Posts Tagged ‘BRICs’
BRICs Lay Foundation Stability: Merrill Lynch
Thursday, October 30th, 2008
Alex Patelis, Head of Global Economics, Merrill Lynch discusses the strength of BRIC (Brazil, Russia, India, China) countries in the midst of the global credit crisis, and how well suited they are to recover strongly.
Patelis points out that close to 90% of global GDP growth will come from emerging markets economies in 2009, and goes one step further saying that he would not be surprised if global growth would come exclusively from emerging markets. They are underlevered, strong domestic economies, where consumption growth is being fuelled by income growth, and strong savings rates. In particular, he favours China and India.
Click image to watch video
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Tags: Brazil, BRICs, China, Credit, Credit Crisis, Economics, Emerging Markets, GDP Growth, India, Markets, Russia, Savings Rate, Video
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Credit Crisis Observations
Tuesday, September 23rd, 2008
Niels Jensen and Jan Wilhelmsen of Absolute Return Partners (www.arpllp.com) produced an informative analysis of the credit crisis and provide the following observations. Here is our summary:
Loans and Mortgages are getting much harder to come by on average, globally.
This has bold and negative implications for property prices everywhere.
Observation # 1
It all began with housing and it will end with housing.
The current overhang caused by the tightness of credit (mortgages) will take years not months to unwind and housing prices will not begin to rise again until this occurs.
Observation# 2
Don’t trust central banks to always do the right thing.
Evidence suggests that while their intent seems to be genuine, central banks around the world have not been very effective at taming inflation. For example, simply raising interest rates in the underlevered economies of the BRIC countries has been futile, since most consumers and companies do not employ credit to the extent that those of us in the west do.
In the case of the BRIC countries, it appears the problem does not consist of sustaining growth, but rather containing growth. China, for instance, has a record of under-reporting both real and nominal GDP growth, and may have only recently more accurately stated inflation owing to the fact that they could not hide from skyrocketing oil and food prices.
Observation # 3
Policy mistakes are likely to be repeated.
The US is currently at risk of making the same policy making mistakes Japan made 10-15 years ago. US residential property prices have risen more during 2000-2006 boom than did the Japanese during the late 80s boom.
Japan too, though more rapidly, reduced the cost of money dramatically to fend off its crisis.
Japan bailed out many of its institutions and used taxpayers money to fund the activity of fixing the ‘unfixable,’ and this could have profound implications for the US GDP growth in years to come.
Observation # 4
The golden era of investment banks is over.
The biggest independent investment banks have just become banks. The US investment banking business is becoming more like Canada’s where the business is dominated by the large schedule “A” chartered banks and America’s “free” market just became a little more socialist. How ironic…The folding of GS and MS into banks also has valuation considerations for the venerated firms as their revenues and earnings are sure to decline under the auspices of Fed regulation. Further de-levering also has negative implications for the market as it entails more liquidation. Hopefully this will be done in an orderly fashion now that the conversion is underway.
Observation # 5
The final shoe hasn’t dropped yet.
There is more to come. For instance, the financial system has yet to deal with $1-trillion in Alt-A securities and further degradation of the CDS market and counter-party risks.
Absolute Return Partners states that the commodity bull is just the final leg of the liquidity super-cycle: take a look the Economist’s VAR-VAR-Voom chart.
Observation # 6
Leverage is ‘dead’ but capital is not.
Global savings rates now exceed 20%, except in the US, and while this is a positive for global stability, the question remains about whether investors are willing to invest money where it is most needed, the shore up the world’s banks. Failing that, property prices will need to stabilize before we can expect better times.
Observation # 7
The end of the crisis looks further away than it did a year ago.
Its complicated, very complicated.
Commodity price induced inflation has made it hard for policy makers to reduce interest rates. Despite this, interest rate cuts may not be the magic bullet and in 20 of the 36 countries recently surveyed by Morgan Stanley, real short-term interest rates are currently negative.
At this point the $700-billion Treasury/Fed proposal appears to be a solid response, as does the stimulus injections of cash into markets around the world.
This problem remains possibly years away from being done with.
Observation # 8
Traditional risk management has lost its way.
Paul McCulley of Pimco touched on the subject in the July 2008 issue of Global Central Bank Focus:
“[...] every levered financial institution - banks and shadow banks alike - decided individually that it was time to delever their balance sheets. At the individual level, that made perfect sense. At the collective level, however, it has given us the paradox of deleveraging: when we all try to do it at the same time, we actually do less of it, because we collectively create deflation in the assets from which leverage is being removed.”
In fact, while it is known that PIMCO was regularly consulted by Secretary Paulson, it was Paul McCulley who rightly proposed in his newsletter during the summer, that the only real solution would consist of the formation of a new government agency to create a market to thaw frozen or cemented assets. This would be the only viable long term solution.
Conclusion
Where is the opportunity? According to Absolute Return Partners, real value is to be found in credit instruments. This is where the most damage has been inflicted and it is where the biggest bargains are to be found in today’s markets.
What would you rather own? Equities which trade at 15-20 times earnings or credit instruments trading at a fraction of that cost? Deutsche Bank estimates that senior secured loans are trading at an implied PE ratio of 5-less than a third of the cost of equities.
