Macquarie: Emerging Markets Are Not Facing a 1997-Style Crisis—They’re Facing Something Worse – Bloomberg Business 09-16-15

Salient to Investors:

Viktor Shvets and Chetan Seth at Macquarie said:

  • Emerging markets and economies are in a worse situation than in the 1997 Asian financial crisis because they now face far longer, more painful and insidious disease with limited or no cures or exits, punctuated by occasional significant flare-ups.
  • The effect of the 1997 crisis were mitigated by excessively loose monetary policies and China’s integration into global trade, which helped all markets recover quickly. However, this is not the environment facing economies in the next 5 to 10 years: long-term structural shifts, driven by the deflationary progress of the Third Industrial Revolution, is aggravated by overleveraging and overcapacity.
  • Turkey, South Africa, and Malaysia are at most risk, while China, the Philippines, and South Korea are at least risk. Brazil and Russia are at lessor risk but their low exposure to external debt could be undermined by slumping commodities and slowing trade.

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Biggest Money Manager Boosts South Africa’s Economy for Returns – Bloomberg 08-27-14

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Dan Matjila at The Public Investment Corp. expects betting on developing South Africa’s power generation, roads, banks, communications and education will boost its economy and improve investment returns. Matjila said increasing investments in developmental projects, such as renewable energy, and in the rest of Africa would increase returns.

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Markets punish South America’s Bad and Ugly economies – BBC News 02-02-14

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Investors are abandoning emerging economies, good and bad, for the US.

Morgan Stanley said Brazil, Indonesia, India, South Africa and Turkey are the Fragile Five – all with large deficits, slowing growth and vulnerable currencies.

Argentina is generally credited with starting the general panic after playing fast and loose with its deficit and letting inflation take hold: government attempts to control the economy on a micro-level have been a failure. The Index of Economic Freedom says state interference has grown substantially since 2003, accelerating the erosion of economic freedom, while the judicial system has become more vulnerable to political interference, and corruption is prevalent.

Venezuela and Argentina have been economically mismanaged and are suffering as the great Chinese commodity cycle takes a downward path.

Brazil is unattractive. Elizabeth Johnson cites a fair amount of government intervention, and inflation is very high at 6%, though the Brazil Central Bank has taken tough action and put up interest rates. Johnson said fiscal adjustment is going to be difficult in an election year. However, Johnson said Brazil’s exports are too big to ignore, particularly agriculture, even with the commodity cycle on a downswing.

Brazil is the world’s biggest exporter of sugar, coffee, and beef and close to being the biggest in soya, chicken and corn – with this dominance a fall in the currency is only good news for exporters.

Brazil’s fall this year has been just 2% and appears manageable. Johnson says strategic foreign investors have not been disturbed by the last week’s panic as foreign direct investment has held up reasonably well, while investors in oil and gas, the agricultural sector, in tractor and car manufacturing, and wind power show no sign of concern.

Peter West at Poalim Asset Mgmt lists Mexico, Peru, Colombia and Chile as “good” emerging economies. he puts Mexico at the top of the list because it has been implementing reforms and because of NAFTA,  80% of its exports go to the US and will share in the recovery there.

Peru, Colombia and Chile have all benefitted from the commodity boom and are now being equally punished by the collapse – particularly in the copper price. West says they have done their homework, with inflation under control and some degree of fiscal discipline, and will separate from the Fragile Five, when the dust settles.

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Slump-Watchers Dump Yield Curve for 1970s Tool: Cutting Research – Bloomberg 11-26-13

Salient to Investors:

Ellen Zentner at Morgan Stanley said:

  • The Fed’s near-zero interest rate and QE is holding down US bond rates, meaning the US Treasury yield curve would struggle to invert, crimping its effectiveness as an indicator of business cycles.
  • Yield curve inversion signals investors are betting on weaker economic growth – recessions have followed 6 of the 8 times that has happened since 1960, and no US recession in the period was not preceded by an inverted curve.
  • The upturn in the Duncan Leading Indicator since Q2, 2009 confirmed the end of the last recession and its subsequent gain over the past 17 quarters indicates the risk of an economic slump in 2014 remains low. The DLI looks at components that react to cyclical demand, such as household spending, and compares them with economic growth. Since 1970, the DLI has indicated imminent downturns by an average of four quarters. A 1985 FRB of San Francisco study found it a more reliable indicator of business cycle peaks than other tools.

