From Russian Rubles to the Chilean Peso, EM Debt Goes Local (Tucker)

Friday, October 28th, 2011

by Matt Tucker, Managing Director, iShares

A decade ago, buying a local currency emerging market (EM) bond fund would have been nearly impossible. In the “old” days emerging market governments primarily issued bonds that were denominated in foreign currencies, like US dollars, Japanese Yen or Euros, when they wanted to raise capital.

Issuers like Brazil, Poland and Indonesia used to target this external debt at foreign investors. Their local currency debt was targeted at local investors, like pension plans, insurance companies and private individuals within the country. Many of these countries directly restricted foreign investors from buying local currency bonds through capital controls, punitive taxes or regulations. A US investor looking to access a Brazilian bond denominated in reals would have been facing an uphill battle.

Some issuers, like China and India, still restrict foreign investors from purchasing their local currency debt. Others have taxes on foreign investors, which are designed to limit the amount of foreign capital, like Brazil’s 6% IOF (Imposto sobre Operações Financeiras) tax.

But times are changing and many EM issuers are relaxing such restrictions. Some countries are now issuing bonds that are denominated in local currencies but targeted at international investors. These “global” bonds trade in global clearing and settlement systems, like Euroclear or the Depository Trust Company (DTC), instead of local clearing systems. The Philippines, Russia, Colombia, Chile, Brazil and Egypt have all issued global local currency bonds.

Last week, my colleague Russ blogged about using emerging market debt as a long-term option for investors worried about a deterioration of credit quality in the developed world.

Local currency emerging market bond ETFs can offer investors exposure to emerging markets without the same type of potential volatility that is typically associated with equities. Adding an allocation to local currency EM debt can also help an investor diversify out of the US dollar or away from developed market currencies, like the Euro or the Yen.

Additionally, because yield levels are higher than for developed market bonds, local currency EM debt can increase the yield of a fixed income portfolio.

Emerging market debt is a relatively new asset class for many investors, especially bonds that are denominated in local currencies, but it offers another tool with which to manage fixed income exposure.  (Potential iShares solution: LEMB)

Diversification may not protect against market risk.

Bonds and bond funds will decrease in value as interest rates rise. In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Securities focusing on a single country may be subject to higher volatility.

Narrowly focused investments typically exhibit higher volatility and are subject to greater geographic or asset class risk. Bond funds may be subject to credit risk, which refers to the possibility that the debt issuers will not be able to make principal and interest payments.
Copyright © iShares

Tags: Bond Fund, Bonds, Brazil, Chilean Peso, Credit Quality, Currency Bonds, Currency Debt, Depository Trust Company, Emerging Market, Euroclear, External Debt, Foreign Currencies, Foreign Investors, Global Bonds, India, International Investors, Japanese Yen, Matt Tucker, Pension Plans, Punitive Taxes, Russian Rubles, Settlement Systems, Term Option
Posted in Bonds, Brazil, ETFs, India, Markets | Comments Off

Interconnected Markets (Econompic Data)

Wednesday, September 21st, 2011

Interconnected Markets

by Econompic Data

In a recent conversation with a friend, we discussed how interconnected global financial markets were (the conversation began with my assertion that the European situation could cause a lot more pain the U.S. than consensus likely believes).

Below are a few charts that outline just how interconnected things have become.

The first chart shows the international investment positions of the U.S. (the level of U.S. owned assets abroad and foreign assets owned within the U.S.). I normalized the amounts by showing the level relative to the size of the U.S. economy. As can be seen, the level of ownership both in and out of the U.S. has spiked since the early 1970′s, with foreign ownership of assets within the U.S. increasing at a faster pace (U.S. owned assets abroad by almost 15% of GDP or more than $2 trillion).

The next chart outlines what makes up that $2 trillion difference. While U.S. investors own more in terms of foreign equity (direct investment and stocks) than foreign investors own within the U.S., foreign investors are much larger creditors within both the public (government) and private (corporate) sectors.