You may read the full original version, at Observations on a Crisis, Courtesy John Mauldin
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Tags: Banks, BRICs, Canada, CDS, Chart, China, Credit, Credit Crisis, EFU, energy, Fed, Focus, Food prices, GDP Growth, Gold, inflation, interest rates, Japan, liquidity, Markets, Mortgage, Paul McCulley, Paulson, PIMCO, Savings Rate, Trading, Value
Posted in Markets, inflation | 1 Comment »
Country Total Returns Since March 2003
Monday, August 25th, 2008
August 25, 2008 - Courtesy: Bespoke Investment Group - The MSCI World index, which measures global equity market performance, is now up just 68% (not total return) since its bottom on March 12, 2003. After analyzing the performance of various country indices since then, we found some interesting results.
Since the 3/12/03 global market bottom, Brazil, India and Mexico all have total returns of more than 400%, with Brazil leading the way at 427%. Germany has been the best performing Western European country with a total return of 187%. At the bottom of the barrel is Japan, with a gain of 68%, but unfortunately the US ranks second to last at 77%. So while much has been made of how well the US has held up during this downturn, it still lags behind pretty much everyone else when looking at the last bull and the current bear. The most surprising performance number comes from China. After its bubble and bust from 2005 to present, China’s performance is pretty much right inline with the US at 79%. With so much focus on China’s growth this decade, one would think its equity markets would be at the top of the performance ladder with other BRIC countries.
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Tags: Brazil, BRICs, China, Euro, Focus, Germany, India, Japan, Markets, Mexico
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Bob Farrell’s “10 Rules For Investing”
Saturday, August 16th, 2008
Bob Farrell, a legend at Merrill Lynch for several decades, had a front-row seat to the go-go markets of the late 1960s, mid-1980s and late 1990s, and the brutal bear market of 1973-74, and October 1987’s crash.
He retired as chief stock market analyst at the end of 1992, but continued to occasionally publish. Rumor has it for a humongous donation to Farrell’s favorite charity, you can get on his very exclusive email list.
Marketwatch gathered some of Farrell’s more famous observations, and republished them as “10 Market Rules to Remember.”
1. Markets tend to return to the mean over time
When stocks go too far in one direction, they come back. Euphoria and pessimism can cloud people’s heads. It’s easy to get caught up in the heat of the moment and lose perspective.
2. Excesses in one direction will lead to an opposite excess in the other direction
Think of the market baseline as attached to a rubber string. Any action to far in one direction not only brings you back to the baseline, but leads to an overshoot in the opposite direction.
3. There are no new eras — excesses are never permanent
Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots. Look at how far the emerging markets and BRIC nations ran over the past 6 years, only to get a sizable haircut.
As the fever builds, a chorus of “this time it’s different” will be heard, even if those exact words are never used. And of course, it — Human Nature — never is different.
4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
Regardless of how hot a sector is, don’t expect a plateau to work off the excesses. Profits are locked in by selling, and that invariably leads to a significant correction — eventually.
5. The public buys the most at the top and the least at the bottom
That’s why contrarian-minded investors can make good money if they follow the sentiment indicators and have good timing.
Watch Investors Intelligence (measuring the mood of more than 100 investment newsletter writers) and the American Association of Individual Investors survey.
6. Fear and greed are stronger than long-term resolve
Investors can be their own worst enemy, particularly when emotions take hold. Gains “make us exuberant; they enhance well-being and promote optimism,” says Santa Clara University finance professor Meir Statman. His studies of investor behavior show that “Losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks.”
7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
Hence, why breadth and volume are so important. Think of it as strength in numbers. Broad momentum is hard to stop, Farrell observes. Watch for when momentum channels into a small number of stocks (”Nifty 50″ stocks).
8. Bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend
I would suggest that as of August 2008, we are on our third reflexive rebound — the Januuary rate cuts, the Bear Stearns low in March, and now the Fannie/Freddie rescue lows of July.
Even when these sporadic rallies end, we have yet to see the long drawn out fundamental portion of the Bear Market.
9. When all the experts and forecasts agree — something else is going to happen
As Stovall, the S&P investment strategist, puts it: “If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?”
Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.
10. Bull markets are more fun than bear markets
Especially if you are long only or mandated to be full invested. Those with more flexible charters might squeek out a smile or two here and there.
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Tags: Bear Stearns, BRICs, Chart, Emerging Markets, Markets, SMI
Posted in Markets | 2 Comments »
Where is the Boom, and the Doom?
Tuesday, July 1st, 2008
July 1, 2008 - The first half of this year has been chaotic and confusing for investors given the Subprime fiasco and rapid deterioration of fundamentals in the Banking and Finance sectors, the secular selloff in stocks globally, recession in the US, and soaring oil and commodity prices.
US Global Investors, an American mutual fund company, founded by Toronto native, Frank Holmes, interviews Dr. Marc Faber, author of the Gloom, Boom, and Doom Report, for 1:15 hrs in this highly informative webcast (courtesy of Investment Postcards) aptly titled, “Where is the Boom, Gloom and Doom?”
Please click here to listen to the webcast.
Source: US Global Investors, June 27, 2008.
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Tags: BRICs, China, Commodities, Emerging Markets, energy, Frank Holmes, GDP Growth, globalization, GloomBoomDoom, India, Infrastructure, Marc Faber, urbanization
Posted in Agriculture, BRIC, Brazil, China, Commodities, Credit Markets, Eastern Europe, Emerging Markets, Financials, India, Markets, energy | No Comments »
Bill Gross: Hmmmm? (Investment Outlook June 2008)
Monday, May 26th, 2008
May 26, 2008 - Pimco’s Bill Gross makes a most humorous analyses, drawing parallels that the hordes are marching on the new Rome (America), and that its time to act. Make sure you read this must read, the June 2008 Investment Outlook, by Bill Gross. At the end, Gross puts forth his recommendations.
