launch a fund if you have a long-term focus in mind. Emerging markets trailed DM in terms of performance for a while, peaking at end of 2010 so we are 3-plus years into a down market and period of significant underperformance.

Who shivers if Russia cuts off the gas?

Markets are fretting about the prospect of western sanctions on Russia but Europeans will also suffer heavily from any retaliatory trade embargoes from Moscow which supplies roughly a third of the continent’s gas needs  – 130 billion cubic metres in 2012.

After all, memories are still fresh of winter 2009 when Russia cut off gas exports through Ukraine because of Kiev’s failure to pay bills on time.  ING Bank analysts have put together a table showing which countries could be hardest hit if the Kremlin indeed turns off the taps.

So while Hungary and Slovakia depend on Moscow for over a third of their energy,  Germany imported less than 10 percent of its needs  from Russia while Ireland, Spain and the United Kingdom received none at all in 2012, ING’s graphic shows.  So while the main impetus for the sanctions comes from the G7 group of rich countries,  it is central and Eastern Europe who will be in the firing line.

Iran: a frontier for the future

Investors trawling for new frontier markets have of late been rolling into Iran. Charles Robertson at Renaissance Capital (which bills itself as a Frontier bank) visited recently and his verdict?

It’s like Turkey, but with 9% of the world’s oil reserves.

Most interestingly, Robertson found a bustling stock market with a $170 billion market cap — on par with Poland – which is the result of a raft of privatisations in recent years.  A $150 million daily trading volume exceeds that of Nigeria, a well established frontier markets. And a free-float of $30 billion means that if Iranian shares are included in MSCI’s frontier index, they would have a share of 25 percent, he calculates.

What of the economy? Renaissance estimates its size at $437 billion, which if accurate would place it higher than Austria or Thailand. Foreign investors are keen — a thawing of relations with the West has triggered a race among multinations to explore business opportunities in the country of 78 million. Last month, more than 100 executives from France’s biggest firms visited Iran. Robertson writes:

Emerging stocks lose again in November

By Shadi Bushra

After years of basking in their reputation as high-return hot spots, 2013 could be the year emerging equity markets finally lost their magic touch. Last month continued the litany of losses — seventeen of the 20 emerging markets listed on S&P Dow Jones indices ended November in the red, the index provider says. Contrast that with developed markets’ fortunes last month– 18 of the markets listed by the index rose, while eight fell.

So last month’s scores: Emerging stocks – down 2 percent; Developed stocks – up 1.6 percent. And for 2013 as a whole, emerging stocks are down 3 percent while developed markets are up a whopping 22 percent, approaching their 2007 peaks, according to S&P Dow Jones.

While each of the emerging market countries has their own unique cauldron of political and economic issues affecting their stocks’ performance, there is common ground too – the expected tapering of U.S. monetary stimulus.  The hardest-hit emerging countries were those that have too much exposure to investors in developed countries, who may move their money from the developing world once the cheap money begins to dry up.  Worst off was Indonesia where equities fell nearly 13 percent in November, and on the year they are down more than 23 percent.

Revitalised West knocks Brazil, Russia off global growth Top-30

By Shadi Bushra

Yet another sign of the growth convergence between developed and emerging markets. Two  of the “BRIC’ countries have dropped out of the Top-30 in a growth index compiled by political risk consultancy Maplecroft, while several Western powerhouses have nudged their way onto the list.

Maplecroft’s 2014 Growth Opportunities Atlas showed that Brazil and Russia — the B and R of the BRIC bloc — had dropped 26 and 41 places, respectively – due to slow economic reforms and diversification.  The United States, Australia and Germany meanwhile broke into the top 30 on the  index, which evaluates 173 countries on their growth prospects over the next 20 years.

The study’s results are indicative of the broader pattern this year of an emerging markets slowdown after years of robust growth fuelled by cheap money from the West and a decade of booming trade. But the two other BRIC countries — India and China — have retained their top spots, albeit with lower absolute scores. And India overtook China for first place due to its “catch-up growth potential,”  Maplecroft’s report said.