Rather than make any bold statement of what this truly means (I am trying to digest it myself), I’ll instead leave readers with two (conflicting) quotes:

Tags: Assertion, Bea, Bold Statement, Corporate Sectors, Creditor, Creditors, Dignity, Early 1970, European Situation, Foreign Investors, GDP, Global Financial Markets, International Investment, Investment Positions, Jean Paul Getty, Public Government, Slave Owner, Trillion, Victor Hugo
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China Still Buying Treasuries, Demand Had Waned Elsewhere (Econompic)

Wednesday, August 17th, 2011

via Econompic Data

The WSJ details:

Private foreign investors sold a record amount of U.S. Treasurys in June as the U.S. debt-ceiling debate intensified.

While it may be easy to blame selling on the debt ceiling issue, that really wasn’t an issue until July. The broader selling likely occurred due to issues that were unrelated to the debt ceiling (supply of debt coming to market, the end of the QEII program, expectations for decent global growth).

That said, the scale of the actual selling is interesting (back to the WSJ).

Private foreign net purchases of long-term Treasury bonds and notes fell by $18.3 billion in June, following a $16.4 billion increase in May, according to the monthly Treasury International Capital report, known as TIC. The previous record drop was set in June 2000, when private foreign investors sold $16.5 billion in Treasuries.

Sales were concentrated in the Caribbean (i.e. insurers / private wealth). The way I would interpret this is that these investors sold Treasuries UNTIL the debt ceiling issue, which combined with concerns over Europe caused the flight back into Treasuries (i.e. if there was no debt ceiling issues, there would have been less demand in July / August).

Immune to this whipsaw was China.

China’s holdings actually rose in June, by $5.7 billion to $1.166 trillion, following net buying of $7.3 billion in May. Analysts caution the data may not reflect the full spectrum of China’s activity in the market, however. The Treasury recently adjusted its estimate of China’s holdings based on use of proxies in other countries.

The below shows the combined purchases by China (direct) and the UK (where China purchases indirectly).

Until something drastically changes, expect a continued rise in the above chart regardless of net purchases / sales from other foreign entities.

Source: Treasury

Copyright © Econompic Data

Tags: Caribbean, China China, Copyright, Debt Ceiling, Entities, Europe, Foreign Investors, Full Spectrum, Global Growth, Private Wealth, Program Expectations, Proxies, Treasuries, Treasury Bonds, Treasury International Capital, Treasurys, Trillion, Whipsaw, Wsj
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Turkey Now Growing Faster Than China

Tuesday, July 5th, 2011

While all the focus is usually on the big emerging (or emerged) markets such as those who are members of BRIC, there are quite a few other interesting stories out there such as Chile, Indonesia, and Turkey.  [July 6, 2010: Turkey - Where East Meets West, and Prospects are Improving]  While there are relatively limited choices to invest in these countries, they are certainly part of a secondary group of locales that are helping to boost the fortunes of U.S. multinationals.

Turkey just reported a 11% GDP figure, outpacing that of China*

*how accurate these figures are, are of course up for debate but directionally they do mean something.

Despite this strong GDP growth, Turkey’s market is struggling with fears of a growing current account deficit.

Via WSJ

• The Turkish economy grew by 11% in the first quarter, outstripping China and confirming Turkey as Eurasia’s rising tiger.   Thursday’s official growth figure, compared with the year-earlier period, easily beat market expectations, at a time when many of Turkey’s neighbors in the Middle East and Europe struggle with political turmoil and bailouts.
• But in what is fast emerging as a Turkish paradox, foreign investors aren’t rushing to snap up assets.   A key concern in markets, economists say, is what action the new government will take to control a ballooning current-account deficit that is above 8% of gross domestic product and rising quickly—an imbalance seen as a sign of overheating, despite relatively benign inflation numbers.
• Thursday’s statistics also included trade figures for May, which saw the trade deficit double from the same month last year, adding to the current-account imbalance. Imports to Turkey expanded by 42.6%, almost four times as fast as its exports at 11.7%, according to Turkstat, the state statistics agency.

