David Fuller and Eoin Treacy's Comment of the Day
Category - General

    Stock Bulls Often Return When Emerging Markets Get This Cheap

    This article by Srinivasan Sivabalan for Bloomberg may be of interest to subscribers. Here it is in full:

    When emerging-market stocks trade this cheap relative to U.S. equities, a rebound is normally in order.

    The MSCI Emerging Markets Index has traded at a discount to the Standard and Poor’s 500 Index since 2006, but for the past five years its relative valuation has held within a range, with its price-earnings ratio fluctuating between 25 percent below the U.S. gauge at the best of times and 33 percent during the worst.

    The index, the benchmark gauge of developing-nation equities, typically bounces back in a matter of weeks once it reaches the floor. That was certainly the case on three previous occasions: at the height of the Russian currency crisis in 2014; in the wake of the Federal Reserve’s December 2015 decision to raise interest rates for the first time in almost a decade; and at the end of the technology sell-off last year.

    The index closed at a valuation ratio of 66.37 percent on Friday, or a discount of 33.63 percent to U.S. stocks based on price-to-estimated earnings. On Monday, it rallied 1 percent, the best one-day gain in six weeks.

    Still, past rebounds are no guarantee of future performance and the environment remains fragile for emerging markets.

    Investors can’t know how ugly the U.S. trade war might get, how deeply Fed interest-rate increases will affect developing-nation currencies or where the next political shock will come from.

    But for those convinced of the investment case for emerging markets and willing to wait for the right valuation to resume buying, this could be the moment. Stocks are as cheap now as at any time in the past five years.

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    Venezuela is pegging its economic recovery to a cryptocurrency that's widely considered a scam

    This article by Kate Rooney for CNBC may be of interest to subscribers. Here is a section:

    Venezuela is doing something completely unprecedented. Some even say illegal.

    As part of an attempt to stop skyrocketing inflation, the country is issuing a new fiat currency called the "sovereign bolivar," which will be backed by a cryptocurrency. But that cryptocurrency, called the "petro," does not trade, and Venezuela's own parliament says it's being illegally used to mortgage the nation's cash-strapped oil reserves.

    "This is a smoke-and-mirrors operation typical of Venezuela — I'll believe it when I see it," said Steve Hanke, professor of applied economics at Johns Hopkins University and one of the world's leading experts on hyperinflation. "The problem with the petro is it's a scam, it doesn't even trade."

    In February, President Nicolas Maduro unveiled the oil-backed "petro" digital currency as a means to raise cash amid an economic meltdown and economic sanctions. Maduro said each petro token, which is not in circulation yet, would be backed by a barrel of the state's national petroleum. He also said about 100 million petro tokens would be issued — estimated to be worth around $6 billion.

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    Immigrants, With Their Split Identities, Trigger Soul-Searching in Germany

    This article by Bojan Pancevski for the Wall Street Journal may be of interest to subscribers. Here is a section:

    “It took an eternity for the conservatives to admit that Germany is a land of immigration. People from Turkey, Spain, Italy, Greece and so on came to our country to help us rebuild it, but they had a difficult time integrating here,” said Sebastian Hartmann, a lawmaker with the Social Democrats and co-author of the bill.

    The #MeTwo debate and the pending legislation are challenging complex, decades-old attitudes in Germany regarding nationality and ethnicity, and raising questions about Germans’ willingness and capacity to integrate foreigners and their descendants.

    Germany needs to attract workers as the current population ages, according to economists who say the country must lure at least 400,000 skilled outsiders a year to maintain economic growth.

    Already, nearly a quarter of Germany’s 82 million people have at least one immigrant parent who was born without German citizenship, according to 2017 figures. And the country takes in almost as many newcomers a year as the U.S., mostly European Union nationals who are free to work across the bloc and asylum seekers who can’t be turned back under international law.

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    China Builders Tap Local Bonds at Record-Low Rates on Easing

    This article for Bloomberg News may be of interest to subscribers. Here is a section:

    Combined bond maturities in onshore and offshore markets for the sector amount to $76.5 billion through the end of 2019, according to data compiled by Bloomberg. Builders are expected to tap both markets to meet the refinancing needs.

    "We expect onshore issuance will remain strong after a pick-up in recent months," said Franco Leung, property analyst at Moody’s Investors Service. "Offshore issuance slowed recently, but we expect issuers will continue to tap the offshore bond market given the maturity walls in the coming 6 to 12 months.”

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    Trump Aide Says U.S. to Stand Firm as China Talks Set to

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    Donald Trump’s top economic adviser welcomed China saying it will send Vice Commerce Minister Wang Shouwen to the U.S. for low-level talks in late August, while also adding that the president’s determination on trade shouldn’t be underestimated.

