Our view is that investors are not only ignoring data that has changed for the better across the Continent, but that positioning is also leading to more follow through from a 4% move that has already taken place in the Euro off the lows.
Massive growth in the need for financial services in emerging markets has demanded financial competitors to adapt and innovate. This has provided tremendous opportunity for fast-acting companies to benefit.
Thursday’s best web covers a new Chiense joint technology venture, the disappearing Russian middle class, trade volumes between Indonesia and other ASEAN nations, and Banco Santander seeking a way into Dubai.
The markets anxiously waited but got no relief on the deal between Greece and the Institute of International Finance (IIF), the organization representing private debt holders. With the S&P 500 now up 19.6% off its November lows and the euro up about 4.5% against the dollar over the last couple of weeks, the market could see a significant sell-off if the news is less than optimal.
The MSCI indices rebalanced last night, adding some interesting names and increasing the weighting of others. This is a bullish
The Spanish credit crunch may have left the headlines, but the country’s biggest bank still looks a little overextended compared to its global rivals after recent acquisitions.
Santander (STD, quote) currently has a capital reserve of around 8.6% of its assets, which allowed it to handily pass the summer stress tests as well as meet the upcoming Basel III banking requirements.
However, Barclays analysts say that STD could be as much as $25 billion weaker than its global counterparts, largely due to the company’s aggressive roll-up of operations pulled from Royal Bank of Scotland (RBS, quote), Allied Irish Banks (AIB, quote) and other crisis-weakened rivals.
Barclays suggests that STD may spin off its ex-RBS business to rebuild about $7 billion of its capital reserves and possibly launch a secondary offering of its Brazilian unit (BSBR, quote). In theory, Santander Chile (SAN, quote) could be on the table as well.
Added supply of either of these stocks could drive institutional investors to rebalance their Latin holdings, albeit on a much smaller scale than the recent Petrobras offering drove new weightings in Latin oil portfolios.
Naturally, since STD is meeting all of its capital obligations, this is not weighing on euro sentiment in any real way. In fact, the European currency is trading at a six-month high against the dollar this afternoon.
Investors have plenty of regional funds to pick from these days, but it is somewhat surprising that there is still only one truly global “frontier markets” ETF out there.
FRN (quote) hit the ground in June 2008, when the wheels started coming off the global economy.
That somewhat inauspicious start date leaves it with 10% lifetime losses, but YTD performance has been an extremely respectable 20% — making it one of the top globally diversified funds out there.
The secret of FRN’s success has been solid exposure to the world’s top-performing markets, which generally happen to be off the beaten path as far as BRIC-heavy portfolios are concerned.
A full 57% of the portfolio is in just four markets of the Latin periphery: Chile, Colombia, Argentina and Peru.
With the Chilean market on a record-breaking trajectory this year — and accounting for 31% of FRN — and Colombia (12%) holding its title of favorite among many single-country investors, it is no wonder that FRN is delivering the goods.
Holdings tend to be the large-cap names in each country with a strong bias toward resource and banking plays: EC (quote) and CIB (quote) in Colombia; ENI (quote), EOC (quote), SQM (quote), LFL (quote), SAN (quote); BVN (quote) in Peru.
In theory, an investor could simply buy ADRs or country-specific funds to get exposure to these big Latin stocks.
Much more than a Latin fund
But where FRN really shines is in the other 48% of the portfolio, which is currently allocated to a band of markets ranging from Nigeria up through Central Europe and the Middle East and on to Kazakhstan.
With very few (and thinly traded) exceptions like Orascom Telecom (ORSTF, quote), these companies are not available to U.S. investors.
In many ways, these countries are the BRICs of tomorrow. If half of FRN is weighted to Brazil’s less well known Latin counterparts, the weighting to Poland, the Czech Republic, Ukraine and Georgia provides a much less oil-driven counterweight to Russia-heavy “emerging Europe” portfolios.
Pakistan is a way to play a vast economy very similar to the old India that is already fast disappearing under the pressure of modernization and vast investor capital.
While specialized portfolios provide access to Africa and the Middle East, FRN is the only ETF out there that gives investors a way to play them all at once.
There is plenty of chatter about a U.S. bond bubble. This morning on CNBC’s Trading the Globe, we looked at the fixed income froth in the world’s emerging markets. Watch the video here:
Fund flows tell the story: $9 billion has moved into emerging markets debt funds so far this year. That is triple the high flow we have seen previously.
Traders want the relatively high yields that emerging markets debt offers compared to U.S. bonds. Paradoxically, risk is also at stake here. All the talk about a Treasury bubble has a lot of people wondering when (not if) the U.S. bond market will correct . . . and so they are parking their money elsewhere until it does.
But does this mean the BRIC bond markets are bubbling? It is true that these countries do not enjoy the safe-haven status of the U.S. Treasury, and so any new bout of global angst could simply push all this money back to the relatively secure embrace of Treasury securities.
And in the meantime, all of the BRIC countries have looming risk factors of their own. Brazil is looking at contentious elections in October. Russia could be vulnerable to a continued decline in oil prices. China still worries about inflation and India is still ratcheting up local interest rates to cool its own economy.
Any of these factors could make a bond market implode if they get out of control.
How can traders protect themselves while hunting those yields?
Emerging banks are highly capitalized and are growing fast. They generally pay solid dividends and have high-quality debt of their own if you want to play the fixed income story.
Beyond the banks, there are relatively solid players out there who may carry less overall risk than politically motivated sovereign borrowers.
On the ETF front, it comes down to a question of exchange rates. EMLC (quote) has been interesting because its returns remain priced in emerging markets currencies. However, if countries like Brazil start aggressively guiding their rates lower, it may make more sense to just stick with dollar-denominated funds like PCY (quote) and EMB (quote).