What this country needs is either a good 5 cent cigar or the reincarnation of an Illinois “rail-splitter” willing to tell the American people “what up” -”what really up.” We have for so long now been willing to be entertained rather than informed, that we more or less accept majority opinion, perpetually shaped by ratings obsessed media, at face value. After 12 months of an endless primary campaign barrage, for instance, most of us believe that a candidate’s preacher - Democrat or Republican - should be a significant factor in how we vote. We care more about who’s going to be eliminated from this week’s American Idol than the deteriorating quality of our healthcare system. Alternative energy discussion takes a bleacher’s seat to the latest foibles of Lindsay Lohan or Britney Spears and then we wonder why gas is four bucks a gallon. We care as much as we always have - we just care about the wrong things: entertainment, as opposed to informed choices; trivia vs. hardcore ideological debate.)
It’s Sunday afternoon at the Coliseum folks, and all good fun, but the hordes are crossing the Alps and headed for modern day Rome - better educated, harder working, and willing to sacrifice today for a better tomorrow. Can it be any wonder that an estimated 1% of America’s wealth migrates into foreign hands hands every year? We, as a people, are overweight, poorly educated, overindulged, and imbued with such a sense or self importance on a geopolitical scale, that our allies are dropping like flies. “Yes we can?” Well, if so, then the “we” is the critical element, not the leader that will be chosen in November. Let’s get off the couch and shape up-physically, intellectually, and institutionally-and begin to make some informed choices about our future. Lincoln didn’t say it, but might have agreed, that the worst part about being fooled is fooling yourself, and as a nation, we’ve been doing a pretty good job of that for a long time now.
Bill Gross - Investment Outlook - June 2008 - “Hmmmmm”
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Tags: Bill Gross, BRICs, Emerging Markets, Fixed Income, Hordes, inflation, Investment Wisdom, Markets, philosophy, PIMCO
Posted in BRIC, Brazil, CPI, China, Commodities, Economy, Emerging Markets, Financials, Geo-political, India, Infrastructure, Markets, Oil & Gas, Politics, Russia, US Stocks, inflation | No Comments »
Jerome Booth: Global Rebalancing to Favour Emerging Markets (FT.com)
Monday, May 12th, 2008
May 12, 2008 - Jerome Booth, Head of Research at Ashmore Investment Management, UK, has written an insightful article for FT.com, Insight: A Global Rebalancing Act, May 12, 2008. Here are a few excerpts:
Gross national savings are over 30 per cent of GDP on average in emerging countries, and for a decade private and official savers in these countries have been investing overseas – in the US and Europe – under the impression that these were safer markets than at home. Yet the dollar is far from the safest currency and not the store of value it was. US Treasuries are not zero risk – the implicit myth in the term “the risk-free rate”. Treasuries have currency, curve and volatility risks. Investors in triple A structured credit got a shock when they realised their investment was risky.
Likewise emerging market savers are getting a shock about Treasuries and other US and European assets. The money is returning home, and the move is structural, not cyclical. The global imbalance of a negative US personal savings rate on the one hand being financed by high emerging savings on the other is starting to reverse.
With this reversal, or rebalancing, is coming, we believe, a currency realignment and a series of investment booms across emerging economies as investment focus shifts. Rather than using “decoupling” in describing the impact of the credit crunch on emerging markets, we should use “negative correlation”.
The policy asymmetry between the US and emerging markets is that the emerging markets, with undervalued currencies, have an additional degree of freedom. They have the choice to mess up (do nothing) or control inflation (let the currency rise, raise interest rates). In our view, emerging market central banks will largely pass this test and do the sensible thing, though this is not what the market appears to have priced in yet.
As recently as ten years ago, emerging markets still held their hands out for development loans and foreign aid. Today, their fiscal prudence and wealth has put them in the position of bailing out the western banking system.
Why are investors taking so long to realize this critical distinction and its meaning?
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Tags: Ashmore Investment Management, BRICs, Emerging Markets, Jerome Booth, Markets, Savings Rate
Posted in Brazil, China, Commodities, Emerging Markets, Financials, India, Latin America, Markets, Russia | No Comments »
Goldman Sachs: BRICs and Beyond
Thursday, March 27th, 2008
Mar. 27, 2008 - In November 2008, Goldman Sachs’ Chief Global Strategist, Jim O’Neill, and associates, who coined the “BRICs” term, have followed up with a complete updated report on the fundamentals for each of Brazil, Russia, India and China. The report goes on to cover the markets of the Next 11 frontier markets. Click the following link to download the complete report, BRICs and Beyond (Goldman Sachs).
Here are some excerpts:
India’s rising growth potential
…We argue that there has been a structural increase in India’s potential growth rate since 2003 on the back of high productivity growth. In this paper, we explain why productivity (by which we mean total factor productivity, or the manner in which all inputs are combined to achieve more output) has surged, and why we think this is likely to continue over the next decade.
… Industry is increasingly becoming an important growth driver, contrary to conventional wisdom that growth in India is only services-led. A quarter of services are directly linked to industry, in sectors such as trade, transport, electricity and construction.