Steroids, punch bowls and the music still playing: stocks dance into 2014

Four years into the stock market party fueled by a punch bowl overflowing with trillions of dollars of central bank liquidity, you’d think a hangover might be looming.

But almost all of the fund managers attending the London leg of the Reuters Global Investment Summit this week – with some $4 trillion of assets under management – say the party will continue into 2014.

Pascal Blanque, chief investment officer at Amundi Asset Management with over $1 trillion of assets under management, reckons markets are in a “sweet spot … largely on steroids with the backing of the central banks.”

Why did the market get the Fed and ECB so wrong?

To err once is unfortunate. To err twice looks like carelessness.
One of the great mysteries of 2013 will surely be how economists, investors and market participants of all stripes so spectacularly misread two of the biggest central bank policy set-pieces of the year.
The first was the Federal Reserve’s decision in September not to begin withdrawing its $85 billion-a-month bond-buying stimulus, the second was the European Central Bank’s decision in November to cut interest rates to a fresh low of just 0.25 percent.
The Fed’s decision on Sept. 18 not to “taper” stunned markets. The 10-year Treasury yield recorded its biggest one-day fall in almost two years, and the prospect of continued stimulus has since propelled Wall Street to fresh record highs. (See graphic, click to enlarge)


A Reuters poll on Sept. 9 showed that 49 of 69 economists expected the Fed to taper the following week, a consensus reached after Ben Bernanke said on May 22 that withdrawal of stimulus could start at one of “the next few meetings”.
But tapering was – and still is – always dependent on the data. And throughout this year, the Bernanke-Yellen-Dudley triumvirate has consistently noted that the labour market is extremely weak and the recovery uncertain.
Going into the Sept. 18 policy meeting unemployment was above 7 percent and the Fed’s preferred measure of inflation was well below target, barely more than 1 percent.
Plus, a simple read of the Fed’s statutory mandate of achieving “maximum employment, stable prices, and moderate long-term interest rates” should have dispelled the notion a reduction in stimulus was imminent.
“People just didn’t want to listen. They just didn’t believe that they have to follow the data. They’ve not been listening, and it’s really hard to understand why,” said David Blanchflower, professor of economics at Dartmouth College in the United States and former policymaker at the Bank of England.
It was a similar story with the ECB’s interest rate cut on Nov. 7 which only three leading banks – UBS, RBS and Bank of America-Merrill Lynch – correctly predicted.
These three institutions quickly adjusted their forecasts after shock figures on October 31 showed euro zone inflation plunging to a four-year low of 0.7 percent, triggering the euro’s biggest one-day fall in over six months.


By anyone’s measure, 0.7 percent falls some way short of the “below, but close to, 2% over the medium term” inflation rate stipulated in the ECB’s mandate.
So why did the highly paid experts get it so wrong again?
Herd mentality might have something to do with it.
“It’s great if you’re all right together, and equally great if you’re all wrong together,” Blanchflower said.
It’s like a fund manager who loses 20 percent in a year where the market is down 21 percent. He might have screwed up, but so did everyone else. And technically, he outperformed the market so can claim to have “earned” his large fees.
To be fair, some of the central banks’ communication this year hasn’t been quite as clear as intended. See Bernanke’s comments on May 22 and recent confusion over the Bank of England’s “forward guidance”.
If one of the aims of forward guidance is to avoid volatility and variance of opinion about the trajectory of policy, then this kind of spectacular misread is an indictment of forward guidance.
In addition, since Draghi’s famous “whatever it takes” speech in July last year, the ECB has always had the potential to catch the market off-guard.
But maybe we shouldn’t be so charitable, and the market’s wailing at being misled by the central banks should be taken on board but ultimately ignored. The tail should not wag the dog.
“The Fed can’t be or shouldn’t be a prisoner of the markets,” we were reminded on Thursday, by none other than Fed Chair-elect Janet Yellen.