• Turkey’s growth until now has been dominated by expansion in the financial, retail and construction sectors, driven by rapid demand and credit growth, said Mr. Alkin. Turkey’s banking sector is solid, but the country’s consumption-driven model, as with Spain and China, no longer looks sustainable in the long term. Turkey, he said, has to lower costs, produce more, import less and move up the value chain.
• One sign of investor nervousness is that the Istanbul Stock Exchange has been one of the worst performers among emerging markets this year, down by 9.75% since early May. Currency traders, meanwhile, have been selling off the lira, which has fallen nearly 19% since November.
• The central bank has tried to squeeze bank lending and consumption by raising reserve requirements for commercial banks. But at the same time, it has put its foot on the gas, cutting interest rates as it tried to deter volatile short-term investment inflows that are financing the current-account deficit. That unorthodox policy is increasingly controversial and hasn’t worked. The central bank says that more time is needed to see effects and that inflation, though ticking up, is only just off record lows.
• Still, many economists and bankers believe monetary policy can’t fix what ails Turkey. Turkey produces minimal quantities of oil and gas. Meanwhile, manufacturers face high costs relative to competitors, economists say, and so tend to use imported semi-finished goods rather than produce their own components. As a result, as Turkey produces more, it imports more—85% of Turkish imports are commodities and semi-finished products, according to Mr. Alkin.

Tags: BRIC, Commodities, Construction Sectors, Current Account Deficit, Eurasia, Foreign Investors, Fortunes, GDP Growth, Gross Domestic Product, Inflation Numbers, Market Expectations, Multinationals, Political Turmoil, Rapid Demand, S Market, Secondary Group, State Statistics, Statistics Agency, Trade Deficit, Turkish Economy, Wsj
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Chinese USD Diversification Continues: First Euro Bonds, Now JGBs

Monday, May 30th, 2011

by ZeroHedge.com

Even as the peanut gallery debates whether or not the dollar is the reserve currency of choice for the world, China continues to diversify away from the USD. After last week’s news that Beijing had not had enough of Portuguese bonds, in a repeat of the same scenario from January 2011, and was preparing to bid up Eurozone bonds across the curve (aka double down) we now learn that China, or rather third-party London-domiciled banks doing its bidding, is now the actor behind “massive Japanese bond buying” seen over the past month. Per Reuters: “Foreign investors have flocked to Japanese government bonds in the past five weeks, finance ministry data shows and market sources say China was among the main buyers, although a large part of buying was made through banks in London.”

That said, even Reuters appears unable to get its story straight: “Foreigners bought a net 4.696 trillion yen ($57.7 billion) of Japanese bonds in the five weeks to May 20, a record amount of purchases for any five consecutive weeks since data began to be compiled in its current form in 2005. One source said China appears to be buying the four to five-year sector after having sold a large amount of short-term bills earlier in the month. But other sources said foreign investors, including China, were buying long-dated bonds with less than one year left to maturity, effectively the same as buying short-term bills.” Wherever in the curve China is focusing, the fact that it continues to actively buy JGBs after 5 consecutive months of declines in its UST purchases (coupled with the news broken by Zero Hedge that Fed custodial accounts of foreign UST holdings suffered the largest one week drop in almost 4 years) is sending a very clear political message to the US. One that certainly got some airplay when the Treasury once again declined to brand China an FX manipulator, despite rhetoric out of very brave Geithner at the first possible opportunity this week, that China is precisely that.

More from Reuters:

One likely trigger for the shift to the short-term yen market is the fall in yields for dollar government bills since April.

The foreign binge on Japanese government bonds started in the week of April 18-22, shortly after a squeeze in U.S. bills pushed U.S. bill yields lower.

A new deposit insurance rule sparked a torrent of buying in government bills, pushing the U.S. three-month T-bill yield as low as 0.01 percent in early May and below Japanese government bill yields.

The yield spread between the two countries widened to around 0.09 percentage point in early May although it has since come back to around 0.05 percent.

Then came a sharp fall in the euro, which may have also prompted investors to move funds to the yen.

“As the euro started to suffer from debt problems again, some reserve managers could have shifted some of their euro-denominated to assets to the yen,” said Makoto Noji, senior strategist at SMBC Nikko Securities.

This was similar to last year when China’s foray in the short-term yen market coincided with worries about Greece’s ability to pay back debt.

But China quickly moved out of that position, selling a large amount of yen bills in August to take profits after the yen rose. Market players said at that the time China was unlikely to keep a large amount of funds in the yen because yields were low.

Slowly China is realizing the joy of an interlinked fiat world: at best it can rotate out of one insolvent regime into another. The bottom line is that all regimes are insolvent. So the only question is whether or rather when, just like back in April 2009 China dropped the bomb that over the past 6 years it had accumulated secretly 454 tons of gold, will China announce that while it has been rotating in and out of paper, the ultimate source of its $3 trillion in USD reserves will be non-dilutable commodities which handily double up as currencies.