…In India, labour is nearly four times more productive in industry and six times more productive in services than in agriculture, where there is a surplus of labour. Economic theory tells us that as labour moves from low-productivity sectors (such as agriculture) to high-productivity sectors (such as industry or services), overall output must improve.
…In absolute terms India will remain a low-income country for several decades, with per capita incomes well below its BRIC peers. But if it can fulfil its growth potential, it can become a motor for the world economy and a key contributor to generating spending growth.
…India’s imminent urbanisation process has implications for demand for housing, urban infrastructure, location of retail and demand for consumer durables. We expect the coming onstream of major highways (especially the Golden Quadrilateral) to drive growth in the transportation sector, spur demand for vehicles, increase real estate values along the corridor and potentially boost construction of suburban homes as people escape congested cities. The SEZs hold out substantial investment opportunities in all spheres of activity.
Russia: A smooth political transition
…There are signs that investment has begun to accelerate over the last 12 months, with capital expenditures up over 21%yoy in 2007H1. Private investment growth may suffer a brief interruption due to the recent troubles in the local credit markets. But public investment may make up some of the shortfall: after repairing its balance sheet and accumulating a substantial ‘rainy-day’ fund, the government has announced ambitious plans to invest over $1-trillion over the next ten years in roads, rail, ports, pipelines and other infrastructure projects.
…The BRICs dream is not even a best case scenario in fact, Russia’s recent performance has been considerably better than projected in the original BRICs papers. But it does assume that the necessary conditions for long-run growth are in place, conditions that we have tried to capture in our Growth Environment Scores (GES). Russia scores well above the emerging market mean on education, government deficit and external debt; marginally above average on openness and life expectancy; lower but still above average on technology (phones, PCs and internet access per capita); and somewhat below average on inflation, which is now in the high single digits.
…Our equity strategists’ favourite themes are the consumer, telecoms and retail sectors, as well as steel and pipe companies, and other names poised to benefit from the state’s infrastructure spending. They also see opportunities in domestic restructuring stories, such as power generation and gas. With significant segments of the economy still private, we see considerable opportunities in direct investment.
China: Will China grow old before getting rich?
…China’s unrivalled economic growth over the past quarter-century has surpassed all records and created a new standard in the history of economic development. With an average annual real GDP growth rate of 9.6% from 1978 to 2004, China’s pace of growth is faster than that achieved by any East Asian economy during their fastest-growing periods.
China’s investment strength is sustainable
…One of the most widely-held misconceptions about China is that the economy contains an over-investment time-bomb, which will soon result in a sharp correction in both investment and GDP growth, resulting in rising non-performing loans (NPLs) and in deflation. The reasoning behind this theory is that fixed asset investment (FAI) is growing at above 20% year on year, while the investment-to-GDP ratio is already above 45% (higher than the levels reached by Asian economies before the 1997 crisis). Furthermore, this investment boom is financed by misallocated bank credits and generates few returns.
Although this is a popular view, we believe it is wrong for two reasons. First, the conclusion is based on macro data that is deeply flawed, leading to a substantial overstatement of the investment-to-GDP ratio. Second, a high investment-to-GDP ratio is consistent with China’s rapid growth. The fact that the return on capital is high and generally has been climbing over the past decade supports our thesis that Chinas investment strength is sustainable.
The “B” in BRICs: Unlocking Brazil’s growth potential
We remain confident about Brazil’s growth potential, at least in terms of what we have envisaged in our BRICs studies. The main reason for Brazil’s underperformance is that, until now, the government had been in the process of implementing a stabilisation programme, with a view to achieving macroeconomic stability. This is a key precondition for growth. Thanks to these adjustment efforts, macroeconomic conditions are more favourable now than they have been for decades. The large balance of payments surpluses have been used to prepay external debt and accumulate reserves, while a credible central bank (BACEN) has reduced inflation to 3.0% in 2006.
We believe that the Lula II administration will sustain sound macroeconomic policies and make some progress on structural reforms. Stability should allow real GDP growth rates to move gradually towards Brazil’s potential rate of about 3.5%, which is near our BRICs potential growth rate of 3.7%.
We also believe that Brazil could grow much faster, perhaps at a secular growth rate of about 5.0%. For this to happen, the government will have to tackle four difficult structural problems:
· Brazil saves and invests too little. To address this issue, the government will have to deepen and improve the quality of the fiscal adjustment.
· The economy should be opened to trade.
· The government must improve the overall quality of education.
· The government should implement structural reforms to improve institutions, with a view to increasing total factor productivity.
We do not believe that the Lula II administration and Congress will be ambitious enough to implement this politically difficult agenda. Therefore, while Brazil has the potential to grow at or above 5.0%, this is unlikely to happen during the next four years.
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Tags: BRICs, China, Emerging Markets, India, Markets, Russia
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The World in 2050
Wednesday, March 26th, 2008
Courtesy: PriceWaterhouseCoopers
March 25 /CNW/ - Long-term growth prospects for China, India and other so-called ‘E7′ economies (Brazil, Mexico, Russia, Indonesia and Turkey) remain upbeat. However according to a new report from PricewaterhouseCoopers (PwC) an additional 13 emerging economies also have the potential to grow significantly faster than the established OECD countries. This rapid growth creates both challenges and opportunities for Canada.
