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Mexico’s market carnage spawns buying opportunities, investors say

Posted in Features by dionrabouin on November 21, 2016

A woman walks pass a board displaying the exchange rate for Mexican peso and U.S. dollars in a Bank in Mexico City, Mexico, November 11, 2016. REUTERS/Carlos JassoA little more than a week after Donald Trump’s surprise election victory, a growing number of emerging market fund managers are saying a selloff in Mexican assets may represent a buying opportunity.

Mexican stocks, currency and debt have been hammered since Trump’s surprise victory last week, fueled by concern about the U.S. president-elect’s campaign promises to renegotiate or scrap the North American Free Trade Agreement.

The Mexican rout was the most dramatic part of a wider emerging markets slide that reflected not just anxiety about Trump’s anti-trade views but also the prospect of higher U.S. yields stoked by increased stimulus under the new administration.

But some emerging market investors are expecting a bounce-back, betting President Trump could be less inclined to implement protectionist trade policies than candidate Trump.

“Our base case is that President-elect Trump will be more pragmatic relating to trade and immigration,” said Chuck Knudsen, emerging markets equity portfolio specialist at T Rowe Price. “We think he’ll try to find ways to work within NAFTA.”

The prospect of introducing mass changes in U.S. trade policy will prove much more politically and economically complicated than the president-elect realizes, said Mark Burgess, chief investment officer of Columbia Threadneedle Investments, adding that he viewed Mexico as a “buy” for the long-term.

Trump also has more “low-hanging fruit” to focus on domestically, including proposals for infrastructure investment and tax cuts, repatriation of corporate assets and overhauling regulations, said Alejo Czerwonko, director of emerging markets investment strategy at UBS.

Even in the short-term, some investors see Mexico as ripe for bargain-hunting, with the MXSE IPC index’s .MXX price-to-earnings ratio at its lowest since August 2015, according to Thomson Reuters Eikon data.

“I would buy now absolutely – with a 2017 perspective,” said Didier Saint-Georges, a member of the investment committee at Carmignac Gestion, speaking at the Reuters Investment Summit in London. “It could well be the top performing emerging market next year for all I know.”

Though many investors appear bullish, such views are far from unanimous.

BlackRock’s Global Chief Investment Officer of Fixed Income Rick Rieder, whose firm last year upped its emerging markets exposure, now says he is stepping back from the asset class as a whole.

FIS Group’s chief investment and chief enterprise officer Tina Byles Williams said Trump’s “notably fluid” positions have taken her from neutral on emerging markets to underweight.

Lipper data showed on Thursday that inflows to emerging markets equity funds declined to the lowest level since August 2015 and emerging market debt funds saw their largest withdrawls on record.

If Trump were to actually implement his campaign promises, “there’s downside from the perspective of any (Mexican) asset class you look at,” Czerwonko said.

That worry helped Mexico’s peso fall as much as 17 percent to an all-time low after Election Day. Mexico’s economy was already plagued by shrinking growth rates and sagging oil revenues, making its currency one of the world’s worst performers even before Trump’s victory.

The selloff has roiled all of Mexico’s financial markets, with the BMV stock exchange falling more than 7 percent since the U.S. election, touching its lowest since June. The dollar-denominated MSCI Mexico Index has plunged as much as 19 percent.

Still, the slide in the peso, down 12 percent since the election, will bolster the Mexican economy by reducing the price of labor, Saint-Georges said.

“The Mexican economy is today more competitive than it was a year ago, just about,” he said.

Some investors are putting such views into action. U.S.-based funds investing in Latin American stocks netted $672 million in cash during the weekly period through Nov. 16, the most since September 2013.

The $1.7 billion U.S.-listed iShares MSCI Mexico Capped ETF (EWW.P) attracted the most money among funds in that category, sweeping in $627 million for the week.

Javier Murcio, senior sovereign analyst for emerging market strategies at Standish, a division of Bank of New York Mellon Corp (BK.N), believes even if Trump does intend to scrap NAFTA, Republicans in Congress would be reluctant to get onboard.

“Even a more radical call from the Trump administration to repeal NAFTA in practice will really mean open negotiations to change or update certain areas,” he said.

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Argentina’s tech sector on the cusp of a boom, but obstacles remain

Posted in Features by dionrabouin on November 21, 2016

Image result for Argentina's tech sector on the cusp of a boom, but obstacles remain

Mauricio Macri’s presidential election victory in November was a clear signal to Diego Saez Gil that it was time to move back to Argentina and take his growing “connected luggage” startup with him.

