people in motion

people in motion

vendredi 24 février 2012


INVESTLOGIC STRATEGY  : The Bear Smiles... How To Trade It?


What strategy would we favor in the coming months and how shall we invest to cope with the financial and economical turmoils ? We can only reply that it made precious little difference – depending upon one’s time zone, personal proclivities, and astrological sign one could play the risk-on scenario via Russian stocks, Venezuelan bonds, Italian banks, Shanghai equities... or, for that matter, pork-bellies and Brazilian Real.
As we have been specializing in EM we shall continue to focus on these areas, more particularly to East and Asia.

The markets now move in a coupling mood as an amorphous lump; thus, if the party does continue, we would expect only the “safest” assets” – yen, dollar, US treasury and Bunds – to underperform. As noted in a previous issue, global financial markets have become a casino where all of the tables have been shut down except for the roulette... and the numbers have been off the wheel, too. Basically, you can bet on either red or black: risk-on or risk-off. Rien ne va plus!

Given the extreme pessimism with which the financial world entered the New Year, the market was overdue for a bounce; the excuse was provided first by the ECB (turning on the taps), then by the Fed (promising free cheese for as far as the eye can see).

Now that the Europeans have joined the Americans in massive monetary creation (the US via outright Fed purchase of government debt, the Europeans by ECB LBTO lending to the commercial banks which the employ the ECB cash to fund risk-free carry-trades on EU sovereign debt) the game will certainly last for another few innings. We are highly sceptical of any purported economic “green shoots”, which strike us as artificial in the extreme, driven solely by continued credit expansion. Note that the US has a structural deficit estimated at 7.5% and a current budget deficit of nearly 10%; the European blended deficit is a more modest 6%, mostly cyclical; alas, there are several notorious outliers with clearly unsustainable debt dynamics. Both blocs are being kept out of outright recession by accelerating monetization alone – never a comforting thought.

Vitally, neither the EU nor the US can roll over maturing debt under market conditions, and have thus resorted to overt monetization (despite the obviously unsustainable debt dynamics, the UST yield curve was flattened last year by massive Fed buying; European sovereign bonds have latterly joined the party, with yields coming in by as much as 50%). Not at all inclined to bet against the central banks, right now would currently tend to befriend the trend.

Of course, until and unless the laws of gravity are repealed, there is ultimately going to be a choice between massive fiscal drag or outright monetization with a severely inflationary outcome. But that is for later – and we get paid for making money now. Our best guess is that we will have a happy first two quarters of 2012, followed by a renewed storm in late Spring... if so, just remember to sell in May and go away.
Having happily sheltered in the emerging markets corporate fixed income space for the past six months, we are currently adopting a slightly more risk-friendly stance. Our preferred Axis-of-Evil (AOE) bond trade – Venezuela (PdVSA) / Cuba (serviced) / Belarus / Russia (private banks) – has worked out nicely indeed, with some of our assets up as much as 15 points (plus carry) since the October bottom. Argentina GDP warrants, arguably also associate members of the AOE, yielded about 60% last year, but still offer considerable value on a multi-year horizon.

We would now be looking to sell US dollars, buying Asian and commodity- currencies, equities (especially China, India), Russian roubles, commodities and emerging markets equities – in particular, Russia and China.

The China Syndrome As one of our basic investment themes, we shall continue to mock the China bears who have been warning of an impending collapse – since about 2003; meanwhile, the Chinese economy has more than doubled in size... Beijing had decided to downshift economic growth to just under 9%, and the last GDP numbers came in – at 8.9%; thus, the virtues of a properly- managed command economy. The Chinese financial system will need some restructuring, and restructure they shall, but without unwanted volatility. One can certainly choose to not play China – but one would be a fool to bet against it.

Fixed Income 
Our beloved PdVSA (Petroleos de Venezuela – Viva Chavez!) bonds are up as much as 15 points from their October lows, with some trading at or above their highs of the past five years. We are disinclined to chase them much above here. Belarus is surging back, and we would expect the bonds(now at 91, after seeing the low 70s) to enjoy further strength as Russia executes a successful buyout of her Western neighbour.

Russian bank bonds still offer free money – a good half-dozen points of yield pick-up with literally zero default risk. Our favourites remain RUSB (Russian Standard), Promsvyaz, and Alfa, to which we might add BOM, and for the truly adventurous, TCS. Your friendly VTB salesman will be able to guide you as regards relative value along the curve.

