It feels like 2015 has been a long year already! Clearly markets have had much to contend with, but the dominant feature has been the continued collapse in core bond yields. Global economic activity remains muted, and the deflationary forces lowering inflation and impacting nominal growth are many and varied. Politics and geopolitics continue to grab headlines, and in the case of the Greek election, have the potential to affect markets significantly due to Greece’s conflicting ambitions of retaining the euro whilst also seeking forgiveness on its debt.
The oil price remains weak, and whilst its impact on inflation is clear, the follow-through in terms of consumer spending is less clear cut. On the policy front, the ECB recently announced full-blown sovereign bond quantitative easing (QE), with an intention to purchase €60bn a month in bonds until its target level of 2% inflation is reached.
Against this backdrop, yielding assets have had a strong start to the year. Credit, particularly investment-grade credit, has performed well, and similarly equities have enjoyed positive returns in a number of markets. Our equity strategy has been to favour the US, which has enjoyed a relatively stronger economy, the UK, which has valuation support, and Japan, where corporate profits are being boosted by ‘Abenomics’. Although the UK equity market has been held back by its exposure to energy and materials, both Japanese and US equities have performed well since we moved to favour them in our asset allocation model.
However, the US equity market’s valuation now looks relatively stretched given both its outperformance and, more worryingly, the impact of a stronger dollar on US corporate profits. Europe, on the other hand, benefits from a number of decent tailwinds: a weaker euro, lower oil prices, and a boost from the ECB’s QE programme. It is quite possible that we will see upward revisions to European GDP growth this year, a first for many years. European corporate profits will be supported by improved competitiveness as a result of the weaker currency, and valuations are relatively attractive. Interestingly, European earnings revisions have just turned positive (albeit in a very small way).
Elsewhere, in Asia Pacific excluding Japan, and also following a long period of underperformance, valuations look increasingly attractive. Whilst there a number of obvious losers in the region as a result of the oil price fall, there are many winners, and we are finding a wider range of interesting investment opportunities. Consequently we have moved overweight the region for the first time in a while. Similarly, we have moved overweight in European equities, funding both of these moves by downgrading US equities to neutral from overweight. We have also used these recent asset allocation changes as an opportunity to reduce the magnitude of our overweight in equities, but we continue to prefer equities over bonds.
Photo: robinhood.org. BlackRock Appoints Deborah Winshel to Lead Impact Investing Platform
BlackRock announces the appointment of Deborah Winshel as a Managing Director and global head of impact investing. In her role, Ms. Winshel will help BlackRock unify its approach to impact investing through the launch of BlackRock Impact, a dedicated platform catering to investors with social or environmental objectives worldwide. Ms. Winshel will also be responsible for overseeing BlackRock’s Global Corporate Philanthropy program.
BlackRock Impact will work closely with the firm’s global investment teams and leverage its data and analytic capabilities to develop scalable, innovative investment solutions that also meet clients’ desired societal outcomes. BlackRock currently manages over $225 billion in strategies designed to align clients’ portfolios with their objectives and values, which will now be integrated under BlackRock Impact. Ms. Winshel joins the firm with a distinguished career in non-profit management and venture philanthropy, during which she took an active role in shaping charitable giving programs while defining and measuring successes based on the programs’ lasting effects.
“Today, many clients are looking for investment opportunities that advance social and financial goals at the same time. While the roots of this movement can be traced back many years, the frequency and complexity of these mandates are increasing. More and more, clients are looking to measure the returns on their investments both by the societal and financial outcomes they can help to create. With her experience at Robin Hood, and its focus on programs with measurable impacts, Deborah is the ideal choice to help BlackRock develop scalable impact investing offerings through both public and private markets,” said Laurence D. Fink, Chairman and CEO of BlackRock.
Currently BlackRock offers a number of investment strategies which incorporate environmental or social considerations, including:
Values Based –Utilizes screens to exclude securities, aligning investors’ portfolios with their values. BlackRock currently manages more than $214 billion in Values Based mandates.
ESG Consideration – Focuses on investing in companies that display strong track records in the governance, social or environmental areas. The firm recently launched the iShares MSCI ACWI Low Carbon Target ETF.