By the time Macri took office the following month, Saez Gil was already staffing an office for his Bluesmart baggage company in Buenos Aires’ Palermo neighborhood, on the way to hiring 21 software developers, designers and customer support personnel – more than double the staff at its headquarters in New York.

“We started thinking about the talent we needed to scale the company, and at the same time we saw the new government,” Saez Gil said in a telephone interview. “That was the catalyst to say Argentina seems a really good place to go.”

As he looks to grow his company, which produces luggage that automatically locks and can be tracked via a smart-phone app, Saez Gil said his home country offers the best mix of startup-friendly cost structure and a highly educated population with engineering skills.

And when Macri removed long-standing currency controls, eased reserve and deposit requirements for overseas investors and cut a deal with its foreign creditors, effectively reopening international debt markets, Saez Gil was convinced Argentina would no longer scare off potential investors.

Like other tech business leaders interviewed by Reuters, he was also attracted by the potential of the president’s now-passed “entrepreneurs’ law” allowing businesses to more easily be incorporated.

Under pressure to turn around a sagging economy long reliant on commodities like beef and soybeans, Macri is hoping a nascent tech sector can provide a fresh source of growth.

Raising investment in the tech sector to 1.5 percent of gross domestic product is one of his government’s key goals as it looks to boost production and employment.

While pleased with the new government’s first steps, Saez Gil and other Argentine business owners such as Martin Migoya, co-founder and chief technology officer of services provider Globant, say Argentina still lacks the kind of market liquidity and depth needed to list their shares there.

Additionally, the country’s size presents a problem.

“Argentina is a good market, but it’s not big enough to think about a multinational company just serving Argentina,” Migoya told Reuters in a phone interview. “So by definition, entrepreneurs in Argentina need to think in a global way. That’s not very common and we need to foster that.”

If Bluesmart eventually goes public, as Saez Gil hopes, the Nasdaq is a more likely venue than Buenos Aires’ stock market. Local Argentine investors have a better handle on businesses like mining, agribusiness and utilities than tech, he said.

That limited awareness is just one of several obstacles to tech expansion in Argentina. Business owners say that even under Macri’s more business-friendly administration there are still many challenges that include stifling taxes and difficulty obtaining financing from banks.

NEAR-SHORING

Nevertheless, in a development that could help more tech startups, a growing number of multinationals have in recent years outsourced thousands of positions to Latin America’s third largest economy.

Companies such as JPMorgan Chase & Co, Citigroup Inc, Accenture and Chevron Corp have shifted research, accounting and call center jobs in English and Spanish to Argentina.

The moves, most of which predate Macri’s election win, take advantage of Argentina’s relative abundance of bilingual college graduates. They have made it a hub for “near-shoring,” in which companies outsource to Latin America rather than to distant locations like India and the Philippines.

Chevron, for example, has for about a decade employed staffers in Argentina who provide accounting services and IT support for many of its affiliates in Latin America, the United States and the United Kingdom.

JPMorgan last year opened its first Latin America-based global support hub in Argentina, months before Macri’s election.

The bank, which previously had only an investment banking operation there with around 140 employees, now has about 700 with some 100 in roles like software development, systems analysis and securities processing, the bank’s senior country officer, Facundo Gomez Minujin, told Reuters.

The outsourcing moves could foster a virtuous cycle creating “a large body of technically savvy and technically trained people,” said Sramana Mitra, founder and CEO of One Million by One Million, a global support network that includes Hernan Kazah, co-founder of Argentine online auction house MercadoLibre Inc.

Gomez Minujin said JPMorgan plans to hire nearly 400 more tech workers in the next year in similar roles to the initial 100, many of whom will serve U.S. operations and clients.

Overall, Argentina’s outsourcing, or “near-shoring” sector boasts 105,000-115,000 full-time equivalent positions (FTEs) in global services, according to industry tracker Everest Group.

That makes it the leader in South America and only about 20,000 FTEs behind Latin America tech services leader Mexico.

“Despite macroeconomic instability in recent years, Argentina continues to witness new center set-up activity,” said Salil Dani, Everest Group’s vice president of global sourcing.

In the last 24 months, 12 new outsourcing service providers have opened there, matching Mexico and more than doubling the pace in much larger Brazil, Everest data shows, although still well behind India.

They are attracted by Argentina’s time zone and cheap currency, down more than 75 percent against the dollar since 2011. But many also rave about its workers’ English and engineering skills.