Paul Mortimer-Lee at BNP Paribas said:

  • Arguments that QE can choke consumption could apply to any easing of monetary policy and the Fed’s 3 rounds of asset buying have added 1.5 percent to US consumption.
  • QE cannot both stimulate and deters excess investment
  • Market distortions are often needed to help the economy
  • QE may have had a limited effect on activity, but it has helped to fend off deflation.

Ralph Solveen and Bernd Weidensteiner at Commerzbank said Japan’s stagnation does not provide a template for the euro area because prices fell in Japan not because of a weak economy but because their level stayed elevated during the preceding boom and needed to be corrected, whereas there was no such jump in prices in the euro area, where inflation is likely to grow at an annual rate of 1 percent, excepting peripheral economies like Greece and Spain, where a price correction is now under way.

Bank of America said Ukraine, Turkey and South Africa are the emerging markets most vulnerable to Fed tapering, while China and South Korea should be the most resilient. Ukraine and Turkey suffer from high external debt and a lack of reserves, while South Africa is weakened by its current account deficit. South Korea benefits from low inflation volatility and a strong fiscal position, and China has a current account surplus and large currency reserves.

Bank of America said a 1% shock to US growth would have the most durable impact on Mexico but provide a pickup for South Korea, add 0.2 percent to expansion in Turkey and India, and a modest and short-term effect on China.

Anja K. Leist at the University of Luxembourg, Philipp Hessel at the London School of Economics and Mauricio Avendano at Harvard School of Public Health found that men aged 45 to 49 and women aged 25 to 44 in 11 European countries who suffered through an economic slump showed worse cognitive functions 25 years later.

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‘Dr. Doom’ Roubini: U.S. Growth Picture Is Sub-par – BloombergTV 09-06-13

Salient to Investors:

Nouriel Roubini at NYU said:

There has been a global recovery in the last year with the US recovery and reduced tail risks of a eurozone breakup and a hard landing in China.

The US economy recovery is very fragile, with barely 2% GDP growth expected in Q3, and the improvement in the labor market is partially due to a lower participation rate. US government spending is still falling, a fiscal drag, capital spending is weak, housing is softening, flat consumption in July, and net exports are worsening.

The Fed may taper in September but with the 10-year T-yield close to 3% so any further tightening will hurt the interest rate sectors like housing and capital spending. Any Fed tapering in September should be accompanied by a very dovish statement: a hawkish statement would push 10-yr T-yields well above 3% and choke the economic recovery.

The Eurozone is improving but the problems in the periphery remain unresolved: 5 of the 7 peripherals remain in recession. While the tail risks of a Greek exit and Italy and Spain losing market access have been significantly reduced, the fundamentals problems of the periphery have not been not resolved:  low potential growth because of slow reform, public debts well above 100% of GDP for Italy, Spain and other peripherals that will keep on rising, problems of competitiveness. and some improvement in current accounts that are cyclical due t the recession and not structural.

Italy government could collapse if Berlusconi’s threat to pull the plug on the government unless he gets a pardon or avoids prison is not a bluff, the government will collapse and there will be elections before year-end and the chances of a government lasting more than a year and structural reforms both of which the country needs are relatively low.

The Greek government could fall within 6 months. Portugal and Spain have political uncertainties. Europe has austerity fatigue in the periphery and bailout fatigue in the core.

If attack on Syria is surgical and last only a few days then the further effect on oil prices will be moderated: if the conflict escalates then oil prices would be longer and more persistent and significantly damaging for all oil importing countries.

Emerging markets have had the double whammy of Fed tapering and rise in bond yields and the slowdown of China which has led to a fall if not the end of the commodity super cycle.  India, Indonesia, Turkey, South Africa, Brazil all have current account deficits, fiscal deficits, falling growth, inflation above targets, and social and political problems and elections within the next 12 to 18 months, and ugly policy choices. However, most of these countries are in better shape than in previous emerging market crises in the past decade crises with more flexible exchange rates, war chest of reserves and less currency miss-match so do not expect a repeat of the massive yen crisis of 10-15 years ago.

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A BRICS Bank Needs a Sense of Purpose to Succeed – Bloomberg 08-05-13

Salient to Investors:

Jim O’Neil writes:

In April, the BRICS said they would build their own development bank. Their difficulty in cooperating is simply because they are not very alike.

Brazil, Russia, India and China are the world’s largest emerging economies, while China is bigger than all the others put together – China effectively grows a new India every 2 years, or a new South Africa every few months.

Brazil, India and South Africa are democracies; China and Russia are not. China and India are major commodity importers; Brazil, Russia and South Africa are major commodity exporters.