Impact Investing – Pursues measurable societal or environmental outcomes alongside financial goals. To date we have participated in over $1 billion in client mandates for investing in Green Bonds. With over $1.5 billion of commitments and AUM, BlackRock’s renewable power investment platform is one of the largest in the world, offering clients compelling opportunities to meet their investment needs.
Brazil has submitted new plans to restore investor confidence and strengthen growth. In this regard, Marie-Thérèse Barton, Senior Manager of Emerging Market Debt at Pictet, who has been visiting the country, believes that despite the pessimism held by many managers regarding the country, change is in the air, and authorities strive to open up for business. So it could positively surprise.
“I landed in Rio de Janeiro for a full day of meetings, with the growing pessimism of foreign investors, and then the local optimism that Rousseff and her team can support this, the largest economy in Latin America, hit me. Besides, the economic and political elites try to be friendly to entrepreneurs. In fact, we were greeted warmly in Congress by a senior coalition party official, even though it was one of their busiest days. Everyone is interested in stressing that Brazil is open for business and I cannot remember how many times I heard the words “tax adjustment”. The message is clear: change is in the air. Foreign investors are almost universally pessimistic and may be pleasantly surprised,” she says.
Even so, there are still some misgivings, and this expert does not deny that the situation is serious. “This economy flirts with recession, and inflation has reached the end of its tolerance levels, yet prices of raw materials like iron, soybeans, and other key exports continue to fall.” In addition, at least one credit rating agency has suggested a drop in rating, while a billionaire scandal which threatens to further undermine confidence, affects Petrobras, the state oil giant.
The administration, however, seeks to restore investor confidence, says the expert. “To shore up state finances, it has already announced cuts to subsidies to state-owned banks, higher interest rates in the development bank BNDES, and limits to pensions and unemployment benefits. But, more importantly, the Government has taken a big step in the right direction with the appointment of Joaquim Levy as finance minister. Mr. Levy is a banker educated in Chicago, an orthodox economist who has worked at the IMF and ECB and is known for having cut spending for the period 2003-2006. Indeed, all officials and bankers whom I have met are almost unanimous about the fact that curbing public spending is the most important task during the next four years, and that Levy is the right person for the job”.
According to one public official, says Barton, “he promises little and obtains much”, which is what it takes to make difficult cuts and increase taxes. “Many investors doubt that he will to be able to exercise any autonomy because Rousseff is interventionist, (apparently, given her promises to union leaders,she has recommended the new planning minister, Nelson Barbosa, to change his position on adjusting the minimum wage). Many people, however, consider that Rousseff has no choice. Levy’s promise, which seems ambitious, is to improve the fiscal balance by 1.5%, but Brazil’s central bank has reaffirmed its commitment to have reached its inflation target within the next two or three years, and it seems that investors are willing to give Levy the benefit of the doubt, at least for the next few months. “
Deceleration: the Risk
Economic slowdown is the inevitable collateral damage of these measures is the economic slowdown, the emerging market debt team at Pictet AM thinks that Brazil, after growing about 0.1% in 2014,will hardly see any growth this year, and an increase in unemployment is likely. On the other hand, the market lists an expectation of rising interest rates by at least 75 basis points. To keep inflation below 6.5%, reference rates have already been raised to four year maximums, at 12.25%, and, given the adverse impact on the economy, it is possible that the central bank does not tighten as much. In any event, officials and executives believe that interest rates will rise this year, but differ as to the rate, with some expecting it to reach as high as 13%. “The central bank, however, may wish to focus by the end of the year, in supporting growth by cutting interest rates, which can generate an interesting investment opportunity in Brazilian bonds,” she says. This scenario can be partly discounted, since the yield curve on maturities from two to six years on the state debt is reversed, but there is room for the gap to widen if Levy and his team positively surprise.”
“However, the Real may fall further against the dollar this year, in line with what is indicated by the currency market’s interest rates’ differential on forward contracts. We must bear in mind that in 2014 the Real was one of the emerging market currencies with higher falls against the dollar, following the Russian Ruble at over 11%. In our fair value models, however, it’s still overvalued by 10.5% in nominal terms.”
