Tag Archives: markets
Look To The Fundamentals In Emerging Markets
http://www.ft.com/cms/s/0/70d9b14c-14af-11e3-b3db-00144feabdc0.html#ixzz2fQfIJxI8 By Gary Mead Being a generalist in emerging markets is to be a mindless herd member – and the herd has no mind, but is just pushed by snapping dogs. So ponder the particularities of a place, an industry, a sector: there will be fantastic opportunities once the herd stays put. What lies behind the recent rout? Quantitative easing (QE) is the monetary policy drug of choice right now, and the threat of its withdrawal has already induced an ugly international bout of cold turkey in world markets. Princeton University’s Jean-Pierre Landau, a former Bank of France deputy governor, put it more diplomatically at last month’s Jackson Hole annual summit for central bankers. Accommodative monetary policy has averted one global financial crisis, but inadvertently produced another – capital markets’ anxiety over how soon and how fast QE might be unwound. Mr Landau was pessimistic about the level of central bank co-ordination necessary to get off this drug without pain: “The most likely scenario is that of progressive fragmentation of the international financial system.” Since December 2008 the US Federal Reserve has poured easy money into the US economy and, by extension, the global system, obedient to one of its mandates, getting America back to work. It has done this partly by keeping a tight lid on US overnight interbank lending rates, maintaining them in a range of 0-0.25 per cent. On top of that it has bought almost $2tn of longer-term US Treasury bonds. This vast QE, aided and abetted by similar (if smaller) schemes in Japan and the UK, has had the inevitable consequence of dragging thousands of billions of dollars into emerging markets, in the desperate quest for yield. Those days are not quite over – but the smartest money is now trying to figure out when US interest rates will start to rise and dispel the Fed’s opiate-induced calm. For some, this is creating rising hysteria; others are exhorting us to calm down because this is just a return to the status quo ante bellum. The canniest, of course, are on the watch for fresh opportunities, and trying to ignore scaremongering headlines in normally reputable media. What are the hard facts? On May 22 the Fed’s chairman, Ben Bernanke, said he might start slowing bond purchases – so-called “tapering” – if the US economy continues to improve. Almost immediately the MSCI Asia-Pacific Excluding Japan Index slipped 14 per cent. Around $44bn has been withdrawn from emerging-market stock and bond funds globally since the end of May, according to the data provider EPFR Global. This retreat from emerging markets now appears to be a fixed trend. According to the authoritative latest (June 2013) Capital Flows to Emerging Market Economies report produced by Felix Huefner and his colleagues at the Institute of International Finance, private capital inflows to emerging markets will total $1.145tn in 2013, $36bn less than in 2012. Next year these flows will fall even further, to $1.112tn, the lowest level since 2009. But that is still a wall of money and it might be seen as a return to normality rather than outright collapse. As the west went into deep recession, cut rates and printed money, investors fled, looking for better returns wherever they could, paying scant attention to the fundamentals of the economies of several big emerging markets. Now that the west is in better health, those often weak fundamentals have reminded many investors why they had not previously entered them. India and Indonesia, the two Asian nations with the region’s biggest external funding requirements for their current-account deficits, have already stumbled. The Indian rupee fell to an all-time low in July after the country’s current account deficit widened to an unprecedented $87.8bn in the fiscal year that ended in March. Also in July, Indonesia’s current-account deficit climbed to a record, economic growth slowed and inflation geared up. Overall, more than $1tn has been wiped from equities in emerging markets in the last few weeks. The hope that a slower-growing developed world was smoothly converging with a faster-growing emerging world is, if not over, then certainly delayed. For anyone exposed to emerging markets as a whole, standing in the way of the crowd heading for the exit makes little sense. Too many countries in the emerging world face serious structural problems that were, perhaps justifiably, ignored when the developed world’s economies were being put through the wringer. It is difficult to ignore incipient revolution in Egypt, appalling civil war in Syria, bitter political divisions in Turkey and rampant corruption in India when the west appears to be on the mend. But the key to all this is an individual country’s balance of payments. Trading on the basis of “is this a risk-on or a risk-off day?” is unwise. Trading on the basis of the underlying strengths or weaknesses of a nation’s economy might be duller but is more rational. It is easy to get distracted by newsflow but look out for economic fundamentals. Continue reading
Global Trade Likely To Remain Sluggish For Years, Says UN Report
http://www.ft.com/cms/s/0/a3465b06-1bbe-11e3-94a3-00144feab7de.html#ixzz2f3WohxhE By Shawn Donnan in London Global trade is likely to remain sluggish for many years, and emerging economies that have depended on exports to fuel their transformation will have to find new sources of growth, says a UN report. The report, released on Thursday by the UN Conference on Trade and Development, makes clear that the effects of the 2007-8 financial crisis and the “great recession” that followed are still being felt in both the developed and developing world. The way the crisis has affected global trade patterns also calls into question the future value of the export-oriented growth model that fuelled the economic emergence of China and other developing world champions over the past three decades, Unctad’s economists wrote in their annual report. Unctad joins the debate at a time when many emerging economies – including Brazil, China and India – are facing slowing growth, and some, such as China, are working hard to rebalance their models towards more domestic sources of expansion. International trade has yet to return to the rapid growth rates seen before 2008, said Unctad economists, adding that growth is likely to remain subdued for years to come. Roberto Azevêdo, the World Trade Organisation’s new director-general, said