Global View May 2015: What Every Emerging Market Investor Needs to Know - It's Time To Raise EM Exposure

by Michael J. Howell2. June 2015 16:28

Emerging Market (EM) investing has fallen out of fashion after several years of underperformance (50% down against World stocks since late-2010). There are two broad reasons for this slump. First and most important, the policy mix in EM has been far less favourable than the QE-driven backdrop that supported the Developed Markets and, particularly, Wall Street. Since a large part of the EM liquidity squeeze arose in China over the 2011-2014 period, the dominant position of China's economy also gave this spill-over an added economic dimension. Second, Developed Market corporations have faced up more quickly to competitive pressures and cost control than their EM counterparts, so helping them sustain high profit margins and generate more cash flow growth.

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Global View May 2015 - The Most Important Question in the World: Have the Chinese Translated Bagehot?

by Michael J. Howell22. May 2015 16:39

Financial crises are different from economic crises insofar that they are often triggered by a jump in contingent liabilities, such as short forex positions and mismatched duration. Walter Bagehot, the nineteenth century doyen of Central Bankers, invented the Lender of the Last Resort role to flood markets with liquidity. Bagehot argued that more liquidity was enough. With China perhaps suffering its equivalent of the 2008 Financial Crisis, we venture that a further sizeable easing of PBoC liquidity is both needed and likely. This will not only reduce domestic Chinese investment risk, but it will have global implications. Foremost are a sell-off in global bond markets ('safe assets'), a revival in cross-border flows to EM and a rebound in gold and commodity markets.

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The Hidden Easing? BoJ boosts cash injections again and Fed reverses uphill!

by Angela Cozzini22. May 2015 14:51

Our Weekly Liquidity Conditions report has just been published. 

  • BoJ liquidity expansion is gathering pace. Net liquidity provision has hit a record Y213.3tr and monetary base is expanding at a 53.2% 3m annualised clip
  • Expansionary BoJ and ECB are leading the latest round of QE
  • Fed tightening not happening as quickly as anticipated: we expect the Fed to resume QE later in 2015 in face of a weaker economy
  • BoE liquidity provision has increased in recent weeks

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TSS - Emerging Markets Report, May 2015

by Michael J. Howell21. May 2015 17:22

The World is split between those markets where liquidity is rising – Eurozone, China, EM and Japan – and those markets where liquidity is falling or low – US and UK. Prospects for the former group is positive. Emerging Market liquidity is rebounding across many fronts, but the single catalyst appears to be rising Chinese Liquidity. We have argued for 2015 that the reality of Chinese monetary easing will prove more important than the diminishing prospects of US tightening.

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Global Liquidity Conditions (Liquidity) Emerging Markets, May 2015

by Michael J. Howell21. May 2015 17:20

April 2015 has proved to be a strong month for Emerging Market Liquidity with the EM component of our GLI™ (Global Liquidity Index) hitting 41.0 (‘normal’ range 0-100) from 32.4 at end-March.

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Global Liquidity Conditions: Major Markets

by Michael J. Howell21. May 2015 17:18

The Global Liquidity Index (GLIÔ) rebounded in April 2015 to 40.3 from 37.1 in March ('normal' range 0-100).

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Global Liquidity Conditions (Risk) Emerging Markets, May 2015

by Michael J. Howell21. May 2015 17:14

The Emerging Market component of our Global Risk Index fell to 68.1 in April, compared to 73.8  in March and the recent peak of 90.6 in January.

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The Most Important Question in the World: Have the Chinese Translated Bagehot?

by Michael J. Howell21. May 2015 17:08

This is the most important question currently facing investors: it is even more important than the question whether China is truly easing or not? Bagehot was a nineteenth century economist, author of Lombard Street and the architect of the key Central Banking doctrine of Lender of the Last Resort. China’s problem is highlighted in the chart below. Shadow bank lending is cratering and many domestic banks look troubled. Shadow banks supply roughly one-third of total Chinese credit. Chinese credit itself totals nearly US$25 trillion or close to a quarter of total Global Liquidity. China is plainly important economically, but she could be more important financially. Put another way, could there be a Chinese equivalent of the Lehman Bros. failure in coming months? China’s People’s Bank (PBoC) plainly has muscle: its balance sheet is now one-fifth larger in nominal terms than the US Federal Reserve’s. But will it use its power to bail-out troubled institutions?

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TSS - Major Markets Report, May 2015 - Is China Really Easing?

by Michael J. Howell21. May 2015 12:15

The World is split between those markets where liquidity is rising – Eurozone, China, EM and Japan – and those markets where liquidity is falling or low – US and UK. Prospects for the former group are positive, but less favourable for the latter group where our asset allocation is consequently defensive.

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Global View April 2015: Is this Really a Bond Bubble?

by Michael J. Howell13. May 2015 15:41

Bonds may be richly priced based on their risk (or term) premia, but we can find no evidence of a G4 bond bubble despite obvious investor concerns raised by negative interest rates for many issues. This does not say that bond prices will not fall, nor yields rise over coming months. Indeed, we are expressly negative on the US Treasury and Bund markets for liquidity-based reasons. However, there is no bubble in the normal sense. The only major anomaly we can spot based on G4 risk premia is the remarkable lack of disparity, despite obvious monetary policy differences.

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