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TURNING LIONS INTO VEGETARIANS – THE TAMING OF EM GROWTH

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TURNING LIONS INTO VEGETARIANS – THE TAMING OF EM GROWTH

By Jade Fu, Investment Manager at Heartwood Investment Management

In the wake of last week’s forced resignation of the Turkish Prime Minister, President Erdogan of Turkey defended his views of strengthening the role of his presidency and moving away from parliamentary democracy, declaring: “No one has the right to turn Turkey into a country of lions condemned to a vegetarian diet.”

Turkey serves as a reminder to investors that political risk is always an important consideration when investing in emerging markets (EM). President Erdogan’s comments were made in respect to constitutional changes, which lie at the heart of Turkey’s domestic struggles. But as ever, underlying much of the current turmoil in Turkey is a deteriorating economy. Turkey experienced rapid rates of economic growth before 2011, when the country embraced a market reform agenda. Since then, however, GDP has fallen sharply – albeit to levels that would satisfy most developed economies, Inflation has been stubbornly high (8% as of April, 2016) and unemployment remains above 10%. For an economy that relies on external financing, Turkey’s sizeable current account deficit (4.4% of GDP as of the fourth quarter of 2015) creates vulnerabilities for the economy.

EM has faced structural and cyclical headwinds

When times are hard, political discourse often becomes a battle between more orthodox, market-friendly economics versus populist rhetoric. Turkey’s ousted Prime Minister, Ahmet Davutoglu, has favoured balancing budgets, reducing inflation and improving fiscal accounts. Erdogan, on the other hand, supports an approach of lowering borrowing rates and raising overall levels of growth to beat inflation.

Structural economic reforms were huge drivers of economic growth and capital markets in the earlier part of this century, but momentum has waned in the past couple of years. It is, therefore, unsurprising that EM growth has been on a decelerating trend since 2014. At the same time, EM countries have had to contend with cyclical headwinds: a China-led global slowdown, commodity price falls, uncertainty around Federal Reserve policy and US dollar strength. The consequence is that investors have voted with their feet. Flows into EM assets have dried up since the summer of 2015 and, despite the equity market bounce since mid-February, investors appear to be reluctant to pile back in.

Political crisis often harbingers change

Many EM countries are experiencing painful adjustments, which part explains weaker risk appetite. Brazil’s current political and economic woes are payback for the lack of reform during the good times. Brazil’s economy is smaller today than it was in 2012; a result of fiscal overspend, declining commodity prices and political corruption. The Brazilian real has fallen by nearly 60% against the US dollar since June 2014, though it has rallied 13% this year.

However, with Dilma Rouseff facing an impeachment trial, investors are optimistic that change is afoot. Local equity markets are more than 40% higher since their January low, in part driven by the commodity price rebound but also expectations of Rouseff’s impeachment. Given the strength of the rally, we believe that much of the good news has been priced in. Nonetheless, we are encouraged by current developments and believe they are a longer-term positive for Brazil’s economy and capital markets.

We are less bearish than outright bullish on EM

Political events this week have encapsulated what EM investing is all about: being selective and avoiding country, idiosyncratic risk. Of course, it is not always that straightforward. Despite averaging a 6% annual growth rate since 2012, the Philippines electorate has just voted in an anti-establishment candidate, Rodrigo Duterte. So far, Duterte has gone some way to assuage market concerns by pledging to continue with the macroeconomic policies of the outgoing administration of Benigo Aquino. We are expecting continuity of policies for the time being and believe that the underlying economic fundamentals will remain intact.

Broadly, and despite this week’s political headlines, the emerging markets asset class is in much better shape than two decades ago. EM equities continue to offer investors significant opportunities in an environment of low global growth. We have been increasing our EM equities weighting within our higher risk strategy since late 2015, when we were underweight. We would not yet describe ourselves as ‘bullish’, but we believe there are reasons to be less bearish; we are, though, cognisant of country-specific risk. Overall, if the US dollar weakens, the Fed remains dovish and we see more evidence of positive fundamental changes, then given how investors are positioned we can see EM doing quite well.

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GameStop stock doubles in afternoon; even Reddit is surprised

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GameStop stock doubles in afternoon; even Reddit is surprised 1

By David Randall and Sinéad Carew

NEW YORK (Reuters) – GameStop Corp shares more than doubled in afternoon trading on Wednesday, surprising those who thought the video game retailer’s stock price would stabilize after recent hearings in the U.S. Congress prompted by the fierce rally and steep dive that upended Wall Street in January.