Tags: Airplay, Banks In London, Consecutive Weeks, Custodial Accounts, Declines, Diversification, Euro Bonds, Finance Ministry, Foreign Investors, Geithner, Japanese Government Bonds, Manipulator, Market Sources, Ministry Data, Peanut Gallery, Political Message, Reserve Currency, Reuters, Term Bills, World China
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Roubini: Question Marks in the Arab World

Monday, January 31st, 2011

The report below comes courtesy of Nouriel Roubini’s team of analysts at RGE.

Two MENA governments have suffered massive blows in the past week. Extended protests in Tunisia forced long-time ruler Zine El-Abidine Ben Ali to flee the country, while Hezbollah pulled out of the deadlocked Lebanese unity government, causing its collapse. While the Lebanese government’s fall was only the most recent setback in a country that has seen the rise and fall of several governments, the events in Tunisia are reverberating throughout the Arab world. Despite Arab leaders’ insistence on the exceptional nature of the developments in Tunisia, the underlying triggers—weak employment prospects, stagnant incomes, rising prices and a lack of representation—are common in much of the region. Using a selected group of economic, social and political indicators, we assess the resilience of the region’s institutions in our latest MENA Focus.

It is difficult to predict if other regimes will go the way of Tunisia, but the volatile mixture of economic grievances will add pressure to fragile political institutions in the MENA region and could temper investment. Arab leaders’ immediate response of boosting subsidies on food and fuel as well as other social transfers and their hyper-vigilance about protests suggest that these regimes may muddle through. Also, we continue to see strong oil prices in 2011 supporting growth in the MENA region, one of the few in the world where growth will accelerate from the 2010 pace.

However, with commodity prices, especially food product prices, set to rise, we see several linked economic risks across the region. These include the deterioration of fiscal and external balances, financing issues and a clampdown on economic and social liberties, including access by foreign investors. Maintaining expensive subsidy regimes (and adding more government spending) will be particularly detrimental to the fiscal and external positions of oil importers. Some, like Jordan, may turn to bilateral aid. Others, including Tunisia, could face significantly higher financing costs and may be forced to delay international bond issuance and turn instead to local markets, possibly crowding out private investment.

These policies are unsustainable in the medium to long term. Subsidy measures will do little to dampen inflationary pressure, especially if governments pair them with higher public-sector wages and other types of fiscal support to soothe troubled populations. Moreover, as RGE noted in the last MENA Focus, the maintenance of social spending and subsidies may curtail planned infrastructure spending. All of this makes the macroeconomic and investment climate for fuel importers more uncertain. These trends are not consistent across the region, however. We believe that investors will continue to differentiate between the stronger and weaker balance sheets in the region, with oil exporters with ample savings (including US$1.8 trillion managed by the region’s sovereign investors) and more open investment climates continuing to attract the bulk of investment.

The situation in Tunisia remains uncertain, with the new government on the verge of collapse as opposition members have pulled out. Public protests continue, calling for a completely new government. Whatever government finally emerges will need to deal with the economic grievances that triggered the unrest while recovering from the chaos of recent weeks. We assume that the developments will dampen Tunisia’s growth in the current quarter by reducing its ability to attract investment and denting its crucial tourist revenues.

The demonstrative effect of the overthrow of the ruler is clear, as events leading to Ben Ali’s ouster were watched all across the Arab world on Al-Jazeera. Self-immolation, a potent symbol that many say catalyzed events in Tunisia, has been present in Algeria, Egypt, Mauritania and Yemen in a dangerous copycat trend. Failure to respond to the underlying causes could create further issues for rulers and stymie economic development. However, in some of these countries, the combination of continued transfers, strong military presence and political restrictions including limits on voting and public assembly rights could keep the regimes in place for some time.

Source: RGE Monitor, January 19, 2011.