Laurent Crosnier, CIO at Amundi London, recently visited Madrid. Attracted by Mexico and Brazil, Amundi’s Laurent Crosnier Begins to See Value in Emerging Market Debt
Towards late 2014, around 80% of the global bond market offered returns below 2%, and half, less than 1%. Under such circumstances, where is it possible to obtain returns in fixed income? Amundi’s Global Aggregate bond strategy seeks to achieve that through a strategy based on expanding the investment universe and in a flexible style, in order to invest wherever there is value, depending on the stage of the cycle (with dynamic asset allocation and by combining long-term macro visions with short-term tactical management).
Laurent Crosnier, CIO of Amundi London, who was recently in Madrid, says the key is to identify the best asset class and learn to adequately combine it so that, for example, currencies do not undermine the gains. For 2015, he is cautious in duration (the fund may vary from 0-8) and in US Public Debt, although he is more positive regarding European Public Debt (where he prefers peripheral debt to German debt, due to its greater potential to benefit from ECB QE).
Laurent Crosnier shall share his market vision with attendees at the first Funds Society Fund Selector Summit organized in association with Open Door Media, to be held on the 7th and 8th of May at the Ritz-Carlton Key Biscayne in Miami. You may view the program and additional event information by clicking on this link.
As explained in a presentation to reporters, he is very positive towards investment grade credit, which will also benefit from the QE in Europe, although at this time he sees more value in the United States because of the valuations. By sector, he prefers the financial to the industrial, and also begins to be positive towards emerging debt, in which he sees attractive valuations in Mexico and Brazil (where “there is no growth but prices are very attractive in light of the devaluation of the Real, and therefore provides a good risk-return ratio”), he also favors the debt of countries benefiting from the fall in oil prices, such as India or Turkey. However, in order to be covered in the event of a hard landing in China, he takes short positions in debt and currencies of commodity-exporting countries such as Canada, Australia and New Zealand.
In currencies, he’s banking on the Dollar (supported by US growth) against the Yen and the Euro, and asked about a possible currency war, he warns of the contradictory effects that may result from the decisions of some central banks to avoid deflation. He considers that all that the Swiss Central Bank’s decision will achieve is to import that deflation.
Regarding China, he affirms that it will need a weaker currency in order to gain competitiveness in Asia against Japan, but it will have to achieve a balanced compromise between the need for a weaker currency and its desire to internationalize the Renminbi. “You cannot ask investors to invest in a currency that is going to depreciate by 20%,” he says, indicating China’s need to find equilibrium between both plans.
Multi-Asset Management
Dan Levy, Head of Multi-Asset Flexible Management Specialists of Amundi, spoke of Amundi Patrimoine and was positive towards many assets (such as equities, fixed income and duration in the US, he’s not expecting an imminent rate hike there, and Europe) but he believes there will be pressures which can add volatility (rate hikes by the Fed, the situation of the emerging world, international political risks, or deflationary pressure in Europe).
In the absence of haven securities, he advises as to the importance of risk management and of decreasing it whenever necessary. In that regard, the fund is flexible to protect the portfolio by cutting risk and adding diversification when needed. Currently, the fund’s exposure to equities is around 45%. “We expect a correction, although it will not be big,” he says.
Jean Jacques Durand, Senior Manager for EdRAM’s Emerging Fixed Income strategy / Courtesy Photo. Venezuela, Amongst the Main Options in EdRAM’s Emerging Debt Strategy
Jean-Jacques Durand, Senior Manager of the Emerging Fixed Income strategy at Edmond de Rothschild Asset Management (EdRAM), is firmly committed to Venezuelan fixed income assets as he considers that the default risk is below 50% and that it has great upside. A few months ago, Venezuela, which currently represents the largest position in their portfolio, had unfavorable technical factors which, during the summer, prompted partial profit taking for an asset in which the portfolio manager had already invested previously, and to which he returned in early 2014. After the fall of oil prices during the month of December, Durand has decided to strengthen his commitment to this country once again.
“Oil risk is high but Venezuela’s upside potential is huge,” says Durand, who explains that, “six months ago I would have thought that the worst scenario for Venezuela’s sovereign debt would be a sharp drop in oil prices, if this was produced by a fall in demand. The highest risk was a brutal fall of the development of Chinese economy, but the decline in prices has been due to supply and the OPEC’s decision not to intervene.”