Russia’s annual per capita income, adjusted for purchasing-power parity, is $24,000 versus $9,000 to $12,000 for Brazil, China and South Africa, and $4,000 for India.

China is the real odd man out, not just because of its size but because it is the only one that so far this decade has met my expectations for growth.

China may see a BRICS bank as a low-risk rehearsal for the role they are fated to play at the IMF and the World Bank, within G-20 and maybe even at the UN.

Nigeria will soon have a bigger economy than South Africa.

Fast-growing emerging economies have rapidly expanding middle classes, who see governments wasting public money on pet projects instead of investment in things that will make them proud and more prosperous, and combat.

Three areas are vital for emerging economies to escape the so-called middle-income traps. Better government not more, education, including at the most basic levels, and access to modern technology.

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What’s Good for U.S.-China-Japan Hurts Emerging Markets – Bloomberg 07-09-13

Salient to Investors:

Fed tapering, China’s credit squeeze, and Japan’s reflation ultimately prime the three biggest economies for less volatile and longer-lasting expansions, but near-term, emerging markets, commodity producers, and economies that need cheap cash or weaker currencies, including the euro area, could suffer.

Stephen Jen at SLJ Macro Partners said that parts of the world are moving, creating frictions and divergence, and more volatility for financial markets.

The IMF says the gap between developed-and emerging-market growth rates will remain close to the narrowest in a decade, at 3.8 percent in 2013, while a slowdown for emerging markets will slow global growth to 3.1 percent in 2013.

Morgan Stanley says the new environment leaves emerging countries like Brazil, Mexico, South Africa, Turkey and Ukraine, vulnerable to a sudden stop in which capital flows are thrown into reverse.

Holger Schmieding at Berenberg Bank said we are seeing significant progress in the global economy, so people need not worry because the gradual return to a more balanced global growth should be good rather than bad for almost everyone in the medium term.

Jim Paulsen at Wells Capital Mgmt says the “good” yield rise reflects mounting confidence by the Fed and investors in the US economy – since 1967, whenever the 10-yr bond yield has been below 6 percent, any increase typically has been associated with improving sentiment. Paulsen said higher interest rates should not materially impact economic activity, and the stock market may continue to provide favorable results.

Blackrock said tapering is actually healthy given that an expansion in the Fed’s balance sheet beyond $3 trillion has failed to spur much growth in credit or the economy. Peter Fisher at BlackRock says emerging markets again may suffer, as the weaker yen is drawing investment away from these countries and toward Japanese equities.

Stephen King at HSBC said the UK, Russia and the euro area periphery may suffer from unwanted yield increases as it will make it costlier for governments to finance their debt and for consumers and companies to access credit. King said a sudden spike in bond yields might send some economies off the rails altogether, and the US could suffer a backlash if trade dries up as a result.

Michael Saunders at Citigroup said less US-led stimulus could hurt economies that took advantage of easy money to run up current-account deficits and borrowing imbalances. Outside of China and the Middle East, emerging economies have aggregate current-account shortfalls of 2 percent of GDP, the highest since the late 1990s. Saunders said many emerging-market countries face the long-absent challenge of rising capital needs with worsening fundamentals at a time when global-liquidity conditions may not be easing further.

Nomura said China, Hong Kong and India are in a high-risk danger zone if a pullback by the Fed prompts investors to punish Asian countries that have weak economic fundamentals and are too slow to reform.

Oxford Analytica says Hungary and Poland are at risk because foreign investors have large holdings of local-currency debt, while Turkey is especially vulnerable because of its reliance on foreign cash to finance its large current-account deficit at a time when political tensions are rising.

HSBC and Goldman Sachs say China will grow 7.4 percent in 2013.

Shane Oliver at AMP Capital Investors said China may be trying to make economic performance more consistent and so avoid the mistake the US and Europe made in not tackling excesses before they sparked crises.

Julian Callow at Barclays said China accounts for one-sixth of global output, but a domestically driven Chinese slowdown would be much more significant than this implies, given China’s role as a major importer of commodities and capital goods, and in supporting business confidence across Asia. Callow says China accounted for 43 percent of worldwide growth from 2007 to 2012. Callow says cheaper commodity prices would be good for advanced nations but would hurt producers.

Deutsche Bank says China accounted for a quarter of worldwide demand for major raw materials in recent years. Bank of America Merrill Lynch says Chinese purchases of copper, coal, iron ore and oil are closely connected to loan-growth conditions and so are at risk if the credit crunch continues.

