Global Investing

How much juice is left in the Indian equity story? Mumbai’s share index has raced to successive record highs and has gained 24 percent so far this year in dollar terms as investors have bought into Prime Minister Narendra Modi’s reform promises.

Foreign investors have led the charge through this year, pouring billions of dollars into the market. Now locals are also joining the party – Indian retail investors who steered clear of the bourse for three years are trickling back in – they have been net investors for 3 months running and last month they purchased Rs 108 billion worth of shares, Citi analysts note. 

Foreigners meanwhile have been moving down the market cap scale, with their ownership of the top 100-500 ranked companies rising from 13% to 15% over the quarter. That’s behind the broader BSE500 index’s outperformance compared to the Nifty index, Citi said.

Citi earlier this month predicted another 3 percent gains for Indian stocks by year-end. Equity derivatives indicate that is feasible – stock exchange data shows foreign investors are loading up on call contracts on the Nifty index at the 8,000 point and 8,100 point levels -a call option gives its holder the right to buy the underlying cash shares.   The index is currently trading at 7,800 points.

Now people are starting to wonder how much further this has to run.

One problem with the Indian market is the valuation. Always expensive by emerging market standards, Indian shares are trading at more than 16 times forward earnings on average, a bit above its long-term average and the second priciest market in Asia. Growth is chugging along at below 6 percent and high inflation means interest rates may rise further. Investors’ positioning moreover is pretty heavy -India is the second biggest emerging market overweight among funds after China. HSBC analysts advise keeping India at marketweight in portfolios, arguing that market upside would be limited from here.

By Andrew Winterbottom

Russian stocks are up today, for the fifth day in a row and at the highest level in two weeks. What’s going on? As we wrote  here earlier in the week, foreign investors have been fleeing this market.  However it could be that some of them are starting to put aside concerns about the potential for further sanctions on Moscow and are scouring Russia’s stock markets for contrarian buying opportunities.

Russian stocks, chronically undervalued, are trading now at a discount of more than 60 percent to broader emerging markets, and to China which by all accounts is the standout beneficiary of the Russian woes. Just how cheap Russian shares are can be gauged from the fact they trade at a discount event to turbulent Pakistan. Here is a link that compares Russian equity valuations with other emerging and developed markets:  http://link.reuters.com/guv77v

While tensions between Russia and the West look to be only increasing, the risks of investing in Russia at present are obvious. But with greater risk comes greater potential reward, says Jonathan Bell, head of emerging market equities at Nomura Asset Management:

Frontier investors have been excited by the opening up of Myanmar’s market since its quasi-civilian government came to power in 2011, after nearly half a century of military rule. But investors also complain that there is very little to invest in. This one is a deep frontier – there is no real stock market, and investors have tended not to go directly into local companies.

Myanmar is seen as ripe for business expansion, given only an estimated 30 percent of the population have access to electricity, for example. And the IMF predicts growth of 8.5 percent in the country this year, one of the fastest growth rates in the world, due partly to rising gas production.

London-listed All Asia Asset Capital recently increased its holding in a Myanmar and Thai-based power generation firm and is also invested in a Thai hospitality and gaming company which has a resort across the border in Myanmar.

We’ve written (most recently here) about all the buying interest that emerging markets have been getting from once-conservative investors such as pension funds and central banks. Last year’s taper tantrum, caused by Fed hints about ending bond buying, did not apparently deter these investors . In fact, as mom-and-pop holders of mutual funds rushed for the exits,  there is some evidence pension and sovereign  wealth  funds actually upped emerging allocations, say fund managers. And requests-for-proposals (RFPs) from these deep-pocketed investors are still flooding in,  says Peter Marber, head of emerging market investments at Loomis Sayles.

The reasoning is yield, of course, but also recognition that there is a whole new investable universe out there, Marber says:

There has been so much yield compression that to get the returns investors are accustomed to, they have to either go down in credit quality or look overseas. Investors have been globalizing their equity portfolios for 25 years but the bond portfolios still have a home bias. We are starting to see more and more institutional investors gain exposure to emerging markets, and a large number of recent RFPs highlight more sophisticated mandates than a decade ago.

Emerging markets have been attracting healthy investment flows into their stock and bond markets for much of this year and now data compiled by consultancy CrossBorder Capital shows the sector may be on the cusp of decisively turning the corner.