Elsewhere, the excitement is to be had in the more exotic neighbouring regions – Ukraine and Kazakh banks (we must here add a health-warning – something along the lines of “Don’t try this at home!” The yields are juicy but there are some very substantial risks).
Ukraine – often described as a joke which gets funnier each time you tell it – Ukraine is facing an unsustainable fiscal squeeze and has fallen squarely between two stools, managing to simultaneously antagonize both Russia and the EU. Given their unsustainable debt/current account/currency dynamics, we would assume that, in extremis, they will either agree a bailout with the IMF (requiring a 35% increase in domestic gas prices in the run-up to an election which is looking increasingly difficult for Yanukovich), or they will agree to a Belarus-type deal with Russia, ceding control of the gas pipeline system (a wasting asset, as competing routes – Nord Stream and soon South Stream – render it less critical for Russian export volumes), in return for a knock- down price on Russian gas imports.

It can be argued for most of the past decade that Nabucco was a pipe-dream not a pipeline – economic nonsense in the absence of a Transcaspian pipeline (vetoed by Russia and Iran). We have been amazed at their ability to keep the dream alive for as long as they have – but we reiterate our view that not a single molecule of gas will ever flow through it. Turkey’s recent agreement to allow the construction of Gazprom’s South Stream is probably the last nail in the coffin of what was always intended as a political luxury project that Europe currently cannot possibly afford.

Of course, this being Ukraine, there is also the possibility that they will dither until the markets lose patience and carry them out; all Ukrainian financial assets currently include a substantial sovereign risk premium. While we still like some of the dollar bonds, we would certainly not hold any local currency.

By far our preferred Ukrainian trade was Alfa Ukraine 2012 (restructured) – alas, this bond is now almost completely amortized, trading above par, and maturing later this year. This leaves Metinvest, in our view a credit substantially better than the sovereign which would be rated investment-grade were it not for the sovereign-ceiling effect; financial ratios are conservative, its sole vulnerability being its exposure to global steel prices.

As regards Kazakhstan, we think that the banking sector bonds offer substantial upside for moderate risk – the subordinated debt of KKB, ATF and BCCRD have been our preferred picks. ATF has performed poorly – the parent company, Unicredito Italia, receiving much unwanted attention as its share-price crumbled in the wake of the deeply discounted rights issue needed to repair its capital levels. That said, absent a European meltdown, we do not see is any meaningful risk of failure of Unicredito – which is TBF (Too Big to Fail) in Italy. Furthermore, as a stand-alone credit, ATF is holding reasonably steady and should continue to gradually amortize its NPL load.
Credit metrics of KKB and BCCRD are slowly improving – not at the pace which could have been expected with oil at $110 and the growing Chinese involvement in the Kazakh economy, but we see very limited default risk. We have at your disposal a full ppt presentation on the investments along the Silk Road, the opportunities and the development of Khorgos dry ports which opens a huge market between China, Russia and EU.

Currencies 
Those currencies which were worst beaten up during the extreme risk-off phase are now likely to outperform – NZD, AUD, KRW, RBL, etc. Which one you choose seems almost irrelevant – perhaps a basket approach would be best. Absent any further surprises out of Europe (always a risky proposition) the Euro should remain steady – but we can find more attractive alternatives.

Our top currency recommendation, indeed out top trade, remains what it has been for the past year – long Chinese RMB. We are increasingly enthusiastic about this call, which has performed remarkably well this year, RMB being essentially the sole major currency to have appreciated against the USD. As China liberalizes its currency regime preliminary to its assuming control over the entire visible universe, the NDF market, which until recently charged a premium of as much as 2.5% to buy RMB forward one year, is now actually offering forward RMB at a discount. Properly leveraged (6-1), assuming a 5% currency appreciation this year (mid-way between the bullish 6% and the bearish 4% calls), this trade should yield somewhere in the vicinity of 30% cash-on-cash. Best of all though, we see precious limited
downside – while the Renminbi might conceivably fail to appreciate, we are hard-pressed to envision a scenario where it would devalue outright.

Equities 
While we admit that the highest-beta assets will likely outperform early in the year, our Russian equity positioning remains “conservative,” heavily biased toward “virtual fixed-income” e.g. the preferred shares of TNK-BP and Bashneft, with perhaps a side- order of Tatneft Prefs. But, according to Deutsche Bank Moscow, the best – Surgut Prefs, which DB expect to yield in the vicinity of 15%, offering both yield and capital appreciation; furthermore, according to Mr Quinn, even that baying hound Transneft may well become something resembling a public company, paying proper dividends and showing concern for investor relations.

