The Bank of Japan unleashed its full firepower this week, pushing the yen to 3-1/2 year lows of 97 per dollar. Year-to-date, the currency is down 11 percent to the dollar. But those hoping for a return to the carry trade boom of yesteryear may wait in vain.
The weaker yen of pre-crisis years was a strong plus for emerging assets, especially for high-yield currencies. Japanese savers chased rising overseas currencies by buying high-yield foreign bonds and as foreigners sold used cheap yen funding for interest rate carry trades. But there’s been little sign of a repeat of that behaviour as the yen has fallen sharply again recently .
It’s not shaping up to be a good year for emerging equities. They are almost 3 percent in the red while their developed world counterparts have gained more than 7 percent and Wall Street is at record highs. When we explored this topic last month, what stood out was the deepening profit squeeze and steep falls in return-on-equity (ROE). The latest earnings season provides fresh proof of this trend and is handily summarized in a Morgan Stanley note which crunches the earnings numbers for the last 2012 quarter.
The analysts found that:
–With 84 percent of emerging market companies having already reported last quarter earnings, consensus estimates have been missed by around 6 percent. A third of companies that have already reported results have beaten estimates while almost half have missed.
What’s Argentina’s Plan B?
President Cristina Fernandez de Kirchner has said she will sell the presidential palace in Buenos Aires, if need be, to keep paying creditors who agreed to restructure the country’s debts. But it may not come to that. Warning: this is a complicated saga with very interesting twists.
A pair of hedge fund litigants demanding $1.3 billion in payments and a New York court are making it hard for Kirchner to keep paying international bondholders. But she might contemplate asking those existing creditors to swap into Argentine law bonds, to which the writ of the New York court will not extend.
LONDON, April 1 (Reuters) – The triumph of hope over
experience. That might describe investors’ continuing
infatuation with Chinese stocks despite mostly meagre rewards in
Though MSCI’s China index is languishing 4
percent in the red this year, many fund managers are betting the
stars are finally aligned for a lasting turnaround in China’s
equity index, the biggest in emerging markets.
The Cypriot crisis, stemming essentially from a banking malaise, reminds us that Europe’s banking woes are far from over. In fact, Stephen Jen and Alexandra Dreisin at SLJ Macro Partners posit in a note on Monday that five years into the crisis, European banks have barely carried out any deleveraging. A look at their loan-to-deposit ratios (a measure of a bank’s liquidity, calculated by dividing total outstanding loans by total deposits) remain at an elevated 1.15. That’s 60 percent higher than U.S. banks which went into the crisis with a similar LTD ratio but which have since slashed it to 0.7.
It follows therefore that if bank deleveraging really gets underway in Europe, lending will be curtailed further, notwithstanding central bankers’ easing efforts. So the economic recession is likely to be prolonged further. Jen and Dreisin write:
Whatever is happening to all those Asian savers? Apparently they are turning into big time borrowers.
RBS contends in a note today that in a swathe of Asian countries (they exclude China and South Korea) bank deposits are not keeping pace with credit which has expanded in the past three years by up to 40 percent.
Any hopes of policy support for the rand from the South African Reserve Bank (SARB) have vanished. The currency fell 1 percent after yesterday’s SARB meeting where Governor Gill Marcus made it clear she would not be standing in the way of the rand’s move south. It is now trading at 9.32 per dollar.
More losses look likely, especially if foreign bond investors throw in the towel, a move which analysts at Societe Generale liken to “the market equivalent of a volcanic eruption”. Foreigners, after all, own more than 36 percent of the 1 trillion-rand market in local currency sovereign bonds.
Victims of the dollar’s strength are piling up.
Total returns on emerging market local currency bonds dipped into the red for the first time this year, according to data from JPMorgan which compiles the flagship GBI-EM global diversified index of domestic emerging debt. While the EMBI Global index of sovereign dollar debt has already taken a hit the rise in U.S. yields, local bonds’ problems are down to how EM currencies are performing against the dollar.
JPMorgan points out that while bond returns in local currency terms, from carry and duration, are a decent 1 percent, that has been negated by the 1.3 percent loss on the currency side. With the dollar on the rampage of late (it’s up almost 4 percent in 2013 against a grouping of major world currencies) that’s unsurprising. But a closer look at the data reveals that much of the loss is down to three underperforming markets — South Africa, Hungary and Poland. These have dragged down overall returns even though Asian and Latin American currencies have done quite well.
LONDON (Reuters) – South Africa faces the risk of a huge exodus of foreign investors who are seeing the plunge in the rand’s value rapidly erode their stock and bond returns.
Africa’s largest economy has sucked in huge investments in the past two decades, but also has one of the world’s biggest balance of payments deficits – over 6 percent of its economy – and depends almost fully on portfolio capital to plug the gap.
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.