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Emerging Markets Have Farther To Fall
Kenneth Rapoza , Contributor INVESTING | 8/20/2013 Emerging Markets Have Farther To Fall Emerging market investors worried about this guy: Ben Bernanke and the Federal Reserve’s quantitative easing policy. The market will get a better sense of so-called “tapering” of QE in the FOMC meeting minutes due out on Wednesday. Barclays Capital expects more pain for emerging market equity and bonds, in the meantime. (Image credit: Getty Images via @daylife) The emerging markets have farther to fall and they can lay the blame on Ben Bernanke and the Federal Reserve for their sad-sack performance over the last several days. On Tuesday, the iShares MSCI Emerging Markets Index (EEM) was trading slightly lower following Monday’s 1.86% drop. Will investors buy on the lows? Of course they will. But is this a market ripe for deeper corrections? It sure is, says Barclays BCS +0.34% Capital analyst Koon Chow in London. Risky assets continue to be weighed down by rising rates in the U.S. Ten year Treasury bonds are now yielding 2.83%. In London trading hours this morning, European equities followed the downbeat tone in Asian markets. Meanwhile, high yielding currencies like the Brazilian real are bearing the brunt in the forex markets. And it’s not over yet. This underperformance is likely to continue as the starting point of Fed tapering nears, said Chow in his daily note to clients today. Right now, all eyes are on the Fed Open Market Committee Meeting (FOMC) minutes coming out on Wednesday. The risk associated with the FOMC minutes is whether the Fed has begun discussing a possible change in its threshold rate for unemployment as a means of continuing its QE program. Remember, Bernanke said that he would not step on the break of quantitative easing until unemployment levels were comfortably below 7%, or at the very least, trending downward. Unemployment has been trending downward, but at a slower pace. Any discussion of a move away from waiting for lower unemployment will likely to be viewed as a dovish surprise by the market and may lead to a near-term rally for global bonds. Equities would also bounce. The noticeable lack of a broad dollar rally, despite the sharp moves against high yield currencies, suggests that the market may already be positioning for such an announcement. One of the problems right now with emerging market investing is fund managers are allocating out of them faster than anyone expected. The positioning in emerging markets is still problematic, said Chow, although arguably slightly less negative in equities than in fixed income where global institutional and retail positions are still large. This would suggest that there can be some asymmetry in emerging markets in the months ahead, with greater risks of disruptive moves in fixed income than in equities. Fund managers do not want to be caught holding the same positions, with the same weighting post-QE as they were during QE. This is driving the bulk of the moves in the market these days. Meanwhile, the investment patterns in developed markets seems different. While in emerging, investors have had asset allocation shifts that look more like “risk reduction”, developed market positioning is suggestive of only the early stages of the great rotation out of fixed income to equities, Barclays’ Chow said. The stock of cumulative retail inflows (as opposed to institutional) to developed market equities since early 2009 is actually negative. But institutional investors have not seen such a radical exit from their emerging equity positions. Since the financial crisis, the cumulative position of retail investment into developed market equity mutual funds is still negative ($239 billion less), but it has been offset by large institutional flow into the market ($364 billion), according to Cambridge, Mass. based fund trackers EPFR Global. EFPR Global data also shows that investment outflow from emerging markets is suggestive of broader risk reduction. Investors in retail funds have nearly completed their exit from emerging. They have also reduced their bond holdings by about 25% from multi-year highs in May. The flows from institutional funds, by contrast, have been “stickier”, said Chow, and sold in moderate amounts of both equities and debt since late May. “Although the institutional investors’ decisions should be more long-term focused and therefore naturally less likely to exit, the fact that they have not reduced their positions significantly is an unhelpful positioning technical and they may need to see a further drop in prices to buy,” Chow said. He expects more volatility, and downside risks. Technically speaking, emerging equity looks better than bonds given the considerably more advanced overall exit by both retail and institutional at this point, Chow said. A look at the assets wealthy investors assumed would return the most for their portfolios this year. Continue reading
US Land Prices ‘Surge’ Despite Fall In Ag Profits