Commodities “Risk-on” means what it says. Precious metals are likely to surge on pleasure-principal monetary policy, and even if Soros is right about gold being “the ultimate bubble,” one make a great deal of money on bubbles provided you remember to get out in time...
Uranium has been one of the worst-performing industrial metals – this was not improved by Fukoshima. At some point – though probably not this year – demand will further outstrip production, and prices will surge.

If the current flight from quality continues, then we would expect financial investors to come crowding back into the commodity space, with predictable consequences. We like energy and think some of the agriculturals are in for a strong bounce, but remain wary of the volatility. The PGMs, Palladium especially, are likely to see insufficient supply in the face of growing demand.
Where could we be wrong? We could be jumping the gun here, and have limited certainty as regards our bullish call – but at some point one simply must get up and dance.

Having once badly underestimated the Europeans’ ability to screw things up, we are cautious about falling through the same ice twice – and if tomorrow morning the reader learns that the Germans have blocked further LTRO loans, have decided to reintroduce the Deutschemark, then it’s game up.

Equally, were the US to suddenly stop talking about a balanced budget and actually attempt to implement one, we would not want to be anywhere near the risk assets. For now, all of these scenarios appear most unlikely 

Happy Trading!


Why Russia could be a gusher for daring investors
 When oil prices collapsed in the wake of the 2008 economic crisis, Russia, the world’s top oil-producer, was hit hard and investors fled. More than three years later, foreign money appears to be returning. But as presidential elections approach and political uncertainty grips the nation, nerves are once again setting in.

