Nigel Rendell: Buy Brazil, Sell Eastern Europe

Tuesday, November 10th, 2009

Nigel Rendell, emerging market strategist of RBC Capital Markets, talks to Izabella Kaminska of FT Alphaville about a broad spectrum of emerging-market related issues.

Part 1:
Rendell talks about the differing fortunes of economies from Russia to Argentina. He says Brazil remains a great pick outside Asia.

Click here or on the image below to view the video.

Part 2:
With many analysts bullish on Chinese growth, the big challenge for investors is gaining exposure. Rendell says Korea and Taiwan offer the best proxy plays.

Click here to view Part 2 of the interview.

Part 3:
With interest at record lows in developed economies, investors are increasingly looking for yield in emerging markets. Rendell comments on whether this inflow of money is creating a fresh bubble.

Click here to view Part 3 of the interview.

Source: Izabella Kaminska, Financial Times (here, here and here), November 9, 2009.

Tags: Alphaville, Argentina, Best Proxy, Brazil, Broad Spectrum, Chinese Growth, Eastern Europe, Emerging Market, Emerging Markets, Financial Times, Fortunes, Ft Alphaville, Inflow, Interview Source, Kaminska, Market Strategist, Rbc Capital Markets, Record Lows, Rendell, Russia
Posted in Emerging Markets, Markets | No Comments »

Is an ‘Energy-Linked’ Currency in the Cards?

Wednesday, April 8th, 2009

This article is a guest contribution by Izabella Kaminska, FT.com Alphaville on Monday, April 6th, 2009.

Izabella Kaminska, contributor to FT.com’s Alphaville comments on Chris Cook, former director of London’s International Petroleum Exchange, who has been lobbying for the creation of an ‘energy-linked’ currency.

Former director at London’s International Petroleum Exchange (and frequent contributor to FT Alphaville’s Long Room) Chris Cook has long been campaigning for a new monetary system that would link monetary units to energy.

Now, it seems his thoughts are finally being picked up on a large scale across the financial blogosphere. At the core of his proposal is redefining the monetary system so it is linked to energy output specifically.

As he explained to FT Alphaville:

I’m not proposing pricing in oil. I’m proposing denominating exchanges in energy as a unit of measure. Whether it’s called an energy dollar or a petro or an electro does not matter. Electricity, and any form of fuel eg gasoline, nat gas, heating oil, fuel oil will all have a fixed price denominated in it, but a variable price against everything else.

And from his most recent posting on The Oil Drum (emphasis his):

So I will conclude by saying, not for the first time, that oil is not priced in dollars: dollars are priced in oil , and recommending that the G20 turn their attention to a sustainable International Energy Clearing Union alternative to our current unsustainable global monetary system.

The idea is that producers of energy like Russia and Iran could issue units redeemable either in electricity or what he describes as “energy vector” fuels such as gasolinem natural gas — in exchange for value received. All of these have a fixed value denominated in energy.

The next phase is the creation of an International Energy Clearing Union where these units can trade (with the collective guarantees of energy producer and consumer nations generally). As Cook goes on to explain:

Both energy creditor nations — such as Russia, Iran, the GCC and Norway — and energy debtor nations, such as the US, UK and EU would all pay an amount into a global “energy pool” in support of the guarantee. The resulting balances would be deployed in massive investment in new renewable energy infrastructure and energy efficiency savings.

The US, which is the biggest energy debtor by far, could therefore be funded by the Pool in redeploying much of its increasingly baroque military expenditure not just into the “Green New Deal” proposed in the US, but also globally, in partnership with the immense UK and EU intellectual capital at the cutting edge of research and development.

The above would also have a welcome effect on wasteful energy use. As Cook puts it (our emphasis):

The use of an “energy dollar” or “Petro” energy unit, as it was referred to in Iran, addresses one of the most pressing issues. This is the catastrophic waste of carbon-based energy in those countries blessed or cursed with large oil and gas reserves. Anyone who wishes to see the negative effects of gasoline available at 30 cents per gallon on the environment and on the quality of life, need only travel to Tehran.

The unitisation of gasoline, on the other hand, allows the price of gasoline to be raised to global levels, and for the population to be compensated with Units redeemable for gasoline. While some will continue profligate use of gasoline, most will cut back on gasoline use and exchange their Units for something else of value.