15 th Aug 2013, by Agrimoney.com Farmland prices in major US agricultural states defied weakening farm incomes to maintain strong gains – in some cases, accelerating – although many bankers feel they may now “have peaked”. Farmland prices in Plains states including Kansas, the top wheat-growing state, and Nebraska, a major corn and soybean producer “surged further” during the April-to-June quarter, the US central bank said. Prices of non-irrigated farms were 18.3% higher than a year before, with those of watered land soaring 25%, faster than the 21% growth recorded in the first three months of the year. “Despite expectations of weaker farm income, district farmland values continued to set records,” the Federal Reserve’s Kansas City bank said. The period “marks the ninth consecutive quarter in which irrigated cropland values have risen more than 20% year over year”, with lingering dryness in some area increasing the premium over land without access to water supplies. Weak income prospects The increase defied dents to farm income from weaker winter wheat yields and prices, and falling cattle values, “although an uptick in hog prices improved profitability for some hog producers”, the bank said. And prospects for farm takings remain “weak for the rest of the year throughout the district”, given weaker prices of corn and soybeans, harvested in the autumn. “Not only would lower crop prices reduce farm income, but persistent drought in parts of the district could limit yield potential, particularly in areas without irrigation,” the Fed said. “With lower expected prices and the possibility of a poor harvest,” lenders contacted for the Fed survey “expected farm income to be less than last year in each state in the district”, which also includes Colorado, Missouri, New Mexico and Wyoming. ‘Overall wealth’ However, it was a dearth of other investment opportunities, for farmers enriched by a strong period for farm incomes, rather than hopes for agricultural returns which was incentivising land purchases “Bankers indicated that expected farm income was not the main factor contributing to the value of farmland,” the Fed said. “Instead, bankers cited the overall wealth level of the farm sector, supported by several years of strong income, as the primary driver of farmland values. “Low interest rates and a lack of alternative investment options were also noted as significant factors.” Price forecasts Nonetheless, lenders expressed doubts as to how long this effect might last in the face of weakened revenue prospects. “While most bankers expected farmland values to remain at current levels, an increasing number of respondents felt farmland values may have peaked,” the fed said. “More bankers also expected farmland values to drop after harvest likely due, at least partially, to expectations of lower farm income,” although the decline was expected to be less than 10% over the next year. Weaker farm prosperity has already become evident in farm credit markets, with loan demand rising for the first time in three years, and repayment rates on borrowings weakening too, and expected to keep falling. The data follow a debate at an investor call by Deere & Co on Wednesday at which analysts persistently questioned forecasts by the tractor maker that cash farm receipts, a key indicator of machinery purchases, will fall only slightly in 2014, despite tumbling crop prices. Continue reading
Fed Says Some U.S. Farmland Values Surge More Than 25 Percent
Carey Gillam, Reuters | August 16, 2013 KANSAS CITY, Mo. – Farmland prices in key U.S. crop regions surged more than 25 percent over the past 12 months as demand for land remains strong despite a decline in farm income, two Federal Reserve bank reports said on Thursday. Prices paid for irrigated cropland in a central U.S. region that includes Kansas, Nebraska, Missouri, and Oklahoma jumped 25.2 percent from a year ago, according to a report by the Federal Reserve Bank of Kansas City. The jump marks the ninth consecutive quarter in which irrigated cropland values have risen more than 20 percent year-on-year. Non-irrigated cropland rose 18 percent on a year ago, while ranchland rose 14 percent, the report said. Gains were weaker for ranchland, particularly in Oklahoma and some mountain states, because persistent drought has left pastures in poor condition. In the Midwest and in some Mid-South states including Arkansas and parts of Missouri, Mississippi, Tennessee, Kentucky, Indiana and Illinois, prices paid for quality farmland rose 20.6 percent over the last year to $5,672 per acre on average, according to a report by the Federal Reserve Bank of St. Louis. However, average ranch or pastureland values for the Midwest and Mid-South district increased only about 1 percent to $2,372 per acre over the past year, the report said. The gains come even as farm income in many states is declining, in part due to reduced wheat production revenues and losses in the cattle sector, according to the Kansas City report. The reports are based on surveys of bankers, who pointed to the overall wealth of the farm sector, the current low interest rate environment and a lack of alternative investment options for the price rises. Still, there is a growing sense that values are nearing, or have reached, a peak. While most bankers expected farmland values to remain at current levels, an increasing number of bankers responding to a survey by the Federal Reserve Bank of Kansas City felt farmland values may have peaked. Compared with previous surveys, fewer bankers expected farmland values to keep rising. Among those expecting values to fall, most thought the decline would be less than 10 percent, the Kansas City report said. The Kansas City federal reserve district encompasses key wheat-producing states and largecattle and livestock production areas, while the Chicago district is dominated by corn and soybean farms, as well as large hog and dairy operations. Continue reading