The manager is confident that Venezuela will not need a restructuring of its debt or reach a default situation, which 85% of the market expects. While considering that the country has been very poorly managed, he thinks it has a good chance of readjustment, which would enable it to continue repaying its debt. “The default risk is below 50%. Even though currently the situation is difficult because social spending is very high, there are elections later this year, and the price of oil is very low, if a default were to occur it would be a political decision. The country has already overcome similar situations experienced in previous crises. It has never defaulted. “With a ratio of external debt to GDP below 20%, and most of its debt held by local investors, Venezuela has a relatively strong position to negotiate with its creditors.
Durand, who has spent the last four years in EdRAM after a long career as an emerging market’s fixed income trader in investment banks in New York and London, confesses that flexibility is required in order to choose the adequate risk and to invest the portfolio in the appropriate assets. “During those periods when the conviction is not as attractive, you have to be able to lower the portfolio’s overall exposure,” he says. When he took over management of the fund in 2012, he had to decide whether he wished to adopt either a more cautious, or a more risky approach as his overall investment philosophy. In his strategy’s investment decisions, the macro situation weighs as much as technical factors (flows, valuation, momentum), which may lead to take positions in assets that are unattractive if we just look at macro data such as the ratio of debt to GDP of the issuing country, but have very favorable fund flows or very attractive valuations. Thus, this strategy’s portfolio has a very distinct composition compared to its peers.
Such is the case of Russia, a market with very negative macro fundamentals. The political crisis and international sanctions imposed on the country have impacted the economy and the Russian Debt market, causing the consensus recommendation to drop from overweight to outright underweight. The price of bonds reflects a situation that is four or five levels below its credit rating, due to lack of investor confidence. According to Durand, “despite the crisis, its level of public debt to GDP is below 15%, external debt is virtually nonexistent, only 3% of GDP, and its ability to repay is very strong”. Currently, despite its fundamentals, which in the past prompted the manager to stay out of this country, the strategy holds a strong position in Russia.
Egypt, where Durand began building a position during the crisis “because when everyone sells there are opportunities”, is yet another example to illustrate that many times the portfolio composition is different from most of the other strategies within its category. In Mexico’s case, however, the momentum and valuation have caused the strategy to exclude it since 2012, when he disposed of an important position with significant gains, even though it shows a positive macro fundamental analysis.
Market flows greatly condition performance. Argentina, with a significant technical specific risk in 2013, was at that particular time the biggest position within the strategy. “There was a consensus recommendation to clearly underweight Argentinian sovereign debt, and us a result that the marginal seller had already exited. The only possibility remaining was for it to climb, and it did. The debt stock changed hands, leaving that of investors who cannot tolerate risk to local or medium long term investors,” added Durand.
Their positions in Belize are another sign of the management style of this strategy, in which the size of the country or its weight in the index are irrelevant. In 2012-13, elections were held in the country, debt was restructured, bonds fell dramatically, and there was very little liquidity, but there was value. “The macro analysis showed that debt was below 90% of GDP, the last government had not performed badly. It was a question of predicting, before the elections, what was the likelihood that the candidate who wanted to restructure debt would win the elections, and upon election, how would it handle restructuring (fast or slow, friendly or not). Seeing the price at which it was trading, profits were assured, regardless of who won power. In order to build the position, we began taking positions in 2012, further increasing them in 2013.”
This strategy, which may invest either in sovereign and quasi sovereign debt, as well as in corporate bonds, also takes advantage of opportunities in hard currency and in local currency debt. The strategy currently does nor hold local currency bonds because Durand expected some adjustment after the commodity boom. “We have something on the radar, but we have not entered as yet. We currently offer a strategy which is more focused on hard currency debt than in local currency debt”, he concludes.
Photo: Dennis Harvis. India’s Prospects Brighter as Modi Gets Serious about Reforms
India offers many investment opportunities but is often stymied by its perceived hostile business climate. Since taking office in May last year ending ten years of a Congress-led government, Prime Minister Narendra Modi has demonstrated that he is eager to revive India’s economy, which has been in the doldrums suffering from a large current account deficit, spiralling inflation, poor infrastructure, as well as having unfriendly business laws and regulatory environment.