Larry Hatheway at UBS says companies and countries that produce materials for transportation, power and property development will be particularly hit. Over 80 percent of exports to China from Russia, Brazil, Australia, Canada and Indonesia are for domestic use. Hatheway says a slowing China would have a disproportionate impact on commodity producers and chunks of emerging markets.

Takuji Okubo at Japan Macro Advisors says Abenomics is essential and seems to be on the right track.

Lena Komileva at G+ Economics said Japan is exporting deflation risk to Europe, increasing competitive pressures when much of Europe is suffering chronic growth deficiency.

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UBS’s Friedman Favors U.S. Stocks, High-Yield Bonds – Bloomberg 06-28-13

Salient to Investors:

Alexander Friedman at UBS says:

  • What Fed has done is not unexpected and the market reacted because it was ahead of itself. All the Fed was saying was that the US is doing OK, that the data is trending as it should, and that it has confidence that in the future it will be able to unwind QE, which is a positive.
  • Some investors were caught overleveraged in fixed income so there is unwinding of the carry trade. In countries like Australia, India and some emerging markets, a lot of investors hold bonds in local currencies which is a risk so expect significant volatility on the emerging market side.
  • China less a risk than perceived because it is just trying to re-balance and is willing to sacrifice some short-term growth to get control over the credit situation and avoid bubbles.
  • Biggest risk to investors is in misinterpreting the Fed, which creates a buying opportunity.
  • Last week the market saw much of the repricing of the tapering risk and so we won’t see a repeat in September. Assuming we see the positive economic data for the next few months which is necessary for the Fed to begin tapering then the market will focus away from life support and more on underlying growth.
  • Buy where underlying monetary policy will match the underlying  requirement and where there is economic growth: meaning US equities, US high yield equities which are oversold and now offer 6 to 8 percent returns over the remainder of 2103.
  • Wary of gold, which was an emotional trade against currency debasement and so has room to decline further.
  • Wary of emerging markets, including Australia, neutral on Europe.
  • Not yet seen bond money switching to equities as most of the money into equities has come from cash and money markets. We will see a shift from bonds to equities for many reasons, not least the immutable force of  demographics such as the elderly selling fixed income savings over time and there is no yield in them.
  • US high yields with equity characteristics are attractive.
  • Expect tapering around December although market is pricing in September. When it happens, US economic data will be trending positively and rising rates will accelerate the housing recovery story as it will cause fence sitters to buy to avoid the mortgage rates increases. Tapering of $10 billion a month is priced into the market and do not expect to see rates rising until 2015.
  •  US financials and insurance companies are a bet that rising interest rates will help their profitability.
  • The Russell 2000 stocks are more attractive because they have more cyclical exposure and exposure to the recovering US story as opposed to the global story where there is still sub-trend growth. With dividends and share buybacks, stocks offer a 4.5%- 5%  yield in 2013 which is attractive.
  • Long the dollar against many alternative currencies because of recovering economy and the Fed slowly winding down QE.
  • Less optimistic about Eurozone, and short Australia.
  • China rebalancing a good thing as banks have been lending too aggressively and China wants to avoid a credit bubble since shadow banking is such a huge proportion of their credit market. Clamping down on lending means it will be more expensive for companies to borrow so GDP will suffer a little bit. China growth could slow to as low as 7 %  causing more volatility short-term but OK over the longer term. Less concerned about China, which has great foreign reserves and is less reliant on foreigners owning local bonds with risk of money exit, unlike Australia, South Africa and India
  • The emerging market is a decent to good place to have a strategic allocation and you want exposure there for the longer term but short-term there is a lot of volatility.  Most worried about countries who have financed deficits with foreign money so when that money leaves they end up in a scary spiral. Countries like South Africa, India, Brazil.
  • Before the end of the year expect to see re-escalations of crises in the Eurozone for many reasons. The Eurozone periphery is like the emerging market with the same concerns including the unwinding of leveraged positions and volatility. After the German election we won’t see a path to true fiscal integration and banking union but instead a recognition that France is very weak, Germany won’t act alone, and that France and Germany are not acting together. Europe needs true labor reform in countries that are not competitive and that is very difficult
  • France is a concern because it has poor underlying economics and Hollande is weak politically.
  • Biggest concern is Spain, which is too big and quite vulnerable and will enter a program with the troika that will be put off politically until the last-minute after volatility spikes over the next 4 to 6 months.

