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Losses Mount For Global Markets As US Considers Syria Action
28 Aug 2013 | 07:14 Nick Paler Markets around the world sold off overnight while oil continued to soar, as the prospect of military involvement in Syria’s civil war grows. As British Prime Minister David Cameron and US President Barack Obama (pictured) meet to discuss the Syrian civil war – and specifically whether the regime has used chemical weapons on its own people – senior military staff in the US have already said they are “ready to go”. The rhetoric has spooked investors, and markets saw even heavier selling overnight, with the US Dow down 1.1% and the S&P 500 off 1.6%. The Nasdaq was impacted more, with the index finishing 2.2% lower, as shares including Apple racked up losses. Asian shares followed suit with the Hong Kong Hang Seng and the Nikkei shedding 1.4% and 1.3% respectively. As stocks dropped both oil and gold have seen an extension of recent rallies. Investors looking once more for safe havens have pushed gold back into bull market territory, up over 20% from lows, and the price climbed again overnight to reach $1,426. While Syria is not one of the world’s largest oil producers, the prospect of further unrest in the region has driven up the price rapidly in recent days, and last night was no different. Gaining another 2.5%, the price of Brent crude is now $117 per barrel. Continue reading
Emerging Market Sell-Off Sets Scene For Long-Haul Returns
By Fiona Hamilton (Money Observer) | Fri, 23rd August 2013 Emerging market sell-off sets scene for long-haul returns Steep setbacks in a number of emerging and Asian stockmarkets have attracted the attention of global and regional investment company managers. Stockmarkets in the BRIC countries have been relatively disappointing for some time, but other emerging markets – in Mexico, Thailand and the Philippines, for example – had a fantastic run prior to the June sell-off. As a result, the shares of many consumer-oriented and higher-yielding companies reached levels that persuaded leading emerging market managers to take profits. They were well advised, as some of the most highly rated companies, such as Mexican restaurant group Alsea, have fallen by more than 30%, even though their businesses seem unlikely to be materially affected by macroeconomic events. Tense times If confidence continues to be undermined by fear that central banks will reduce quantitative easing in the West and credit conditions will tighten in China, emerging stockmarkets are likely to remain out of favour, as Western money tends to fly home when nerves are jangling. Riots in Brazil and Turkey have not helped, and nor have the Syrian bloodbath, the increasingly authoritarian tone of the Russian government, or a series of interventionist or confiscatory moves by Latin American leaders. Despite all this, the long-term outlook for many emerging market and Asian companies remains far more exciting than it is for their counterparts in the West, and investors who buy when the worst of the setback is over should be well rewarded. Mark Mobius has managed the £1.6 billion Templeton Emerging Markets Investment Trust (TEMIT) since its 1989 debut, and has achieved net asset value total returns averaging close to 20% a year over the past decade. He believes emerging markets continue to offer potential for superior long-term returns, primarily because their economies are, on average, growing much faster than developed economies. “We believe this growth has become increasingly self-sustaining, as levels of trade with emerging markets start to dominate overall trading patterns, and rising consumer wealth in emerging market economies stimulates domestic demand. The finances of emerging market countries as a group, as measured by factors such as foreign reserves and debt-to-GDP levels, appear stronger than those of many developed markets, while demographic factors in emerging nations today are also much more favourable,” he says. Matthew Dobbs, who has achieved highly competitive returns for Schroder Oriental Income and Schroder Asia Pacific, makes a similarly positive case for Asia, which dominates the emerging market indices, and particularly for the 10 countries that make up the ASEAN region. Dobbs says political conditions seem encouragingly stable in the key countries of Thailand, Indonesia and the Philippines, which have a combined population of around 400 million. Urbanisation is continuing to increase, which boosts productivity and growth, while intraregional trade is growing, helped by improved infrastructure. He believes the Asian economies have become much less vulnerable to problems in the West because most are now well financed, with sturdier current account balances, robust foreign exchange reserves and less US dollar-denominated debt. Although such positive fundamental measures were priced in before the June correction, he says valuations have started to look interesting again, especially in areas such as property development, banking and healthcare. Investor options Investors wanting to venture into emerging markets have a variety of options among closed-end investment companies. The most indirect choice would be a developed market trust holding a lot of companies exploiting emerging market opportunities, such as Jupiter European Opportunities or Henderson