Buy-side
Jerome Booth of Ashmore Investment Management recommends the solid use of equity instruments to acquire distressed companies, with debt instruments a useful, but secondary tool to enhance influence. He acknowledges that, given the abundance of local liquidity in a country like Russia, majority ownership may be difficult. “Hence a loan note or other fixed income instrument may complement equity exposures to gain more influence.
Fixed income instruments, covered by international legal documentation, may also be used to give greater security than is available through local equity,” he argues.
Sell-side
- Danske Bank debates the market impact of the sacking of Poland’s deputy prime minister, Andrzej Lepper. Although, he was not a reform-minded leader, Danske notes the uncertain outlook for Polish politics is a negative factor for FX and fixed income markets. The minority government consisting of the two rightist nationalistic-oriented parties Law and Justice (PiS) and League of Polish Families (LPR) threatens the 2008 budget. However, Danske notes that, if Lepper’s departure triggered new elections, the creation of a reformist government could become possible – although the probability of this is difficult to gauge at present.
- Standard Chartered in its “Monthly Analysis of Asian Economies” discusses challenges for the region’s monetary policies in the context of rampant liquidity. They caution: “investors need to be more careful and less complacent in pricing risks.” On the positive side, it says political risks, are unlikely to be a source of capital volatility as in the past, except in Thailand. In particular, progress on curbing nuclear activity in the Korean peninsular has reduced the risks for the South Korean won.
Although headline consumer inflation in China, Indonesia and India is a relatively modest 3%, Standard Chartered note that monetary growth is booming which could lead to systemic shocks. To meet these challenges, the report observes that the tightening bias of central banks in the region has returned. But abundant swathes of global liquidity in an increasingly integrated world inhibit the success of such a policy, the bank argues.
“Further to using interest rates and reserve requirements to manage domestic liquidity, some economies are also looking to eject excess liquidity from their own system to the global market. Economies are also looking into ways to allow domestic businesses or investors to invest more overseas in order to cut excess liquidity or reduce upward pressure on their currencies. While economies may pass the buck of liquidity around, the fundamental issue of a world flushed with liquidity remains unresolved.”
Standard Chartered reiterate the familiar argument that Asian economies’ trade surplus is rooted in the savings to investment disequilibrium: “Asia's savings rate has been quite steady at between 32-34% of GDP over the past decade. But the investment rate declined from 33% in the mid-1990s to 22% now.”
Corporates are excessively risk-averse after the Asian Crisis a decade ago, and are therefore conservative in their investment plans, so domestic consumption needs to be boosted. In the short term, however, asset price inflation poses the main risk. “When central banks try to keep deposit rates low in order to discourage savings, funds flow into the "undesired" equity and property markets. Then policymakers may need to raise rates back to correct the disincentives to save. The fundamental problem is the lack of viable investment projects, or the lack of an effective channel to pool funds to them.”
- Deutsche Bank recommends being short Peru 2016s against Colombia 2017s, as Peru is the richest of the ‘BB’ category Latin American credits. For Brazil, they argue “on the back of recent widening of the basis, we once again find the short basis positions on the Brazil curve attractive. In particular, we recommend selling 5Y protection against the 2013s (at >=45bps) and selling 10Y against the 2017s (at >=62bps).”