Summit Notebook
Exclusive outtakes from industry leaders
Is emerging Europe out of the woods yet?
A surge in portfolio inflows is flooding into emerging central Europe, although yield-hungry investors are picking solid policy and higher growth over countries still struggling to put the crisis behind them.
After deep contractions across the region, a two-speed recovery is underway, with countries boasting better debt fundamentals like Poland and the Czech Republic for the moment ahead of those who depend on foreign lending.
Investors are also dipping into countries like Hungary, but struggles by the new centre-right Fidesz government to get its budget deficit under control mean it is lagging for now, along with fellow International Monetary Fund benefactor Romania.
“There has… been clear differentiation between the more robust and the weaker economies of the region,” Goldman Sachs wrote in a research note on the region.
“We believe that the region’s stronger economies — namely, Poland, Turkey, Israel and the Czech Republic — will be the first to see an acceleration in financial inflows both in debt and, increasingly, equity.” Turkey and Israel are often grouped with emerging European markets.
Extremely easy monetary policy in the world’s developing economies, including expectations the Fed will push ahead with more asset-buying, plus continued worries over debt in troubled euro zone countries like Greece and Ireland have helped push investors into these higher-yielding countries.
But these new, more volatile, portfolio flows carry risks.
from Global Investing:
Time up for emerging markets?
Well, not in the long-run, no. You would be hard pressed to find an economist, investor or even politician who does not reckon the global shift in growth to Asia and Latin America is going to be the story of the coming decade, century etc.
But in the shorter term, strange things are happening. MSCI's benchmark emerging market stock index is barely in the black for the year. Even more surprising is that it is underperforming its developed market counterpart.
Many economists and investment strategists are still beating the drum for emerging markets and a Reuters European Funds Summit in Luxembourg this week heard numerous cases of retail investors beginning to move into the sector, joining their institutional brethren.
The problem is that all this demand can transform itself into too much money chasing too few assets. LGT Capital Management insists that we are not there yet, but used the "bubble" word during a meeting with Reuters reporters at the summit.
Again, no one is moving away from the story of emerging markets as a long-term growth theme -- indeed demand for emerging debt is holding up well. But the doubling of the MSCI stock index during last year's rally, plus general volatility and global economic uncertainty, might mean the sheen is off for a bit.
Tax evaders on the run
By Neil Chatterjee The U.S. has promised it will hunt down tax evaders. And it seems tax evaders are on the run. DBS bank, based in the growing offshore financial centre of Singapore, told Reuters it had been approached by U.S. citizens asking for its private banking services. But when told they would have to sign U.S. tax declaration forms, the potential clients disappeared. Swiss banks also approached DBS on the hope they could offload troublesome U.S. clients to a location that so far has not been reached by the strong arms of Washington or Brussels. DBS said no thanks. In fact many private banks and boutique advisors now seem to be avoiding U.S. clients. Will this spread to other nationalities, as governments invest in tax spies and tax havens invest in white paint? Is this the end of offshore private private banking?
Offshore investment or not. You have to be allowed to invest your taxed money wherever you want. Evading payment of taxes where you reside will always be an illegal act.
Independent in appearance
Japan is edging towards the introduction of independent directors and auditors for publicly listed companies, but so far even the idea of having someone from outside at the top of a company remains a foreign concept.
The tradition is for someone to join a Japanese company at age 22 with the ultimate goal of serving on the company board, says Takeyuki Ishida, the head of Japan Research at RiskMetrics Group, which advises institutional investors on how to vote their shares.
Such a tradition of insider appointments means that even if the government requires companies to appoint at least one independent director or an independent auditor — as a recent government discussion report suggested — it might be a classic case of Japanese “tatemae” (appearance) rather than “honne” (substance).
A reluctant company, faced with such a requirement, might ask their friendly bank or accounting firm to find someone for them — and end up with an ex-staff member, Ishida told the Reuters Japan Investment Summit.
Shareholder activism got a shot in the arm in Japan when foreign fund Steel Partners won a proxy battle in May over the management and directors of Aderans, a wigmaker.
On the surface, the activism has since gone quiet again but both Ishida and Jun Frank, from rival proxy advisory firm Glass Lewis & Co, say change is happening among investors in Japan.
While many investors still return empty ballots, leaving Japanese companies to decide how to vote their shares, the just completed round of annual shareholder meetings did see more tension, they both say.
AUDIO – Finding a model; then build, baby, build!
Infrastructure spending. Public-private partnerships. Government buildouts.
This week, all of these kinds of phrases are much on the mind of our guests at the first ever Reuters Infrastructure Summit held in New York, San Francisco and Washington.
While infrastructure means different things to almost all of our guests (schools, roads, bridges, etc) — one of our first guests, Petra Todorovich, talked at length about the need for high speed rails.
Todorovich, the director of the Regional Plan Association’s America 2050 project, told Reuters that buiding the high-speed rails makes a great deal of sense for travel, business and infrastructure.
What model would she use? Try the airlines. While equity investors might feel a cold wind blowing through their portfolios at the mention of the perpetually difficult-to-predict sector, Todorovich likes the way the industry melds its private side with its public financing.
Todorovich also spoke about other models for infrastructure spending that different locales have used.
Todorovich was one of the first speakers at this year’s summit, which runs through the end of this week.
We are going to have to pay for all these projects sooner or later. I don’t think at this point we even know the true costs of these project and as it always happens, the price tag will dramatically increase by the time these infrastructure and other projects will be completed. Look at Boston’s Big Dig. This is a perfect example of government failure and miscalculation, the project costs were dramatically underestimated (maybe even voluntarily, to make it easy to sell to the public) and by the end the expenses and costs had ballooned. I think all the new projects that had been on the discussion plate, you could easily multiply it by 2 or 3 and that will be your true cost, and if not 100% correct, the number is very close to reality. How to pay for these? That’s a good question…
from Funds Hub:
Counting sheep
By Lorraine Turner
Speakers at the Reuters Hedge Fund and Private Equity summit this week were asked "what keeps you awake at night" and the answers were wide-ranging, from "my 7-week old daughter" to "the next meteorite".
from Global Investing:
Reuters Funds Summit: Kingdom for a horse
Anyone expecting investors to start galloping back into riskier assets in a rush might have something of a wait, according to Kathleen Hughes, who runs money funds for JPMorgan Asset Management in Europe. They are more likely to wander back in.
"Risk appetite returns in stages. It leaves on a horse but comes back on foot," she rather neatly told a Reuters funds summit being held in Luxembourg.
There are nonetheless some signs around that show leather is getting some wear. Fund trackers EPFR Global says that although overall fund flows fell during the second week of March, there were some signs of growing risk appetite. Commodities, technology and energy sector funds as well as global emerging market equity and non-Japan Asia funds all saw net inflows.
Perhaps most noteworthy, money market funds, the bellwether for investor risk aversion, had net outflows of $381 billion in the week.
Hughes says she has seen something of the same. The size of the safest-of-safe segment of her money markets funds -- the short-dated U.S. Treasury paper bit -- has halved since the fourth quarter of 2008.
So there is some walking going on even if the horse remains in the stable.
(Reuters photo: Ilya Naymushin)