Smaller Companies. They invest in companies with higher levels of corporate governance, their liquidity tends to be better and it is easier to keep close tabs on what a company’s management is up to. They can get plenty of exposure to some sectors of emerging market demand – consumer goods, industrial equipment, tobacco, luxury goods, aerospace and pharmaceuticals, for example. However, investors will be unable to tap into many other sectors through Western companies, so their emerging market exposure will be partial. Also, Western companies are more comprehensively followed, so it becomes harder to spot valuation anomalies. Some trusts in global sectors offer a more direct but still flexible exposure. Murray International is the stand-out option. It has roughly half its portfolio invested in Asian and emerging market companies and boasts a fantastic long-term record. Its net asset value fell sharply in June. If this brings the premium down to earth, it could offer a buying opportunity. British Empire Securities & General has about a quarter of its portfolio in Asia, largely through well-managed conglomerates selling at deep discounts to their asset values. Scottish Mortgage Investment Trust has just under a quarter of its assets in emerging markets and Asia, but its high-conviction portfolio and high gearing means it is not for the fainthearted. Scottish Investment Trust reduced its emerging market and Asian exposure to around 22% before the setback, but lead manager John Kennedy is keen to rebuild it. Global emerging market trusts, such as TEMIT, JPMorgan Global Emerging Markets Income and JPMorgan Emerging Markets, require a more wholehearted commitment, as they cannot swing the balance elsewhere when times are tough. Regional specialists in Latin America, eastern Europe and Asia Pacific are even more circumscribed. Single-country trusts have a narrower selection of equities and nowhere to hide if their market falls out of favour, but they may offer deeper exposure. The portfolio of VinaCapital Vietnam Opportunity, for example, includes private equity and real estate as well as equities. Antony Bolton’s difficulties managing Fidelity China Special Situations Investment Trust have underscored the importance of picking specialist managers with a lot of relevant local knowledge and contacts. Schroders, Aberdeen and First State Stewart are all strong in Asia and emerging markets, and offer a variety of trusts and offshore funds. Green tinge First State’s Pacific Assets Trust is a carefully-run trust that does not use gearing and steers clear of overvalued consumer companies. It looks to buy quality companies on modest valuations, but manager David Gait is also committed to finding companies that directly or indirectly address the enormous sustainable development challenges confronting Asia, such as sourcing clean water. Fund Data Name 1 Year (%) 3 Years (%) 5 Years (%) Rating Brit Emp Sec&Gen Tst plc 15.43 22.41 22.41 2 star(s) Fidelity China Spec Sits Plc 29.28 -8.10 – 1 star(s) Henderson Sm Cos 63.29 120.63 140.59 3 star(s) JP Morgan Emg Mkts IT plc 2.30 7.20 37.16 4 star(s) JPM GblEM Inc Tst plc 5.53 22.69 – N/A star(s) Jupiter European Opps 41.59 105.52 147.07 5 star(s) Murray Intl Tst PLC 15.05 50.78 96.78 3 star(s) Pacific Assets Trust plc 25.94 50.16 74.00 3 star(s) Schroder Asia Pacific 6.22 29.59 83.20 4 star(s) Schroder Oriental Inc 14.57 51.20 133.58 4 star(s) Scottish Investment Trust PLC 24.38 51.30 42.71 3 star(s) Scottish Mortgage IT 32.45 67.64 72.15 3 star(s) Templeton Emerging Markets 1.31 4.56 47.98 3 star(s) VinaCapital Vietnam Opp 31.55 43.41 -11.99 Continue reading
Emerging Market Stars Have Lost Their Lustre
A man counts Indian rupee banknotes near the Bombay Stock Exchange building in Mumbai. Photograph: Dhiraj Singh/Bloomberg Tue, Aug 27, 2013 India, 1991. Thailand and east Asia, 1997. Russia, 1998. Lehman Brothers, 2008. The euro zone from 2009. And now, perhaps, India and the emerging markets all over again. Each financial crisis manifests itself in new places and different forms. Back in 2010, José Sócrates, who was struggling as Portugal’s prime minister to avert a humiliating international bailout, ruefully explained how he had just learned to use his mobile phone for instant updates on European sovereign bond yields. It did him no good. Six months later he was gone and Portugal was asking for help from the IMF. This year it is the turn of Indian ministers and central bankers to stare glumly at the screens of their BlackBerrys and iPhones, although their preoccupation is the rate of the rupee against the dollar. India’s currency plumbed successive record lows last week as investors decided en masse to withdraw money from emerging markets, especially those such as India with high current account deficits that are dependent on those same investors for funds. The trigger for market mayhem in Mumbai, Bangkok and Jakarta was the realisation that the Federal Reserve might soon begin to “taper” its generous, post- Lehman quantitative easing programme of bond-buying. That implies a stronger US economy, rising US interest rates and a preference among investors for US assets over high-risk emerging markets in Asia or Latin America. The fuse igniting each financial explosion is inevitably different from the one before. Yet the underlying problems over the years are strikingly