The report, The World in 2050: Beyond the BRICs: a broader look at emerging market growth prospects, suggests that China could overtake the US by 2025 to become the world’s largest economy and will continue to grow to 130% of the size of the US economy by 2050. The Indian economy could grow to almost 90% of the size of the US economy by 2050. Brazil seems likely to overtake Japan by 2050 to move into fourth place, while Russia, Mexico and Indonesia all have the growth potential to surpass the economies of Germany or the UK by the middle of this century. The most impressive economic growth could be realized by Vietnam, with a potential growth rate of almost 10% per annum in real dollar terms. This rapid growth could propel the Vietnamese economy to around 70% of the size of the UK economy by 2050.
Interestingly, Nigeria has the long-term potential to overtake South Africa as the largest African economy by 2050. This assumes that non-oil based growth policies implemented in recent years are sustained in the long-run, something that may prove to be a challenge.
“As the economies of emerging nations grow, Canada’s share of the global economy is projected to diminish,” says Edward Mansfield, an associate partner with PwC’s statistics and economics group. “To maintain our competitive position, Canadian businesses will have to differentiate through innovation and technological progress. This will require greater investments in education and capital equipment to promote the productivity gains necessary for economic growth. However, as a highly culturally diverse nation, Canada could be well positioned to capitalize on the growth of emerging markets due to well established cultural and economic links.”
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Tags: Brazil, BRICs, China, de-coupling, Emerging Markets, India, Markets, Metals, Russia
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Don Coxe: Remain Heavily Overweight Commodity Stocks
Friday, March 14th, 2008
Mar. 14, 2008 - There are few who can rival Donald Coxe, BMO Financial’s Chief Investment Strategist, when it comes to providing what has historically been an accurate macro outlook on financial markets. Below, are Mr. Coxe’s paragraphed recommendations from February’s edition of Basic Points (courtesy of J’s Global Analysis). In a time of great uncertainty, this kind of clarity and direction is invaluable.
1. Long-term investors should remain heavily overweight commodity stocks, including the base-metal stocks. As the bear market grinds on, use days of stock market weakness to add to commodity stock exposure. They not only remain the asset class with the best earnings outlook, but also the asset class that is least understood by conventional asset allocators, who still see them as cyclicals dependent on OECD growth.
2. In the near term, the golds will continue to outperform stock markets and to act as a form of hedge against two kinds of shocks – financial panics and inflation shocks.
3. Remain heavily underweight bank stocks, and financials tied to “Jurassic Park Avenue” excesses. Within the financial group, overweight high-quality fire and casualty companies, life insurers, and asset management organizations.
4 Retain above-average cash positions, preferably in strong currencies.
5. Where possible, borrow in dollars and invest in assets denominated in strong currencies.
6. The Canadian dollar remains the Western currency with the best fundamentals. Canada’s problems arise because the Great Lakes are an insufficient barrier to the flow of bad economic and financial trends from the South.
7. Within the commodity groups, continue to emphasize investment in companies with long-duration unhedged reserves in the ground in politically secure regions.
8. The growth of sovereign control of energy assets means that the supply-side response to record-high oil prices will probably be inadequate to meet relentlessly growing global demand. Too many Third World governments with rich oil reserves have too many other demands for cash to reinvest heavily for the long term in new production. Retain exposure to the shares of producing Alberta Oil Sands companies with reserves that could outlast this century.
9. Long-term-oriented investors should use any temporary pullback in base metal producers to build their portfolios for the Final Movement of the Sonata – which will be the longest and loveliest performance of metal music in history.
10. The Treasury yield curve is now in recession mode – low yielding and upward sloping. It is of investment merit only for those who expect a long, deep recession. The Ten-Year note, with a negative real yield of 50 basis points, should appeal only to those who believe the recession will be accompanied by deep deflation. Oddly enough, credit spreads, though they have widened from their record-low levels, do not discount any recession at all.
We think bond investors should go for short- and medium-term high-quality non-Treasury paper – preferably in currencies other than greenbacks.
11. Defence stocks remain attractive, even if Democrats win it all in November. The next president may well choose to speak more softly than the incumbent, but if he or she doesn’t carry a big stick, the jihadists won’t listen.
Also, click here for Donald’s most recent webcast, dealing with the case for commodities and resources stocks.
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Tags: Agriculture, BRICs, Commodities, energy, Fixed Income, Investment Strategy, Investment Wisdom, Markets
Posted in Markets | 2 Comments »
George Soros: The Worst Market Crisis in 60 Years
Friday, February 22nd, 2008
February 22, 2008 - George Soros, the infamous hedge fund manager who broke the British Pound, penned an article for FT.com, in which he posits that this crisis, unlike many of its peers, which occur every 4-10 years, is actually the end of a 60 year period of credit expansion led by the once dominant greenback. Here are a few excerpts from The Worst Market Crisis in 60 Years, by George Soros:
…the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years.
…Everything that could go wrong did. What started with subprime mortgages spread to all collateralised debt obligations, endangered municipal and mortgage insurance and reinsurance companies and threatened to unravel the multi-trillion-dollar credit default swap market. Investment banks’ commitments to leveraged buyouts became liabilities. Market-neutral hedge funds turned out not to be market-neutral and had to be unwound. The asset-backed commercial paper market came to a standstill and the special investment vehicles set up by banks to get mortgages off their balance sheets could no longer get outside financing. The final blow came when interbank lending, which is at the heart of the financial system, was disrupted because banks had to husband their resources and could not trust their counterparties. The central banks had to inject an unprecedented amount of money and extend credit on an unprecedented range of securities to a broader range of institutions than ever before. That made the crisis more severe than any since the second world war.
