The BRICs’ Enduring Edifice Cracks

2013 April 15 by admin

EPFR’s Q1 fund flow data showed the BRIC theme with a $775 million net outflow, continuing a 2-year aversion, as the frontier and newest CIVETS-MIST acronym packs registered an average $1 billion inflow. Brazil, Russia and India were down almost $3 billion, while China was near $2 billion positive. The dedicated equity sum overall was $30 billion beating last year’s same period pace with the diversified global subset representing two-thirds of the total. EMEA and Latin America were both losing regions, while Asia brought in $9.5 billion with smaller destinations like the Philippines and Thailand breaking records. Mexico saw a $1 billion turnaround from 2012, and Korea and Turkey attracted modest numbers, while Africa’s net allocation was negative on the drag from recent BRIC addition South Africa. Europe pullout came to $650 million, in contrast to Western Europe’s $3.2 billion draw as the developed was over triple the emerging world’s tally. Japan had an infusion of $10 billion after years of lethargy and the US take at $55 billion was up almost twentyfold from a year ago. Bonds too were ahead in quarterly comparison with almost $20 billion in inflows, but the relative local-external preference flipped with 70 percent absorbed by the former even as both benchmark indices were off slightly through end-March. Asia was again the favorite and also tapped broader global bond funds committing over $25 billion while mostly shunning Europe. Emerging market diversion was noticeable from the mainly US high-yield category which fell to one-quarter of 2012’s corresponding total. Inflation-protected appetite swung in the opposite direction with across-the-board declines in the commodity complex by far the worst fund sector performer according to the Boston-area based industry tracker, which put the great asset class rotation at a tentative turn.

The Japanese numbers are under rare scrutiny with the new government and central bank head’s unchartered anti-deflation monetary expansion and direct asset purchase push which coincided with traditional end-fiscal year big institution portfolio repositioning and retail decisions about foreign market investment trust participation. Cross-border share focus may deepen in high-return East and South Asia as well as at home, while currency overlay funds may regroup to $50 billion, with the 80 percent Brazilian real weighting increasingly eroded by interest in Turkish lira, Mexican peso and other units. Dedicated bond vehicles at half the size may also diversify, particularly if Brazil’s central bank starts to hike rates while keeping capital controls in place. Despite the IMF’s last-resort endorsement of such measures most recently in Cyprus, Japanese houses remain sensitive to a repeat of the post-Asia crisis experience which trapped holdings for long stretches. They have resumed cautious exposure in Indonesia, Malaysia and elsewhere and now eye possible restriction proliferation in Europe where bans on “naked” credit default swaps and bank stock short-selling are already flagrant.   

The Capital Ecosystem’s Unfit Survival

2013 March 12 by admin

The McKinsey Global Institute used its 180-country proprietary capital flow database to warn of an unhealthy “ecosystem” with the cross-border total down 60 percent the past five years as post-crisis correction overshoots. Financial assets went from $200 trillion to $225 trillion over the period, but have fallen 45 percent as a chunk of GDP with annual growth crawling at 2 percent. Emerging market depth at 150 percent is under half the advanced economies’ 400 percent as loan, stock and bond market development lags. The holding pattern may stifle business investment and homeownership. International allocation has fallen from its $12 trillion 2007 peak mainly due to Eurozone bank retrenchment, and within Europe the ECB and other public institutions now account for most of the activity. Under additional regulatory strictures commercial banks have shed $725 billion in assets chiefly from foreign operations. The 2012 estimate for inward developing world direct and portfolio investment was $1.5 trillion, while the outward sum was $1.8 trillion increasingly in “South-South” direction, according to the research arm. FDI was off 15 percent last year, but represented 40 percent of global capital commitments as a “stabilizing influence.” Current account imbalances which contributed to debt buildups have also improved, with previous deficits particularly pronounced in peripheral Europe and the US. Emerging economies can reset integration with corporate bond and small enterprise access pushes to meet trillions of dollars in equipment and infrastructure needs. Policymakers can restrain balkanization tendencies by completing the Basel III agenda, including for bank resolution and derivative clearing, while removing geographic restrictions for pension and insurance fund engagement. Low yields and growth for industrial countries will propel emerging financial market resort in the coming decade where trading is “shallow and illiquid” and can hurt both public and private equity strategies without greater attention to fostering “new models and skills,” the institute remarks.

