Thanks to Brent Donnelly from Nomura for this chart showing USDMXN vs 10-year US Treasuries since “tapering” became a new market watchword:
So what? Here’s so what: For anyone who ever thought Videgaray, Carstens or whoever else had any sway, when push comes to shove, dollar-peso moves almost in lockstep with Fed expectations. Put another way, whenever Bernanke & Co. decide easy money is over and raise interest rates, expect the peso to go back above 13.0+ and stay there (possibly even 14). And if Carstens or whoever replaces him is smart, they’ll keep their hands off. Draw your own conclusions about what that means for Mexican inflation, TIIE, etc.
The most recent Milken Global Conference in Los Angeles featured a panel entitled, “Two, Three, Many Middle Easts: A Region’s Economic Prospects”, whose commentary is really only for the hard core MENA geeks, but I thought these charts were worth drawing attention to:
This one was the leader, showing average real GDP per capita from 1980 to 2000:
Here we have slides showing variation in GDP per capita across the Middle East and North Africa since 2001. Notice the y-axis scale difference between the Gulf states in the rightmost chart versus North Africa and “core” Middle East:
An approximate comparison of just how miniscule FDI flows to the region relative to the world:
Of the FDI that does go to the region, we shouldn’t be surprised to find more of it going to the oil producers than to the non-oil producers:
And yet expected GDP growth for the coming few years is expected to be mostly uniform:
Finally, intra-regional FDI against total FDI to the region:
The link to the full hour panel discussion is here and embedded below. If MENA development is your gig, I guarantee there’s something in there for everyone, from diplomats to venture capitalists and anyone in between. For my time, by far the best bang for the buck commentary comes from Chris Schroeder, who starts speaking at approximately minute 36. This man talks way too fast for me to transcribe or bother quoting any of it, but suffice it to say he depicts in words far more illustrious than any of these charts the economic potential the Arab World possesses.
London-based Clear Path Analysis has an excellent report detailing investment considerations for Emerging Markets debt and FX investing. So good, actually, that it’s forcing me to second-guess my previously held view that Emerging Markets debt is in a bubble approaching crisis proportions. It’s a long-ish report (32 pages) and it’s all important, so let’s get straight to some of the notable commentary they’ve put together. I think these quotes really speak for themselves.
Gregoire Haenni, Chief Investment Officer, CERN Pension Fund, on why Asia has and will continue leading EMs:
One of the main reasons why investors are beginning to allocate into EM is because of the Asian sovereign credit re-rating trend. Asian sovereign credit fundamentals have generally been on the up for the last six years which is in contrast to other developed countries. The fiscal discipline and underlying economy growth has capped government debt to GDP without exceptions and trade surpluses over the past decade have resulted in a build up of foreign exchange reserves. Continue reading →
S&P Capital IQ slipped this press release out last week, which I’m glad I followed up on since it led me to the following correlation chart:
Equally important, this comment which came alongside it:
From an asset allocation perspective, one of the biggest positive differentiators of frontier market equities is their relatively low correlation with both developed and emerging market equities as well as commodities (see table 2). The asset class’ ability to “zig” when others “zag” is a function of its aforementioned limited integration into the global economy and its more domestically driven fundamentals, in our view.
Thanks to Ernst & Young, I’ve got my retirement destination all picked out: Turkey.
Because, you see, in 2040, when I’m 67 years old, forget the BRICs or Mexico or Dubai or South-South anything; Turkey’s gonna be an export boomtown. Or at least that’s one of the forecasts E&Y is touting in its new Rapid Growth Markets forecast. And if, come 2040, I’m not rolling G-style through the souks of Istanbul, I’m definitely suing the crap out of the 2040 incarnation of Ernst & Young, which by then might be better known as ErnstPWCDeloitte-Slim/Gates LLC dot unit D sector.
In all fairness E&Y does a dependable job of summarizing the main economic characteristics of developing markets for those who don’t plug into this stuff every day.
And they also have a nifty online interactive tool you can play with here.
