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Posted in Uncategorized by dionrabouin on July 19, 2018



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Posted in Uncategorized by dionrabouin on July 19, 2018


Emerging markets bleed capital again; investors say now’s the time to buy

Posted in Uncategorized by dionrabouin on July 9, 2018


International investors have jettisoned their holdings of emerging market stocks and bonds of late but some analysts and money managers are betting that EM could be poised for a comeback.

Sentiment has been particularly dour in the second quarter this year with June showing $8 billion in net outflows from the asset class, after $12.3 billion of outflows in May, a survey from the Institute of International Finance showed Tuesday.

Brandywine Global Fixed Income Portfolio Manager Jack McIntyre on the market and consumer impact from trade uncertainties and Federal Reserve policy.

It was the first time the asset class has shown outflows for two straight months in debt and equities since the great financial crisis in 2008. The second quarter was also the weakest for EM since the fourth quarter of 2016.

After a high-flying couple years, emerging markets appear to be stuck. Not only was June the second month of negative flows, but it marked the fifth consecutive month that flows fell below the 2010-2014 monthly average, IIF found. In fact, inflows have only topped the 2010-2014 monthly average once in the last 12 months. Also notable was that outflows came from Chinese securities, which the organization said was likely prompted by the growing trade tensions between China and the United States.

The flow of investor capital to both emerging markets’ stocks and bonds have been negative for the first time since 2008, the Institute of International Finance said.

“The month began with a remarkable ‘buy the dip’ surge episode as investors scooped up cheaper EM assets, followed by an equally striking reversal coinciding with increased trade tensions and a stronger [U.S. dollar] following the Fed’s rate hike in mid-June,” IIF’s Deputy Director Emre Tiftik, Senior Analyst Scott Farnham and Senior Director Sonja Gibbs wrote in the report.

“Trade tensions, coupled with diverging economic outlooks, have also prompted a marked upturn in portfolio allocations to U.S. assets – at the expense of other developed markets as well as EMs.”

‘It’s time to buy, not sell’

This may simply be the dark before the dawn, some analysts say, as many emerging market countries boast improved current account balances, limited external debt and are still supported by a growing China and high commodities prices.

“The global growth picture is still supportive, even though it doesn’t feel like it,” said Josephine Shea, emerging markets debt senior portfolio manager at Standish Mellon, a subsidiary of BNY Mellon. “At a certain point we believe things should stabilize and the growth we’re seeing should start to come through again.”

Analysts Chris Brightman, Michele Mazzoleni and Jonathan Treussard of Research Affiliates assert that throughout EM there are “only a few small markets at any material risk of crisis.” They advise that in emerging markets, “it’s time to buy, not sell.”

This chart from Research Affiliates shows the downward trend of global poverty and inflation.

Having learned a lesson from the taper tantrum of 2013, many emerging countries have limited their holdings of dollar-denominated debt and reduced their deficits, making them less exposed to increases in the value of the dollar. Many have also increased their dollar reserves, making them more resilient to increases in the value of the dollar.

So far, though, countries such as Brazil, Taiwan and Mexico that have cleaned their proverbial fiscal house have tumbled in the emerging market selloff along with countries like Turkey and Argentina that have shown less discipline. Shea and others believe that has created opportunity for selective managers.

Two out of three isn’t bad

“There is a lot of dislocation,” Shea said, noting that prices for bonds issued by Turkey have fallen to nearly the same rate as those issued by Mongolia, which has a notably lower credit rating.

She also points out that of the three main drivers of emerging markets – growth in China, the value of the U.S. dollar and Treasury yields, and commodities prices – two are in good position for the asset class, even with the dollar’s recent strength.

Jim Paulsen, chief investment strategist at the Leuthold Group, believes that once sentiment turns and investors are again ready to move into risky assets emerging markets will again outperform developed markets.

He says fund managers should look at paring back their holdings of FAANG stocks in the U.S., this year’s top performers, and consider moving into EM.

“I love the fact that there’s some panic to EM right now,” Paulsen said. “It tells me people are giving it away without a lot of thought.”

In an email to Yahoo Finance, IIF’s Tiftik said that indeed emerging market “valuations and allocations look attractive and this could prompt some investors, particularly dip-buyers, to enter EMs, but much will depend on how the global trade landscape and the [dollar] evolve.”