    “It’s a good thing that they’re sending a delegation here - we haven’t had that in quite some time,” National Economic Council Director Larry Kudlow told CNBC Thursday. “The Chinese government in its totality must not underestimate President Trump’s toughness and willingness to continue this battle to eliminate tariffs and non-tariff barriers and quotas to stop the theft of intellectual property and to stop the forced transfer of technology.”

    He said the Chinese economy and currency “are slipping, as you all know, but let’s just see what happens.” Talks can produce better outcomes than expected, and talking is better than not talking, he added.

    The Chinese delegation led by Wang will meet with an American group led by David Malpass, under secretary for international affairs at the Treasury Department, at the invitation of the U.S., China’s Ministry of Commerce said in a statement on its website on Thursday.

    “This will be ‘talks about trade talks,’” said Gai Xinzhe, an analyst at the Bank of China’s Institute of International Finance in Beijing. “Lower-level officials will meet and haggle and see if there is a possibility for higher-level talks.”

    Before an earlier deal collapsed in May, China agreed to "significantly" increase purchases of U.S. goods and services, and that may provide a guide for the next round of discussions.

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    Amazon's Real Rival in India Isn't Walmart

    This article by Andy Mukherjee for Bloomberg may be of interest to subscribers. Here is a section:

    Meanwhile, Indian-managed companies like Ambani’s Reliance Retail Ltd. will be free to control and improve their supply chains while building a fearsome online presence in partnership with his mobile operator, Reliance Jio Infocomm Ltd.

    That’s not the only onerous aspect of the policy. The draft speaks of a two-year period after which data generated in India – on social media (Facebook Inc.), via search engines (Alphabet Inc.’s Google), or e-commerce (Amazon) – will have to be stored on local servers. As the Wall Street Journal noted this week, the move is bound to push up costs for Western firms.

    This new restriction will probably make it to the final law. The Indian central bank is already directing all payment firms like Visa Inc., Mastercard Inc. and PayPal Holdings Inc. to keep their Indian data exclusively in the country by October, so there’s little reason to expect that rules for e-commerce data will be much less stringent.

    Besides, similar laws already exist in China. Amazon sold its Chinese servers and some other cloud assets to a local partner to comply with Beijing’s local storage rules. Alphabet, which has no data centers in China, is also looking for a local partner to bring its Google Drive and Google Docs to that country, Bloomberg News reported recently.

    Other aspects of the policy may die without Bezos needing to move a muscle. Indian privacy activists will balk at the idea of a “social credit database,” to be set up — in a very Chinese fashion — by mixing state and non-state citizen data. While the goal of the database is to promote digital lending, there’s no guarantee it won’t be used to stifle dissent. 

    A more problematic suggestion in the draft is that the Indian government would have access to the data stored in India, “subject to rules related to privacy, consent etc.” A proposed Indian data-privacy law is yet to be passed by parliament, and whatever makes it onto the books will in turn be shaped by the Indian apex court’s verdict in a case challenging the constitutional validity of a biometric identification system that the government has rolled out to 1.2 billion Indians.

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    A dangerous bubble in corporate debt

    Thanks to a subscriber for this article from the New York Times which may be of interest. Here is a section:

    To help pay for its recently completed $8 billion buyout of the margarine and spreads business of Unilever — since renamed Flora Food Group — KKR, the private equity firm, offered investors 1.1 billion euros (about $1.3 billion) of senior notes with a minimal covenant package. Moody’s rated it 4.99 on a scale of 1 to 5, with 5 being the weakest. Nevertheless, investors gobbled them up.

    Or consider the mighty AT&T — now stuffed to the gills with an estimated $180 billion in debt following its $85 billion acquisition of TimeWarner. It is, according to Moody’s, the “most indebted, nongovernment controlled, nonfinancial rated corporate issuer” and one now “beholden to the health of the capital markets.” In other words, the company is so indebted that chances are high it will need continuing access to the credit markets to refinance and pay back its mountain of debt as it becomes due.

    So-called junk bonds — issued by companies with poor credit ratings — historically have yielded around 10 percent or more, to compensate investors for taking the risk of buying the debt of such companies. These days, junk bonds yield around 6.25 percent, meaning that investors — still desperate for yield — have overpaid for these bonds sufficiently to drive down their effective yields to levels that fail to compensate them for the risks they are taking.

    When junk bond yields return to more normal levels, as interest rates rise and investors’ yield-fever breaks, the price of the bonds bought during the feeding frenzy will fall and billions of dollars stand to be lost — by endowments, pension funds and high-yield funds, among others — as bonds across the board are repriced by the market.

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