For the rest of us…the thing is I really just have a hard time taking seriously any forecast that goes out to 2040. But let’s try anyway. According to the charts, those of us lucky enough to still be alive in 2040, assuming there’s still a human race by then, should probably be doing something with exports. But definitely not anything between the Eurozone and the US:
The New York Fed has just published what is absolutely mandatory reading for anyone with a stake in the foreign exchange market. It’s a 10-page pdf entitled, “Do Industrialized Countries Hold the Right Foreign Exchange Reserves?” and is one of those rare documents whose entire text is quotable, making excerpting rather difficult, but I’ll try to keep it short. The abstract provides a pretty good summary:
That central banks should hold foreign currency reserves is a key tenet of the post–Bretton Woods international financial order. But recent growth in the reserve balances of industrialized countries raises questions about what level and composition of reserves are “right” for these countries. A look at the rationale for reserves and the reserve practices of select countries suggests that large balances may not be needed to maintain an effective exchange rate policy over the medium and long term. Moreover, countries may incur an opportunity cost by holding funds in currency and asset portfolios that, while highly liquid, produce relatively low rates of return.
And this, from the opening paragraph, is also worth drawing attention to:
To date, the foreign exchange reserves of major industrialized economies have received relatively little attention in public policy circles, with few questions posed regarding their optimal size, composition, and use. Instead, discussion of foreign exchange reserves tends to center on the large holdings of emerging market countries—including China, whose reserves reached about $3 trillion in mid-2012. Foreign currency reserves are also overshadowed in public discussion by the much larger external imbalances that countries amass in the form of trade deficits and surpluses.
The key element here is that this paper only looks at the US, the UK, Switzerland, Japan, Canada, and the euro area, and rightly so as these are the big fish of the global FX market. The brief mention of emerging market countries’ holdings highlights what’s implied in the debate but rarely stated explicitly, so allow me to do so now:
Sometimes news editors exercise such brain-dead judgment that it’s a wonder journalism as a practice even survives.
That sentence was one of a few I conjured up as a possible lead-off thought. Well, technically, it was the only sentence, since the rest are thoughts posed as questions. Here they are:
Is the BRICS Durban conference officially the acronym’s 14th minute of fame?
When will the country grouping of France, Uganda, Chad, Kenya, Oman, Fiji and Finland finally supplant the BRICS as the political economy cadre du jour? What about Bulgaria, Uganda, Lithuania, Latvia, Spain, Haiti, Italy and Thailand?
Does anyone honestly still believe in the BRICS as an investment theme?
Am I the only one seeing that Brazil, Russia, India, China and South Africa may actually have less in common than a brain, an athlete, a basket case, a princess and a criminal?
What drives this apparently human need to shrink everything down into bite-sized archetypal infonuggets?
Bernanke gave a speech at the London School of Economics yesterday which is grabbing a lot of attention. Those who have heard or read some of his other non-Fed public lectures over the past few years will recognize that he spent about half of it reviewing some of his favorite historical lessons, mostly sourced from his pre-Fed academic work. But there were some new statements to add to this mix. My interpretation of some of the key themes:
The current financial crisis is in fact a classic panic: a systemwide run of “hot money” away from assets whose values suddenly became uncertain.
That said, there were some different bells and whistles this time, notably the introduction of new financial instruments, more varied actors beyond just banks and (in my opinion) most vitally, a scale and complexity altogether new.
Currency war, which Bernanke chooses to refer to as, “competitive depreciation of exchange rates”, is similarly not new.
The accommodative monetary policies central banks around the world have been implementing (read: zero interest rate policy) to support growth do not constitute competitive devaluations, currency wars or whatever term you prefer. The primary reason for this is that domestic demand counts for a lot more than exchange rate meddling and in any event when competitive economies both devalue their currencies, whatever effects result from these devaluations effectively cancel each other out.
I was interviewed for the weekly Nomad Capitalist radio show over the weekend, hosted by Andrew Henderson. On the agenda: the Africa-China relationship, putting the hot-or-not test to Frontier Markets and the nuances of investing in Mexico. Here’s the link and here’s the mp3:
Andrew Henderson: I want to start with a piece that you touched on recently, commodities, and emerging markets’ domination of reserves of commodities, explain that a little bit and let’s get into what exactly that can tell us.