However, Win Thin, global head of emerging market currency strategy at Brown Brothers Harriman, doesn’t see a turn happening any time soon.

“I think it’s naïve to think that the worst is over,” he said. “If anything, the trade backdrop has gotten worse. You can quibble about the Fed [raising rates], but this whole trade war is turning out to be the biggest risk for EMs and I don’t think that’s going away.”

Dion Rabouin is a markets reporter for Yahoo Finance. Follow him on Twitter: @DionRabouin.

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It’s the end of the world as we know it, and investors feel bullish

Posted in Uncategorized by dionrabouin on July 9, 2018


Around the world, in nations large and small, developed and emerging, there has been a retrenchment of democracy and an emergence of previously fringe political elements to the mainstream. That has been accompanied by significant government dysfunction.

In the United States, President Donald Trump, with the lowest-ever approval rating for a president in his first year, has presided over one of the least productive Congress (measured by laws enacted) in at least 40 years.

And in Europe, Italy was unable to form a government for three months; Germany took nearly six months to put a government in place; Paris is at a standstill as medical workers, trash collectors and pilots join striking train workers to oppose French President Emmanuel Macron’s attempts to institute labor reforms.

China has made Xi Jinping president for life; Nicolás Maduro has dissolved Venezuela’s parliament and taken the presidency hostage; Vladimir Putin has been elected president a fourth time in Russia, as an ever-growing list of opposition figures end up dead or exiled before challenging him; Turkey’s Recep Tayyip Erdoğan  thwarted a coup attempt in 2016 and has cracked down on dissent and free elections; South Africa recently deposed its scandal-plagued president; Brazil impeached its president in 2016, and the president who preceded her is now in jail, as a retired Army captain who has spoken favorably of the country’s previous military dictatorship leads the polls; Malaysia just elected a former dictator as its prime minister, following in the footsteps of Nigeria, which made its former dictator president two years before.

This is all part of a trend. U.S.-based democracy advocacy organization Freedom House reported earlier this year that 2017 was the 12th consecutive year of a decline in global freedom.

“Since 2008 the world has entered a period of economic dysfunction,” George Friedman, author of “The Next Decade” and “The New American Century,” told Yahoo Finance. “There is a tendency of moving away from the pure liberal democratic model that’s really been driven by the failure of that model economically and socially.”

‘There’s not … a premium to having democracy’

That economic dysfunction is the result of governments responding to the global financial crisis of 2008 by saving the banking system without providing a lifeline to working-class citizens, says Friedman, an international affairs strategist and founder of Geopolitical Futures.

China’s rapid ascent and its growing debt bubble along with the rise of globalization have created significant new wealth, but the lion’s share has been amassed amongst the top earners, no matter their geographic location.

Curiously, the growth of unconventional and undemocratic regimes has occurred in concert with ever greater investor allocation to financial instruments. Debt has risen to a record $237 trillion, as more companies and countries issue bonds, and equity investment remains near all-time high levels. Allocation to stocks and other risky financial assets rose to all-time highs earlier this year, data from Jefferies shows.

“There’s not historical evidence that there’s a premium to having democracy,” said Vincent Reinhart, chief economist at Standish Mellon, part of BNY Mellon Asset Management North America.

Reinhart, like many asset managers and economists, cites both the U.S. and global trends of falling unemployment, accommodative monetary and fiscal policy and increasing gross domestic product as reasons to favor riskier assets like stocks over safe-haven assets like U.S. government bonds.

The finance pros are bullish

A recent Reuters survey of more than 300 equity strategists and fund managers found they expect all 17 of the major indexes from around the world to rise from their current levels and close the year with gains. That’s despite 11 of those indexes posting negative returns so far this year and many being well below where they were predicted to be by mid- year in Reuters’ February poll.

Nearly 60% were confident or very confident world stocks will rise over the next 12 months. They were even more bullish in the February survey.

A chart compiled by asset management firm Jefferies shows the growth of investment in equities, bonds, money market accounts and commodities over a year. Investors largely threw caution to the wind as stocks rose to all-time highs in 2017 and early 2018.