While the reforms introduced have so far been incremental, Modi has now promised “unlimited” economic reforms. Recently, the PM opted to push through reforms via ‘ordinances’ – a temporary executive order while parliament is in recess. Six weeks after parliament reconvenes, an ordinance must be approved by parliament or be reissued. We think this could be a game changer for India as Modi is showing he means business and will not be deterred by parliamentary obstruction.
Key reforms include:
Insurance: Raising the foreign investment limit in insurance to 49% from 26%. This could potentially attract up to US$ 7-8 billion from overseas investors, providing a major boost to the industry.
Land acquisition: Making it easier to acquire land for projects such as power,defence, industrial corridors, social infrastructure and housing for the poor. These projects no longer require consent of 80% of landowners during acquisition.
Coal mining auction process: The repromulgation of the ordinance on coal will facilitate e-auction of coal blocks for private companies and allot mines directly to the state. This removes a big overhang for the sector and will boost coal production.
Auction of minerals: All minerals other than coal will be allocated through auctions instead of an allotment basis. This will aid transfer of leases and allow a bigger scale of operations for mining companies and attract global majors.
In our view, India is one of the most positive markets in Asia. From a macroeconomic perspective there are reasons to be cheerful. GDP is forecasted to grow at a respectable 6.4% this year, while inflation appears to be under control, with the CPI remaining within the RBI’s target of 6% retail inflation by January 2016. Additionally, the manufacturing sector has been strengthening over recent months. While this more optimistic view for India is reflected in stock prices, following the recent market correction Indian equities appear to be reasonably valued now relative to historical valuations.
In the short term, lower commodity prices should be positive for corporate earnings. Lower oil prices would significantly benefit India as an oil importing country; resulting in more savings for consumers, reducing imports, improving the fiscal deficit and increasing foreign exchange reserves. Longer term, progress on reforms could provide a boost to equity markets and support the already positive macroeconomic investment case for India. Similar to many other countries within Asia, demographics, relative fiscal strength and a higher rate of growth should ensure India’s attractiveness to investors.
The Henderson Horizon Asian Growth Fund remains overweight India as we believe our investments in selected financial, consumer, pharmaceutical and IT services companies can continue to generate significant profit growth and superior returns over the next few years. Clearly the risk is that the economic reforms stall but the companies that we hold have delivered impressive returns even in a weaker political environment. Our current favoured holdings include HDFC and affiliate HDFC Bank, Tata Motors, fast moving consumer goods manufacturer Dabur, and software business, Tech Mahindra. We have also initiated a position in Lupin. The pharmaceutical has broad geographic exposure and a strong pipeline, and is also one of the fastest growing major generics companies in the key US market.
Andrew Gillan and Sat Duhra are Portfolio Managers of the Asia ex Japan Equities team at Henderson Global Investors. Andrew Gillian will be speaking in Miami Beach in the investor’s brunch, which will precede the II Funds Society Golf Tournament, on March 13th, 2015. If you are a professional investor and would like to register for this event, please contact info@fundssociety.com
CC-BY-SA-2.0, FlickrPhoto: OTA Photos. Investec: Japan Receives Industrial Output Boost
Japan’s industrial output edged higher in December, suggesting the world’s third-largest economy may be turning the corner after a recession brought on by a hefty sales tax hike. Data released last week showed manufacturing production increased by 0.3 per cent in December from a year earlier and by one per cent from the month before.
But inflation slowed to 2.5% from a year earlier, compared with 2.7% in November.
Tackling deflation
Prime Minister Shinzo Abe has made pushing prices higher the main focus of economic policies aimed at ending years of deflation that have discouraged corporate investment and hobbled growth. Japan returned to recession last year, shrinking in both the second and third quarters of 2014. The surprise slump prompted Mr Abe to call a snap election to renew his economic policy mandate, a poll that he won in December.
Now it seems the country’s mighty industrial base could be returning to health.
Flag of Japan
The Ministry of Economy, Trade and Industry said that, on top of the rise in production, there was also a 1.1% rise in shipments of goods compared with November and a 0.4% increase compared with a year earlier.