A separate study by a group of business executives under the auspices of the Washington-based CSIS urges a private-sector based development approach to catalyze momentum, with financial and technical assistance going to promote entrepreneurship and trade. US government aid agencies would place economic growth at the mission core, and support corporate partnerships and bilateral and multilateral investment treaties. Financing mechanisms at AID and OPIC could be overhauled to serve these priorities, with the latter independent profit-making institution able to provide equity for its own account as with G-7 peers. An additional $350 million should be found through cost savings and efficiencies to aid commercial climate reform and small firm credit access, and low-income country targeted efforts like the African Growth and Opportunity Act could be expanded to other duty-free sectors, the panel believes. It backs capital increases for the official international lenders, as the Treasury formally submitted a $65 billion IMF quota request again to Congress from the 2011 G-20 agreement which has since barely evolved.

The IIF’s Salutary Cyclical Salute

2013 February 4 by admin

Under new leadership the Institute for International Finance offered its first capital flow cut for 2013 which despite “greater cyclicality” should modestly bump last year’s almost $1.1 trillion result. A main risk is rate reversal in the industrial world upending the push as in the Fed’s sudden tightening two decades ago which presaged the Mexican crisis. Among individual contributors, FDI was distinct in a lower forecast to $515 billion, while portfolio equity will jump one-quarter to $100 billion with the $500 billion bank loan and bond category constant. Official lines will increase $20 billion to $55 billion with North Africa programs, which as in Egypt’s case so far are more frequently underwritten by other emerging economies. The latter’s GDP growth should average 5 percent which will favor share allocation also not as subject to anti-speculative controls as currency and fixed-income. Outward Chinese direct and portfolio investment doubled in 2012 to over $250 billion despite slower reserve accumulation as mainland bank foreign assets neared $500 billion. In the former, natural resources diversification is apparent with business and financial services acquisitions, while geographically Hong Kong takes half, with Latin America and Africa also popular as the pace into developing now exceeds developed regions. Emerging Asia as a destination gets 45 percent of private capital into the thirty countries followed by the publication, as India, Indonesia and Korea take share from China. However with European banks in retreat cross-border lending is 25 percent off recent annual levels. Asian reserve buildup has fallen three-quarters to under $150 billion as Indonesia’s current account joins India’s in deficit. In Europe net quarterly inflows were up 50 percent from recent trends, with Russian and Turkish borrowers particularly active. Bank repayment continued in the Czech Republic, Hungary, Poland and Romania while Ukraine lost access pending a possible fresh IMF agreement. Russian ruble debt will experience a spike with non-resident opening, while Turkey alone on the continent will have higher foreign capital demands with its chronic balance of payments gap.

Brazil, Chile and Mexico have likewise become large investment exporters as the control regime in the first has been relaxed within the context of an informal 2 real/dollar band. Peru has leaned against currency appreciation with regular intervention and stricter reserve requirements, and Uruguay imposed a holding period on high-yield notes. Mexican public debt is owned one-third abroad, while Argentina still faces capital flight from its “policy radicalization” and holdout creditor clash. Middle East transition nations have received bilateral assistance from the Gulf and South African bonds brought in a record $10 billion-plus last year following entry into standard world indices. That “technical” move will ease in the coming months as bad mining and rand direction also exact a price. Nigeria in contrast may continue to benefit from index inclusion as well as power and petroleum industry reforms. Enthusiasm will depend on eventual fiscal terms for international oil companies that could be “too onerous,” the group cautions going into heavier fog.