“Argentina is the best place in Latin America for setting up shop,” said Dileepan Siva, chief revenue officer at digital commerce software provider Moovweb who has a long history working with tech companies like eBay Inc and Twitter Inc.

EMBRACING TECH

Mentoring and networking groups such as Endeavor, started in Buenos Aires in 1997 by two Americans, have helped connect startups like Bluesmart’s Saez Gil with those who own multinational companies, like MercadoLibre chief executive Marcos Galperin.

Tech champions MercadoLibre and Globant as well as community listings firm OLX and travel site Despegar – all valued at more than $1 billion – were the stars of the only session Macri led at the recent Argentina Business and Investment Forum organized by his government in Buenos Aires.

Macri’s embrace of the tech sector is not new. As mayor of Buenos Aires he created a technology district and awarded companies that opened or moved there a 10-year tax break.

But there have been no targeted steps to bolster the sector since his election, and the government’s most recent budget aims to cut funding for the Ministry of Science, Technology and Productive Innovation by more than 30 percent.

“We’re not expecting the effort in technology from Argentina to come entirely from the public sector,” Finance Minister Alfonso Prat-Gay recently told Reuters in New York.

“It’s about deregulation, opening up the conditions for local and foreign players to be involved. So I think it’s wrong to just look at the budget and conclude that our priorities are not there.”

Colombia peace pact won’t boost economy in near term – investors

Posted in Articles, Features by dionrabouin on November 21, 2016

Colombia’s historic peace agreement with FARC rebels, to be unveiled on Wednesday after almost four years of negotiations, is not likely to give the country’s struggling economy an immediate boost, investors said, as sluggish commodities prices remain the most pressing issue.

Any benefit to the agreement, set to be unveiled late on Wednesday, is already reflected in the country’s markets and economy, investors said, after the government and rebels reached a ceasefire deal in June, setting the stage for a final pact.

The agreement will end more than 50 years of combat between the Revolutionary Armed Forces of Colombia (FARC) and the country’s government. Colombian voters still need to approve the agreement in a referendum expected to take place in the next couple of months.

“It’s good news in the abstract, but we have to see whether the referendum will be approved … and there are other issues in terms of fiscal reform that need to be addressed by the government,” said Jim Barrineau, co-head of emerging markets debt at Schroders Investment Management.

Wednesday’s accord would see FARC rebels reintegrated into civil society and given the opportunity to participate in politics.

“While there is little doubt that the deal is a net positive for the economy, the more optimistic estimates of its impact on the economy in the near term are unlikely to be borne out,” said Adam Collins, Latin America economist at Capital Economics in a research note.

“The security situation in Colombia has been steadily improving for more than a decade,” he said. “As such, most of the economic benefits of peace in terms of increased investment and tourism have already been felt.”

Colombia’s economy grew 4.4 percent in 2014 before slowing to 3.1 percent GDP growth in 2015, pressured by declining oil revenues.

How Colombia navigates its fiscal deficit and rising inflation is now more pressing than the long-term prospect of peace in the country, investors said.

Assuming the referendum on the deal passes, Colombian President Juan Manuel Santos is expected to seek approval for a package of tax increases aimed at offsetting falling oil revenues, Eurasia Group said in a research note.

Investors also cautioned that the agreement could be an economic hindrance as re-integrating rebels could add to Colombia’s budget deficit, which might hamper reform efforts and cause a downgrade in the country’s credit rating.

The Colombian peso fell 0.85 percent against the U.S. dollar on Wednesday. The country’s IGBC stock exchange, which has gained 18 percent so far this year, rose 0.7 percent.

The price of oil and gold, two of Colombia’s key exports, fell 1 percent and around 2 percent respectively on Wednesday.

Analysis: Venezuela crisis is opportunity for foreign bond investors

Posted in Articles, Features by dionrabouin on November 21, 2016

As Venezuela’s economy teeters on the edge of collapse and some people go hungry, a growing number of foreign investors are reaping outsized returns betting on the oil-rich nation’s depressed debt.

Venezuela’s bonds have sunk so low amid a deep crisis that even if it defaults on its debt, bondholders reckon there will still be rewards when the South American country eventually recovers, helped by its huge reserves of crude.

Venezuelan dollar bonds on average have returned an impressive 14.1 percent so far this year, according to Datastream figures. That means investors have reaped around $3.5 billion in returns from the bonds already in 2016, according to a calculation by London-based brokerage Exotix Partners.

The figure is nearly three times the $1.2 billion Venezuela plans to spend on imports of pharmaceuticals this year as dire shortages of medicines from anti-itch skin cream to chemotherapy drugs hit home.

