It’s 1998 again in emerging markets, and it’s good:
The best parallel with recent events – major shock (this time, the UK vote), DM central bank liquidity reassurance and market surge – is, in our view, the collapse of Long-Term Capital Management (LTCM) in September 1998. In addition to a bailout for LTCM, the Fed ‘turned on a dime’ then and cut rates by 75bp in two months; risk markets took off. While MSCI GEMs fell much more before Sept. 1998 (Asia and Russian crises) than recently, EM rose by 31% in two months after LTCM and by 120% by March 2000. As usual, the USD played a role; after a four-year 34% rally to August 1998, the $ TWI fell by 11% after LTCM. The extremes will be hard to repeat, but the earlier episode confirms how liquidity is a ‘great healer’…
What’s the biggest coupon you can get lending US dollars to an African government south of the Sahara these days?
Ghana’s bond due 2030 of course. It will pay 10.75 per cent starting from its first coupon date next month.
And what will investors get for agreeing to swap Mozambique’s government-guaranteed tuna debt for its own sovereign paper? Read more
Borrowing isn’t necessarily bad, but you could be forgiven for thinking so, considering all the new research showing what tends to happen after big increases in indebtedness.
The latest comes from a speech by Jaime Caruana, the Bank for International Settlement’s general manager and the former boss of the Bank of Spain. We already discussed the first part of his speech, which explains the basic differences between his framework for economic analysis and the approach popular before the crisis, in a previous post. In this post we’re going to focus on the meat of his speech, which concerns the dangers facing many so-called “emerging market economies”. Read more
Jaime Caruana, the general manager of the Bank for International Settlements, and the former boss of the Bank of Spain, gave an important speech Friday, which, among other things, highlights the radically different frameworks economists use to evaluate what’s going on.
In textbook macro models, economies grow at some “trend” rate based on productivity on population growth, except when occasionally buffeted by “shocks” in different directions such as an oil price spike or a tax cut — shocks that fade in importance over time as economies “naturally” return to their “trend”. In these models, policymakers should focus on boosting productivity, which improves the trend path, and establishing institutions that smooth out the impact of the shocks when they occur by temporarily shifting resources to those most affected. Little else matters. Read more
History never repeats and most analogies are wrong, but there are some intriguing parallels between the global macro environment in 1997-8 and today.
Back then, the Federal Reserve controversially chose to ease policy, first by refraining from rate hikes anticipated by the markets and then by cutting its target for Fed funds by 75 basis points. Many believe this choice inflated equity prices and encouraged excessive business investment at a time when America’s economy was already running hot. Despite the subsequent fillips of tax cuts, a boom in defence spending, and a housing bubble, the aftermath was a massive decline in employment and painfully slow recovery.
A simple comparison between conditions then and now suggests the Fed’s explicit desire to “normalise” financial conditions may come from a desire to avoid repeating the experiences of the late 1990s. Whether policymakers are right to prioritise the real economic data, which tells us what’s already happened, over the action in the financial markets, which tends to affect what will happen, is anyone’s guess. Read more
Analysts are mostly agreed. AKP’s decisive victory in Turkey at the weekend has brought some long awaited political certainty to the region.
Twenty-four hours later, the lira appeared to be consolidating recent gains against the euro and the dollar while the country’s benchmark stock index, which surged five per cent on Monday to its highest level since July, was off less than a per cent:
It’s apparently sorely needed, if this from Nomura’s Jens Nordvig on EM FX pessimism is anything to go by:
During my presentation [at Nomura's annual central bank conference], I asked a number of simple questions about currencies. One of them was on the 2015 outlook for EM currencies – 67% of the audience was bearish, with the rest evenly split between bullish and neutral, a pretty extreme result, as these polls usually have a lot of neutral answers.
As already mentioned, this may not be your usual oil-price decline. But it’s also not crude’s first appearance in the 50 per cent club:
Now, in absolute terms the falls aren’t comparable ($100 to $50 versus $30 to $15) but there are similarities. Read more
Yup. Analysts and economists still can’t decide whether the fall in oil prices is net positive or net negative for the global economy.
Unfortunately for the net positive camp, it looks increasingly like global demand and growth figures are beginning to side with the negativity team.
Indeed, the longer the oil price stays low, the more it looks like global stimulus hopes were overdone due to poor understanding of financial feedback loops in the commodity space.
So what’s behind the anomaly? How did a whole school of economists get this potentially so wrong? Read more
* Suggest Citi, kinda.
Still, it’s AN argument (with our emphasis):
After the debating – A favourite year-end discussion point for investors and brokers is do you back current winners or play reversion to the mean. Instead of looking at share price performance alone we ran a screen based on 1 year forward Price/Book today versus their past 5 year median. Our sample was Citi’s global coverage universe of bank stocks with a market capitalisation of over $10 billion (121 stocks). The “winner” in terms of largest de-rating is Standard Chartered with a 45% discount vs its 5yr median:
Credit Suisse has a new report out on the winners and losers of the recent rout in global natural resource prices. While everyone has been paying attention to the remarkable decline in the value of oil, agricultural commodities and industrial metals have also become a lot cheaper recently:
We all know the role played by the vendor financing feedback loop of hell in dotcom bubble mark 1.