And what with global currency talk, the idea itself might not be as radical as first appears. Firstly it’s appealing to those commodity producers and buyers on the political fringe - like Venezuela, China and Russia. Note Chavez’s call to Arab nations last week for support on the creation of an oil-backed currency to challenge the US dollar.

The Fox news article cited above notes that China has already struck deals — most recently with Argentina — to trade in currencies other than the dollar. This is indicative of the will currently in the world to set up some other system . Chavez is set to arrive in China on Tuesday for a two-day visit following a trip to Iran earlier last week, the outcome of which saw an agreement to create a joint Venezuelan/Iranian bank. Iran is another country that is unhappy with the current dollar dominated system and a country Chris Cook has personally advised on alternative strategies - such as development of the ‘petro’ dollar.

But if you thought it was just dollar-reserve countries that would be interested in such a development, note the feelings of V Anantha-Nageswaran, Bank Julius Baer’s chief investment officer, on the matter. In an FT video interview last week, Anantha-Nageswaran said it was not very realistic to expect that the dollar would remain the centre or the anchor of the international monetary system for long. As he said:

I think there have been quite a few, even in the last 35, 40 years, when such a single currency dominated monetary system has exerted a lot of cost, and extracted a heavy demand on other countries participating in that system.

As for the alternative, he proposed:

Well, I think the alternative is not necessarily to go back to the straitjacket of the gold standard, which did impose a lot of constraints on policy makers. All we need is a system which does not have excessive dependence or reliance on one country sticking to prudent policies all the time, or one country undertaking economic policies mostly suited to their national interest.

I think it is possible for economists to design a system where you don’t necessarily have to have a commodity anchor, but you can have a system which is rule-bound, and applies across the board to all countries, because right now we have a system which is quite capital to what the US government or the federal reserve does with respect to its own domestic economy interests, and other countries are simply forced to follow suit, regardless of whether that suits them or not.

But could it actually be back to the drawing board completely, including prospects for a renewed commodity anchor? Quite possibly:

Frankly, I don’t think I have very well-developed thoughts on the architecture that we’ll finally have. I think we need to sort of, go back to the drawing board and look at whether we have to have an SDR, or some other basket of currencies. Well there’s more than one country which contributes to the global monetary architecture, or do we go back to a commodity anchor, if not gold, then something else?

At the end of the day, the real issue is, the United States in 2001 and in 2007, not to mention 1973, pursued monetary policies that it thought were necessary for its own interest, and that had repercussions for the entire world, and look at Europe as well; Germany did what it had to do in 1989, 1990 when it gave one Deutschemark for the East German currency, and that created inflation, higher interest rates, the rest of Europe couldn’t handle that. So basically, when you have this one country dominance, it always leads to issues like this, so that is where I think there is agreement now, but where there is no agreement is, what is the replacement?

And I’m sure it is not something that we can sort out in a week or a day or a quarter, but certainly we need something like, a WTO [?], which was based on a principle of, one country, one vote. No single country enjoyed extraordinary rights or responsibilities in the WTO, IMF or the World Bank. I think we need a similar architecture for the international monetary system, where the rights and responsibilities are equally shared.

Furthermore, the topic of a new reserve system is likely to stay at the forefront of the economic/financial news agenda in the days to come. The latest comments from George Soros - the main advocate of the IMF Special Drawing Rights bailout package agreed at the G2o - suggest as much.

As Reuters reported on Monday, Soros remains of the opinion that the US dollar is clearly under pressure because the entire US banking system as a whole is “basically insolvent”. Consequently, it makes sense that the dollar should be replaced as a world reserve currency - possibly by a system linked to SDRs.

But would that system be as viable as a commodity-linked one? The argument against reviving the gold standard, for example, centres around the original reasons for why it collapsed in the first place — there was not enough gold in the world to reflect growth. That would not be the case with Cook’s energy system, however.

That’s because at the heart of Cook’s system is the concept of peer-to-peer financing via the unitisation of energy. It is not a new currency derived from the combined values of anything else (as would probably underpin an SDR system). It is a new unit altogether. This differentiates it also from some other commodity currency proposals in the market already like the Terra, which is being pitched by Belgian economist Bernard Lietaer — the man who implemented the convergence mechanisms for the Euro Zone.

The Terra, Lietaer argues, would dodge inflationary effects by being based on a basket of the twelve most important commodities (according to their importance in world wide trade). However, because it is designed to trade as a complimentary currency operating in parallel with national currencies it doesn’t provide the same unitisation of energy that Cook’s idea does. It is also differs by being linked to the market prices of the commodities themselves, which vary in standards across the board. Cook’s idea is linked to the actual productivity of those commodities in energy terms - a much more effective way of standardising commodities that everyone uses - be they oil, natural gas, wind power or heating oil.

Meanwhile, the “peer-to-peer” system aims to empower all trade partners by eliminating credit intermediaries themselves. As Cook highlighted in January in the Asia Times:

In this model, the financial service provider ceases to be a middleman, or credit intermediary, and becomes a pure service provider. The fact is that in the Internet age there is no need for credit intermediaries, whether private banks or central banks.

And in another Asia Times article he explained:

In my view, John Maynard Keynes’s proposal in 1944 of an “International Clearing Union” was the correct approach. The key difference in the alternative networked and decentralized architecture I envisage is that the “value unit” (Keynes’s “Bancor”) would not be an inherently worthless “fiat” currency issued by a global institution. It would instead be a redeemable “energy dollar” issued by producer nations within a networked pool of energy production and a global Master Partnership framework agreement. Moreover, a carbon levy - essentially a mandatory, but valuable, investment - could then fund direct investment in renewable energy production (megawatts), and indeed even in energy savings (”negawatts”).

So, as the debate over a new reserve system rages on, the key question will be which way will the world go? Will it be the creation of a totally new system based on the unitisation of energy — itself encouraging the development of green energy alternatives — or a collectivised system based on a currency/commodity basket still linked to old day market prices.

Perhaps one place to look for clues will be the success rate of the Gulf Cooperation Council’s efforts to forge a common currency. In its latest communique the GCC, composed of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, says it aims to meet in May to discuss the location for a common central bank.

However, the move might yet flounder as the global crisis distracts members’ attention to more pressing domestic affairs. The group has already admitted it will not make its original January 1, 2010 deadline for monetary union.

This article is a guest contribution by Izabella Kaminska, FT.com Alphaville on Monday, April 6th, 2009.

Tags: Alphaville, Blogosphere, Chris Cook, Energy Dollar, Energy Output, Energy Producer, Frequent Contributor, Ft Alphaville, G20, Global Monetary System, Heating Oil, International Energy, International Petroleum Exchange, Izabella, Kaminska, Monetary Units, Nat Gas, New Monetary System, Oil Drum, Oil Fuel, Petro
Posted in Commodities, Credit Markets, Gold, Markets | No Comments »

Corporate Bonds or Equities? Deflation or Inflation?

Monday, March 30th, 2009

The debate rages on, and it is between whether to invest in corporate bonds or equities, or if economic conditions are deflationary or inflationary? FT Alphaville, Fortune.com and Capital Spectator have covered this quite well. Here are all the pieces:

Of Bonds and Stocks and the Weimar Republic
(FT.com/Alphaville, March 30, 2009)
by Tracy Alloway

You’d have to be living under a bailout-sized rock not to be aware of the current debate surrounding equities vs corporate bonds.

HSBC has now thrown its hat in the ring, in a 24-page research note entitled “The triumph of the pessimists”, which looks at the behaviour of corporate bonds and equities over the past 140 years or so. Here’s the summary.

Lots of studies have looked at government bond and equity valuations, few at the relationship between corporate debt and equities. We’ve filled the gap, going back to the middle of the 19th century.

The results don’t look pretty for equities, which are likely to suffer a multi-year downgrading compared with corporate debt… Historically, there have been three multi-decade periods. Relative prices in the first two were very different to those in the third. Before the beginning of the last century, yields on corporate equity were sometimes lower than those on corporate debt and sometimes higher.

Over the following 50 years — from about 1907 until 1951 — they were almost always higher, sometimes a great deal higher. But for the 50 years starting in the early 1950s, dividend yields on equities fell sharply relative to yields on corporate bonds. By 2000, the peak of the cult of the equity, the relative yield of equities compared with government and corporate bonds had reached its lowest level ever.

In fact, the only significant period in which dividend yields weren’t higher than corporate bond yields was in the early 1930s (chart, using railway bond yields as a proxy for corporates, below), when dividend yields collapsed and corporate bond yields surged because of the cascade of Depression-related defaults, according to HSBC. Investors’ enthusiasm for equities was dulled, and, in a parallel with our current financial crisis, their appetite for corporate debt sharpened. Even as the economy improved and profits rose, investors attached an increasingly low valuation to dividend payments, resulting in increased dividend yields.

Fearing another depression, then, investors demanded more of their returns upfront. That’s why dividend yields went up and corporate spreads went down. Although stocks went up and down, the shift continued until 1950, by which time the trailing PE for the S&P had fallen to 6x, its dividend yield had reached 7.5%, yields on Baa bonds had fallen to 3.2% and spreads to less than 80bps. In the early 1930s, Baa yields reached 11% and spreads touched 725bps.

That was the cheapest that equities have ever been against corporate bonds. Over the next 50 years, not all at once and with big, sometimes huge setbacks, valuations of stocks compared with corporate bonds moved from their cheapest ever to their most expensive. Which … is the situation in which we find ourselves now.

Which leads us to today, when, according to HSBC, we’re facing two scenarios for corporate bonds and equities.

Over the past 18 months, the implosion of the global financial system has led to huge risk aversion and acute deflationary concerns, both of which have driven government bond yields lower still. Now, it could be that quantitative easing by central banks will lead to a pick up in inflationary concerns and worries about how governments will repay the huge numbers of bonds that they have issued and will continue to issue. That’s certainly not an argument that one should dismiss out of hand. That wouldn’t augur well for government bonds in the long term.

Alternatively, the situation we’re in now might echo the 1930s, when risk appetite was shot to pieces and, regardless of whether inflation fell through the floor or picked up somewhat, government-bond yields fell and then fell further. For their part, having spiked up hugely, corporate spreads declined for the rest of the decade. But as we saw earlier, if investors lapped up bonds, particularly corporate bonds, they shunned equities; earnings yields and dividend yields rose dramatically. In that environment, investors, in other words, were expressing a strong preference for safety and income over risk and capital gains.

Although we strongly suspect that the present world looks more like the second of these scenarios than the first, we really don’t know for sure. Perhaps it doesn’t much matter, as long as governments don’t unleash another huge inflation. For what is certainly true is that central bankers have now told us explicitly that they will not allow government bond yields to rise for the foreseeable future. Their aim is simple: to make risk-free assets so unattractive that investors wade into riskier markets, thus restoring confidence to the financial system and the economy as a whole. For now, it’s clear, equity markets have taken the hint, but corporate credit markets haven’t. That situation will, we think, be reversed.

This is a sentiment echoed in The Aleph Blog and Crossing Wall Street. The spread between corporate bonds and equities is getting big - corporates were sitting out of the recent rally. They are, as per HSBC’s research title, the pessimists.

However, as HSBC also notes, this is essentially a deflationary vs inflationary debate. In a deflationary environment, as in the Great Depression, corporate bonds, with their stable returns, make sense. In an inflationary environment those fixed returns are eroded. Equities, with their ability to raise prices in tandem with inflation (or as close as they can get) could be more attractive.

A slightly random example here - but the German stock market of the 1920s increased by a staggering amount as inflation shot through the roof. We’re far from hyper-inflation, but throwbacks to that era, like the below 1921 clipping from the New York Times, should give us pause for thought.

Related links:
Sunday links: Stocks vs bonds - Abnormal Returns
Is it back to the Fifties? - FT
Equity lives! - FT Alphaville
The death of equity - FT Alphaville

This entry was posted by Tracy Alloway on Monday, March 30th, 2009 at 16:32.

WHAT ARE MONEY MANAGERS THINKING? (Capital Spectator)

What are professional money managers thinking these days? A new poll by Russell Investments offers an answer. Among the highlights:

• 67% of managers are now bullish on corporate bonds
• 61% are bullish on high-yield bonds

In both cases, the percentages are a bit higher compared with the previous poll from last December. “In this environment of caution and realism, managers are finding opportunity in spreads between high-quality corporate bonds and Treasuries that are at historic levels,” Erik Ristuben, Russell’s chief investment officer, says in the accompanying press release. Expectations for junk bonds are also higher from late last year.

U.S. equities, on the other hand, have fallen in the eyes of managers. Value and small-cap equities suffer the most in terms of the current outlook, according to the Russell survey. Here’s an overview of how the changes in expectations for the various asset classes stack up:

Source: Capital Spectator

High-yield bonds: Appetite for risk

If you’ve got the stomach for it, industry watchers say now is the time to hit the bargain buffet.

By Beth Kowitt, reporter

Last Updated: March 30, 2009: 12:02 PM ET

NEW YORK (Fortune) — Like most investments with higher credit risk, the high-yield bond market took a huge hit in 2008 as investors fled to quality. But with the sector recently seeing its deepest discount ever - and even rallying a bit - some say it’s time to test the waters again.

“The values are just extraordinary,” says Martin Fridson, CEO of Fridson Investment Advisors and a high-yield bond specialist. “I think it’s an opportunity you’re not going to see very often in your lifetime.”

Fridson says the spread between high-yield bonds and treasuries over the last few months has been far beyond anything seen before. The option adjusted spread, which measures the difference, is about 17.6 points, according to Merrill Lynch data. A year ago, the spread was 8.2 points.

Lower valuations mean more upside, Fridson says, but they’re also the reason for investors’ hesitations. Default rates will likely run higher than during past recessions, he notes, partly because the quality of the sector has deteriorated since the last low cycle.

Lawrence Jones, associate director of fund analysis at Morningstar, said some experts he’s spoken with expect default rates, which have run between 2% and 3% the last few years, to reach between 10% and 15%.

“I see the opportunity,” Jones says, “but almost everyone who’s being straight with you will say there’s a lot of risk.”

You may know them as “junk”

High-yield bonds, or “junk” bonds, are defined by the industry as a bond with below a Standard and Poor’s BBB- rating. They have a higher risk of default (failure to make a scheduled interest or principal payment), and are subject to greater price swings than more highly rated bonds. But on the upside they also have a higher rate of interest.

Jones suggests making high-yield bonds a small part of your portfolio through bond funds run by experienced managers and research teams investing in better-quality high-yield securities. A fund provides the advantage of a manager’s expertise and also the diversification that’s needed to limit the risk of default in any single investment. And high-yield bonds can be highly illiquid, i.e., hard to unload if they’re thinly traded, but a fund gives you the security of getting in and out when you want.

Read the entire piece here.

Source: Fortune.com

Tags: 1930s, 1950s, Alphaville, Bailout, Capital Spectator, Cascade, Corporate Bond Yields, Corporate Bonds, Corporate Debt, Corporate Equity, Corporates, Debate Rages, Deflation, Dividend Yields, Economic Conditions, ETF, Ft Alphaville, Gap, Government Bond, Government Bonds, Pessimists, Relative Prices, Valuations, Weimar Republic
Posted in Bonds, Canadian Stocks, Credit Markets, ETFs, Markets, Outlook, US Stocks | No Comments »

Rio Tinto/BHP Billiton at parity

Friday, December 19th, 2008

Yep, the share prices of the two mining giants have crossed. After suffering another sickening fall on Thursday, Rio shares (down 10 per cent) are now trading at £10.40, about 4p lower than BHP’s.

This is seriously embarrassing for Rio. After all, BHP’s abandoned bid was pitched at a ratio of 3.4:1.

Of course, the reason Rio is being dragged lower is debt. And Rio has a lot of it - $40bn to be precise, against a market value of $27bn.

The company says it will be able to meet its debt repayments ($8.9bn is due next September) and does not need a rights issue.

But the market doesn’t believe Rio, and the result is a sinking share price.

Since BHP walked away last week, Rio shares have fallen 58 per cent.

Related links:
No respite for Rio - FT Alphaville

Source

Tags: Alphaville, Bhp Billiton, Bid, Debt Repayments, Ft Alphaville, Giants, Lot, Parity, Reason, Respite, Rio 10, Rio Tinto, Share Price, Share Prices, Shares
Posted in Markets | No Comments »