Quiet CDS creep highlights China risk
As credit default swaps (CDS) for many euro zone sovereigns have zoomed to ever new record highs this year, Chinese CDS too have been quietly creeping higher. Five-year CDS are around 135 bps today, meaning it costs $135,000 a year to insure exposure to $10 million of Chinese risk over a five-year period. According to this graphic from data provider Markit, they are up almost 45 basis points in the past six weeks. In fact they are double the levels seen a year ago.
That looks modest given some of the numbers in Europe. But worries over China, while not in
the same league as for the euro zone, are clearly growing, as many fear that the real scale of indebtedness and bad loans in the economy could be higher than anyone knows. Above all, investors have been fretting about a possible hard landing for the economy, with the government unable to control a growth slowdown.
The CDS rises have coincided with worsening economic data – state-owned companies’ profits have fallen 8.6 percent in the January-April period from year-ago levels while industrial production weakened sharply in April. Fixed asset investment – a key driver of the economy – has hit its lowest level in nearly a decade.
CDS fell slightly today after Premier Wen Jiabao called for more efforts to support growth. His comments also provided a mild boost to China’s stock markets. Gavan Nolan, Markit’s director for credit research, says Wen’s comments suggest growth is taking precedence over inflation in policymakers’ minds:
Tough funding climate delays Turkish privatisations
LONDON, May 19 (Reuters) – High valuations and tough funding conditions due to the euro zone crisis are affecting Turkey’s privatisation plans, forcing the postponement of several recent tenders, delegates at the EBRD’s annual meeting heard on Saturday.
“Pre-crisis, the first priority was asset quality. If it was good, banks were able to provide lending even if you didn’t have equity,” Suha Gucsav, CEO of Turkish conglomerate Akfen Holding told a conference at the European Bank for Reconstruction and Development Bank’s meeting.
“Post-crisis, the first thing banks ask is who is the sponsor, second what’s the equity, then the asset and that is a dramatic change in environment.”
Akfen is involved in construction, power generation and also has a stake in airport operator TAV. The company bid for a 10 percent stake in Baskent, a state-owned gas distribution company and is also keen on the multi-billion dollar highways and bridges in the privatisation tender.
However, the privatisation agency recently pushed back bidding deadlines for several major highway projects and last month cancelled the Baskent auction after all four groups withdrew from bidding.
Since 2008, several tenders have been postponed after tender winners were unable to secure funding as credit markets ran dry.
Prices have also fallen, with the Baskent asset carrying a minimum bid price of $626 million this year compared to a previous tender for the firm that initially drew a winning bid of $1.6 billion.
Euro crisis is big threat to emerging Europe – EBRD
LONDON (Reuters) – Lacklustre growth in emerging European economies could turn into recession if the euro zone crisis escalates, the European Bank for Reconstruction and Development said on Friday.
The EBRD nudged up its 2012 growth forecast for the 29-country emerging Europe and central Asia region to 3.2 percent, from 3.1 percent in its January outlook.
It also projected 3.1 percent growth for 2012 across the whole region where it now operates, including for the first time Jordan and three countries of North Africa.
But it said the uncertainties facing the euro zone made it likely that growth this year and in 2013 would turn out lower than expected and could even be negative.
“The risk that emerging Europe as a whole will re-enter recession within the next 12 months is viewed as high,” the EBRD said in a statement accompanying the growth forecasts.
“A further worsening of the euro zone crisis or an oil supply shock are both possible and pose significant downside risks for the region as a whole,” the report said.
The euro zone is struggling to contain renewed risks of Greece falling out of the single currency, which many fear could be the first step in a wider breakup of the bloc.
Euro crisis is big threat to emerging Europe
LONDON, May 18 (Reuters) – Lacklustre growth in emerging European economies could turn into recession if the euro zone crisis escalates, the European Bank for Reconstruction and Development said on Friday.
The EBRD nudged up its 2012 growth forecast for the 29-country emerging Europe and central Asia region to 3.2 percent, from 3.1 percent in its January outlook.
It also projected 3.1 percent growth for 2012 across the whole region where it now operates, including for the first time Jordan and three countries of North Africa.
But it said the uncertainties facing the euro zone made it likely that growth this year and in 2013 would turn out lower than expected and could even be negative.