Tags: Arab Leaders, Arab World, Commodity Prices, Economic Risks, Employment Prospects, External Positions, Food And Fuel, Food Product, Foreign Investors, Hyper Vigilance, Lebanese Government, Mena Region, Nouriel Roubini, Political Indicators, Political Institutions, Question Marks, Social Transfers, Unity Government, Volatile Mixture, Zine El Abidine Ben Ali
Posted in Energy & Natural Resources, Infrastructure, Markets, Oil and Gas, Outlook | Comments Off

Byron Wien’s “Ten Surprises for 2011″

Tuesday, January 4th, 2011

Byron Wien, Vice Chairman of Blackstone Advisory Partners, yesterday issued his list of “The Ten Surprises for 2011″. This is the 26th year Byron has given his predictions of a number of economic, financial market and political Surprises for the coming year. Byron defines a “surprise” as an event which the average investor would only assign a one out of three chance of taking place but which he believes is “probable”, having a better than 50% likelihood of happening.

Byron started the tradition in 1986 when he was the Chief U.S. Investment Strategist at Morgan Stanley. He joined the Blackstone Group in September 2009.

The surprises for 2011 are as follows.

1.         The continuation of the Bush tax cuts coupled with the extension of unemployment benefits has put all working Americans in a better mood. Real Gross Domestic Product rises close to 5% in 2011 driven by improved trade and capital spending in addition to stronger retail sales. Unemployment drops below 9%.

2.         The prospect of increasing Federal budget deficits and rising government debt finally begins to weigh on the bond market. The yield on the 10-year U.S. Treasury approaches 5% as foreign investors become more demanding. Spreads with corporate fixed income securities narrow.

3.         Encouraged by renewed economic momentum the Standard & Poor’s 500 rises close to its old high of 1500. A broad range of sectors participate, but telecommunications and utilities lag. With earnings improving, valuations seem low and individual investors return to equities for the first time since the financial crisis. Merger and acquisition activity becomes intense and the market reaches a blow-off euphoria. Stocks correct in the second half as interest rates rise.

4.         Although inflation remains benign, the price of gold rises above $1600 as investors across the world place more of their assets in something they consider “real.” Sovereign wealth funds of countries with significant dollar reserves also become big buyers. Hedge funds keep thinking the price rise is becoming parabolic and sell their positions and some even short the metal but gold keeps climbing and they scramble back in.

5.         Worried about inflation and excessive growth, the Chinese decide to use their currency as a policy tool. They manage the value of the renminbi aggressively to keep the growth of the economy below 10% and to prevent consumer prices from increasing above the 4%–5% range. The move is viewed as a precursor to the world-wide adoption of a basket including the renminbi as an alternative to the use of the dollar as the principal reserve currency.

6.         Rising standards of living in the developing world seriously increase the demand for agricultural commodities. The price of corn rises to $8.00, wheat to $10.00 and soybeans to $16.00. Commodities become a component of more institutional portfolios.

7.         The housing situation improves. Although the inventory of unsold homes remains high, the oversupply is drawn down substantially, contrasting with an increase in 2010. The Case-Shiller gradually heads higher and housing starts exceed 600,000.

8.         Continuing demand from the developing world and a failure to bring onstream new supply causes the price of oil to rise to $115 per barrel. The higher price at the pump fails to discourage driving, increase sales of hybrid vehicles or cause Congress to initiate conservation measures.

9.         Frustrated by the lack of progress against the Taliban and the corruption of the Karzai government, President Obama concludes that whenever American troops return home, Afghanistan will once again become a tribal state ruled by warlords. He accelerates the withdrawal of most military personnel to the end of 2011. Coupled with the pullout of forces in Iraq, this will leave the Middle East without a major Western presence in the face of rising fears of terrorism.

Tags: Acquisition Activity, Blackstone Group, Bond Market, Byron Wien, Commodities, Currency, Economic Momentum, Emerging Markets, Euphoria, Federal Budget Deficits, Fixed Income, Foreign Investors, Gold, Government Debt, Gross Domestic Product, Income Securities, Individual Investors, Investment Strategist, Merger And Acquisition, Morgan Stanley, Russia, U S Treasury, Unemployment Benefits, Valuations, Wea
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The Economy and Bond Market Diary (October 25, 2010)

Saturday, October 23rd, 2010

The Economy and Bond Market Diary (October 25, 2010)

Treasury bond yields were little changed this week as the market focus shifted to corporate earnings releases instead of economic data. Expectations continue to build for the Fed Reserve to announce some form of quantitative easing (QE) on November 3 and two Fed officials commented on the likely path the Fed would take. Both speakers indicated a QE program of roughly $100 billion per month or, possibly, the amount could be decided at each Federal Open Market Committee (FOMC) meeting, which occur roughly every six weeks. This incremental approach has pros and cons but may disappoint market participants who favor a “shock and awe” approach of a large upfront commitment of $500 billion to $1 trillion.