The IIF’s Anxious Anniversary Annals

2012 October 26 by admin

The Institute for International Finance marked 30years and the retirement of its longtime director at the Tokyo IMF-World Bank sessions as it raised the annual capital flows forecast slightly, with an over $1 trillion showing particularly on improved cross-border debt and Asian direct and portfolio investment prospects. Its conference featured an appearance by US Treasury Secretary Geithner and an annual review of application of its bond restructuring principles to the opposite cases in complexity and size of Greece and Saint Kitts-Nevis, where the leadership assumed an unprecedented creditor steering committee role in the former triggering controversy among the global bank and non-bank membership with diverging interests. The evaluation found that guidelines had been followed although the Greek haircut represented departures with the simultaneous historic developed country and EU regional workout. Prices have since doubled for the defaulted private instruments as the official Troika may disburse an installment delayed since June and extend the program timeline and the ECB signals increased future bond-buying support. A headline bank merger has been resubmitted and the coalition arrangement between the two main parties has held despite persistent violent protests and attacks from populist and far-right rivals. At the IIF an executive search is underway for a successor to former Treasury Undersecretary for International Affairs Dallara, with candidates likely to include recent occupants of that key government position. As with the IMF governance battle emerging market representatives argue that the top post could be drawn from their constituency for the first time among many public and private sector luminaries.

The transition will occur as the Fed’s QE3 and anti-slowdown fiscal and monetary space keep net private capital flows to thirty destinations above $1 trillion, although at 4 percent of GDP half their pre-crisis peak. A study confirms that emerging market mutual fund commitments grow after industrial country central bank asset purchases even as economic expansion will not reach 5 percent for the universe. FDI is the exception with an expected return next year to $535 billion at almost the previous high despite stagnation in top recipient China, with Latin America registering a “remarkable” gain. In other categories equities are more attractive with average P/E ratios around 10 and bank lending stabilized according to the latest quarterly conditions survey. Both sovereign and corporate debt at one-third of total exposure remain buoyant with the latter jumping by half since 2008 and standing at $150 billion in Q3 mostly from Asia. On official flows only traditional bilateral and multilateral sources are collected excluding Chinese and other providers. Sovereign wealth vehicles with $5 trillion in assets may also be missed unless activity is tracked in standard investment data and as they target countries outside the IIF’s roster. The update also notes the developing world’s mounting outward capital heft despite flight tendencies in Russia and elsewhere that seem regular rites.  

UNCTAD’s Floundering FDI Flourish

2012 July 18 by admin

Geneva-based UNCTAD issued its annual global FDI picture with the $1.5 trillion total in 2011 to stay flat this year and still one-quarter down from the pre-crisis apex. In recent months both M&A and greenfield investments “retreated,” but a “modest increase” is foreseen in the medium term toward the $2 trillion mark. According to its survey of multinational company executives a pessimistic outlook is the immediate consensus by a 10-point margin. Developing and transition economies take half the sum at $780 billion. All regions saw double-digit gains except Africa and the least-developed category; outbound FDI in turn declined on stagnation in Asia and 25 percent drawdown in Latin America with capital repatriation. Cross-border mergers came to $525 billion last year, while new projects were $900 billion. All industry segments—raw materials, manufacturing and services—rose with extraction, utilities and transport among the leaders. The trade body cites sovereign wealth funds with $5 trillion in assets as a growing source with over $30 billion in commitments to date. Data from the largest 100 transnational firms show cash levels including retained earnings at the same SWF combined amount. This “overhang” is due to financial market volatility and dividend payment and debt reduction policies. One-tenth of the hoard can be readily deployed representing $500 billion or one-third the current direct inflow figure. A separate attraction index ranks the top 10 destinations with Mongolia entering for the first time and a number of African countries moving toward that status including Ghana, Mozambique and Nigeria. Argentina, the Philippines and South Africa underperformed, while foreign affiliates’ economic impact is greatest in Europe as in the Czech Republic and Hungary. By region Africa’s fall to $45 billion was concentrated on the Arab North and Egypt and Libya in particular with their civil strife. Commodity price advance and middle class creation encouraged Sub-Sahara activity across a sector range including banking and retail.

Asia accounts for one-quarter of the global total but Asean member growth is catching up with China’s, the review remarks. For the Mainland’s record $125 billion counted in 2011 services outpaced manufacturing in contrast with the historic pattern. In Latin America offshore financial center flows dipped but overall expansion derived from consumer and natural resource outlays. In the outward channel intra-company loan transfer in Brazil was large at $20 billion and industrial policy translating into stricter licensing and procurement rules for the continent may deepen international firm presence in a “barrier hopping” strategy. The CIS grouping picked up after a period of stagnation with Russia’s WTO accession and a resumed privatization program. Kazakhstan continued to draw hydrocarbon interest and Russian banks and corporations have been active investors throughout their traditional geography. Promotional and free trade efforts have increased, with environmental and social sustainability criteria becoming standard to sustain this capital flow component.   

