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from Global Investing:

Certain danger: Extreme investing in Africa

The Arab Spring, for all its democratic and political virtues,  put a big economic dent in the side of participating North African countries, particularly when it came to attracting foreign investment in 2011.

According to a recent UNCTAD report:

Sub-Saharan Africa drew FDI not only to its natural resources, but also to its emerging consumer markets as the growth outlook remained positive. Political uncertainty in North Africa deterred investment in that region.

So far, so logical. Except that simply can't be all there is to it.

Why? Because plenty of African countries marred by political uncertainty have succeeded in attracting inward FDI.

The Democratic Republic of Congo is a good example. According to political risk consultancy Maplecroft, the country ranks as "extreme" in its risk index for governance framework, regulatory and business environment, conflict and security and human rights and society. It scores 0.00 on business integrity and corruption. And yet in 2011 it attacted over a billion dollars in FDI, according to the UNCTAD report.

from Global Investing:

SocGen poll unearths more EM bulls in July

These are not the best of times for emerging markets but some investors don't seem too perturbed. According to Societe Generale,  almost half the clients it surveys in its monthly snap poll of investors have turned bullish on emerging markets' near-term prospects. That is a big shift from June, when only 33 percent were optimistic on the sector. And less than a third of folk are bearish for the near-term outlook over the next couple of weeks, a drop of 20 percentage points over the past month.

These findings are perhaps not so surprising, given most risky assets have rallied off the lows of May.  And a bailout of Spain's banks seems to have averted, at least temporarily, an immediate debt and banking crunch in the euro zone. What is more interesting is that despite a cloudy growth picture in the developing world, especially in the four big BRIC economies,  almost two-thirds of the investors polled declared themselves bullish on emerging markets in the medium-term (the next 3 months) . That rose to almost 70 percent for real money investors. (the poll includes 46 real money accounts and 45 hedge funds from across the world).

See the graphics below (click to enlarge):

Signals are positive on positioning as well with 38.5 percent of investors reckoning they were under-invested in emerging markets, compared to a quarter who felt they were over-invested. Again, real-money investors appeared more keen on emerging markets, with over 40 percent seeing themselves as under-invested. SocGen analysts write:

This is positive as it points to potentially higher risk-taking...On this basis one could argue that there is potentially a positive driver for (global emerging markets) if indeed real money investors re-establish their risk positions in the period ahead.

Interestingly SocGen's head of emerging markets research, Benoit Anne, is out  of sync with his clients on this one. "Give me one single reason to be bullish on emerging markets," he wrote earlier this week.  Macro data, policies, asset valuations  -- all seem to be working against emerging markets these days,  Anne says, though he acknowledges that light investor positioning is a positive.  He adds:

from Global Investing:

Investors hungover after wine binge

During this depression, it would appear that investors are no longer finding solace in turning to the bottle.

Fine wines are being hit hard by the global downturn, with the Liv-ex Fine Wine 100 index down 7.4 percent on the year, according to July’s Cellar Watch Market Report.

The Liv-ex Bordeaux 500 was down by 3.4 percent month-on-month - an especially disappointing showing given that the market is usually energised in June by new Bordeaux releases.

The close correlation of prices in wine and gold since 2004  had suggested that wine was proving very resilient to economic recession; concerns about its "luxury" status were perhaps outweighed by its alcoholic content.

However, since early 2011, the prices have been steadily declining, reflecting a sharp decline in the market for top end Bordeauxs in particular.

Only a fifth of the wines in the Bordeaux 500 are seeing year to-date increases, with buyers turning away from First Growths, which are traditionally seen as blue-chip investment wines, towards smaller producers. Latour is the best performing First Growth wine, posting a decrease of only 4% on the year.

from Global Investing:

Lipper: Getting serious about giving

"Wouldn't you rather your donations achieve a lot rather than a little? Then you'll need to get serious and proactive. If you do it wrong, you can easily waste your entire donation."