According to analysis by Russian investment bank Troika Dialog, $475 million cascaded into Russian retail funds in the 12 months through Feb 15. Russia was the second-most popular investment destination after China among the so-called BRIC countries (Brazil, Russia, India, China), despite its comparatively slow economic growth and its greater exposure to the troubled European region.
The growing interest in Russia comes at a time when oil prices are rising and the country is recovering strongly from the global economic crisis. State statistics agency Rosstat in January reported that the economy grew by 4.3% in 2011, surpassing forecasts. Continued growth is expected in 2012, though at a more subdued rate, as Europe, a major customer of Russian oil, continues to struggle with its sovereign debt crisis.
Russia-focused analysts also point to falling inflation, strong exports and increasing retail sales as reasons to be bullish on the country. Increased demand from the Russian middle class, which is growing in both number and influence, is also bolstering sentiment.
Bank of America Merrill Lynch analysts have even suggested that Russia could be “the next Brazil,” if it considers wooing foreign investors to help develop offshore oil and gas resources, as the South American nation has done in recent years.
A campaign billboard  in the Siberian city of Yakutsk
Political and economic risks
Investor confidence in Russia has recently been knocked by a series of mass anti-government protests that erupted in response to an allegedly rigged parliamentary election in December. Troika Dialog data revealed that at the end of January all other emerging market country funds attracted new money, but Russian funds reported outflows.
To be sure, the presidential election slated for March 4 is heightening the political risk for investors in Russia. And though the main target of the rallies, Prime Minister Vladimir Putin, is widely expected to win the presidency, analysts are not convinced his victory will quash the unrest.
This uncertainty could certainly continue beyond the elections, as market participants wait to see what kind of regime Putin will lead in his third term as president.
Even beyond the Kremlin, Russia’s political landscape is risky. Vladimir Putin said it himself... the business environment is difficult because although the corporate legislation is there, the tax code is there, it seems that everything is perfect on paper, [but] the implementation remains problematic...
Investors also see risk in Russia’s dependence on its energy sector. Unlike other emerging market economies, including India and China, its economy is extremely vulnerable to commodity price changes.
Alternatively this heightened risk represents a significant opportunity to make timely investments.
Russia’s track record of economic and political volatility has pushed asset prices below those of its emerging market peers, and this discount has widened since political unrest broke out in the country in December. At the end of 2011, Russia’s main equities index had a price to earnings ratio of 5.13, versus a ratio of 10.75 for the MSCI Emerging Markets index (reflecting 21 emerging economies).
Taking stock
There are several ways for investors to tap into Russian equities.
First, some Russian companies are listed in the U.S. as American Depository Receipts (ADRs). Bought and traded like any other security, ADRs allow investors to sidestep Russia’s tricky trading environment, while gaining exposure to the economy.
A substantial number of Russian companies are listed in ADR format, including major players in the pharmaceutical, transport, utilities and finance sectors. Some of the country’s big telecommunications firms are also available, including one top pick VimpelCom Ltd. (NYSE:VIP)  .
VimpelCom has been operating under the radar while it consolidated a series of acquisitions. The company now has a presence across Europe, in Africa and in several Asian states.
Buying ADRs in Russia’s dominant energy sector is a worthwhile move. If China continues to grow, it will be phenomenally good for Russia. China does not have natural resources, so Russia is in an unbelievably good position to feed China’s growth.
Shares in firms like Gazprom OAO,  the world’s top natural gas producer, or Rosneft , Russia’s leading oil company, are available as ADRs, for example. Both entities are partly state-owned, which gives them extra stability.
Alternatively, investing in Russia’s largest conglomerate, Sistema JSFC (OTN:JSFCF)  , which trades in London as a global depositary receipt (GDR). The company is highly diversified, with telecom, technology, tourism, energy and construction divisions. This one stock gives you exposure across Russia, not only in oil, gas and telecoms, but also in the next most promising [sectors], including retail.
But according to Chris Weafer, chief strategist at Troika Dialog, “the more attractive domestic stories are not listed [internationally], including some of the fastest growing.”
Weafer calls upon the example of M.Video, “Russia’s Best Buy,” to illustrate his point. While counterparts in Western Europe floundered, M.Video sales rose 30% in the first nine months of 2011. It’s a fast-growing company that is plugging into rising affluence — that’s exactly the sort of story people should be buying in Russia as the economy grows.
Open access
International investors will soon be able to purchase local shares in companies like M.Video as easily as they can purchase ADRs in Russia’s corporate giants.
As part of a series of efforts to ease outside access to Russia’s financial markets, President Dmitri Medvedev signed a law in December to create a central depository. The facility is expected to be operational in April, when investors will be able to instruct their broker or bank to open an account in the depository. There they can hold local shares.
Still, putting money into a country as complicated as Russia can be daunting, and some investors prefer to engage in Russia through mutual funds, managed by analysts familiar with the market.
“Russia is a difficult, idiosyncratic equity market,” said Roland Nash, chief investment strategist at Russian investment specialist Verno Capital. Fund managers understand the equity market and if you’re not comfortable with the risk, the volatility and corporate governance issues, they allow you to have exposure whilst mitigating those risks.
Mutual funds also offer diversification. Innes’ fund, of which 70% is invested in Russia, comprises a range of sectors including financials, energy, information technology, consumer goods and health care. Russian giants Gazprom, Rosneft and Sberbank Rossia (OTN:SBRCY)  are among the recent holdings.
In addition, mutual funds that represent a pure play on Russia include Third Millennium Russia Fund (MFD:TMRFX) , ING Russia Fund (MFD:LETRX) , and JPMorgan Russia Fund (MFD:JRUAX) .
Mutual funds are not the only way to get diversification. Exchange-traded funds (ETFs) are increasingly popular among investors wanting a piece of Russia’s growth story. Analysis by Troika Dialog shows that in the 12 months to Feb. 15, ETFs accounted for 72% of the total investment received into Russian retail funds.
The range of Russia-focused ETFs trading in the U.S. includes SPDR S&P Russia ETF (NAR:RBL) . This fund tracks an index that measures the investable universe of Russia’s public companies. It includes holdings in firms in the energy, communications, financial and real estate sectors.
Other options include Market Vectors Russia ETF (NAR:RSX) , Market Vectors Russia Small-Cap, and iShares MSCI Russia Capped Index Fund (NAR:ERUS)
Alternatively, investors can buy ETFs that track all the BRIC countries. The SPDR S&P BRIC 40 (NAR:BIK)   has more than one-quarter of its holdings in Russia and returned 18.4% in the 12 months to Feb. 16.
Troika Dialog’s Weafer says ETFs are a good way to manage interests in an environment as prone to volatility as Russia.
Investors are attracted to Russia, but there’s always lingering suspicion, That’s what makes an ETF attractive, because you can get in and get out very quickly.

lundi 20 février 2012


Greece Will Leave the Eurozone

A Greek exit from the euro zone would be traumatic and the potential for serious policy errors exist. 
However, Greece’s fiscal path is not sustainable as part of a currency union dedicated to a strong currency and immediate fiscal balance, even with a haircut that takes government debt to GDP down to 120%. 
Moreover, even with Greece fulfilling the Maastricht criteria after a haircut down to 60% government debt to GDP that includes ECB (public sector) involvement, the lack of euro zone convergence means these problems will arise again. Greece is simply not competitive as part of a currency union with Germany – and it never will be. That means almost permanent fiscal transfers and a loss of Greek fiscal sovereignty. 
The political will necessary to support this solution does not exist. And so Greece will exit the euro zone.