Credit expansion must now be followed by a period of contraction, because some of the new credit instruments and practices are unsound and unsustainable. The ability of the financial authorities to stimulate the economy is constrained by the unwillingness of the rest of the world to accumulate additional dollar reserves. Until recently, investors were hoping that the US Federal Reserve would do whatever it takes to avoid a recession, because that is what it did on previous occasions. Now they will have to realise that the Fed may no longer be in a position to do so. With oil, food and other commodities firm, and the renminbi appreciating somewhat faster, the Fed also has to worry about inflation. If federal funds were lowered beyond a certain point, the dollar would come under renewed pressure and long-term bonds would actually go up in yield. Where that point is, is impossible to determine. When it is reached, the ability of the Fed to stimulate the economy comes to an end.
And finally,
Although a recession in the developed world is now more or less inevitable, China, India and some of the oil-producing countries are in a very strong countertrend. So, the current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the US and the rise of China and other countries in the developing world.
Soros concludes that there is a danger that US protectionism could disrupt the global economy and plunge the world into a recession or worse.
Source: The Worst Market Crisis in 60 Years, George Soros, FT.com
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Tags: BRICs, China, Credit Market, Economy, Emerging Markets, India, Investment Wisdom, Markets
Posted in Markets | 1 Comment »
How Solid are the BRICs? (Part 2)
Sunday, February 3rd, 2008
Feb. 3, 2008 - The nature of the economic strength and stability of the BRIC (Brazil, Russia, India, China) countries is a less well known or understood fact among investors. There remains a wide gap between perceptions and reality.
Remember 1997 and 1998? Many investors, excited about the growth of Asian and emerging countries in the late nineties and invested their money found out about credit related risk first when the 1997 ‘Asian Contagion’ occurred and was followed upon by the Long Term Capital Management bailout which unfolded in 1998. These events destabilized global markets and investors were taken by surprise as markets melted down.
For this reason, its important to go back to that time and re-examine Malaysia and Thailand, as examples, of where investors were excited by the rapid economic growth, but ignored the then inherent high credit risk, much to their expense. A decade ago (yes, a decade ago) when all of this was happening, only 3% of the grand total of emerging markets sovereign debt was rated as investment grade by any of the ratings agencies.
In 1997, only 10 out of 120 companies that form the MSCI Emerging Markets Index, had ADRs.
Excited by the G7 debt-financed growth, investors made bets that were inherently risky to their preservation of capital, not simply volatile. Circa 1997, emerging markets were in debt to the industrialized world by about $100-billion in the current account deficit column, and dependent on the kindness of their G7 financiers.
When the Malay and Thai governments were unable to meet current account obligations, and started printing money in order to meet them, the Fed blew the whistle upon discovering that sufficient reserves were not available to support the currency valuations. Hence the overnight slashing of Asian currencies.
At best, the general sentiment surrounding emerging markets has remained sceptical, and for this reason, as fundamentally sound as the BRIC countries economies are today, the market has been adopting the BRIC investment story very gradually. This time though, it is credit worthiness that is being overlooked.
Source: Merrill Lynch October 2006
Source: Merrill Lynch, October 2006
Today, emerging markets sit atop a current account surplus in excess of $700-billion, and it is the industrialized G7 who are in debt, by the same amount. Longer term surpluses in excess of $3-trillion are to be found on the balance sheets of mostly the BRIC countries today in the form of Foreign Exchange surpluses, and trade surpluses. China alone now nurses a trade and forex surplus nearing US$1.5-tillion. Russia, has managed to build up reserves of US$450-billion as well as Putin’s US$150-billion ‘contigency’ fund, set aside so that it may sidestep any kind of financial shock. India has amassed a forex surplus of around US$275-billion. Brazil’s forex reserves now stand at US$178-billion.
BRIC countries have been financing the debt, and driving the growth of G7 countries for the last 5-7 years. China has emerged as the worlds manufacturing hub, while India has come on very strong as its counterpart hub in services, both providing Western firms access to inexpensive educated and -or- highly-skilled labour. Russia, under Putin, has successfully emerged as a highly profitable energy and raw materials producer, second in oil and gas reserves to Saudi Arabia. Brazil has changed the regional balance in the Americas by turning itself into the winds of east-west trade in hard and soft commodities and using its strength to bolster its new economic clout in relation to North America.
China’s growth is less dependent on the health of the US economy, as is commonly perceived. A recent Economist article points out that China’s true exports-to-GDP ratio is actually below 10%, that China has been quite successful to date at rebalancing its economy in favour of domestic growth as a driver. As for India, 87% of its GDP is consumed domestically, making it quite independent from the risk of the US threatened consumer hegemony. Russians are enjoying three times the disposable income of 7 years ago and driving consumption growth, as are Brazilians.
North American and European companies are looking to these consumers to drive demand and growth to their top and bottom lines.
In a word, things have changed.
They have changed in a very meaningful, very important way. The relationship that now exists between emerging markets and G7 countries is ‘symbiotic.’ and interdependent.