“The risk that emerging Europe as a whole will re-enter recession within the next 12 months is viewed as high,” the EBRD said in a statement accompanying the growth forecasts.
“A further worsening of the euro zone crisis or an oil supply shock are both possible and pose significant downside risks for the region as a whole,” the report said.
The euro zone is struggling to contain renewed risks of Greece falling out of the single currency, which many fear could be the first step in a wider breakup of the bloc.
Battered India rupee lacks a warchest
The Indian rupee’s plunge this week to record lows will have surprised no one. After all, the currency has been inching towards this for weeks, propelled by the government’s paralysis on vital reforms and tax wrangles with big foreign investors. These are leading to a drying up of FDI and accelerating the exodus from stock markets. Industrial production and exports have been falling. High oil prices have added a nasty twist to that cocktail. If the euro zone noise gets louder, a balance of payments crisis may loom. The rupee could fall further to 56 per dollar, most analysts predict.
True, the rupee is not the only emerging currency that is taking a hit. But the Reserve Bank of India looks especially powerless to stem the decline. (See here for an article by my colleagues in Mumbai) . One reason the RBI’s hands are effectively tied is that India is one of the few emerging economies that has failed to build up its hard currency reserves since the 2008 crisis and so is unable to spend in the currency’s defence. Usable FX reserves stand now around $260 bilion, down from $300 billion just before the 2008 crisis. See the following graphic from UBS which shows that relative to GDP, India’s reserve loss has been the greatest in emerging markets.
But there is worse. The relative decline in reserves since 2008 coincides with a ballooning in India’s external debt, both private and public. Comprising mostly of corporate borrowing and trade credit, the debt stands at $350 billion, up from $225 billion four years back.
No wonder investors have upped their bearish bets on the rupee: a Reuters poll of Asian fund managers shows these at a six-month high and significantly higher than any other Asian currency. For now, the trade looks worryingly like a one-way street.
EBRD investing too much in polluting fuels-study
LONDON, May 17 (Reuters) – The European Bank for Reconstruction and Development is lending excessively to polluting fossil fuel projects, especially coal, undermining its own sustainable energy strategy, NGO Bankwatch said in a report released on Thursday.
Lending to fossil fuel projects, coal, oil and gas, accounted for 48 percent of the bank’s energy-related investments between 2006 and 2011, said the report by Bankwatch, an agency that monitors international financial institutions.
“Firstly the EBRD’s continued support for fossil fuel projects, starting with coal, needs to be halted,” Bankwatch said on the eve of the EBRD’s annual meeting.
“Secondly there is a need for an increase in the quantity and sustainability of the EBRD’s investments in new renewables.”
The EBRD, set up in 1991 to invest in the ex-communist states of eastern Europe, in 2006 unveiled a sustainable energy initiative (SEI) to focus on renewables or energy efficiency projects. The plan was to reduce carbon emissions across the region, considered one of the world’s least energy efficient.
The strategy looked set to gather pace in 2007 after the EBRD quit Russia’s Sakhalin gas project which was criticised for potentially harming endangered whales’ habitat.
Bankwatch praised the EBRD for its efforts but urged it to do more. It noted renewables lending rose to 272.9 million euros in 2011 from 6.8 million euros in 2006 while investment in power sector efficiency quintupled to 394 million in this period.
Investors caught between growth worry, QE hopes-poll
LONDON, May 15 (Reuters) – Investors fretting about world growth and euro zone chaos kept cash holdings at high levels in May while upping allocation to bonds and cutting equities and commodities in portfolios, a closely watched fund manager survey showed on Tuesday.
The bearish growth picture is also prompting increasing numbers of investors to bet on additional stimulus action from policymakers in the developed world, a factor that could be preventing a large-scale equity selloff, according to the monthly survey by Bank of America/Merrill Lynch (BofAML).
“Risk appetite is subdued but there is no panic because of expectation that there will be a policy safety net that will be rolled out if the situation so requires,” said Gary Baker, head of European equities strategy at BofML Global Research.
“There is a massive belief policymakers will act.”
The global survey, which polled 234 investors managing $669 billion in assets, found a net 56 percent predicting a third round of quantitative easing by the U.S. Federal Reserve, up slightly from 55 percent in April. A net 65 percent expect more from the European Central Bank, versus 60 percent last month.