The crisis has forced Venezuela to sharply curtail such imports, adding to hardship for millions of people already struggling with triple-digit inflation, power cuts and food shortages.

But with the world’s largest proven oil reserves of nearly 300 billion barrels and an almost doubling of oil prices off this year’s troughs, the OPEC nation is expected to keep servicing debt at least through 2016.

And the precedent of Argentina being forced to pay up to dissatisfied creditors years after a 2002 debt default will protect against excessive losses if Venezuela also restructures its debt, investors reckon.

John Baur, a portfolio manager for Eaton Vance’s Global macro Absolute Return Fund, added further to his holdings of Venezuelan bonds earlier this year after a sizeable cutback in 2015.

“The view has been that the bonds are trading below recovery value. The situation is the country is disastrous, they’re very likely to default at some point, but with the world’s largest oil reserves, you’re likely to see a recovery that’s well above the current bond prices,” Baur said.

Derivatives markets assign a 95 percent probability of default over the next five years, according to credit default swaps (CDS) monitored by data provider Markit.

Bonds from the government and state oil firm PDVSA still only trade around 40 cents in the dollar on average. But Venezuelan yields above U.S. Treasuries – a measure of the country’s risk premium – have contracted a third since February to about 2,800 basis points on JPMorgan’s EMBIG index. All eight investors canvassed for this article believe recovery rates post-restructuring will be higher than the bonds’ current market value. “This is one of those situations where the bond prices have simply sold off so much that even in a very bad outcome we still think you’re going to make money,” said Jan Dehn, head of research at emerging markets asset manager Ashmore, which has also raised Venezuela exposure. President Nicolas Maduro insists Venezuela will honor all debts, repaying $1.5 billion in February. Government leaders routinely point out that the ruling Socialist Party has never missed a bond payment. They say the huge discounts on bonds are unfair and unwarranted given the country’s payment record.

Maduro faces a huge challenge ahead from protests and food riots, and blames the crisis on the fall in global oil prices and an “economic war” by his foes, whom he also accuses of seeking a coup.

Critics say the economic chaos is the consequence of failed socialist policies for the last 17 years under Maduro and his predecessor the late President Hugo Chavez, especially price and currency controls.

Security forces fired tear gas at protesters chanting “We want food!” near the presidential palace in Caracas last week and a woman died on Monday after being shot when looters raided state food warehouses in a town near the Colombian border.

Venezuela has fallen hard from the 1980s when it enjoyed AA-credit ratings in debt markets.

SHORT-TERM GAIN

The government and PDVSA combined now have $61 billion in outstanding bonds, according to brokerage Exotix.

While no sovereign bond matures until 2018, PDVSA must repay around $8 billion in 2016-2017. However, a significant chunk of this is believed to be in the company’s hands after a series of quiet buybacks.

PDVSA did not respond to a request for comment but has repeatedly assured investors it will meet all bond commitments. Indeed, Caracas has made provisions to repay short-term debt, having liquidated $3.6 billion of gold since September, analysts at consultancy Eurasia note.

It is also slashing imports to preserve hard currency – imports shrank 42 percent in the first two months of 2016 after falling 21 percent last year, Eurasia added.

CDS reflect expectations that short-dated debt will be honored, with one-year contracts implying a 61 percent default probability, down from 78 percent in February, Markit says. In the meantime, the sovereign 2022 dollar bond pays a 12.75 percent semi-annual coupon, while Venezuela’s most-traded 2027 issue pays 9.25 percent. Coupon returns on Venezuelan debt are almost 10 percent year-to-date versus an average 2.5 percent on the EMBIG index. “The bonds are still paying coupons which is a miracle per se. So one enjoys (a) surprisingly large current yield for now whilst waiting for this to unravel,” said Jason Maratos, principal at London-based hedge fund Onslow Capital Management Ltd, which holds Venezuelan bonds.

Longer-term, default looks likely. Yet creditors’ hand may be strengthened by Venezuela’s oil reserves and Argentina’s tough experience at the hands of hedge funds. Almost $40 billion of Venezuelan bonds are estimated by debt experts to lack collective action clauses (CACs), a mechanism that makes a restructuring binding on all creditors and makes it harder for funds to “hold out” for better terms. Without CACs, Venezuela will want to avoid an Argentina-style battle with hedge funds who could attempt to seize oil shipments or overseas refineries. “We think that not having a CAC adds value,” Baur of Eaton Vance said.

