- UBS forecast the implications of MSCI Enhanced Methodology. The changes will most substantially affect EM which will be divided into 3 segments- large, middle and small, they accordingly predict :
“Asia is expected to be a beneficiary at the expense of Latam and EMEA. At the country level, China, Brazil, Russia, South Africa and Taiwan are the winners with Mexico, Israel, Korea and Chile being the losers. At the industry group level the changes are a little more acute with banks and energy being the main beneficiaries at the expense of the other industry groups”.
UBS took the opportunity to restate EM risks: “Potential emerging market related risks include, but are not limited to, the volatile nature of the currency, regulatory and socio- political risk, and abrupt potential changes in the cost of capital and economic growth outlook. Valuations can also be impacted by "contagion" from developments in other emerging markets. Each of the above has the potential to significantly impact company/industry performance.”
- Moody’s annual report on Israel explains its investment-grade ratings and positive outlook reflect the country's improving economy despite the recent war and ongoing regional tensions.
"The Israeli economy is in the midst of a prolonged upturn that was only briefly affected by last year's war with Hizbullah, the militant Islamic movement based in Lebanon... Israel has a clear comparative advantage in knowledge-based information-technology products and services, and has attracted large-scale foreign direct investments both in the midst of the conflict and after" said Moody's Vice President Kristin Lindow, one of the authors of the report.
Moody’s explain that despite a very volatile local political climate, there is consensus on economic policy due to its continuing success and political volatility has not disrupted financial markets.
- RBC are bullish on Russia and Turkey as EM hotspots. Russia’s sustained commodity boom has placed the sovereign in a very good position to weather any commodity or stock storm, whilst the upcoming election period provides no real risk.
More specifically they: “are holding steady our 2007 USD/RUB forecast profile: Q1 26.00, Q2 25.60, Q3 25.40 and Q4 25.25. However, the pace of annual RUB appreciation is likely to slow in the coming years to a <5% per year. Further downside in local yields looks limited, with rates likely to push higher in the medium-term as the government steps up its domestic debt issuance and expectations for RUB upside ebb.”
RBC also forecasts sustained buying interest in Russian corporates financing as value in government paper diminishes.
RBC also note that “current levels on Turkish external debt, local yield and TRY do not provide a very attractive risk/return trade-off but that better entry levels will emerge over the next 1 to 3 months.”
Despite this they are bullish on the TRY revising the USD/TRY profile lower: “Q1 1.40 (from 1.44), Q2 1.50 (from 1.55), Q3 1.50 (from 1.52) and Q4 1.46 (from 1.50). We advocate adding 1yr-2yr local yield exposure on any short-term backup in yields or rally in USD/TRY to 1.43 or above. High rates are here to stay for longer. We now expect 50bp in rate cuts (vs. 100bp previously) by the CBRT by end-2007 to 17%.”
RBC advise that opportunistic buyers may see value in Turkey’s external debt if spreads widen 20bp to 30bp from current levels in the next couple of months due to political volatility.
- Deutsche Bank notes the financial probity of the banking sector Kazakhstan, particularly the 2nd and 3rd tier banks, is under serious question. In particular, regulatory oversight is limited: “FSA resources for on-site inspections are already limited (and the frequency of such visits to 2nd and 3rd tier banks, in our view, wholly insufficient) a situation made worse by large numbers of staff leaving for the financial sector where competition for human capital is fierce and wages much higher.”
DB confirm that external borrowing restrictions for banks will go ahead April 1 but expect the impact to be limited due to the 1y grace period. But they worry that there is complacency over the rapid credit growth which could prove dangerous if no other measures are introduced and volatility could hurt investor sentiment towards the “seemingly endless supply of Eurobonds.” But underlying assets, oil, and borrowing could help to engineer a soft landing, DB claim.