The study found fund managers keeping cash balances at a high 4.7 percent, steady from last month’s levels and not too far from the 5.5 percent peak from December 2008. A net 28 percent are now overweight cash, up from a net 24 percent in April.
Investors have also scaled back their underweight on bonds to 33 percent, from a net 48 percent in April, while the proportion of investors overweight equities shrank to a net 16 percent compared to a net 28 percent last month.
Poland’s price-busting stand bucks emerging trend
LONDON (Reuters) – Working out whether central banks will deliver on publicly-stated mandates has become a lottery for investors, especially in emerging economies, as the global credit crisis grinds into its fifth year.
Effectively reversing a two-decade move among emerging central banks towards greater transparency, independence and inflation-targeting, the shift is raising volatility on emerging bond and currency markets and could ultimately reverse much-needed investment flows.
Poland’s trend-breaking quarter point interest rate rise on Wednesday sets it apart from emerging market peers which appear to have backed away from their inflation-fighting mandates.
Despite above-target inflation, central banks from Brazil to Indonesia have in recent months either resorted to sharp rate cuts or are holding out against tightening policy.
Poland’s step will highlight the divide between those banks that are willing to act on inflation and others perceived to have succumbed to government pressure over growth, says Benoit Anne, head of emerging markets strategy at Societe Generale.
“The concept of central bank independence in emerging markets has been trashed; there is no longer a guarantee that central banks will be as proactive as they used to be in the face of rising inflation,” Anne said.
“But if you have a bank like Poland, that can distance itself from the global picture and say a rate rise is needed to deal with inflation, it does send a message to the market.”
Analysis: Poland’s price-busting stand bucks emerging trend
LONDON (Reuters) – Working out whether central banks will deliver on publicly-stated mandates has become a lottery for investors, especially in emerging economies, as the global credit crisis grinds into its fifth year.
Effectively reversing a two-decade move among emerging central banks towards greater transparency, independence and inflation-targeting, the shift is raising volatility on emerging bond and currency markets and could ultimately reverse much-needed investment flows.
Poland’s trend-breaking quarter point interest rate rise on Wednesday sets it apart from emerging market peers which appear to have backed away from their inflation-fighting mandates.
Despite above-target inflation, central banks from Brazil to Indonesia have in recent months either resorted to sharp rate cuts or are holding out against tightening policy.
Poland’s step will highlight the divide between those banks that are willing to act on inflation and others perceived to have succumbed to government pressure over growth, says Benoit Anne, head of emerging markets strategy at Societe Generale.
“The concept of central bank independence in emerging markets has been trashed; there is no longer a guarantee that central banks will be as proactive as they used to be in the face of rising inflation,” Anne said.
“But if you have a bank like Poland, that can distance itself from the global picture and say a rate rise is needed to deal with inflation, it does send a message to the market.”
Not everyone is “risk off”
Who would have thought it. As fears over the euro zone’s fate, Chinese economic growth and Middle Eastern politics drive investors toward safe-haven U.S. and German bonds, some have apparently been going the other way. According to JPMorgan, bonds from so-called frontier economies such as Pakistan, Belarus and Jordan (usually considered high-risk assets) have performed exceptionally well, doing far better in fact than their peers from mainstream emerging markets. The following graphic from JPM which runs the NEXGEM sub-index of frontier debt, shows that returns on many of these bonds are running well into the double digits.
NEXGEM returns of 8.4 percent are on par with the S&P 500, writes JPMorgan and outstrip all other emerging bond categories. Clearly one reason is the lack of correlation with the mainstream asset classes, many of which have been selling off for weeks amid growth fears and in the run up to French and Greek elections. Second, investors who tend to buy these bonds usually have a pretty high risk-tolerance anyway as they keep their eyes on the double-digit yields they offer.
So year-to-date returns on Ivory Coast’s defaulted debt are running at over 40 percent on hopes that the country will resume payments on its $2.3 billion bond after June. The underperformer is Belize whose bonds suffered from a default scare at the start of the year.
JPMorgan said NEXGEM, accounting for 9 percent of the broader emerging debt index and containing 18 countries, offers the best investment opportunity for the rest of 2012:
Stay overweight NEXGEM credits, including Belize, Dominican Republic, Georgia, Sri Lanka and upgrade Gabon to overweight this month.
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