Source: Merrill Lynch, October 2006
Today, around 60-70% of emerging markets sovereign debt is investment grade rated and all 120 companies that form the key MSCI Emerging Markets Index have ADR listings.
In 1997-1998, the world’s biggest western banks took advantage of bailout conditions to take ownership of Asian banks, once protected by thousand-year-old protectionist laws. Today, powerful and wealthy Sovereign Wealth Funds (SWFs) are bailing out the same banks, Citigroup, Merrill Lynch, and Morgan Stanley.
On Wall Street in the past few weeks, the sums have been bigger and the actions more benign—at least so far. This week Merrill Lynch and Citigroup became the latest to get the sovereign-wealth treatment, picking up a further $6.6 billion and $14.5 billion respectively, much of it from governments in Asia and the Middle East (see article). Sapped by the subprime crisis, rich-world financial-services groups have been administered nearly $69 billion-worth of infusions from the savings of the developing world in the past ten months, according to Morgan Stanley.
Commodities are not the only source of sovereign wealth. Many Asian emerging markets have been running current-account surpluses at the same time as they have been managing their exchange rates. As they have mopped up dollars, using government bonds, they have accumulated reserves. At first these went into safe, liquid assets like American Treasury bonds—the Asian financial crisis of 1997-98 was still a recent memory and many countries were keen to amass reserves. But economies like China, South Korea and Taiwan now have more reserves than they need to defend themselves against shocks. Their governments understandably want to earn a higher return than Treasury bonds will pay, so they create a fund to manage their assets. Source: The Economist, Jan. 17, 2008, Asset-Backed Insecurity
It has become such that neither Emerging Markets nor the G7 can allow each other to be destabilized, as evidenced by the large, noted, SWF investments, as they have each other’s economic ‘lives’ in the balance.
You might get the idea that emerging markets are correlated more to the US than they actually are, when you see that they have suffered like western stock markets, from a selloff. Their correlation is low, between .30 and .40, not zero or negative. There are those who would have us believe that the decoupling thesis is suffering from the same disease as the bull market. Those are probably the same folks, who last year began to re-write their theses from decoupling to recoupling to suit themselves this year, as the need to raise cash by selling the last two year’s profitable trades became an increasingly inevitable requirement, in order to shore up balance sheets.
Our expectation is that the credit squeeze ailing the market will come to a reversal point, at some point over the next 2-4 weeks as the banks round the corner on the cash call that has forced the wholesale liquidation of emerging markets and commodities related investing.
Emerging Markets are strong, and some of their [inflationary] growth pressures may get somewhat solved by a slowdown in the US, in the form of an imported soft landing. This is by no means advice, but if you subscribe to this thesis, then there is reason (for those of us on the buy-side) to believe that there will be a recovery in the decoupling thesis, and thus emerging markets equities throughout the second half of the year, from the current lows.
First, however, until the cash call is complete, and the future of the monoline insurers (MBIA, ABK) is resolved in the form of perhaps a bailout, we may continue to see more downside.
Now may prove to be a good time to nibble at emerging markets and commodities again and add or gain exposure as they are far more attractively priced. Here are a variety of ETFs and open ended funds (Canadian fund companies with offerings) that provide broad (diversified) and narrow exposure (country and regional funds) to BRIC and emerging markets.
On the AMEX
“Total” Emerging Markets ETFs
iShares MSCI Emerging Markets Index Fund (EEM)
PowerShares FTSE RAFI Emerging Markets Portfolio (PXH)
SPDR S&P Emerging Markets ETF (GMM)
Vanguard Emerging Markets ETF (VWO)
Dividend Emerging Markets ETFs
WisdomTree Emerging Markets High-Yielding Fund (DEM)
Multi-Region (but not Total) Emerging Markets ETFs
BLDRS Emerging MKTS 50 ADR Index Fund (ADRE)
Claymore/BNY BRIC (Brazil, Russia, India, China) ETF (EEB)
streetTRACKS SPDR S&P BRIC (Brazil, Russia, India, China) 40 ETF (BIK)
iShares MSCI BRIC Index Fund (BKF)
Latin America Regional ETFs
iShares S&P Latin America 40 Index Fund (ILF)
SPDR S&P Emerging Latin America ETF (GML)
European Emerging Markets Regional ETFs
SPDR S&P Emerging Europe ETF (GUR)
Middle East and Africa Regional ETFs
SPDR S&P Emerging Middle East & Africa ETF (GAF)
India - Barclays iPath India ETN (INP)
On the Toronto Stock Exchange
Claymore BRIC ETF (CBQ.T)
Open Ended Funds (Canadian)
Broad Mandate Emerging Markets
Tmpleton Emerging Markets
AGF Emerging Markets
Pro FTSE RAFI Emerging Markets Index
TD Emerging Markets
United-Emerging Markets Pool Cl A
CI Emerging Markets
United-Emerging Markets Pool Cl W
BMO Emerging Markets
Brandes Emerging Markets Equity
CIBC Emerging Markets Index
National Bank Emerging Markets
Region/Country Mandates
Excel India Fund
Excel China Fund
Excel Chindia Fund
Excel Emerging Europe Fund
Templeton BRIC Fund
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Tags: Brazil, BRICs, Commodities, Credit Market, de-coupling, Emerging Markets, India, Latin America, Markets, Russia, SWFs
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Breakingviews: Sovereign Wealth Funds Risk Index
Friday, January 25th, 2008
Jan. 25, 2008 - Today, we received this piece about Breakingviews.com’s new SWF Risk Index:
Breakingviews sovereign wealth fund risk index
By Una Galani AND Simon Nixon
To see the full index with detailed rankings, click on the link below
Sovereign Wealth Fund Index: Sovereign wealth funds were hardly talked about twelve months ago. Now they are one of the hottest topics in global financial markets. Over the last year, these state-owned entities have spent over $75bn snapping up stakes in some of the world’s biggest banks, taken big positions in stock exchanges on both sides of the Atlantic and even attempted a takeover of one of Britain’s leading supermarkets.