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China Poses Global Growth Risk as Li Squeezes Credit – Bloomberg 06-21-13

Salient to Investors:

Shane Oliver at AMP Capital Investors said he was not worried until this week because things are much different in China than expected and potentially pose risks for global growth. Oliver said we relied on the Fed and China so much over the last few years that any signs that either might be less supportive is taken negatively – we got both last week.

Investors and economists from Barclays to HSBC are lowering their outlook for China and warn growth may fall short of the government’s target of 7.5 percent.

Darius Kowalczyk at Credit Agricole CIB said China was responsible for a third of global growth in 2012 so the world economy would suffer from China’s slowdown as it has been adding more to global growth than any other economy. Kowalczyk said commodity demand would suffer in particular and Asian markets relying on China for exports growth would be hit.

David Hensley at JPMorgan Chase said concerns about China getting it wrong threatens global financial markets.

Tim Condon at ING said commodity exporters, with a double-whammy of falling exports and prices, are among those likely to suffer the most from a weaker China. Brazil, South Africa and Australia all count China as their biggest trading partner. Condon said a weakening in China to 7 percent would likely force a response, says ING’s Condon.

China is more reluctant than in the past to loosen monetary or fiscal policies to check an economic slowdown. Stephen King at HSBC said this reflects a focus on quality of growth rather than quantity. HSBC cut its forecast for Chinese growth this year and next to 7.4 percent.

Ken Courtis at Next Capital Partners said a slower China may be a price worth paying if it results in an economy with more even growth that’s less prone to shocks. Courtis said China is taking the tough medicine to squeeze excesses out of the system, and you can’t build long-term, sustainable growth if the system is not cleansed of excesses.

Citigroup said China’s private debt rose to 168 percent of GDP in Q3 2012 versus 119 percent 4 years previously – a rise bigger than those of the US and euro area in their pre-crisis years. 

David Loevinger at TCW said slowing the growth in credit now increases the prospects for strong and steady growth later – good for China and the world.

Manoj Pradhan at Morgan Stanley said accelerations in the US and Japanese economies puts the world is in a much better position to absorb a slowing and more-balanced China.

Tim Drayson at Legal & General Investment Mgmt said if a slowing China helps ease commodity prices it could help reduce inflation elsewhere in the world which is eating into consumers’ spending power.

Nobel laureate Michael Spence would be surprised if China allows this to go on much longer.

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The Global Economy In 2013: 5 Key Economic Trends? – Seeking Alpha 01-23-13

Salient to Investors:

Shane Brett at AllAboutAlpha writes:

  • The long-term outlook for the US economy is broadly positive with housing stabilized, consumer confidence slowly returning, political instability solved by Obama’s decisive win, and as health spending increases under Obamacare.
  • Cheap domestic energy will continue and the US will seriously expand exploration of shale oil using fracking technology. 2013 will see a relocation of energy intensive industries back to the US, causing trade disputes.
  • The big unknown for the US is the effect of massive Quantitative Easing, and currency volatility is virtually guaranteed.
  • The US has the benefits of being food and potentially energy independent, having a young growing population, and of being the center for economic creativity and new business start-ups.
  • China will ramp up infrastructural spending in 2013 providing a boost to the world economy, boosting copper prices and commodity dependent economies like Canada and South Africa.
  • Chinese companies are starting to bid more aggressively for both US companies and domestic American contracts, which will cause friction over the next few years.
  • The German election in September will completely dominate 2013  in Europe, with little substantive progress being made in ending the Euro Zone Crisis until then.  Merkel has disguised both the true size of the Euro crisis and the price to hold the Euro Zone together from the German electorate.
  • The main economies of Europe will teeter between zero growth and recession in 2013.
  • Global money creation will increase currency volatility, with the US Dollar and Euro weakening significantly in 2013. The Australian Dollar is the most overvalued currency now that country’s commodity export boom is subsiding, domestic economy slowing, and interest rates falling. The Euro will remain volatile.
  • The amount of money creation is unprecedented and its outcome largely unknown – massive currency debasement has always preceded high inflation and economic decline. Inflation will rise in the years ahead – always the intention of the US to devalue in real terms its gigantic national debt.
  • Commodity prices will stop declining in 2013 and the super cycle will resume – excluding oil, commodity prices declined progressively throughout the whole of the twentieth century, but reversed the whole decline during the past decade.
  • The world faces a zinc and phosphorous shortage.  The world population will increase by 140 million people in 2013. Many important countries depend on importing food.
  • The melting of the North Pole ice caps will add new regular shipping routes across the Arctic in 2013, a major economic advantage to Russia, Canada, the US and Scandinavia.

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