GameStop shares were up 60% after hours at around $146, following a 103% rise during the day’s trading.

Trading in GameStop was halted several times following a rally that began around 2:30 pm Eastern time Wednesday with no obvious catalyst.

Analysts that follow the stock could not point to one single reason for the sharp move, offering reasons that included a corporate reshuffle.

“GameStop announced the resignation of its CFO last night. Some may have taken this as a good sign that RC Ventures is making a difference at the company in terms of trying to accelerate the shift to digital,” said Joseph Feldman, an analyst at Telsey Advisory Group.

Stephanie Wissink, analyst at Jefferies Research declined to comment on the afternoon stock spike but referred to her research report following the CFO resignation. Wissink said it did not seem like a coincidence that the CFO resigned after the company settled with activist investor Ryan Cohen’s RC Ventures.

“We expect GME to pursue a CFO with a more extensive tech (vs. retail) background, which will be a signal of the direction the company is due to take in coming years,” Wissink wrote in her note.

The spark also seemed to take posters on Reddit’s popular WallStreetBets forum by surprise.

“Why is GME going back up. is it Melvin covering?!,” one user wrote.

In January, shares of GameStop soared more than 1,600% as retail investors bought shares to punish hedge funds such as Melvin Capital that had taken outsized bets against the company. Melvin Capital said it lost 53% before closing its position in GameStop.

Other so-called “stonks” – an intentional misspelling of ‘stocks’ – favored by retail traders, also shot higher in Wednesday afternoon trading. AMC Entertainment Holdings Inc gained 18%, while BlackBerry Corp rose nearly 9%. Shares of Canadian cannabis company Tilray Inc gained nearly 13%.

The retail trading frenzy was the subject of hearings in Washington last week, where Keith Gill, a Reddit user and YouTube streamer known as Roaring Kitty who had boosted the stock with his videos, reiterated that he was a fan of the stock.

Shares of GameStop remain nearly 74% their all-time high reached on Jan. 27 despite Wednesday’s rally.

(Reporting by David Randall; Editing by David Gregorio)

 

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Analysis: Central banks say no tapering. Markets aren’t buying it

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Analysis: Central banks say no tapering. Markets aren't buying it 2

By Sujata Rao and Dhara Ranasinghe

LONDON (Reuters) – Central bankers worldwide have been unequivocal: There are no plans to cut back on money-printing any time soon, let alone raise interest rates.

Markets don’t seem to be buying it.

U.S. 10-year Treasury yields rose on Wednesday to one-year highs above 1.4%, extending this year’s near 50 basis-point jump that has dragged up sovereign borrowing costs in Europe, Japan and elsewhere.

The reckoning is that the spending step-up by U.S. President Joe Biden’s administration and post-vaccine economic reopening will fuel a global growth-inflation rebound, forcing central banks to “taper” or withdraw stimulus ahead of schedule.

A brighter outlook may indeed justify higher yields. But what has started to spook markets is a sudden move up in so-called real yields, or returns in excess of inflation. That shift can tighten financial conditions, suck cash from stock markets and in general, hamper the recovery.

It’s spooking policymakers, too. From the Federal Reserve’s Jerome Powell to New Zealand’s Adrian Orr, many have weighed in this week to stress policy will remain loose for some time.

But the mantra they have chanted for years seems now to be falling on deaf ears.

Powell, the world’s most powerful central banker, knocked yields just a couple of bps lower even after commenting that the inflation target was more than three years away.

Euro zone yields only briefly heeded European Central Bank chief Christine Lagarde’s warning on Monday that the bank was “closely monitoring” the recent rise in yields.

(GRAPHIC – Who’s uncomfortable with rising bond yields?: https://fingfx.thomsonreuters.com/gfx/mkt/jbyvrdbewve/de2402.png)

(GRAPHIC – Powell reassures bond markets but yields stay high: https://fingfx.thomsonreuters.com/gfx/mkt/xlbvgdmzapq/US2402.png)

The reason, according to ING Bank is that markets are pricing “with an increasing degree of conviction” the end of ultra-easy policies.

“Market confidence in the strength of the U.S. recovery is so strong and widespread that the tapering boat has sailed already,” they said, predicting “tapering” to happen by the end of 2021, earlier than the early 2022 predicted by Fed surveys.

“We expect consensus is converging to our view,” they added.

Money markets show investors expect a Fed rate rise next year; some bet on an even earlier move. Euro-dollar futures suggest a roughly 64% chance of a 25 basis-point rate hike by the end of 2022. A week ago it was seen at 52%.

