Emerging Markets Hogwash

21 August 2013 --

Today's Financial Times opens (front page) with three articles.  I quote the first lines from each:

Heat is on developing world to raise rates: Turkey's central bank unexpectedly raised rates to buttress its wilting currency as policymakers across the developing world scrambled to stem the turnoil rattling emerging markets [...].

German election race overshadowed by [...] Greek bailout:  The politically toxic subject of financial support for Greece burst into Germany's election campaign yesterday as Wolfgang Schauble, finance minister, acknowledged for te first time that Athems would need a third bailout.

Investment banks hire traders and dealmakers:  Investment banks [...] have started hiring dealmakers and traders in Europe in a sign that recruitment is picking up after a two-year cull in which thousands of bankers lost their jobs.  Recruiters say they are at their busiest since 2010 [...]. 

Our Dutch Financieele Dagblad also opened with a big spread on the emerging markets 'meltdown', with worrying articles on the main countries on the inner pages.  What is all this about, and how can the events sketched above make any sense in synchronisation?

I believe the answer is at once simple and difficult to believe.  Driven by the fears of the US Fed winding-down its multi-year stimulus programmes, global markets appear to expect a rise in US rates and the dollar. Emerging markets, especially in Asia, enjoyed a great run through the spring of this year, but have been overtaken by OECD markets more recently. Glimmers of Euro-recovery are visible, southern-European markets (the "PIGS" not so long ago!) have bounced. Hence the opportunism of investment banks gearing-up for what they hope will be a revival in business in European markets.  But with the Germans distracted by politics and another round of Greek moaning and hand-wringing coming-up, who is really so optimistic?

Is there a massive rotation in asset allocation underway from emerging markets to the US and Europe? Has everyone lost faith in the growth prospects of the likes of Indonesia, Thailand, Turkey, Kenya or Nigeria (let alone the BRICS)?  Since US interest rates are not going up -- the Fed has said this over and over again, and the most recent evidence about the impact of QE is that it is far less inflationary than the pessimists think -- and EM rates are, what are the arguments to beat a path to the NYSE or FTSE?  And if US rates do, after all, start to edge up, how could this possibly be good for OECD equities or corporates generally?

Personally, I believe there is a disconnect between short-term trading views, medium-term likelihoods, and common sense at work presently.  And its still August.  There has never been a period when the medium-term prospects for the interesting emerging markets was better than today.  So perhaps those of us interested in emerging markets should stop reading the papers for a bit and just relax.
 
-- Jan Cherim

  

After controversial elections, direct aid to Zimbabwe in limbo

14 August 2013 --

We have been relatively bullish on Zimbabwe of late, bidding on a couple of deals there and developing local partnerships for the future.  Our associated from SEAF have also looked hard at Zim investment potential for the SME sector recently.  But all the recent optimism has been premised on continuing evolution towards a normalised and inclusive democratic process.  Last week's disastrous elections make have brought all this to a screeching halt.  One local contact of ours reported that 'this has set us back 4 years or more.'

Given the parlous state of government finances and the shaky recovery in the economy, continued foreign assistance, as well as FDI, is of critical importance.  Whilst Western aid was on an upswing, this too is now very much in danger, as Western donors re-evaluate their positions post-election fiasco.  Devex produced a useful summary of the current position - click on the link below.

-- Jan Cherim

After controversial elections, direct aid to Zimbabwe in limbo - Business Insight: Zimbabwe | Devex

Nigeria’s small banks pack a punch - The Banker

17 July 2013

By African standards, and for a country of its size, the Nigerian banking system has been tidied-up with only 20 banks left standing today after rounds of crisis, consolidation, (re-)privatisation and acquisition.  This piece from The Banker illustrates some of the strategies being explored by the smaller banks to generate growth, and to tap into a market of astonishing potential.  With 80% of Nigerians still unbanked, while 80% do have mobile phones, an glimpse of the retail potential is visible.  Also some insights from the outgoing Central Bank Governor on the potential for agri-lending and SME business, as opposed to the "me-too" strategies of many banks at the corporate end.

-- Jan Cherim

Nigeria’s small banks pack a punch - The Banker

Cropping up: Opportunities abound in African agriculture - World - The Banker

17 June 2013 --

Recent article from The Banker magazine makes the well-worn points that opportunities abound in African agricultural investment, now increasingly driven by domestic and regional demand, as opposed to European or Asian offtake.  Rabo's Marttin is quoted on the importance of focusing finance on supply chains, and the article argues that better financing is helping the sector.  But there is still a long way to go.  Our NEAFSEEP programme in Kenya seeks to address precisely this gap in the market.

--Jan Cherim

Cropping up: Opportunities abound in African agriculture - World - The Banker

Indonesian banking regulators flex their muscles

The New York Times's Deal Book blog posted an article yesterday detailing the difficulties Singapore's DBS Bank -- southeast Asia's largest bank -- has been having getting approval to acquire control of Indonesia's Bank Danamon.  What seemed a simple process of reshuffling holdings of Temasek, one of Singapore government investment vehicles and DBS (itself for nearly 30% state-owned) so as to concentrate the focus on Danamon logically with DBS has suddenly become politically mired.  Indonesia wants equal access to the island state's markets for its state banking flagships Mandiri, BNI and BRI.  Not so simple.

This will be an interesting case of just how rapidly ASEAN integration will be allowed to proceed.  The region's Balkanised banking systems and long history of regulatory protection and local favouritism will be increasingly tested as ASEAN's open markets initiatives unfold.  This story will run and run.

-- Jan Cherim

To see the full article:

http://dealbook.nytimes.com/2013/05/22/indonesia-links-ownership-of-banks-to-more-access-elsewhere/?smid=pl-share

Standard Chartered's Next Worry: A $1 Billion Indonesian Loan - NYTimes.com

This is a tendentious article from today's New York Times, and undoubtedly covers only a piece of what is really going on.  Unfortunate for the bank, who probably are constrained about correcting any misperceptions here.  But also bad news in general for SCB and tough luck for fans of the bank's EM focus and strategy.

--Jan Cherim

Standard Chartered's Next Worry: A $1 Billion Indonesian Loan - NYTimes.com

The Hazard of Second Best | Het Financieele Dagblad

I want to applaud and draw attention to an opinion piece by Mohamed El-Erian which appeared (amongst other places) on FD.nl.  El-Erian points out, in the second part of the article, that the Nigerian Ngozi Okonjo-Iweala a (female) former Finance Minister and senior World Bank executive is far and away the most qualified candidate for the World Bank presidency.  If El-Erian is correct, even the US administration are embarrassed by the fact that Okonjo is head and shoulders more appropriate as a new WB President than the Obama nominee, Dartmouth President Jim Yong Kim.  The question is whether European countries have the guts and good sense to back the current groundswell swinging to Mrs Okonjo.

--Jan Cherim

The Hazard of Second Best | Het Financieele Dagblad