Capital Flows’ Strange Subdued Spirit

2012 June 25 by admin

The IIF bid farewell to its longtime managing director as it lifted the early year $750 billion emerging market capital inflow estimate 20 percent to over $900 billion in still “subdued and subject to unusually large downside” conditions. The ECB massive liquidity operation temporarily helped sentiment but “mood swings” have reversed with crisis spread and universe pivot China, which accounted for the bulk of the higher projection, also feeding mixed growth, currency and investment expectations. Latin America was the other marginally upgraded region, while Europe and the Middle East/Africa both stayed flat. Annual ambivalence is reflected in recent fund-tracking data showing across-the-board asset class exit despite the relatively unchanged 5 percent GDP growth forecast and government debt levels. A disorderly Greek euro departure would have “severe repercussions” as money was stashed in safe havens and an external funding squeeze hit Central Europe. FDI will be off $25 billion from 2011 at $500 billion and mainly target services, which now outstrips manufacturing and natural resources for the 30 countries covered. Net portfolio equity will triple from last year’s dismal $20 billion as p/e ratios are in line with historical trends, while commercial bank lending will halve to $75 billion on global deleveraging and capital replenishment prods. Bond commitments at $275 billion are off from previous records but the yield pickup over G-3 instruments sustains the pipeline. Official assistance from the IMF and bilateral sources is put at $50 billion for 2012 and 2013 chiefly directed to Europe’s periphery. Outstanding Fund credit was over $150 billion as of the Camp David summit decision to raise future capacity to almost $1 trillion, with Greece, Ireland and Portugal taking half the amount followed by Romania, Ukraine and Hungary.

 China, which subscribed to the increase, however will experience a one-third inward private capital fall to $200 billion as the debt-creating portion dips to $75 billion. Despite foreign investor opening as with the more than doubling of the QFII quota to $80 billion and expansion of the investment bank and brokerage local ownership limit to 49 percent, economic growth will “slip” to 8 percent on a diminished trade surplus and profit and remittance current account stream as the currency likewise weakens against the dollar in the coming months going into leadership transitions in Beijing and Washington. India is confronted by its own balance of payments “travails” according to the association, and the central bank will continue to draw on its $300 billion reserve pile for rupee support. Turkey’s inflows have been stable but come in part from volatile unidentified channels to bridge its “outsize” external deficit. In Latin America Argentina and Venezuela are notorious for “anti-business policies” and in the Mideast Egypt’s $25 billion in financing needs through next year will be a multiple of the $3 billion IMF facility that the new government may pursue along with easier non-resident equity access to redirect fervor.

FDI’s Forgotten Near-Frenzy

2012 February 9 by admin

UNCTAD’s January update hailed a 15 percent global FDI rise to $1.5 trillion, half going to developing and transition economies in a record high. Developed world performance was mixed with Greece and Germany down, but Italy and France receiving a boost. Latin America outstripped Asia’s total by $10 billion at $215 billion as flows increased at 4 times China’s pace. Indonesia, Malaysia, Thailand, Brazil and Colombia experienced spikes in their respective regions. Natural resources drove the Latin story with continental reach achieved with large market establishment and expansion. Offshore Caribbean centers also benefited from safe haven wealth allocation over the crisis period, which diverted interest from Europe outside big energy cross-border deals in Russia, according to the Geneva-based UN agency. The Middle East-Africa continued to fall on political and social unrest, although Saudi Arabia and South Africa hosted new projects. M&A has surpassed greenfield activity as the major catalyst, and 2012’s picture is of “cautious optimism” looking at underlying GDP growth and multinational company cash flows. About a dozen transactions in the $5-10 billion range were completed in emerging markets, and the pattern should continue and deepen over the medium term, the review predicts.