Investors also say any future Venezuelan government can ill-afford to impose punitive terms on foreign creditors as it will need investment into its degraded oilfields.

Even impoverished Ukraine inflicted a mere 20 percent writedown on bondholders during its 2015 restructuring in order to keep markets’ goodwill.

“You may not get 80 cents a la Ukraine but the majority will be happy with 50 cents, with that you can make a significant return and that’s the end game,” said Marco Ruijer, a portfolio manager at NN Investment Partners.

(Additional reporting by Sujata Rao and Brian Ellsworth; Editing by Christian Plumb and Alistair Bell)

Brexit triggers surprise emerging market asset rally

Posted in Articles, Features by dionrabouin on November 21, 2016

When British voters shocked world markets by voting to leave the European Union last week, emerging markets assets seemed among the most vulnerable to a full-on retreat to safe havens from riskier investments.

Yet as investors have realized that the vote and the resulting uncertainty will probably keep the U.S. Federal Reserve on the sidelines at least until December, emerging currencies, stocks and sovereign bonds have stormed higher – outpacing a wider market bounce-back from the initial Brexit rout.

MSCI’s emerging equity index is set for its biggest weekly gain since March, while yields on debt denominated in emerging currencies such as rouble and the Brazilian real have fallen as much as 50 basis points over the week. (Graphic:reut.rs/2938RL0)(Graphic:tmsnrt.rs/298pvNd)

“Janet Yellen has made it clear that events outside of the U.S. will have a bearing on the Fed’s decision making and she was explicit about the risk that she thought Brexit would pose,” said Viktor Szabo, Senior Investment Manager at Aberdeen Investment Management. “This pause from the Fed is going to support emerging markets.”

Latin American currencies have been particularly well bid, with the Brazilian real near its highest level in almost a year, the Chilean peso at a one-month high and the Mexican peso on course for its best four-day streak since early 2010.

Underlining the renewed appetite for emerging market assets, Argentina announced on Thursday an offer of $2.75 billion in bonds, just three months after the country’s historic return to the international capital markets.

Brazilian dollar bonds also saw strong investor demand with JPMorgan’s index tracking the country’s sovereign debt up more than 4 percent since Tuesday while Mexican debt has gained 3.8 percent.

The average yield premium demanded by investors to hold emerging debt over Treasuries has fallen by 30 basis points since Monday.

To be sure, the rally may not be sustainable. Brazil still faces record deficits and expects to remain in a recession next year while Mexico’s peso had drifted to a record low against the dollar prior to this week’s action. A set of particularly strong U.S. data might also rekindle Fed rate rise expectations, putting emerging currencies under pressure again.

But for now, investors like what they’re seeing from these assets.

“Emerging markets are in a good place with ‘one and done’ Fed,” Bank of America Merrill Lynch told clients, referring to the likelihood the Fed will not raise rates again this year.

YIELD HUNGER

Typically, the uncertainty triggered by an event like Brexit would prompt investors to flee riskier emerging market assets, but pessimists may have underestimated the positive effect of increased liquidity in markets.

Not only have markets effectively priced out a Fed rate rise this year, Bank of England Governor Mark Carney on Thursday signaled more policy easing to counter the negative economic effects of Britons’ vote to quit the EU.

Expectations of further stimulus are also building in the euro zone, Japan and China.

Since the Brexit vote more than $1 trillion worth of bonds have joined the negative-yield club, with more than $11.7 trillion worth of debt worldwide now estimated to be yielding less than zero.

U.S. 10-year bond yields are just a whisker off record lows while the dollar’s retreat is lifting emerging currencies, with Brazil’s real moving below 3.20 reais per dollar for the first time in a year on Thursday.

The Mexican peso was on pace to gain more than 4 percent against the dollar since Tuesday, lifted partly by a half-point interest rate rise.

Local currency bonds, already among this year’s best performing assets with gains of around 15 percent in dollar terms, are on a roll.

Here Latin America is benefiting less than other regions given interest rates look unlikely to fall – Brazil’s central bank governor for instance said it was too early to cut rates.

But across emerging Asia benchmark 10-year bond yields have fallen between 20 and 40 basis points in the past week. Russian yields are at the lowest since February 2014 while South African yields fell to seven-month lows, down 50 bps in the past week.

“If you look at real yields in G4 they have fallen very sharply,” said Unicredit strategist Kiran Kowshik, referring to the grouping of Britain, euro zone, United States and Japan. “And typically when real yields fall you tend to see a search for yield in emerging markets.”