similar. So are the principal phases – including the hubris and the nemesis – of the economic tragedies they endure. No one who has examined the history of the nations that fell victim to previous financial crises should be shocked by the way the markets are treating India or Brazil today. First comes complacency, usually generated by years of high economic growth and the feeling that the country’s success must be the result of the values, foresight and deft policymaking of those in power and the increasing sophistication of those they govern. Sceptics who warn of impending doom are dismissed as “Cassandras” by those who forget not only their own fragilities but also the point about the Trojan prophetess: it was not that she was wrong about the future, it was that she was fated never to be believed. So high was confidence only a few months ago in India – as in Thailand in the early 1990s – that economists predicted that the local currency would rise, not fall, against the dollar. Indian gross domestic product growth had topped 10 per cent a year in 2010, and the overcrowded nation of 1.3 billion was deemed to be profiting from a “demographic dividend” of tens of millions of young men and women entering the workforce. India was destined to overtake China in terms of GDP growth as well as population size. ‘Sense of entitlement’ Deeply ingrained in the Indian system, says Pratap Bhanu Mehta , head of the Centre for Policy Research in New Delhi, was an “intellectual belief that there was some kind of force of nature propelling us to 9 per cent growth . . . almost of a sense of entitlement that led us to misread history”. In the same way, the heady success of the southeast Asian tigers in the early 1990s had been attributed to “Asian values”, a delusional and now discredited school of thought that exempted its believers from the normal rules of economics and history because of their superior work ethic and collective spirit of endeavour. The truth is more banal: the real cause of the expansion that precedes the typical financial crisis is usually a flood of cheap (or relatively cheap) credit, often from abroad. Thai companies in the 1990s borrowed dollars short-term at low rates of interest and made long-term investments in property, industry and infrastructure at home, where they expected high returns in Thai baht, a currency that had long held steady against the dollar. The same happened in Spain and Portugal in the 2000s, although the low-interest loans that fuelled the property boom were mostly north-to-south transfers within the euro zone and in the same currency as the expected returns. Indeed, the euro was labelled “a deadly painkiller” because the use of a common currency hid the financial imbalances emerging in southern Europe and Ireland. The downfall Phase Two of a financial crisis is the downfall itself. It is the moment when everyone realises the emperor is naked; to put it another way, the tide of easy money recedes for some reason, and suddenly the current account deficits, the poverty of investment returns and the fragility of indebted corporations and the banks that lent to them are exposed to view. That is what has started happening over the past two weeks as investors take stock of the Fed’s likely “tapering”. And the fate of India – the rupee is one of the “Fragile Five”, according to Morgan Stanley, alongside the currencies of Brazil, Indonesia, South Africa and Turkey – is particularly instructive. It is not that all of India’s economic fundamentals are bad. As Palaniappan Chidambaram, finance minister, said on Thursday, the public debt burden has actually fallen in the past six years to less than 70 per cent of GDP – but then the same was true of Spain as it entered its own grave economic crisis in 2009. Like Spain, India has tolerated slack lending practices by quasi-official banks to finance the huge property and infrastructure projects of tycoons who may struggle to repay their loans. Ominously, bad and restructured loans have more than doubled at Indian state banks in the past four years, reaching an alarming 11.7 per cent of total assets. According to Credit Suisse, combined gross debts at 10 of India’s biggest industrial conglomerates have risen 15 per cent in the past year to reach $102 billion. For those who take the long view, a more serious failing is that India has manifestly missed the kind of economic opportunity that comes along only once in an age. Instead of welcoming investment with open arms and replacing China as the principal source of the world’s manufactured goods, India under Sonia Gandhi and the Congress party, long suspicious of business, has opted to enlarge the world’s biggest welfare state, subsidising everything from rice, fertiliser and gas to housing and rural employment. Phase Three is when ministers and central bank governors survey the wreckage of a once-vibrant economy and try to work out how to rebuild it. India’s underlying economy is nevertheless sound and its banks are safe, say Mr Chidambaram and other senior officials. There is therefore no need to contemplate asking for help from the IMF or anyone else. Mr Sócrates said much the same in Lisbon three years ago. “Portugal doesn’t need any help,” he said. “We only need the understanding of the markets.” The markets did not understand, and Portugal did need the help. Continue reading