Ulysses de la Torre: Thanks for having me. If it’s the graph I think you’re talking about, it’s not a graph, it’s actually a map, which I pulled from Glencore, which, given Glencore’s footprint in this universe, shouldn’t be surprising that they should come up with something like this. And what it basically shows is a map of the world and how all of the key commodities are dominated in one form or another by underdeveloped markets. When I look at it, the first thing I see is that one of the big obstacles here is nothing more than logistics and infrastructure. And this is something that’s frequently lost on foreign investors trying to research this from afar because these are elements of an economy that you cannot fully understand without experiencing it. It’s one thing to be stuck in a traffic jam that takes you two hours to make a trip that normally takes one hour, but it’s entirely another thing for a truckload of raw materials to take three days to drive a couple hundred miles because of anything from bad roads, military checkpoints, bandits, local territorial disputes, on top of your basic traffic problems. This adds significantly to transport costs and who ultimately foots the bill for this added cost is often a point of dispute that can manifest in a lot of ways that North America and Europe haven’t really had to think about in decades, since before most of us were even alive.
AH: You talk a lot about Africa and I want to get into some of the specifics that are going on there. There’s a big media play that China is recolonizing Africa and so many of the resources plays, even the financial sector plays, let’s talk about Africa, because that’s one area to hone in on for these resources, it’s very resource rich, it’s fast growing, but it’s more than just China, let’s talk about who the players are in Africa and what’s going on there, give us the introductory sketch to Africa.
Why does it not surprise me that a map showing commodities reserves of emerging and frontier markets would have come from a Glencore report?
Looking at it in these terms kind of raises an obvious question: how is it that these countries aren’t in more dominant positions of setting the global agenda, policymaking, or development? Chalking it up to corruption is a bit too easy, and I’m honestly coming around to the opinion that nobody is totally free from corruption. It’s partly corruption, sure, but it’s also just simple logistics.
“Only the most bullish should even think about putting up to 5% of their equity portfolio in frontier markets. And even that might be too much.” — Ben Levisohn
The March issue of Bloomberg Markets magazine apparently attempts to rank the “most promising” Emerging and Frontier Markets for investors according to relative economic performance across a variety of areas. And because we simply cannot resist rankings and lists, I’ve been spending some time digging through some of this which is currently available online (the methodology is described here).
So this is the EM table (go here if you prefer a slideshow format…I personally do not):
Sometimes when I read mainstream financial media coverage of how frontier and emerging markets are booming-heaving-climbing-winning-advancing-accelerating-faster-bigger-better-more, I get this weird sensation in my gut. It’s like I’m listening to some combination of carnival barker and auctioneer and used car salesman all rolled into one.
Actually, I know what it reminds me of. This is exactly what it reminds me of:
Take a look at this opening from this Bloomberg article last week and see if you don’t feel it too. It starts with the headline, “Best Stock Pickers Trawl Frontier Markets as U.S. Funds Lose” and continues as such. Try reading this aloud in as few breaths as possible:
Eurasia Group released its “Top Risks for 2013” report last week. It’s interesting, and it’s worth reading if political risk is your sort of thing. But pretty early on this part stood out to me (boldface emphasis is mine):
“It’s worth breaking down emerging markets into three broad categories:
A – becoming developed. These are governments with the tools to respond effectively to domestic and international challenges and continue to put policies in place that make investment more attractive over time, reducing the chances of sudden crises. Many emerging markets in Latin America are in this basket. In part, that’s a structural advantage: the lack of geopolitical turmoil in the region and the ability of many Latin American governments to “pivot” in a more fragmented globalization environment. But it’s also a result of the work of three leaders who enter 2013 with significant political capital: post-Lula, Brazil’s Dilma Rousseff; post-Uribe, Colombia’s Juan Manuel Santos; and, the most exciting story, post-Calderon, Mexico’s Enrique Peña Nieto–one of the only leaders in the emerging market space willing and able to advance structural economic reforms.”
“International money is flying into emerging market sovereign bond markets with frontier credits, such as Zambia, Mongolia and Bolivia, now boasting low yields. The jury is out on whether there is a bubble brewing in developing bond markets in hard currency.”
Um…personally, the jury is in if you ask me. It’s been in for quite a while and I don’t think anyone doubts that there is a bubble. The only question is when it’s going to pop. I mean, seriously folks. Disregard whatever spin you’re hearing from compromised money managers. The facts speak for themselves: Continue reading →
The answer to that question may be yes to both. It’s too easy to turn this topic into an indictment of the credit ratings cartel, but the following map from Reuters stands out as an example of a few undeniable realities in the fixed income universe: