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Corporate Bonds’ Blunted Body Slam

2020 April 16 by

Posted in: General Emerging Markets   

Corporate bond promoters continued to slough off growth, earnings credit downgrade, and tight valuation worries with spreads well under 300 basis points over Treasuries into the first quarter before the covid-19 scare, citing Sharpe ratio return over a decade and Asian company resilience after the last SARS epidemic outbreak to support the asset class. JP Morgan’s annual conference participants favored Latin America with China’s economy retreating, despite a likely Pemex fallen angel rerating and Mexico and contentious sovereign restructuring over Argentina’s $100 billion pile owed more to the IMF than commercial holders. A core industry argument is hiring of dedicated analysts to perform bottom up evaluations, with reduced leverage in financial ratios and risks of massive currency depreciation remote. CEMBI risk adjusted returns were superior in particular the past five years, with liquidity also better than US high yield, according to historic calculations. Lower volatility has come with pension fund allocation, and cross over investors from pure advanced country instruments are now committed. Across major Chinese, Russian, Brazilian and Turkish issuers balance sheet and management fundamentals improved, although profit outlooks may suffer with the coronavirus spread. Ratings trends remain slightly negative, with Indian companies recently following post-sovereign rethinking on growth and competiveness reservations. Argentine names already followed this track, while Ukraine ones could benefit from opposite sovereign upgrade. China real estate was an iffy proposition before the disease pressure, and will fall further into the speculative category unlike steady rating patterns otherwise expected. Primary supply in January and February was strong for refinancing purposes chiefly with surprise pickup in Chile at 20% of the region for anti-unrest increased social spending ahead of a proposed constitutional redraft. Asia tapered as the COVID-19 epicenter, and Russian appetite was solid despite the threat of US and Europe election interference sanctions, while ESG green instruments also featured.

Banks have fallen out of favor in the Middle East and elsewhere, joining previously sidelined Chinese and Turkish ones. Non-bank problems are likewise in the spotlight in India and selectively in Latin America, and hydrocarbons and metals as one-fifth of the CEMBI are under demand squeeze with output and environment caps. Oil and gas suppliers can now be screened on a sophisticated range of operational and carbon footprint metrics gaining institutional investor acceptance. The leading providers have launched stand-alone indices that could be merged over the medium term with conventional gauges and cover both public and private markets, experts believe. On Argentina specialists argue that corporate negotiations on a case by case basis could be smoother than the latest sovereign saga. After the IMF declared the debt load unsustainable, recovery in the 50 cent range may not be assumed, and energy-related issuers will have to take on a new set of tariffs and regulation after the Macri government’s liberalization push.  Brazil should be a better bet with infrastructure and consumer goods’ rebound signs, but a key driver will be changing local capital markets behavior as retail customers switch from banking deposits and Treasuries to private securities preference. Mexico has enjoyed a peso bump with passage of another North America free trade pact, but near recession and President AMLO’s erratic decision making exacerbated jitters, despite top industry association investor relations marks for career professionals.

Turkey’s Pesky Pump-Priming Primer

2020 April 9 by

Posted in: Europe   

Turkish shares briefly roared into the new year to leave behind 2019’s lagging single-digit gain versus the MSCI benchmark, as Finance Minister and Presidential son-in-law Albayrak unveiled another bank-credit fueled plan to restart 5% growth in contrast with last year’s near recession. The central bank with half a dozen rate cuts the past six months has supported the thrust, with the lira firming for a time at a “competitive” level below 6/dollar after previous crash fears, officials assert. Renewed monetary relaxation has resulted in negative real rates, with inflation stubbornly in low double digits on food price pressure. State and private banks were ordered to reclassify loans so that the NPL ratio is above 5%, but they are expected to again open the spigots as the government debates a central bad asset disposal arm. As a contingent fiscal liability the move along with accounting for public-private infrastructure partnerships could reveal a sizable deficit at odds with traditional balance. High-profile construction projects remain saddled with high debt, as President Erdogan vows completion through local funding and new Gulf and Asian sources. His team pledges better management with industry and operating overhauls at the core of the near-term structural reform agenda, without relinquishing close business ally control.

Along with loose monetary policy, the current account deficit resumed in January after a rare surplus was registered last year on import squeeze. Agriculture and textile exports are at the mercy of world market values and auto-assembly has suffered with Europe-wide downturn. Foreign portfolio outflows as a trend have slowly reversed, but direct investment as a perennial weak spot is meager. The amount of usable foreign reserves is a mystery with resort to interbank and stock exchange currency swaps, while the offshore market is banned and bank deposit dollarization has barely budged. At most tens of billions of dollars is available, as private sector debt rollover is in the $100 billion range in 2020, with the global liquidity picture potentially tightening at the margin. Unlike 20 years ago the government insists an IMF program is not under consideration, as it turns to China and regional neighbors for potential infusions.

Politics is a major driver of the economic strategy repeat after the ruling AKP party lost Istanbul and other big cities to opponents now in charge of over half the country’s output. The former prime minister and his deputy defected from the group to start a new competitor, and a succession race has broken out among the incumbent’s backers. President Erdogan’s popularity was briefly boosted with his takeover of Kurdish-run Syria as US President Trump pulled troops back, although relations between the two remain volatile, with the latter regularly threatening trade sanctions and tariff hikes. Strains with Europe have multiplied over Cyprus, Syrian refugees and Libya, where Ankara voted to intervene militarily on behalf of the Tripoli regime which has lost central bank and oil field control. Its main challenger with ISIS knocked out of the contest is General Shifter, who lived in exile in the US, getting arms from Russia, Saudi Arabia and the UAE. The fighting has spawned massive internal displacement alongside the African onward trek to Europe, with EU assistance not primed for recycling.

Frontier Debt’s Exacting Exploration Excitement

2020 April 2 by

Posted in: General Emerging Markets   

Following consecutive years of double-digit gains above the core sovereign bond benchmark, and with crowded trades in the main emerging market local and external instruments, investment houses pre-virus were touting fundamental frontier allocations based on diversification and underlying country improvements. They argue that risk re-pricing can partially offset illiquidity, although the credits have not been tested in crisis and remain outside standard ETFs, Last year’s big winners were Egypt and Ukraine, while Kazakhstan and Kenya lagged the JP Morgan EMBI and GBI-EM indices. A major debt and equity rebounder predicted for 2020 is Pakistan with another IMF program, with inflows into domestic Treasury bills yielding almost 15% as the currency stabilizes. Economic growth will be 2-3% on fiscal and current account adjustments, as double-digit inflation drops from prior depreciation and bad farming results. The balance of payments gap should halve to 2.5% of GDP with import compression, as reserves are bolstered by fresh foreign direct and portfolio investment. The exchange rate stance has moved from pegged to flexible and at 155/dollar currently is roughly fair value. International reserves remain negative on a net basis but Fund injections aim to restore balance, with the government coalition in slight majority in parliament. Tax revenue may reach 15% of GDP this fiscal year on a wider base and with spending cuts almost eliminate the primary deficit. Energy reform will entail costs over time, and anti-money laundering compliance is outstanding to avoid FATF sanctions. Geopolitics is not in the equation, with India again stoking tensions in Kashmir and denying Muslims future citizenship under a proposed law. Daily T-bill market turnover is over $300 million, with frequent auctions and narrow bid-ask spreads compared with frontier rivals, on 10% withholding tax according to JP Morgan research.

In Africa Ghana and Nigeria are back in favor after foreign investors were subject to access and rule changes resulting in the latter’s local index exclusion. Ghana’s twin deficits are under stricter control heading into end-year elections, with a several billion dollar financial sector cleanup consolidating banks and holding executives accountable for crimes and mismanagement. The crackdown suspended bank shares on the stock exchange prompting removal from the MSCI frontier rung, and potential reinstatement awaits the index provider’s next review. Inflation is in single digits as the central bank is poised to lower 15% interest rates. The current account gap is put at 4% this year, but the currency should be steady on external bond inflow momentum and calmer capital flight after successful poll transitions. A good medium term yield curve is offset by thin trading, but authorities are trying to launch derivatives for further liquidity. In Nigeria the reserve drain has bottomed at around $35 billion, and the central bank has turned its attention from currency intervention to reigniting credit and economic growth. It recently barred domestic buyers from high-yield open market operation (OMO) paper so that banks eventually have more room to extend loans especially to non-oil smaller business. Pension funds and corporations shifted their portfolios into other government instruments, and foreign investors now holding half the amount will be the main OMO target to whet their broad fixed income appetite. The naira after previous convulsions should only fall toward 370 over the coming months as import and dealing grips relent from past seizure.

The World Bank’s Empty Shaft Prospecting

2020 March 26 by

Posted in: General Emerging Markets, IFIs   

The World Bank’s January Global Economic Prospects issued before the coronavirus surge found “marked deceleration” in global growth last year affecting over half of emerging economies, with the average around 3.5% on weak manufacturing. This year’s projection is only 4%, half a point below previous forecasts, as trade will only expand 2% despite the US-China first phase deal. “Subdued” financial market sentiment will continue and flatten commodity prices, and even with monetary easing about one-third of the developing country universe can expect lower growth. In the medium term low income countries will set the fastest pace at 5.5%, but per-capita income and poverty levels will barely budge. High debt and lagging productivity block anti-shock capacity as traditional policy space is thin. Food and fuel cost controls mask actual inflation, and fiscal deficits limit countercyclical spending as tax bases are unable to support investment and social safety nets. Business climate improvement and technology integration are unfinished agendas, as weather emergencies and energy needs demand “green” solutions, according to the publication. China’s expansion will dip under 6% for the first time in three decades, with total debt over 250% of GDP. Both exports and domestic demand are down, and budget and credit measures cannot reverse the trend. The drag contributes to Asian cross-border goods and services slowdown, with construction and tourism softening for the latter. Protectionist levies affected over $1 trillion in world commerce last year, overshadowing a few new bilateral and multilateral free trade accords most notably a Pan-African one.

Over $10 trillion or one-quarter of global debt has negative yields, spurring emerging market borrowing at narrow spreads although lower-rated sovereigns may not benefit. Most currencies continue to depreciate against the dollar, and FDI slipped in all regions through the first half of 2019 outstripped by remittances. Oil was off 10% to $60/barrel, and agricultural and metals values also fell. Commodity exporters grew just 1.5%, half the figure for importers led in Asia by China and the Philippines. Almost the entire pickup this year will come from a handful of major markets, including Brazil, India, Mexico, Russia and Turkey. Extreme poverty defined as living on less than two dollars a day dropped by a billion people in recent decades, but double that number have no basic sanitation access. The infrastructure elements of the Sustainable Development Goals call for unlikely annual investment over 5% of GDP for poor and middle-income economies, with Africa especially at the bottom as conflict and penury concentrate there, the report warns. On purchasing power parity basis China is now one-fifth of world output and integral in auto and other supply chains at risk from further tariff and geopolitical struggles. Emerging market credit booms have been mostly for consumption, and contagion may center on common foreign investor ownership of local bonds. Social unrest and climate change have economic and financial implications across the asset class yet to be calculated, and China’s excessive leverage can best be tackled over time that may not be available. Almost half of developing markets have insufficient reserves, and macro-prudential policies often stifle banking and securities modernization. Output per worker is less than one-fifth the advance economy result, with a century required to close half the gap as another grim reading.

Central Africa’s CFA Franc Deception

2020 March 19 by

Posted in: Africa   

As leaders representing the two CFA Franc zones declared after long negotiations with Paris that they will no longer keep half of foreign exchange reserves with the French Treasury under the euro peg, the IMF described the Central African economic and monetary union (CEMAC) at a “crossroad” still reeling from oil export price reversal five years ago. All member countries, Cameroon, Gabon, Congo, Chad, Central Africa Republic, and Equatorial Guinea are already in or about to enter formal adjustment programs, with regional growth due to repeat 2018’s 2.5%, as the non-oil segment languishes. Inflation is the same figure, and fiscal deficits beyond agreed EU-modeled convergence criteria keep public debt over 45% of output. With stricter currency rules and modest private capital inflows the balance of payments gap is only half a percent, but the current account one could hit 3% in 2020 on lower petroleum earnings. The common central bank BEAC has tightened monetary policy but excess liquidity and an almost 20% bad loan ratio afflict banks, and ailing smaller units should be swiftly closed. Staff and expertise shortages at the system supervisor are obstacles as Basel III prudential standards will soon apply. The November CEMAC high-level summit acknowledged that foreign reserves were insufficient covering three months of imports, and that budget discipline was tilted toward government investment cuts harming medium-term growth rather than tax revenue collection. Economic diversification is slow toward agriculture and transport industries in particular, with dominant Cameroon also in the grips of a breakaway struggle with armed Anglophone groups. Repatriation of bank overseas assets should compensate for reduced donor aid, but credit extension is zero as institutions park money at BEAC or in Treasury bonds available through the nascent securities market. A 1% possible growth pickup toward mid-decade will hinge on business climate reforms, where the zone ranks behind neighbors according to the World Bank’s flagship reference.

Tax exemptions should be eliminated as collection improves, and the region needs to pay off contractual arrears above 5% of GDP, possibly in securities form, to stimulate the private sector and financial markets. The benchmark 3.5% borrowing rate stayed at the November meeting, as the IMF urged authorities to increase “absorption” operations to drain liquidity. Repos are a main short-term instrument, but pilot certificates of deposit may soon be issued. BEAC refinancing will no longer be approved beyond 10% of bank assets, and under new procedures foreign exchange can only be retained for trade purposes and not surpass 30% of repatriated client funds. Oil and mining companies have not yet adopted the regulations and are in stiff opposition, as central bank officials fan out for “consultations” that may result in big revisions. A first credit bureau will launch in 2020 accessible to microfinance providers, and in fixed income secondary trading development is a priority to create a yield curve. Treasury market-makers have been designated to sell at least one-third of inventory, and on the equity side the separate Cameroon and regional markets were merged and state enterprise IPOs are set for the coming months. The BDEAC development bank may also eventually float shares if it can be placed on a sound footing after years of minor changes, as the currency regime tempts similar fate.

China’s Dialed Back Decade Dominance

2020 March 11 by

Posted in: Asia   

With Chinese “A” shares’ 40% gain at the top of the core MSCI Index last year amid past decade retrospectives charting the mainland’s across the board asset class hold, investors expect economic and financial market growth momentum to flag over the medium term as they look for other geographic and thematic anchors. The disconnect between emerging market share of global GDP and stock market capitalization, at 60% and 20% respectively remains as wide as ever despite the latter near doubling to over $6 trillion since 2010 with China accounting for 30% of the figure. In daily currency trading the EM portion is now one quarter, with the renimbi and Hong Kong dollar the runaway favorites at over $500 billion combined annually. Local and external debt sales tell the same story at $2.5 trillion in 2019, triple the amount during the 2009 crisis. Chinese companies are almost one-third the Bank of America gauge in that category, with Mexican ones a distant second at less than one-tenth. The two most popular Vanguard and iShares ETFs listed in New York, with $60 billion each under management, have similar mainland weighting roughly mirroring the current MSCI formula. It will increase in 2020 as more “A” listings are added, and more market-friendly IPO rules go into effect for foreign investor access outside long-running bilateral trade and financial services negotiations that will continue to affect sentiment around the US presidential election.

Asia with its closer ties was again the top performing region as the MSCI main index rose 15% last year, with the so-called BRICS up 20% with Russia’s equal 40% spurt. Taiwan was in second place with 30%, and Korea was the only other double-digit winner. India, Indonesia and Thailand were ahead single digits, while Malaysia lost 5% but was behind Bangladesh (-18%) on the frontier index as the biggest area drop. In Latin America Brazil and Colombia jumped over 20%, but Chile declined in comparable magnitude and Mexico’s advance was just half the benchmark one. In Europe Greece’s climb equaled Russia’s, Hungary matched the MSCI, and Turkey (+7%) ended positive after early year carnage, but Poland and the Czech Republic slid. In the Middle East complex Egypt (+38%) triumphed by far, with Saudi Arabia (+5% barely helped from the gigantic Aramco offering designed for domestic and Gulf buyers. The UAE and Qatar were in the negative column, as frontier Bahrain and Kuwait otherwise paced the GCC pack with 30-40% upticks.

That universe lagged 2% behind the core, with Lebanon’s 50% crash amid political gridlock and protests and possible debt default and exchange rate realignment dragging the region. Africa was up just 5% as Kenya’s 40% jump was offset by double-digit setbacks in Nigeria, Botswana and Zimbabwe, in contrast with South Africa’s +7% close. Europe’s ten markets were mixed, with 20-30% rises in Lithuania, Romania and Slovenia, and Bulgaria and Ukraine the biggest losers as the former is due to formally enter the euro. In Central America/ Caribbean Jamaica and Trinidad went opposite ways and Panama (+35%) was a standout in a triangle hobbled by bad migration and security trends as exotic markets reconfigure their own geometry.

The Arab World’s Smudged Small Business Patchwork

2020 March 5 by

Posted in: MENA   

 Amid the hype over Saudi Aramco’ s 1.5% sale as the $25 billion world’s largest IPO corralling institutional and retail investors toward the the target $ 2 trillion valuation, an IMF paper laments “patchy progress” among twenty Arab countries in small and midsize enterprise capital markets access. This category is a “cornerstone” accounting for 90% of regional business as a major job and output source, but governments continue to lag in finance, training and infrastructure support. Regulatory, tax and governance frameworks are tilted in favor of large state-owned firms to stifle commercial and funding competition, and higher employment and growth trends will depend on overdue corrections. The analysis does not touch on Aramco, where banks offered retail investors subsidized loans and the wealth fund reached out to Gulf counterparts as an allied group, as an example of headline stock exchange listing advantages with swift inclusion in the core MSCI Index. It also came in the wake of an estimated $45 billion in area sovereign debt issuance, now one-third of the JP Morgan benchmark, as budget deficits soar despite recovering hydrocarbon export prices amid “piecemeal” SME  efforts, the report argues. As formal employers, the sector’s share is already 50% in Iraq and Lebanon and the informal one is greater throughout the geography. Women’s entrepreneurship is only 15%, less than half the world average. Bahrain, Egypt and Morocco have dedicated overall strategies, and three-quarters of the area has established credit bureaus and guarantee schemes. The former cover both individuals and companies, and the latter are often donor-backed with mixed public-private shareholding and presume modernization of insolvency laws. Arab private investment at 15% of GDP is behind emerging economies elsewhere, with small customer bank lending just 7% of the total versus 10-15% ranges in Asia, Europe and Latin America. An increase could lift growth 1% annually and create 8 million jobs over the next five years, the IMF projects.

The region ranks poorly on the World Bank’s Doing Business scorecard, and labor productivity and technology such as broadband are inferior. Research spending and innovation has not kept pace with peer economies, even as the 2018 Arab World Competitiveness Report shows interest in ecosystem development. It finds that early-stage startups lag low-income Africa, despite three-quarters of survey responses endorsing entrepreneurship as a career choice. In governance rankings weighing regulatory quality, rule of law and corruption the majority of countries “deteriorated the past decade.” Procurement and tax procedures are arbitrary, with small firms refusing government contract bids and prone to fiscal evasion.  On finance demand can be better mobilized through literacy and securities market promotion than direct government backing, which should concentrate and general education and infrastructure. Malaysia’s SME master plan through end-decade is featured as a model, which integrates licensing, registration and export match-making in a customized platform. Guarantees are only a partial tool and should be transparent on budget expense. An EU study of hundreds of thousands of small firms concluded that non-financial advice on risk management and networking ultimately raised growth and productivity, and that the group was often too diverse to clearly quantify costs and benefits in a sewn-up case.

Low Income Economies’ Bottoming Out Bottlenecks

2020 February 28 by

Posted in: General Emerging Markets   

The IMF with a new managing director in place committed to boosting poor country performance, released a mixed annual assessment of 60 members in the category, defined as per capital income under $2700. It covers one-fifth of world population but only 5% of output, with average 5% GDP growth through 2019. Commodity producers lagged more diversified exporters and fragile states were at the bottom. Public debt rose in half the group, and the tax/GDP ratio remains below 15% despite VAT application potential. Bank failures with weak resolution and deposit insurance schemes were a drag, and the longer-term outlook is tied to productivity and business climate improvements along current emerging market standards, the paper notes. It underscores “striking heterogeneity” between fuel and non-fuel commodity frontier market spreads with international financial access. Oil prices rebounded the past year in contrast with the agriculture and metals complex, and half a dozen African sovereigns were repeat bond issuers. Tajikistan, Papua New Guinea and Benin debuted, but half of markets do not receive portfolio inflows and FDI is still the dominant overall source. Remittances and aid increased, but the latter merely retraced previous drops. Growth leaders like Laos and Rwanda benefited from relative diversification and large-scale infrastructure projects, while disaster and war-affected Afghanistan and Mozambique were laggards. Commodity economies have smaller average fiscal deficits at 2.5% of GDP, with tax collection unchanged despite priority status under the Addis Ababa domestic resource agenda. Policy and revenue administration reforms helped selectively, but VAT design and implementation is an outstanding task. On public debt primary and off-budget deficits have been the main drivers, with 45% at high risk or in distress. Non-fuel exporters had the worst current account gaps at 5% of output, often due to capital equipment import surges. International reserves are under the three months trade need threshold, and inflation moderated to 4%, with flexible exchange rate countries easing the most. Interest rate reduction followed, but private credit slackened in one-third the cohort.

On an ominous note, the evaluation cited financial sector difficulties in 40%, double the fraction in 2016. Bank capital adequacy is stable, but bad loans have spiked above 10% in half of countries on a combination of factors, including lower export values and mounting government arrears. Correspondent relationships ended over money laundering and terrorism concerns in places like Nicaragua, Solomon Islands and Nicaragua. Almost 40% of the population now has account access with mobile catalysts, versus over 60% in emerging markets. Only one-tenth if customers have any savings, and private credit to GDP is minimal at 20%. Human capital in terms of education and health is a basic obstacle but labor quality, technology, and the investment climate are broader considerations for infrastructure and World Bank “Doing Business” attention. Power grids and school enrollment have expanded from low bases, with efficiency and results still to be tested. Environmental and China trade risks also cloud the future, with a cross-section of poor economies in the value chain or shipping raw materials for Asian demand. Through the publication date Chinese “A” shares up 30% continued to top the core and frontier MSCI indices, with the so-called “Next 11” barely positive reflecting Fund ambivalence.

The EBRD’s New Scaffolding Scrapes

2020 February 21 by

Posted in: Europe, IFIs   

The approaching 30th anniversary of the post-communist European Bank for Reconstruction and Development, with a core democracy and private sector building purpose and geographic spread to the Middle East and Central Asia, has set off a wholesale rethink after a high-level task force recently weighed in on the Luxembourg-based European Investment Bank’s future. That report urged reorientation on climate and sustainability lending in poor countries, with the EBRD as a possible shareholder in a spinoff entity. It came as the EIB’s main infrastructure project portfolio will likely come under pressure with post-Brexit budget cuts, and member countries are able to separately attract private debt and equity finance. Europeans together still hold a majority stake in the London-headquartered Bank, originally championed by a French official on the understanding it would be built elsewhere. North African nations joined after the Arab Spring and stillborn attempts to create a stand-alone Middle East body, and the target central and east Europe block now accounts for only one-third of investment, with the Southeast and MENA roughly split at 20%. Total allocation to date is around $150 billion, with Turkey replacing Russia as the leading single focus after post-Crimea sanctions suspended operations in the latter. Infrastructure and energy currently absorb half of commitments, in contrast with the early manufacturing and services footprint. 80% is loans, 15% equity, and 10% guarantees and other “de-risking’ instruments. Banking and capital markets work came to over $50 billion for 2000 projects through 2018, and an active technical assistance program recruits foreign advisers and consultants. Only a half dozen of the founding area members did not rise in income classification, and the Czech Republic “graduated” from eligibility altogether a decade ago. The US remains a large shareholder with a 10% holding, and it has emphasized geopolitical rivalry in recent years against Russian and Chinese economic and credit expansion in the area. Moscow has natural gas pipelines and drew neighbors into the Eurasian Economic Union aiming for full integration with Belarus, while Beijing’s Belt and related initiatives sprinkle $300 billion across the wider Silk Road.

A December CSIS think tank report points out that graduation policy is undefined and that “fault lines” have opened as borrowers may be tempted to turn to cheaper sources with “malign interests.” It argues that assigning a green mandate within the context of a new organization would confuse its mission and undermine a versatile commercial culture, and that expanding into Africa and other low-income regions will stretch capabilities and create additional rivalries. However on the issue of migration the EIB and EBRD could better collaborate on fresh solutions, building on the latter’s Syrian refugee support in Jordan and Turkey which also acts as a “force multiplier” for US humanitarian assistance. Rediscovery more than reinvention should be the future strategy especially with frontier capital market deepening lacking basic knowledge transfer. More countries should graduate under a clear process, and equity and guarantee volume can better balance loans. These changes should be embraced under the next President as longtime leader Chakrabarti exits the scene, and the US should not consider reducing or selling off its estimated $150 million share, which can backfire in both deal and diplomatic terms, CSIS warns.

Index Performance’s Elaborate Endurance Formula

2020 February 13 by

Posted in: General Emerging Markets   

With a last quarter surge after a rocky start in 2019, the main emerging market stock and bond indices managed 15% gains, largely due to relief from negative economic policy and performance expectations. The US Federal Reserve reversed signaled monetary tightening; Washington and Beijing agreed to roll back retaliatory tariffs in their trade and investment showdown; energy and food price inflation resisted geopolitical and climate stress; and developing country growth was only around half a percent below the magic 5% threshold investors consider fast-track. With this worst-case avoidance including, plunge into advanced economies’ negative debt yields, a handful of currencies were up against the strong dollar, as the Dow Jones Index’s return was double double the MSCI benchmark.

Fund flow numbers for the year were over $60 billion positive and $10 billion negative for the respective fixed income and equity asset classes, with retail support the key driver, according to data trackers. On a regional basis, Asia was the best stock performer as its top export technology was also the leading sector. Europe and Latin America lagged from crises in Turkey and Argentina, while the latter experienced a broader setback as civil unrest over stagnant incomes spread throughout the continent. In structural reform, India as a standout example lost luster as it threatened new taxes and restrictions and grappled with non-bank collapse into Prime Minister Modi’s second term. In China second-tier banks were rescued but wider feared carnage did not materialize, but in 2020 economic and financial sector woes must be handled more decisively if fund managers are to retain faith in immediate fundamentals and the longer term major emerging market story.

So-called frontier markets were more judged on individual merits in 2019, with a mixed outcome. Dedicated mutual funds showed outflows, and their returns exceeded the index on external sovereign debt but lagged the equity core universe. Central Europe had this split result, as Ukraine bonds rallied after presidential and parliamentary elections but stocks slid. In the Middle East, the landmark Aramco oil company flotation valuing it at $2 trillion on the Saudi Arabian bourse grabbed headlines, but attracted only local buyers as foreign ones questioned governance and transparency.  Lebanon was at the bottom of performance ranks as street protests coincided with bank runs, exchange rate depreciation, and possible debt default. In Africa Kenya’s 40% jump was an exception to disappointments elsewhere, including a decline half that size in Nigeria. The region was virtually alone in promoting a breakthrough direct and portfolio investment narrative, as a 40-member pan-African free trade agreement was signed, which will be under scrutiny this year for initial implementation.

While traditional metrics did not meet an affirmative test or got benefit of the doubt last year, the renewed screening bar going forward will be complicated by acceptance of ESG criteria as important allocation factors. Environmental, education, health, and corporate and government integrity issues increasingly feature in analysis, amid launch of new industry associations and category benchmarks. Green bonds, including from emerging markets China, Korea and Brazil, have grown to $250 billion outstanding despite continued issuance classification and cost difficulties, as global mainstream investors pledge higher exposure. The Ebola virus resurfaced in Africa, and the swine flu epidemic in Asia is a lingering concern. In Latin America the Venezuelan displacement crisis reached historic proportion as millions flee economic and social misery for neighbors caught in their own poverty and rule of law vise. For 2020 the United Nations requested over $1 billion in international aid, as a previous appeal for half that amount fell short. December‘s Global Refugee Forum in Geneva urged private finance to help fill the gap, previewing future contours of the emerging market selection matrix. Winners this year could be countries like Colombia, intent on preserving an investment grade rating with fiscal discipline steps and displaced population funding innovation, as the asset class lure turns more creative and insistent.