If travel, dining out and shopping fully resume in coming months, it could unleash trillions of dollars in pent-up savings worldwide. Just in the United States, personal savings totaled $2.38 trillion at a seasonally adjusted annual rate in December, higher than at any time before the pandemic.

(GRAPHIC – U.S. savings: https://fingfx.thomsonreuters.com/gfx/mkt/azgpoeylypd/Pasted%20image%201614185996035.png)

That makes it an inflection point of sorts for the economy, according to April LaRusse, head of fixed income investment specialists at Insight Investment. At times like this, even strong forward guidance can fall flat, she said.

“Markets hear central bankers saying ‘Stop it, markets, you are going too far’, but they are worrying central banks might change their mind as new data emerges,” LaRusse said.

“Markets are saying: ‘Yes, we believe what you are saying, but conditions could change and could necessitate a change of policy’.”

ELSEWHERE

It’s a similar picture elsewhere.

In New Zealand, Orr’s highlighting of potential downside risks to the economy contrasted with the buoyant picture painted by data.

Bond yields shrugged off his comments to hit 11-month highs. More importantly, overnight index swaps (OIS), instruments allowing traders to lock in future interest rates, have started pricing a small possibility of an end-2021 rate hike.

Not long ago it was seen cutting rates below 0%.

BNY Mellon noted across-the-board rises in one-year forward inflation swaps — essentially gauges of future inflation — from Canada to Australia.

“Risks are now more toward further removal of easing prospects,” they added.

There is of course the possibility that the pledges to keep policy ultra-loose in the face of recovering growth only fan inflation expectations further. So, could markets force central banks to act rather than just jawboning?

Here the Fed faces less of a dilemma than its peers.

Japan’s 10-year yields are near the highest since late 2018 at 0.12%, posing credibility issues for a central bank that aims to hold yields around 0%.

The ECB too, already struggling to lift growth and inflation, may have to step up bond purchases under its emergency asset-purchase programme to combat rising yields.

“At the moment it’s a tension between markets and central banks rather than a conflict, though that might come,” said Jacob Nell, head of European economics at Morgan Stanley.

“The attitude of the Fed is that if markets think growth is stronger than we do then that’s fine, it will help growth and inflation expectations. So the Fed won’t fight the market — it just doesn’t believe it.”

(Reporting by Sujata Rao and Dhara Ranasinghe; Editing by Hugh Lawson)

 

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Energy, bank stocks drive FTSE 100 higher

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Energy, bank stocks drive FTSE 100 higher 3

By Shivani Kumaresan and Amal S

(Reuters) – Britain’s main stock index recouped early losses to end Wednesday higher, as gains in commodity-linked and banking stocks on investor optimism about a post-pandemic economic recovery outweighed losses in defensive sectors.

After falling as much as 0.8%, the commodity-heavy FTSE 100 index closed up 0.5%, with oil heavyweights BP and Royal Dutch Shell providing the biggest boost with gains of 5.4% and 3.3%, respectively.

Mining stocks including Rio Tinto plc, Anglo American Plc and BHP added between 0.7% and 1.5%, boosted by higher metal prices.

“One of the main drivers for the FTSE over the next few months is going to be investors’ interest in a possible commodity super-cycle,” said Andrea Cicione, head of strategy at TS Lombard.

“If commodities continued to perform as strongly as they have over the past few months, well that’s going to benefit disproportionately.”

British bank Barclays jumped 3.4%, while other lenders rose as Bank of England Governor Andrew Bailey said Britain will resist “very firmly” any European Union attempts to arm-twist banks into shifting trillions of euros in derivatives clearing from Britain to the bloc after Brexit.

Defensive plays such consumer staples, healthcare and utilities were among the top laggards.

The domestically focused mid-cap FTSE 250 gained 1.2% and marked its best day over a week, on hopes that speedy vaccination will help ease coronavirus restrictions faster.

In company news, Metro Bank fell 9.9% as it posted a much bigger annual loss and said it expects defaults to rise through the year as government support measures set in place due to the COVID-19 crisis are wound down.

Consumer goods maker Reckitt Benckiser shed 1.5% even as it capped 2020 with the strongest sales in its history, while Aviva slipped 0.5% as it agreed to sell its 40% stake in a joint venture in Turkey for 122 million pounds ($173.2 million).

(Reporting by Shivani Kumaresan and Amal S in Bengaluru; editing by Anil D’Silva and Emelia Sithole-Matarise)

 

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