Quickly summarised, tech equipment suppliers became overly dependent on sales to internet startups funded through vendor financing, a situation which saw them lending money to companies with dubious track-records for the purpose of buying equipment directly back from them. It didn’t end well.
Nevertheless, it’s still a model replicated on a consumer level in the west, whether it’s through car company lending money to customers so that they can buy their cars or sofa company loans for purchases of sofas. Read more
The rather less dramatic sequel is brought to you by Nomura:
Or, why investors might be less than sanguine about sanctions against Russia.
We could start with the OFZs.
That isn’t one of the pungent lines from a BofAML note on Tuesday — dissecting “an international leverage binge, yet another carry trade, the third in 20 years,” by issuers of corporate bonds in emerging markets.
But there are plenty already:
The Fed giveth and the Fed taketh away
The long-term emerging market equity story is the story of wars
In each cycle, risk morphs – we repeat the mistakes of our grandfathers, not our fathers.
That, and a call for this $2trn carry trade to unwind as the Fed begins rolling liquidity back. Which makes investing in EM not so much about EM — as about what the Fed will be doing as it exits policy.
On the eve of the Sochi opening ceremony, FT Alphaville is pleased to present this guest post by Jorge Mariscal, emerging markets chief investment officer at UBS Wealth Management…
As it hosts this month’s Winter Olympics in Sochi, Russia will spend more time entertaining the world than educating it about the Russian economy. But financial market conditions mean it must also use the Games as a platform to prove some serious economic points.
This year, a tidal wave of capital outflows has engulfed emerging market currencies. Although Russia is stronger than the average developing nation, its currency and stock market have underperformed emerging market averages, with declines of 7.3 per cent and 11.6 per cent in US dollar terms, respectively. Against this backdrop, Russia needs to use the Games as a platform to advertise its resilience and competitiveness to investors. Otherwise, contagion from weaker countries risks sweeping it up. Read more
Wondering where next to focus attention after the emerging market carnage? Citi has a bank chart for you:
We’re coming to the end of a… multidirectional week for EM rates and currencies. BNP Paribas’ strategist here also pokes the media in the eye for “vying to produce the most bearish story on emerging markets…”
So we should note this dose of bullishness from the French bank: Read more
Turkey-like policy action is hypothetical, I would not venture there.
- Raghuram Rajan, RBI governor, Jan 29th. We’re assuming he meant he wouldn’t touch the hypothetical…
Anyway, this is how Citi’s David Lubin explains the rupee’s recent fortitude
already battered position and, perhaps, Rajan’s aggresive attitude to the Fed’s tapering: Read more
SocGen’s cross-asset research team believes that when it comes to EM outflows they may have only just begun:
The new capital-flow projections from the IIF begin with impressive understatement: “Emerging market conditions have continued to be quite choppy…”
The report’s main points: Read more
While you wait for Turkish Midnight Madness, here’s an excerpt from a 2010 paper by Camilo E Tovar:
Public authorities tend to resist sharp depreciations in their economy’s exchange rate, presumably because they fear that they would be very costly in terms of foregone output. This article presents new evidence on the relationship between currency collapses, defined as large nominal depreciations or devaluations, and real GDP. Read more
The share price is down a fifth in 12 months. It’s cheaper than Lloyds (on price to tangible book), as a bank with Asia supposedly at its feet. The boardroom is a mess and last week’s “reorganisation” may not fend off an eventual cash call.
Still, after that excellent year for Standard Chartered — Citi’s analysts suggest it’s time for ANZ to buy it: Read more
This guest post is from Larry Brainard, Chief Economist and Co-Founder of Trusted Sources, an independent advisory firm specialising in emerging market macroeconomic and policy research.
The continuing debate about the timing of Fed tapering has overshadowed two developing issues that have important implications for EMs in 2014. The first is the reappearance of deflation in the Eurozone and the other is the suggestion by former Treasury Secretary Larry Summers that the US economy is slipping into secular stagnation. Read more
One-year total return of the Athens stock index, to the end of October 2013: +50%
One-year return of the Bloomberg Greece Sovereign Bond Index, same period: +134%
One-year net return of Dromeus Capital’s Greek Advantage Fund: +107%
Yep — FT Alphaville hears that the first-year performance of Dromeus Capital’s Greece-focused fund would make it one of 2013′s best-performing, having already made a strong start at the beginning of the year.
It’s another indicator of how much both Greek equities, and the sovereign’s restructured debt, have recovered this year… Read more
This vision of 2014 caught our eye — from Nomura’s annual outlook (out Monday)… Read more
A common criticism of the secular stagnation and post-scarcity theory is that it is contradicted by the fact that unacceptable levels of poverty exist in many places around the world, and in particular the developing world.
If there’s so much growth potential out there, how is it possible that the economy is in secular stagnation? Or so, at least, the argument goes.
But perhaps the question we should be asking is what continues to frighten investment capital away? Read more