Colombia’s oil boom has coincided with President Santos’ entry into office and restoration of the sovereign investment grade rating which recently enabled 30-year bond reopening at an unprecedented 6 percent yield. Three-quarters of buyers were from the US, as European and Asian investors also focus on portfolio and mining investment potential. GDP growth is officially set near 5 percent, although inflation has also slipped to the upper-end target prompting another 25 basis point central bank rate bump. A minimum wage hike will soon kick in to maintain price pressure, but is part of labor reforms slowly eroding traditional double-digit unemployment which fueled crime and security problems. The free trade agreement finally approved in Washington late last year should favor fresh participation, and stands in stark contrast to the stance in adjoining Venezuela, where President Chavez has reacted angrily to international arbitration awards with plans to exit the World Bank’s dedicated tribunal. Exxon won a near $1 billion judgment over seized property as one of numerous petroleum company claims against the government, despite the original demand running 5 times that amount. The pullback was widely seen as a pre-election gesture as he also reshuffled the cabinet to tilt toward military and ideological loyalists. For the first time the opposition appears to be unifying around a candidate to be formally tapped in February primaries with Miranda governor Capriles in the lead. Bond prices rallied on the prospect of a credible Chavez alternative, although he still wields the administrative and budget tools to ensure powerful direct investment in his voting future.

Fund Trackers’ Strange Footprint Sightings

2011 December 19 by admin

Going into December dedicated equity fund outflows of $35 billion were double the local currency-oriented bond inflow total which has also waned in recent weeks, according to EPFR. The BRICs including South Africa accounted for half the exit, with ETF selling accounting for one-quarter of India’s loss. In Latin America, Chile and Mexico declines were also due mainly to ETFs, while positive stock allocation has only gone to a handful of countries including Colombia, Poland and the Philippines. On the MSCI Colombia’s and Mexico’s market drops have been limited to single digits, while the sole core gain was Indonesia’s despite currency correction. Frontier funds continue to be shunned with African destinations in particular off an average 25 percent. Kenya has been battered the most as it turned to the IMF for emergency assistance on 20 percent-level inflation and interest rates, while world-beating oil growth story Ghana has sputtered heading into the traditional pre-election high government spending period. In the BRIC category, Brazil and China have each sustained $5.5 billion in redemptions. Holders are skeptical of Chinese central bank claims that lenders and developers can absorb a 20-30 percent fall in housing prices and that local government non-performing credit so far is less than 3 percent. Japanese investment trusts have joined international peers in spurning Brazilian assets despite the removal of capital controls as GDP growth of 3 percent will likely come in at half of above target inflation. Rumors have swirled there that small banks reliant on wholesale lines and domestic bond issuance are in trouble as the Rousseff cabinet continues to shed ministers on corruption charges. Russia had experienced a $1.5 billion exit before parliamentary elections brought ruling party reversal and street protests as yearly capital flight by official estimates could be $80 billion. Public sector wages were raised 6 percent in October, but the largesse did not sway voters who cut the Putin’s United Russia grouping to a simple from a two-thirds majority.

Europe after its solid 2011 start has become a pariah region with even its remaining AAA-rated advanced economy members put on ratings watch. Croatia and Slovenia have been among better frontier performers as elections put opposition candidates campaigning for overdue fiscal and competitive adjustment in office. Zagreb is on track for EU partnership and the new Slovenian leader headed a business with ties throughout the former Yugoslavia. Lithuania, on the other hand, joined the bottom ranks after a bank collapse which resulted as well in closure of its Latvian arm as Baltic solidarity proved double-edged.

Capital Flows’ Capped Wellspring Whirl

2011 October 14 by admin

The IIF’s September Capital Flows survey kept the 2011 total for 30 emerging markets roughly constant at $1.05 trillion while reshuffling the portfolio debt-equity mix in favor of the former, given the push from interest rates on industrial country instruments “cut to the bone.” The 2012 prediction is for the same amount, although with another year of 6 percent-range economic growth the portion will decline relative to GDP to 4 percent. FDI will be almost half the sum at $450 billion, overwhelmingly going to China, whose direct investment outflows at $100 billion also reflect the net creditor status of a large swathe of the tracked universe. In contrast, the MENA and Europe regions have been further downgraded, with the latter hit in particular by stock and bond sputtering in Turkey over its record current account deficit and credit expansion. A secular trend toward greater exposure should not be halted by recent selloffs as sovereign re-ratings will continue to elevate developing relative to developed credits, according to the report. In addition to traditional risk metrics, the emerging world no longer seems as historically prone to crises, while the institutional quality in advanced counterparts cannot be automatically presumed as evidenced by the Eurozone rescue and US budget ceiling debates.