CrossBorder and its managing director Michael Howell say their Global Liquidity Index (GLI) — a measure of money flows through world markets — showed the sharpest improvement in almost three years in June across emerging markets. That was down to substantially looser policy by central banks in India, China and others that Howell says has moved these economies “into a rebound phase”.

This is important because the GLI, which has been around since the 1980s, has been a fairly accurate leading indicator, leading asset prices by 6-9 months and future economic activity by 12-15 months, Howell says:

A colleague of mine, Marius Zaharia (@MZaharia) interviewed Moritz Kraemer, Standard and Poor’s head of sovereign ratings for Europe, Middle East and Africa. (you can read the interview here) Kraemer offered this piece of advice to the African governments who are busily tapping bond markets these days:

    What I want to tell all those governments in africa is that you are not a successful market participant when you’ve issued your first eurobond. You are a successful participant when you’ve paid it back for the first time.   

A sound piece of advice. But where does that leave Ecuador which has a frequent history of default spanning three centuries? One might argue in fact Ecuador’s market strategy has been highly successful — not only has it avoided repaying creditors, it also seems adept at persuading them to part with more cash at regular intervals.

South Africa is due ratings reviews this Friday. Chances are that the Standard & Poor’s agency will cut its BBB rating by one, or possibly even two notches.  Another agency Fitch has a stable outlook on the rating but could still choose to downgrade the rating rather than the outlook. What will be the damage?

There is undoubtedly a link between ratings and bond prices.  So a one-notch ratings downgrade tends to lead to roughly a 20 percent increase in bond yield spreads and credit default swaps (instruments that are used to hedge against default), according to calculations by JPMorgan. But in South Africa the lower credit rating may already be already reflected in asset prices — Panama, Brazil, Colombia, Philippines, Uruguay, Indonesia, and Romania carry lower sovereign credit ratings but boast lower CDS and dollar bond yield premia over Treasuries.  Russia and Turkey have lower average ratings than South Africa but their debt and CDS spreads  are roughly on the same level.

So a ratings cut is unlikely to trigger huge outflows from South African debt markets, says JPMorgan, which runs the most widely used emerging bond indices. In Brazil for instance, a well-anticipated  downgrade back in March did not lead to significant cash outflows from its markets, JPM points out:

Last week I went to a very unique session on North Korea which featured a rare appearance of a North Korean diplomat, at London-based policy institute Chatham House.

A wide range of topics — from North-South relations, human rights, a potential nuclear test to a new generation of young diplomats — were discussed, but  under the so-called Chatham House rules (meaning I cannot reveal who said what).

Participants discussed how Pyongyang’s relationship with South Korea and the United States has been deteriorating as both sides exchange some pretty acrid verbal attacks. For instance earlier this month North Korea’s official KCNA called  South Korean President Park Geun-hye a “political prostitute” while it described U.S. President Barack Obama as a “wicked black monkey”.  South Korean Ministry of Defence spokesman Kim Min-seok for his part, had retorted that North Korea wasn’t a real country and that it existed solely to prop up a single person.

Dubbed the Toxic Trio earlier this year,  the high-yield bond markets of Argentina, Ukraine and Venezuela are starting to look a lot more appealing.

Argentina and Venezuela were the biggest beneficiaries of the recent rally in emerging market debt, according to data from JP Morgan, which says it has added an overweight Argentina position to its existing overweight in Venezuela, and has Ukraine at market-weight:

High spread and NEXGEM (frontier) countries have led the spread tightening since early February, making positions in these segments difficult to ignore

After almost a year of selling emerging markets, investors seem to be returning in force. The latest to turn positive on the asset class is asset and wealth manager Pictet Group (AUM: 265 billion pounds) which said on Tuesday its asset management division (clarifies division of Pictet) was starting to build positions on emerging equities and local currency debt. It has an overweight position on the latter for the first time since it went underweight last July.

Local emerging debt has been out of favour with investors because of how volatile currencies have been since last May, For an investor who is funding an emerging market investments from dollars or euros, a fast-falling rand can wipe out any gains he makes on a South African bond. But the rand and its peers such as the Turkish lira, Indian rupee, Indonesian rupiah and Brazilan real — at the forefront of last year’s selloff –  have stabilised from the lows hit in recent months.  According to Pictet Asset Management:

Valuations of emerging market currencies have fallen to a point where they are now starkly at odds with such economies’ fundamentals. Emerging currencies are, on average, trading at almost two standard deviations below their equilibrium level (which takes into account a country’s net foreign asset holdings, inflation rate and its relative productivity).