this week that it would downgrade its 2013 growth forecast for global trade from 3.3 per cent to 2.5 per cent. Among rich countries, only the US had recorded a positive growth rate in its international trade in 2012, said Unctad. “Imports by all developed regions remain below their pre-crisis level,” its economists wrote, “and only the United States has managed to increase its exports to a higher level than their previous peak of August 2008.” Trade by developing economies had also “decelerated considerably” in recent years. Between 2002 and 2007, export volumes from those economies grew at an annual rate of 11.3 per cent. But that growth fell to 3.5 per cent between January 2011 and April 2013. The downward trend “highlights the vulnerabilities developing countries continue to face at a time of lacklustre growth in developed countries. It is also indicative of a probably less favourable external trade environment over the next few years,” Unctad economists wrote. While the pre-crisis rapid growth of exports from emerging economies to satisfy buoyant consumer demand in the rich world had been favourable for many developing countries, it “was built on unsustainable global demand and financing patterns”. “Reverting to pre-crisis growth strategies cannot be an option,” they wrote. “Rather, in order to adjust to what now appears to be a structural shift in the world economy many developing . . . economies are obliged to review their development strategies that have been overly dependent on exports for growth.” Encouraging greater domestic consumption and investment could come alongside the continuing development of exports. Bolstering domestic demand in emerging economies could also encourage the future development of “South-South” trade between developing countries, the report added. The share of South-South movements in international trade had increased from slightly less than 30 per cent in 1995 to slightly more than 40 per cent last year. The report also called for reform at the national and global levels to encourage more efficient financing of productive parts of the real sector such as industry, agriculture, services and infrastructure. Central and development banks needed to do more to finance productive investments, Unctad economists wrote. In the years since the financial crisis, credit had too often been directed to consumption rather than to investment. The result was that it was fuelling asset bubbles in sectors such as real estate “rather than innovation and production”. Continue reading
Bank Lending To Emerging Markets Soars To Record
http://www.ft.com/cms/s/0/20802e26-1e12-11e3-a40b-00144feab7de.html#ixzz2f3VWpQSH By Claire Jones, Economics Reporter Banks piled into emerging markets at a record pace earlier this year, highlighting the scale of the global search for yield that has partially reversed since the US Federal Reserve said it intended to slow its bond buying. Cross-border lending to emerging markets surged by $267bn, to an estimated $3.4tn, in the first quarter of 2013, the Bank for International Settlements said on Sunday. The BIS said the 8.4 per cent increase was by far the highest recorded, with the amount of interbank lending rising by almost $200bn, or 12 per cent. The so-called central bankers’ bank, which compiles what are widely regarded as the most comprehensive set of statistics on cross-border capital flows, said in its latest Quarterly Review that 85 per cent of the rise was accounted for by more lending to China, Brazil and Russia. The publication of the figures comes as the US Federal Open Market Committee gears up for its policy meeting, ending on Wednesday, when it could decide the timing and pace at which it will slow its $85bn worth of monthly bond purchases. With interest rates close to zero across advanced economies and liquidity abundant as a result of their central banks’ mass bond-buying sprees, credit has flowed into emerging markets in recent years as lenders and investors sought higher returns. According to the BIS data, interbank lending to emerging markets in the Asia-Pacific region alone has doubled since the investment bank Lehman Brothers collapsed five years ago. Lending to emerging markets has shown signs of retrenchment since Ben Bernanke, chairman of the Fed, signalled in May that the US central bank had begun to consider unwinding its exceptional monetary stimulus. The expectation of a return to higher interest rates in advanced economies in the years ahead has led to a retreat – particularly from emerging markets with large current account deficits such as India – although the pace of that retrenchment has slowed in recent weeks. According to the BIS data, the record rise in cross-border lending to emerging markets in the first quarter mainly reflected buoyant interbank lending, while cross-border credit that was extended to borrowers in China rose by $160bn, or 31 per cent. With international demand for Chinese assets growing, companies in the world’s second-largest economy can borrow at cheaper rates from lenders abroad and are reliant on banks headquartered off the mainland for foreign-currency loans to help fund their expansion overseas. The BIS data showed emerging market companies were also increasingly turning to debt markets in offshore financial centres such as Hong Kong to secure funds. Chinese businesses’ borrowing through offshore financial centres has soared from less than $1bn between 2001 and 2002 to $51bn in the 12 months to June. Of these bonds, 16 per cent is denominated in renminbi, with most of the rest – 77 per cent – in dollars. Though there are restrictions on bringing capital into China, businesses apply for permission to bring funds borrowed abroad into the domestic market. Overseas lending to Brazil expanded by 14 per cent, or $34bn; for Russia, the figure was $29bn, an 18 per cent rise. Both were the largest quarterly increases on record. Euro area banks increased their lending to emerging markets for the first time since the second quarter of 2011. Lenders in France, the Netherlands, Germany and Luxembourg accounted for most of the growth. In contrast to the rapid rise in lending to emerging markets, cross-border claims on banks in the advanced economies slipped by $341bn, or 1.5 per cent. Though bank lending to emerging markets could remain strong as long as growth remains so, the end of quantitative easing and an eventual rise in interest rates in advanced economies are likely to slow the pace of cross-border flows. Additional reporting by Simon Rabinovitch. Continue reading