In Asia share allocation will slip from 2010’s $120 billion to $70 billion, but private debt components, equally bank and non-bank, will come to $250 billion. India is alone in running a current account deficit while Indonesia’s FDI has quadrupled since 2009. In Europe Swiss-franc borrowing vulnerability is an obstacle in Hungary, Poland and Romania, and Ukraine remains out of compliance with its IMF program and Russia’s election calendar injects unease even with Putin’s intention to reclaim the presidency. Latin America’s overall “resilience” with net private inflows over $250 billion will be tested by Brazil’s continued capital control use, Mexico’s trade and remittance ties to the US and Argentina’s likely extension of the state intervention model into a second President Fernandez term with worsening external accounts and capital flight already features. Monetary policy in the region could switch toward cuts particularly if commodity prices weaken, which is also a danger for Persian Gulf destinations and South Africa. High oil and metals revenue are needed to sustain infrastructure and social spending, and nonresident bond purchases of $4 billion through the first half serve to offset the perennial balance of payments gap despite their consequences for rand volatility.

In a companion annual update on its stable capital flow and debt negotiation principles the group hails the top information dissemination and investor relations scores of Latin American and other issuers and examines restructuring cases in Greece, Dubai, Iceland and Cote d’Ivoire. In Greece the assessment may be complicated by its own role in offering a reduction menu to European authorities to meet desired private sector involvement. The package calculates the principal and interest haircut at 21 percent in a deeper concession than original French and German bank-backed proposals, and while self-congratulations are in order for following the “good faith” guidelines the episode may be far more involved in terms of potential conflict and Eurozone repercussions.

Fund Flows’ Roped Pool Lane Refuge

2011 June 10 by admin

Through June tracked fund divergence intensified according to EPFR collection as equity outflows at $7.5 billion hit all major regions as debt moved $4.5 billion in the opposite direction with all core countries getting inflows. In the former category Asian dedicated funds represented over half of flight, led by Chinese ETF escape, and Russia reversed a previous positive allocation course with year to date overall capital exit exceeding $30 billion by central bank calculation as inflation hovers stubbornly at 10 heading into the presidential election season. By region only Africa has seen a minor infusion, along with a smattering of frontier and long-established markets in Europe and East Asia. On the bond side Brazil and Mexico have topped the pack with around $1.5 billion each received, with local currency and blended versions fare exceeding traditional dollar and euro-denominated vehicles. Japanese retail investment trusts with assets of $65 billion have become large players in their own right with heavy Brazilian concentration. The fixed-income allocation has been driven by poorer industrial production and retail sales data cramping GDP growth forecasts, exchange and interest rate tightening expectations as commodity price inflation may have peaked this cycle, and peripheral Europe aversion as the Greek default saga lingers and Portuguese 10-year yields score records even as the center-right free market oriented oppositions won a convincing election victory. Spain may soon join Ireland in the ailing more developed contingent with regions declaring their precarious solvency after recent national polls as they breached the 2.5 percent of GDP ceiling agreed with the central government. In Central Europe long considered stability bastions have also lost favor as Poland may have finessed observation of the 55 percent of GDP public debt limit with derivative transactions and the Czech Republic’s ruling coalition continues infighting that compromises promised budget cuts.

For stock funds Korea commitments have waned as the central bank extends rate hikes with household borrowing at 150 percent of income and floating rate mortgages the standard. Africa structures have taken in $35 million after last year’s billion-dollar bonanza but Kenya’s shilling has plummeted to near 90 on double-digit inflation and drought bringing GDP growth under 5 percent. Ghana’s exchange is up over 30 percent but the cedi continues to depreciate as the fiscal deficit overshoot provoked IMF criticism in the latest review of its post-crisis $600 million program. Oil will spur historic economic expansion this year even as fund conduits spring unaccustomed leaks.