Caroline Fiennes is not one to pull her punches when talking about charitable giving, but the more I talk to her, or read her new book - 'It Ain't What You Give It's The Way That You Give It' - the more it becomes apparent that her philosophy is not all that different from that of a professional fund manager.

No self-respecting fund manager would invest in a company just because they were asked to. A fund manager will choose to invest (or disinvest) because they believe it will help their fund perform well and that the investment fits within their investment objectives. Fiennes, who advises companies and individuals on their giving, advocates a similar approach for any donor: be clear about your objective and find organisations that have done a good job of achieving this, not just the ones that market themselves well.

This is just the start. As James Caan, entrepreneur and philanthropist, puts it, "Finding, investing and supporting good businesses is hard, but identifying, donating and supporting great charities poses the same challenges." This is all the more apt as Caan has also been the chairman of a fund manager, Insynergy Investment Management.

This is not to say that giving and fund management are natural bedfellows. A collaborative exercise between several fund groups created the Invest & Give fund, but sadly it did not generate significant investment and was eventually closed. Lipper data reveals that socially responsible investment (SRI) equity mutual funds in Europe have healthy assets of just over 50 billion euros, but this still accounts for less than 3 percent of the equity fund universe (1.8 trillion euros).

Yet investing and giving can learn from each other, despite their differences. Those fund managers who avoid hugging an index are clearly pro-active in their selection of investments. By contrast, charitable donations are typically made reactively.

At a simple level, most people are more likely to give to those charities that shake a tin on the high street rather than tracking down a cause they really care about. While relevant for anyone, for those giving more sizeable sums it is all the more important to make a pro-active decision.

from Global Investing:

Emerging stocks: when will there be gain after pain?

Emerging equities' amazing  first quarter rally now seems a distant memory. In fact MSCI's main emerging markets index recently spent 11 straight weeks in the red, the longest lossmaking stretch in the history of the index.  The reasons are clear -- the euro zone is in danger of breakup, growth is dire in the West and stuttering in the East. Weaker oil and metals prices are hitting commodity exporting countries.

But there may be grounds for optimism. According to this graphic from HSBC analyst John Lomax, sharp falls in emerging equity valuations have always in the past been followed by a robust market bounce.

What might swing things? First, the valuation. The  2008 crisis took emerging  equity prices to an average of 8 times forward earnings for the MSCI index, down from almost 14 times before the Lehman crisis. The subsequent rebound from April 2009 saw the MSCI emerging index jump 90 percent. Emerging equities are not quite so cheap today, trading at around 9 times forward 12-month earnings but that is still well below developed peers and their own long-term average.

Lomax says:

Macro headwinds are strong but emerging markets are looking very cheap. On a price/earnings basis they are 15 percent below historical lows which guards against further falls. In the past, whenever you bought emerging markets at such levels, you made money.

Crucially however, that bounce back in 2009 came after a March G20 leaders' meeting announced a massive stimulus package estimated at around $1 trillion to prevent a global economic and banking collapse. Investors are betting that global central banks will react to the current financial market distress via more money-printing or cheap loans to banks. According to Bank of America/Merrill Lynch's monthly fund manager survey, investors are firm in their belief  that global central banks, led by the euro zone and the Fed, will soon embark on stimulus.

from Global Investing:

The ETF ‘Death List’

Our colleagues at Lipper have put together some eye-catching data on developments in the ETF industry. You can read the slides here.

Most intriguing is the idea of a slumbering cohort of 241 exchange-traded funds forming what Lipper calls a 'Death List'; ETFs which are more than three years old, but which have failed to drive assets up to the 100 million euro-mark.

Detlef Glow, Lipper's head of Research for EMEA, notes these funds might well be thought to be under review by their promoters, but he hasn't spotted any particular trend towards consolidation. Why?