Such funds have existed for decades, but the shift in global economic power and the current weakness in western markets has given SWFs – forecast to grow assets fivefold to $13.4tr by 2017 – new influence and raised new fears about their motives. Critics such as President Sarkozy of France and some US politicians worry that SWFs tend to be secretive, target political as well as financial returns, and operate at the whim of governments not always sympathetic to western economic and political interests…
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Tags: Brazil, BRICs, China, Emerging Markets, Miscellaneous, Russia, SWFs
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Why the selloff in commodities and emerging markets?
Tuesday, January 22nd, 2008
Well, here we are in the midst of a global panic, and the media has been all over it, doing its best to carry the news of the panic. That’s why its really important to keep a clear head here, and cut through the clutter.
Emerging markets and commodities are still the strongest bets globally. Emerging markets have been operating from a higher quantum of growth roughly 2-3 times that of industrialized economies. In fact, emerging markets have been dealing with inflationary pressures. A recession in the west relieves some of that pressure, and that is good news. Fact is, the BRIC will still be in need of the raw materials, metals, oil and food, and that demand growth is expected to continue well into the next two decades. So why are they selling off?
The headlines say that demand from emerging markets for commodities will decline and that’s why they are getting hit hard. The real story is that they have been the best performing assets out there, and that is the easiest place to raise cash given the outstanding obligations of the credit market. Those responsible plain and simply need the cash, to refinance their obligations, and to shore up their balance sheets.
Who is doing all of the dumping of stocks? It is most certainly NOT you and me, or the average investor. We are just supposed to stand by and watch this happen.
Its a cabal of large institutional so-called ’smart money’, hedge funds, and currency traders that have driven this market to its present levels.
The credit market (subprime) meltdown, and the credit default swap meltdown, with the failures of MBIA, AMBAC, and ACA, that is following on its heels is the first part of this. The losses at the investment banks are precipitating the repatriation of capital in order to shore up balance sheets. The large proprietary traders are selling off their fundamentally strongest holdings with the biggest gains, in such things as commodities and emerging markets, to accomplish this. This amounts to a giant MARGIN CALL against these obligations. So, Canada and Emerging Markets are not selling off because there is something terribly wrong with them; it is because the biggest players need to get their hands on cash.
Cut through the clutter and you get to the unwinding of the carry trade. This most likely is the largest contributor to the ’round the world’ sell-off.
The slide of the dollar as a result of out-of-sync interest rate cuts, the late start in cutting rates by the Fed to get around the subprime and CDO meltdown, followed on by the ECB and BoJ’s reluctance to cut rates or print money is now leading to a wholesale unwinding of yen/dollar carry trade. And it is BIG. This, in our humble opinion, is the real source of indiscriminate selling of equities which explains why we have seen the kind of volatility we are seeing in the BRIC, emerging markets, and Australia and Canada.
Here’s what’s at the heart of it.
Yen hits 2-1/2-year high vs dollar as stocks slide
Tuesday January 22 2008
By Masayuki KitanoTOKYO, Jan 22 (Reuters)…The dollar hit a 2-1/2-year low of 105.61 yen on electronic trading platform EBS early on Tuesday, but later pared its losses and stood at 106.16 yen as of 0322 GMT…
The euro fell to a five-month low of 152.32 yen on EBS, while sterling fell as low as 204.87 yen the lowest since April 2006. They later rebounded off those lows.“…It’s a combination of carry unwind and repatriation, as well as little or no chance of rate hikes being priced into the high-yielders,” says Gerrard Katz, head of North Asia FX trading at Standard Chartered.“…Yen carry unwinding might, say, account for about 5 out of 10 of the entire move, with short-term speculators accounting for the other 5 or a bit more,” said a vice president for foreign exchange sales at a European bank…
Euro Falls to Five-Month Low Against Yen as World Stocks PlungeFrom Bloomberg - Jan. 21 (Bloomberg)
“…What we are seeing now is investors pulling out of their profitable trades because of risk aversion,’’ said Bilal Hafeez, London-based global head of currency strategy at Deutsche Bank AG, the world’s biggest currency trader. “You see the euro coming off, a decline in emerging-market assets and a rally in the yen.They are typical signs of carry trades being unwound…’’“…Investors are likely to continue to liquidate their carry trades in coming weeks, said Neil Jones, head of European hedge fund sales at Mizuho Capital Markets in London. Jones predicts that a weekly close below 154 yen (vs. Euro) will “trigger a wave of sell signals’’ for the euro. He said the yen could rise to 100 per dollar by the end of March…”
To wit, in advance of the unwinding, you can bet that some of these ’sophisticated’ investors who borrowed in yen to invest in higher yielding opportunities elsewhere, covered their own backsides with short positions which they will undoubtedly cover once they are thr