Strengths

• Fed officials reiterated views that additional quantitative easing was likely and an announcement could come as soon as November 3.
• China’s economy grew 9.6 percent in the third quarter and continues to be a bright spot for world economic growth.
• Housing starts hit the highest level in five months in a sign of possible housing market stability.

Weaknesses

• U.S. economic data was mixed this week with industrial production declining for the first time since June 2009.
• China raised interest rates for the first time since 2007, largely in an attempt to offset some of the loose monetary policy that is being imported into the country.
• Brazil and Thailand increased taxes on fixed income securities for foreign investors to dampen inflows into the country as the so-called “currency war” heats up.

Opportunities

• Inflation is unlikely to be a problem for some time and this gives central bankers and other policy makers around the world room for expansive policies.

Threats

• Inflation expectations as measured by Treasury Inflation-Protected Securities (TIPS) spreads have risen sharply this month. Inflation expectations will be key data points driving Fed policy changes going forward.

Tags: Brazil, China, China Raised Interest Rates, Corporate Earnings, Country Brazil, Currency War, Fed Officials, Fed Policy Changes, Fed Reserve, Federal Open Market Committee, Fomc Meeting, Foreign Investors, Incremental Approach, Inflation Expectations, Inflation Protected Securities, Market Diary, Market Participants, Market Stability, Open Market Committee, Shock And Awe, Treasury Bond Yields, Treasury Inflation Protected Securities
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India to Open Equity Markets to Foreign Retail Investors

Tuesday, August 24th, 2010

This article is a guest contribution by American Century Investments.

Over the past few years, India has moved forward with market-oriented economic reforms such as reductions in tariffs and other trade barriers, the modernization of its financial sector, major adjustments in government monetary and fiscal policies, and more safeguards for intellectual property rights. In a move to reform its economy and boost double-digit growth, India—Asia’s third largest economy—is now planning to open equity markets to foreign retail investors.

The Financial Times reported last week (“India Eyes Foreign Retail Share Investors,” August 9, 2010) that a panel set up by the government to explore ways of bolstering foreign capital inflows had recommended making it easier for foreigners—particularly wealthy foreign nationals of Indian origin—to buy shares on the Indian exchanges.

In the article, Ashvin Parekh, a partner at Ernst & Young in Mumbai, who has also been working with the finance ministry on the project, said that “the finance ministry has accepted the recommendations in principle as it wants to capitalize on India’s incredible growth by attracting more foreign investors.” The move to open up the country’s equity market to retail investors abroad had been passed on to India’s market regulator and central bank, which would have to create a framework to protect investors’ interests.

About 18 years ago, foreign institutional investors were first allowed to invest in India. Now, foreign-owned brokers are common and trade directly on the country’s exchanges, while individual investors are prohibited from such practices. The plan to open up equity markets to foreign markets comes as India’s exchanges are upgrading technology in a bid to lure high-speed, computer-driven trading that accounts for a large proportion of activity on U.S. and European stock exchanges.

India’s government is also reportedly seeking to raise about $5 billion by selling minority stakes in state-owned groups, including Oil India and Coal India, and as investors eye India for higher financial returns. Over the past six months, India’s equity market has drawn much foreign institutional investor cash. In addition, the economy has grown 8.5% on the back of strong domestic demand and abundant liquidity, thus outperforming large emerging market rivals.

In the first seven months of 2010, foreign institutional investors have poured approximately $11 billion into Indian equities (see chart below), compared with about $7.5 billion during the same period last year. Analysts expect inflows for this year to top the $17 billion record hit in 2007.

Source: The Financial Times

More Growth Potential for Investors

While opening up its equity market to foreign retail investors will likely benefit India and increase capital inflows in that country, there is also more growth potential for investors who are prepared to accept the risks and invest for the long term.