Well, Glow reckons the question of whether an ETF is proving profitable doesn't quite come down to a simple volume/management fee play; creation fees and redemption fees play their part too. And promoters like a full stable. Even if an ETF isn't pulling in punters by the cart-load, they see value in presenting clients with an impressively exhaustive product suite.

All that means Glow isn't convinced this group is as ripe for consolidation as it might seem. Maybe 'Death List' starts to look a bit melodramatic, but successfully marketing ETF data takes some creative gumption. And it's in the headline to this post, so who am I to judge?

Perhaps more interesting is evidence of a major switch round in asset gathering by ETF product launches in the first part of this year. Take a look at the following pie charts. The first shows assets gathered by new product launches in 2011; the second AuM reaching funds launched in Q1 2012.

10 years of fund industry evolution: Lipper

“A game of two halves” is a footballing cliché in the UK, but was particularly apt for the European funds industry in 2011. The stock market falls that began in July not only ended the healthy sales activity that had started the year, but triggered a wave of redemptions that rolled through the industry. While these outflows ebbed slightly in the final quarter of the year, there were few who did not feel the cold chill of investors withdrawing from mutual funds by the year-end.

Net sales of long-term funds (i.e. excluding money market funds) in 2010 (305.8 billion euros) exceeded not just those of 2009 (257.7 billion), but also the level achieved in pre-crisis 2006 (265.9 billion). Expectations were therefore high when the first half of 2011 saw inflows of 96.1 billion euros, but this was followed by outflows of 155.9 billion, so that the year as a whole ended in the red (-59.8 billion) for only the second time in a decade (the 2008 total was -391.4 billion euros).

Giving investors the motivation and confidence to move money out of deposits and into funds amid the ongoing political and economic maelstrom remains a crucial challenge for asset managers.

But a longer term view is also useful in fully understanding the current status of the industry and the dynamics that have been at work to shape its current structure.

PRODUCT DEVELOPMENT

2011 saw a slight contraction in the number of funds for only the second time in the past decade. The last time this happened (in 2009) the net reduction was 801, while the latest figure was a mere 43. In recent years there have been about the same number of fund launches in both halves of the year, but in the latest year there was an unsurprising tail-off (1,687 over the first half; 1,291 in the second) partly the result of some planned launches being shelved. Just as 2009 did not herald a new dawn of product rationalisation across the industry (there was a net increase of 871 funds in 2010), so it seems very unlikely that 2011 will either. Instead market conditions will largely dictate where product development priorities lie.

With new fund launches such a significant part of asset management companies’ activity, it is worth providing further insights here. Looking back over the past ten years it is possible to see the proportion of growth in the industry that relates to these new launches. Over the first five years (2002-2006), the 79 percent growth in industry assets was attributable to both new launches (60 percent) and existing funds (40 percent).

How much do UK investors care about costs?

One way of measuring this is to look at the assets invested in index tracking funds (where minimising costs is a core part of the product) and compare this to funds of funds (where the importance of professional fund manager selection entails an additional cost).

With 30.5 billion pounds invested in the former and 56.6 billion pounds in the latter as of November 30 2011, it would seem that retail investors in the UK are almost twice as likely to pay more for active management and fund selection than to minimise costs and seek to mimic the returns of an index. A similar picture is revealed for sales activity in 2011.

Having been researching this subject since 1999, I continue to believe that transparency and awareness of the ‘drag’ of charges on returns are crucial for long-term investors. Of course cost awareness cannot guarantee investors’ happiness and neither will greater transparency inevitably lead to greater competition. But both are powerful selling points for the mutual funds industry.

Other comments on the current debate:

· Fiduciary responsibility. This concept is acknowledged in the UK – to act in the best interests of investors – but it has not been extended to the oversight of fees. This surely needs further consideration.

from Global Investing:

Emerging markets facing current account pain

Emerging markets may yet pay dearly for the sins of their richer cousins. While recent financial crises have been rooted in the United States and euro zone, analysts at Credit Agricole are questioning whether a full-fledged emerging markets crisis could be on the horizon, the first since the series of crashes from Argentina to Turkey over a decade ago. The concern stems from the worsening balance of payments picture across the developing world and the need to plug big  funding shortfalls.