In years past, money managers avoided the prospect of governments that were dysfunctional or hostile to democracy. However, that thesis has been turned on its head as the number of countries with highly functioning governments dwindle and countries that emerge from crisis produce double- or triple-digit returns, no matter what government takes charge.

A great example of this phenomenon is Egypt, which has been described my numerous multinational and non-governmental organizations as a dictatorship but is expected to see its highest level of cash inflows from investors on record this year.

Even Venezuela has lured continued investment from Wall Street firms hungry for its high bond coupons, despite many in the country literally starving to death thanks to the so-called diet of rationed imports and medicine imposed by Maduro’s administration.

Consequently, much of the thinking about what makes a good place to invest has changed.

“There’s this notion that we saw more liberal democracies and more market economies and that those two went hand-in-hand,” Kate Warne, principal and investment strategist at asset manager Edward Jones, told Yahoo Finance. “I’m not sure that was true.”

An ‘improving trend’ in the emerging markets

Even flows to emerging markets, such as Brazil, South Africa, Malaysia and China, have taken off in recent years. Investors say that while the countries present more risk than developed markets like the United States, they now have deeper capital markets and stronger structural banking systems, despite their broad drift away from democracy.

“We are seeing a bit more autocratic behavior in several of the countries that we’re investing in,” said Peter Gillespie, a portfolio manager and analyst on the developing markets equity team at Lazard Asset Management. “What we’re seeing is more intervention in the companies that we’re investing in, so our companies are being asked to do more government service, some more national service. I would say at the moment it’s been fairly modest, but it certainly has the potential to be a bigger issue.”

Data from the Institute of International Finance shows that investment levels, which shifted toward developed markets in the years following the 2013 U.S. taper tantrum, had been shifting strongly back towards emerging markets since 2015. That trend has reversed since the appreciation of the dollar in April, but EM investors remain bullish on the asset class.

Lazard’s emerging markets team sees EM as currently in an “improving trend.”

“We’ve been very negatively skewed on geopolitical risks for the last two years, frankly,” said Lazard multi-asset portfolio manager Rupert Hope. “But at the moment, the economics and the synchronized nature of this particular growth cycle and what that meant for the growth of trade volumes in particular for emerging markets has really overwhelmed these issues.”

A bar graph showing the increases in global debt since 1997.

Dealing with unstable, corrupt and/or repressive regimes has simply become the norm for investors in emerging markets of late, said Ed Al-Hussainy, senior interest rates and currency analyst at Columbia Threadneedle.

“If you’re going to be an investor in emerging markets, you need to have a stomach for weak institutions,” Al-Hussainy told Yahoo Finance in April. “I cannot name a single major emerging market where institutional quality, particularly when it comes to democratic institutions, has improved in the last five years.”

Investors unfazed by Italeave

That appears to be true of developed or mature markets as well. Investors have maintained a largely rosy outlook on risk after last week’s turmoil in Italy sent markets around the globe tumbling. Italy’s new leadership looks poised to rethink the country’s participation in the European Union and the euro. That could deal another blow to the euro zone, the world’s third-largest economy, following 2016’s Brexit vote.

Jefferies data shows that U.S. and Asian equities saw inflows last week, and apart from Italian stocks, which have seen 12 straight weeks of outflows, bourses around the globe have seen money continue to flow to stocks.

“In bouts of uncertainty, it’s probably not such a bad idea to take on a little risk,” said BNY Mellon’s Reinhart. In fact, he added, given the global economy’s current strong fundamental environment, “It’s probably a good time for risk taking.”

Dion Rabouin is a markets reporter for Yahoo Finance. Follow him on Twitter: @DionRabouin.

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The dollar’s status as the world’s funding currency is in question

Posted in Uncategorized by dionrabouin on July 9, 2018

U.S. President Donald Trump’s trade war and America First protectionist policies could be helping to accelerate the end of the dollar’s (DX=F) reign as the world’s reserve currency, analysts warn.

Having already instituted worldwide tariffs on steel and aluminum and threatening more taxes on foreign products from China, the European Union and a host of other U.S. allies and rivals, the president is pushing foreign governments to reconsider holding dollars and U.S. Treasury reserves.