There was also a run-down in the inventories held by businesses, which shrank by 0.4% compared with November, suggesting a pick-up in demand.
The ministry said: “Industries that mainly contributed to the production increase are, first, electronic parts and devices, second, information and communication electronics equipment, and third chemicals, excluding drugs, in that order.”
It added: “Industrial production shows signs of increase at a moderate pace.”
Production forecast improves
The ministry published also its “survey of production forecast”, which it describes as “one of the useful economic indicators, which reflect changing business conditions and provide a view of where the economy is heading in the near future”.
The latest forecast found planned production this month was expected to be 6.3% higher than in December, but to be 1.8% lower in February than in this month.
The same survey in December forecast a 5.7% rise in production this month compared with December, so the expected level of output has risen by 0.6% points.
CC-BY-SA-2.0, Flickr. Lorenzo Parages Appointed Head of Distribution by March Gestión de Fondos
March Gestión de Fondos, one of the largest Spanish private bank-owned asset managers, named Lorenzo Parages as its head of Distribution – responsible for the promotion of MGF funds in UK, Germany, Austria, Spain, Italy, Luxembourg and Latin America.
Prior to joining the Spanish asset management company, Parages was in charge of Allfunds Bank’s investment services operations in Latin America. Formerly, Parages worked in the equity sales division of Banco Urquijo, a Spanish private bank, before pursing his career at Axa Investments as financial advisor, then in several UK firms such as BSN Capital Partners, BlueCrest Capital Management and CMD.
March Gestión de Fondos CEO Jose Luis Jimenez said Parages would help maintain the rapid growth the firm has seen in Spain and overseas since the beginning of the financial crisis, namely a fourfold increase in asset under management since 2008.
He also commented: “Thanks to strong performance, we see continuing support for our range of global equity and bond products not only in Spain but also in Italy and increasingly in Latin America. With Germany being particularly supportive of investment in family business focused funds, we see potential for strong growth there too. In the UK, we are working towards establishing a more permanent base and so Lorenzo´s experience in London will prove particularly helpful.”
CC-BY-SA-2.0, FlickrPhoto: Honest Reporting. Fear of the Foreign
Investors are on edge. We’re barely into the New Year and markets have been left shaken by the Swiss franc’s biggest ever one-day move; an election win for a populist party that’s demanding to renegotiate Greece’s relationship with the European Union; more evidence of a slowdown in China; and worries that cheap oil reflects weak global demand rather than a turf war between producers. Against this uncertain backdrop investors are looking again to central bankers for coordinated action, yet policymakers look set to move in opposite directions.
Stock pickers hoping this year will herald a painless transition back to a world in which central bankers and liquidity play reduced roles in determining investment returns will most likely be disappointed. All this uncertainty is making it harder for the US Federal Reserve to decide when best to raise interest rates in the first step of so-called monetary policy ‘normalisation’, even as Europe and Japan remain committed to further stimulus.
More recently emerging markets have suffered. Within six months what had been a narrative of slow recovery has turned once again into an exercise in spotting the weakest link. Like predators isolating the weakest member of the herd, short-sellers are already said to be rounding on the currencies, bonds and equities of selected emerging markets.
Many of the arguments that sustain the critics have been around for a while: a rising dollar makes assets in ‘riskier’ parts of the world less attractive to international investors; countries that rely on foreign capital to plug gaps in current account deficits will come under pressure; higher US interest rates force emerging economies to follow suit despite sluggish growth.
All of which is true, to a degree. But emerging economies are still growing faster than most developed ones and will do so for many years to come; emerging economies are in better shape today because they began reducing current account deficits after the ‘taper tantrum’ of 2013, when the suggestion of an end to Fed stimulus policies caused a panic; and emerging markets hiked interest rates following the taper tantrum and so, with the collapse of oil prices driving deflationary pressures, actually have room to cut. At the country level, most emerging countries are well- positioned to handle the latest tempest.
Yet, now there’s a new concern – the level of corporate debt denominated in foreign currencies. The argument goes like this: ever since the global financial crisis, emerging market companies have gorged on cheap debt, especially dollar debt. So with the dollar (and now the Swiss franc) surging higher, corporate borrowers face ever more expensive debt repayments, even as revenues slow and show no sign of imminent recovery.