The above chart from Credit Agricole shows that as recently as 2006, the 34 big emerging economies ran a cumulative current account surplus of 5.2 percent of GDP. By end-2011 that had dwindled to 1.7 percent of GDP. More worrying yet is the position of "deficit" economies. The current account gap here has widened to 4 percent of GDP, more than double 2006 levels and the biggest since the 1980s. The difficulties are unlikely to disappear this year, Credit Agricole says,  predicting India, Turkey, Morocco, Tunisia, Vietnam, Poland and Romania to run current account deficits of over 4 percent this year.

Some fiscally profligate countries such as India may have mainly themselves to blame for their plight. But in general, emerging nations after the Lehman crisis were forced to embark on massive spending to buck up domestic consumption and offset the collapse of Western export markets. For this reason, many were unable to raise interest rates or did so too late. As the woes of the Turkish lira and Indian rupee showed last year, the yawning funding gap leaves many countries horribly exposed to the vagaries of global risk appetite.

There are some supportive factors however. The Fed's signal this week that  U.S. interest rates are unlikely to rise before 2014 shows  that central banks in Europe and the United States will continue to gush money for now. So there should be enough cash available to plug the gaps in emerging nations' balance sheets. Second, as growth eases, so will the deficits.  For these reasons, Credit Agricole says the market will be forgiving of large current account deficits this year. But it warned:

What will happen once (developed market) rates are raised is another story, and emerging markets would better have fixed their main imbalances when the global monetary normalisation begins.

from Global Investing:

EM growth is passport out of West’s mess but has a price, says “Mr BRIC”

Anyone worried about Greece and the potential impact of the euro debt crisis on the world economy should have a chat with Jim O'Neill. O'Neill, the head of Goldman Sachs Asset Management ten years ago coined the BRIC acronym to describe the four biggest emerging economies and perhaps understandably, he is not too perturbed by the outcome of the Greek crisis. Speaking at a recent conference, the man who is often called Mr BRIC, pointed out that China's economy is growing by $1 trillion a year  and that means it is adding the equivalent of a Greece every 4 months. And what if the market turns its guns on Italy, a far larger economy than Greece?  Italy's economy was surpassed in size last year by Brazil, another of the BRICs, O'Neill counters, adding:

"How Italy plays out will be important but people should not exaggerate its global importance.  In the next 12 months the four BRICs will create the equivalent of another Italy."

Emerging economies are cooling now after years of turbo-charged growth. But according to O'Neill, even then they are growing enough to allow the global economy to expand at 4-4.5 percent,  a faster clip than much of the past 30 years. Trade data for last year will soon show that Germany for the first time exported more goods to the four BRICs than to neighbouring France, he said.

"Post-crisis, these countries will be our passport out of this mess."

But there has to be a payoff for this kind of increased financial clout, he warns. Developing countries are increasingly disgruntled about the the richer world's strangehold on global policies via the International Monetary Fund and the World Bank and most have responded coolly to the call for additional funds for the IMF which is fighting to stem the euro zone malaise. An attempt last year to install a representative of the developing world at the helm of the IMF for the first time ever fell apart, with Europe retaining the position. But emerging countries could make a bid for the World Bank chief's position this year, a position traditionally held by a U.S. citizen. O'Neill said the West had to bow to the new reality:

"You can't have it both ways...This game of 'You have the IMF and I have the World Bank' has to stop or these institutions are going to lose their relevance."

He is also dismissive of fears China is headed for a so-called hard landing, a sharp slowdown of growth, potentially leading to unemployment, a property crash and social unrest in the world's No. 2 economy.  "A lot of people (in the West) want China to have a hard landing, " he said. "And that's because it isnt us."