“Although the dollar will continue to be used in most trades, there is a possibility that participants in the global economy start to look at alternatives like pricing in euro or pricing in [Chinese] renminbi,” said Karl Schamotta, director of FX strategy and structured products at Cambridge Global Payments in Toronto.

The dollar is a big risk to some countries

Using the dollar has long posed a risk to certain countries. China’s central bank in 2009 called for a global move away from the U.S. dollar after the market turbulence caused by the U.S.-induced global financial crisis. The People’s Bank of China renewed those calls in 2013 after the U.S. government shutdown when House Republicans refused to raise the nation’s debt ceiling, causing a downgrade to the nation’s credit rating.

Further, the dollar’s use as a funding currency means that nations that do business with one another must use dollars instead of their own currencies when purchasing commodities like oil. These nations have no control over the currency’s value, which has at times been volatile.

View photos


A man walks past an advertisement promoting China’s renminbi (RMB) or yuan, U.S. dollar and Euro exchange services at foreign exchange store in Hong Kong, China. REUTERS/Tyrone Siu

“There’s a disconnect there, increasingly so as the U.S. is less dominant in terms of the total economic pie in the world,” said John Hardy, head of FX strategy at Saxo Bank in Copenhagen.

However, Omer Esiner, chief market analyst and Commonwealth FX in Washington, says that we’ve seen this story play out before and so far little has changed.

“There’s something to be said about it over a very, very long-term horizon … anything could happen,” he said. “But it ultimately typically comes down to where do global investors see as the most liquid, deepest and reliable financial markets in the world, and that remains the United States.”

The rise of China

What may have changed is that China’s emergence on the world stage has provided an alternative. The country’s renminbi, or yuan, was added in 2016 to the International Monetary Fund’s reserve currency basket and China recently introduced a market to buy crude oil in renminbi rather than dollars.

China’s currency is held in reserves by less than 5% of reserve managers currently, but that could quickly change, says Douglas Borthwick, managing director at Chapdelaine Foreign Exchange in New York.

“The fact is that China is now the No. 1 or No. 2 export market to pretty much every country in the world,” he said. “So the U.S. has lost its dominance as being the No. 1 trading partner to everyone in the world and China’s picked up the pace on that.”

China’s One Belt, One Road initiative has helped create partnerships with countries in Asia as well as Africa and parts of Europe. Central bank leaders in Africa recently have been discussing adopting the yuan as a reserve currency.

Beijing’s tight control on capital flows and a lack of policy transparency have kept the renminbi from becoming more widely adopted, but that tide has been turning. The European Central Bank converted 500 million euros worth of its dollar reserves into the Chinese currency last year and other banks have said they are considering adding more renminbi reserves in 2018.

Donald Trump and Xi Jingping

View photos
Donald Trump and Xi Jingping (Reuters)

Beijing also has reduced its holdings of dollars and slowed its purchases of U.S. Treasuries in recent years as has the Bank of Japan. Since 2013, foreign ownership of U.S. government debt has fallen to 43% from 50% of publicly-held marketable Treasury securities, and the dollar’s share of global currency reserves recently fell to a four-year low.

More than just the dollar

Borthwick also urged that as the U.S. escalates sanctions on Russia, Iran, Venezuela and other countries that are major players in the oil market, they will have greater incentive to migrate away from the dollar.

Recent U.S. conduct has “weaponized” the dollar, Saxo Bank’s Hardy said, and Trump’s latest actions are accelerating efforts to move the world away from it.

More than just moving from the dollar, though, Cambridge’s Schamotta says multinational corporations are beginning to think of cutting the United States out of their supply chains because Trump’s tariff policies go directly against the growing interconnectedness of global business. It could cost companies more to do business in the United States than to move outside and avoid it.

Harley Davidson’s move to do more business in Thailand and the European Union and less in the U.S. could be seen as a recent example.

“You’re already seeing this happen for a number of sectors where cost is rising to manufacture in the United States because you’re importing the intermediate good from somewhere that tariffs are potentially applied to,” he said. “So there’s a lot of unintended consequences here.”

See also:

Dion Rabouin is a markets reporter for Yahoo Finance. Follow him on Twitter: @DionRabouin.

Follow Yahoo Finance on FacebookTwitterInstagram, and LinkedIn.