The numbers certainly look scary. From 2009 until last year, dollar- denominated borrowing by the private sector in the emerging markets increased more than 100 per cent, or by more than $1 trillion. With memories of the global financial crisis still fresh for many people, it is only right that the risks of excessive debt shouldn’t be lightly dismissed.
However, these numbers need to be reappraised within the proper context. While some economies may still be ‘emerging’ in terms of governance and market liberalisation, they now rank in size with the biggest. The obvious example is China which, by one measure, overtook the United States last year as the world’s largest economy.
All emerging markets grew rapidly over the past two decades and once the size of these economies is taken into consideration, a very different picture emerges. In fact, external emerging market debt as a percentage of gross domestic product (GDP) has been remarkably stable – around 40 per cent – since 1995. Meanwhile, external emerging market debt (as a percentage of GDP) that’s attributable to the private sector has been almost flat over the same period and remains well under 10 per cent.
That’s not to say it isn’t an issue. Debt levels – the total level of all borrowing – need to be carefully monitored. Let’s not forget that the lion’s share of debt in emerging markets is still denominated in local currencies and there has been an expansion of all debt. But we don’t think that existing levels of foreign debt specifically represent a systemic risk.
Another reason for our view is because a lot of this foreign currency debt is linked to borrowing by commodities companies, especially those in the oil and gas sector. Sharp falls in commodity prices are a problem, but it is also an industry in which dollar borrowing is matched by dollar revenues, so the danger of a currency mismatch of the type we saw in the 1997/98 Asian crisis is greatly reduced.
Of course, high-yield Chinese property bonds are now in the spotlight with Shenzhen-based Kaisa Group Holdings having missed a coupon payment and its creditors scrambling to protect their interests. Chinese companies have become some of the biggest issuers of foreign currency bonds as they sought to sidestep credit curbs at home. But investors still recognise that, on this occasion, the problems are company-specific and panic hasn’t spread to the larger developers. We’re still confident in the ability of the authorities to manage debt levels.
The coming year will be challenging for many markets, not just those in the developing world. However, we feel that most emerging markets are set to benefit from oil prices at current levels (although oil exporters are obviously big losers) and companies will continue to make steady progress trimming fat to operate more efficiently. Sure, investor sentiment remains poor and this won’t help with capital outflows, but with price-to-book valuations well below the five and 10-year averages we think there is plenty of value.
Column by Devan Kaloo, Head of Global Emerging Markets, responsible for the London based Global Emerging Markets Equity Team at Aberdeen AM
Photo: BTC Keychain. Bitcoin and Altcoin Transactions Will Shrink by More Than Half in 2015
A new report from Juniper Research has found that the value of all cryptocurrency transactions will fall sharply this year to just over $30 billion, compared with over $71 billion in 2014.
According to the report, the surge in altcoin transactions in 2014 was overwhelmingly attributable to brief spikes in activity during the first quarter in Dogecoin, Litecoin and Auroracoin. By the end of the year, daily dollar values of these transactions were at less than 5% of their earlier peak.
However, the report argued that the introduction of licensed, regulated exchanges could lead to a stabilization in currency values and with it an increase in retail transaction adoption. It pointed out that in an unregulated marketplace, consumer confidence had been eroded by the demise of the Mt Gox exchange in February 2014 and the recent theft of nearly 19,000 Bitcoins from BitStamp hot wallets.
Nevertheless, despite the fact that PayPal has now begun to allow US consumers to purchase digital goods via Bitcoin, the report argues that the scale of the challenges facing Bitcoin is so great that it will struggle to gain traction beyond a tech-savvy and/or libertarian demographic.
Real Time Transaction Settlement Opportunity
Instead, it identifies a longer term role for cryptocurrency protocols in the wider payment space. According to report author Dr Windsor Holden: “It is likely that we will see the technologies behind cryptocurrency deployed in areas such as real-time transactional settlement. Ripple Labs is already focusing overwhelming on that approach and in the medium term we may see a role evolution to this end amongst other cryptocurrency players.”
