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
What a difference a no-taper made:
We had allowed the World Bank’s annual ranking of, well, everyone by the ease of which their country facilitates business to pass unremarked. Singapore retained its top spot for the sixth year in a row, under criteria that clearly take no account of chewing gum preferences.
However, Maquarie have dug a little deeper into the survey results, and they find that the Philippines is on the up and up, while warning lights are flashing in China which slid to 96th globally, from 78th four years ago. Read more
Abundant flows of global capital in search of fresh yield are unstoppable but unabsorbable.
The imposition of new capital controls is often appropriate but, nearly as often, ineffectual. Read more
Okay, don’t just think ‘Oh, Goldman are trying to wring a few last drops of revenue from the EM story…”
Instead, click to enlarge. Read more
As announced amid Raghuram Rajan’s ‘big bang’ on Wednesday — BofAML reckon that this could bring in $10bn for the Indian central bank from non-resident deposits and stabilise the rupee:
BNP Paribas has an interesting note out on the increased use of FX swaps by central banks.
If you’re a central bank in emerging markets, struggling to keep your economy stimulated/protected from hot money flows, using swaps or FX sales is a tempting and viable alternative to interest rate hikes, they note.
And generally speaking, the BNP EM strategists argue, swaps provide for a richer toolset for most central banks. Read more
From a recent Citi presentation, a chart stressing the potential risk of negative-feedback loops in the options available to those emerging market countries now trying to stem capital outflows and defend their currencies: Read more
Creaking where, actually?
Here’s a useful exercise from BAML on Thursday — at least if you can assume Indonesia’s the emblematic economy for everything that’s made emerging markets look so ugly this summer. Read more
Another day — another 5.5 per cent selloff on the Jakarta stock market.
That’s the Jakarta Composite down more than 5.5 per cent at pixel time on Monday, anyway.
If you were wondering how fears over policy ‘credibility’ could send the Sensex in such a spin on Friday — India’s benchmark closed down almost 4 per cent — and trash the rupee…
Here’s an illuminating chart from Nomura: Read more
Here’s a chart that caught our eye on Wednesday morning (click to enlarge):
It comes via George Saravelos at Deutsche Bank and shows the surge in short-term flows. Read more
Today, the combined market capitalization of Wells Fargo and JP Morgan ($440bn) exceeds that of every Energy and Materials company in Brazil, Russia, India and China ($420bn). Less than three years ago, those two banks were valued at less than half the market cap of the BRIC commodity sectors, indicating how quickly market leadership has rotated away from China to the US real estate story.
That’s from BofAML Michael Hartnett’s latest Thundering Word which runs through the bull and bear case for EM. A taste Read more