MacroScope

from Global Investing:

Russia’s babushka time-bomb

The babushka, that embodiment of Russian grandmotherly goodness that has spawned iconic dolls and inspired a Kate Bush song, poses one of the gravest threat to the Russian economy.

Moscow-based investment bank Renaissance Capital also expects this segment of the demography to spur politically risky pension reforms.

Russia's pension system is coming under increasing strain thanks to growing life expectancy -- particularly among women -- and a shrinking labour force due to the collapse in birth rates in the 1990s.

Since the introduction of the current system, the average life span of the Russian man has risen to 63.4 years, up from 58.7. Over the same period of time, the life expectancy for the country's women has risen to 75.4 years, up from 71.9.

Russian women are thus likely to claim a pension for 20 years after retirement at 55. Compare this to the three to four years that the average Russian man gets.

Brazil joins fellow-BRIC China in world’s Top 5

Volkswagen's Brazil car factory. Sales are booming as the economy roars ahead

Volkswagen's Brazil car factory. Sales are booming as the economy roars ahead

Distracted by the upheaval in the Middle East and $120 per barrel oil,  few noted Brazil’s ascent last week to the ranks of the world’s top five economies. Strange given that the move comes just months after China displaced Japan as the second-biggest economy in the world.

Goldman Sachs Asset Management head Jim O’Neill points out that  Brazil — part of the BRIC group of big emerging economies – grew 7.5 percent in 2010. By the end of last year the economy was valued around $2.2 trillion. That’s next only to the United States, China, Japan and Germany. And bigger than France and Britain.

The promise of middle age

The wave of popular discontent now sweeping the Middle East and North Africa has been driven by the region’s youth, frustrated by chronic umemployment and enraged by widespread corruption.

In a special report entitled ‘Youth bulges and equities’, Deutsche Bank argues that the proportion of angry young men to the general population is not only a gauge of socio-political stability but also a key indicator of market performance.

The ‘youth bulge’ — the ratio of males between 15-29 versus those aged 30-59 – came in at an average of 106 percent in the 251 conflicts seen around the world between 1950 and 2006. Two-thirds of countries that suffered social upheaval had a young-to-old men ratio of above 100 percent compared to the current 45-55 percent average seen in developed countries.

from Global Investing:

Jean-Claude Trichet, EM c.bankers’ new friend

What a friend emerging central bankers have in Jean-Claude Trichet. Last month the ECB boss stopped euro bears in their tracks by unexpectedly signalling concern over inflation in the euro zone. Since then the euro has pushed steadily higher  -- against the dollar of course, but also against emerging currencies. The bet now is that interest rates -- and the yield on euro investments -- will start rising some time this year, possibly as early as this summer.

That's ptrichetrovided some relief to central banks in the developing world who have struggled for months to stem the relentless rise in their currencies.

Being short euro versus emerging currencies was a popular investment theme at the start of 2011, partly because of EM strength but also because of the euro zone debt crisis. "What that also means is that people who were short euro against emerging currencies had to get out of those positions really fast," says Manik Narain, a strategist at investment bank UBS. Check out the Turkish lira -- that's fallen around 5 percent against the euro since Trichet's Jan 13 comments and is at the highest in over a year. South Africa's rand is down 6 percent too. Moves in other crosses have been less dramatic but the euro's star is definitely in the ascendant. The short EM trade versus the euro  has more room to run, Narain reckons.

Building BRICs in Africa

Some eye-catching numbers from Standard Bank out today on the influence of BRICs countries — Brazil, Russia, India and China — on Africa.

First off, the bank says the global recession and its recovery have been nourishing these so-called South-South ties. But it is all now ready to take off. The bank estimates:

– By 2015, BRIC-Africa trade will have incresed threefold, to $530 billion from $150 billion this year.

What emerging animal are you?

Ever since Goldman Sach’s Jim O’Neill came up with the idea of BRICs as an investment universe, competitors have been indulging in a global game of acronyms. Why not add Korea to Brazil, Russia, India and China and get a proper BRICK? Or include South Africa, as it wants, to properly upper case the “s” – BRICS or BRICKS?

Completely new lists have also been compiled — HSBC chief Michael Geoghegan has championed CIVETS to describe Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa (ignoring the fact, as Reuters’ Sebastian Tong points out here, that a civet is a skunk-like animal blamed for the spread of the deadly SARS outbreak in Asia).

Fun though some of this is — and no one can argue that BRICs has not had an impact — there is a danger that the acronym could become more relevant  than the actual countries involved. For example, imagine Mexico, Uruguay, Panama, Philippines, Egypt, Turkey and Sierre Leone being lumped together because they spell MUPPETS.

from Global Investing:

Investors love those emerging markets

No question that investors are in the throes of passion over emerging markets. The latest Reuters asset allocation polls show investors pouring money into Asian and Latin American stocks in October to the detriment of U.S. and euro zone equities. Exposure to equities in emerging Europe, Asia ex-Japan, Latin America and Africa/Middle East rose to 15.6 percent of a typical stock portfolio from 14.3 percent a month earlier. untitled

Investment Week: From the Trenches…

Early September skirmishes turned this week into full-scale “currency wars”, to use Brazil’s terminology. Dramatic language, but not unwarranted. The markets have taken Fed signals of preparation for further money printing as an effective attempt at a dollar devaluation, allowing the country export its deflationary pressures overseas via capital outflows to higher-yielding developing countries.

GERMANY-IFO/

The major developing nations, for all the arguments favouring currency revaluations of 20-25% over the next couple of years, are not going to stand idly by and watch that happen overnight. But their attempts to offset the impact of soaring local currencies and attendant asset bubbles merely floods local economies with cash at a time when fighting inflation — not deflation — is their priority. Brazil has raised the red flag, but the likes of Turkey and Taiwan are also registering fears about the impact of another bout of US monetary pump priming. Meantime, the gloves are off in the US-China yuan row; possible trade measures are being invoked in DC; and there is little chance of cooler heads prevailing this side of the US mid-term elections. This story will run.

What’s certain is the G20 finance meeting in South Korea on Oct 22 has significant work to do. Next week the battle lines are already drawing up at the Asia-Europe summit in Brussels (and China’s PM Wen and Japan’s PM Kan both travel) and then the annual IMF/G7 meetings in DC. The key US September payrolls report on Friday, for good measure, may be the deciding data set for the Fed to pull the trigger on QEII. And also meeting next Thursday is the Bank of England, itself back in a QE frame of mind if you listened this week to one of its policymakers Adam Posen  

Giant FX market now $4 trillion gorilla

Global foreign exchange has always been one of the biggest markets in the world but its exponential growth keeps accelerating. The triennial survey by the Bank for International Settlements shows global foreign exchange market turnover leapt 20 percent to $4 trillion, compared with $3.3 trillion three years ago.

FXBIS

The increase in turnover was driven by growth in spot transactions, which represent 37 percent of FX market turnover.  Turnover was driven by trading activity by “other financial institutions” — a category that includes hedge funds, pension funds and central banks, extending a trend seen in the past several years where buyside firms are increasingly trading currencies themselves, via prime brokerage, rather than turning to interbank dealers.

Also notably, emerging market currencies are gradually increasing their share in the marketplace. Turnover of the Russian rouble has increased its share in total turnover to 0.9 percent of 200 percent (FX is double counted as transaction involves two currencies), up from 0.7 percent three years ago, while the Brazilian real rose to 0.7 percent from 0.4 percent. The Indian rupee’s share rose to 0.9 percent from 0.7 percent. The dollar keeps its dominance, although off its 2001 peak, with its share standing at 84.9 percent.

from Global Investing:

Shock! Emerging capital controls may just be working

Do capital controls work?  After years of telling us that they do not, the IMF and World Bank reluctantly conceded last year they may not be all that bad and indeed in some cases they may actually help keep away some of the speculators who have in recent years been pouring into emerging markets.

Developing countries for the most part like foreign capital, indeed they rely on it for development. What they don't like is hot money -- short-term speculative flows which are widely blamed for causing past emerging market crises. So starting from October last year several of them slapped controls on some of this cash. There are signs these may be working.

Take the experience of two large emerging markets, Brazil and Indonesia. Brazil shocked forBRAZIL-MARKETS/eign investors last October with a 2 percent tax on all flows to stocks and bonds. Nine months on, investors are still putting their cash there and Brazil has raked in millions of dollars thanks to the tax. But many fund managers, like HSBC's Jose Cuervo, who runs a $6 billion portfolio of Brazilian stocks, are buying American Depositary Receipts (ADRS) of Brazilian firms rather than stocks listed in Sao Paulo.  Because ADRs are in dollars and listed in New York, investors are getting exposure to Brazil but sidestepping the tax.  Brazilian firms continue to receive investment but Brazil's currency is not appreciating  like it was last year. A win-win all around.