Over the past decade, the economies of emerging market countries like India have been more dynamic and faster growing than the developed world. Maintaining growth and stability is certainly a top priority for emerging market countries like India. Compared to when emerging markets funds were first listed some 20 years ago, the asset class is also better regulated and offers more transparency due to improvements in the legal and financial systems. Many economies such as India have also built up their foreign exchange reserves, which allows them withstand market turbulence from developed economies. Moreover, sound macro fundamentals and stimulus measures helped the country weather the recent global financial crisis.

Over the next five years, we also believe that India and emerging market economies will be driven not only by export demand from the rest of the world, but by growth in domestic consumption, including health care, technology, infrastructure, and finance, among others. Accordingly, we think that this will create huge opportunities for investors and companies doing business in these sectors.

Investment return and principal value will fluctuate, and it is possible to lose money by investing.

International investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.

The opinions expressed are those of American Century Investments and are no guarantee of the future performance of any American Century Investments portfolio. This information is not intended to serve as investment advice; it is for educational purposes only.

You should consider a fund’s investment objectives, risks, and charges and expenses carefully before you invest. The fund’s prospectus or summary prospectus, contains this and other information about the fund, and should be read carefully before investing. Investments are subject to market risk.

Copyright (c) American Century Investments

Tags: American Century Investments, Ashvin, Capital Inflows, Double Digit Growth, European Stock Exchanges, Finance Ministry, Financial Times, Fiscal Policies, Foreign Institutional Investors, Foreign Investors, Foreign Nationals, India, India Asia, Indian Origin, Individual Investors, Intellectual Property Rights, Market Regulator, oil, Retail Investors, Share Investors, Speed Computer, Stock Exchanges India
Posted in Energy & Natural Resources, India, Infrastructure, Markets, Oil and Gas | 1 Comment »

Contemplating Capital Controls

Wednesday, July 7th, 2010

A guard stands before a Thai bank

This article is a guest contribution from Dr. Robert Horrocks, Matthews International Capital Management LLC.

It seems that every week we hear that the world’s economy is unbalanced—European and American economies face, among other things, fiscal austerity, weak housing markets and the threat of deflation. In contrast, China and India are booming. Western central banks are trying to stimulate demand through low interest rates while central banks in Asia are trying to cool demand amid private capital inflows.

While the West pushes for more growth from the East, Asia’s governments fear that speculative inflows of “hot money” could cause economic overheating and price volatility. Recently, China raised reserve requirements and India raised interest rates. China also implemented a series of administrative controls to sharply decrease property speculation by making it harder and more expensive to buy a second or third home. One tool policymakers might use to quell speculative investors is currency appreciation—but many countries in Asia have preferred to peg their currencies to provide a predictable value for the exchange of goods in their most important overseas markets.

Another tool for policymakers in discouraging asset bubbles is capital controls. However, capital controls are a double-edged sword. They help governments retain control over their exchange rate and domestic monetary policies but they are also coercive measures that bring into question a country’s commitment to free markets. Asia has had a checkered history with capital controls. Most notably, Malaysia imposed harsh controls to prevent capital from fleeing the country during the Asian financial crisis of 1997–1998. Malaysia had a difficult choice to make: it imposed its controls at the height of the crisis in order to stop a panic and buy time for the economy to recover. Nevertheless, it left foreign investors feeling bitter for years afterward.

The situation is different now. Asia’s economies are not in crisis. They seek to dampen the influx of capital for fear that it will be suddenly withdrawn at the first sign of volatility. Capital controls are perhaps both a blunt tool (determined investors can circumvent them) and a controversial one. So, recent moves to impose controls have been modest compared to Malaysia’s experience: Korea has imposed limits on its banks’ positions in currency derivatives; Taiwan banned foreigners from holding time deposits as a way to speculate on its currency; and Indonesia announced controls on sales of central bank paper. All countries have downplayed the idea that they would impose stricter capital controls. In addition, inflows of portfolio equity investments are probably less concerning to policymakers than inflows of credit, particularly bank loans. The withdrawal of equity investments, while damaging to sentiment, should not cause a credit crunch. Harsh controls on equity investments at this stage would appear unlikely.

Policymakers are clearly wary of imposing further controls on capital. However, they cannot prevent the bubbles they fear by using monetary policy alone—until they allow their currencies to appreciate. Otherwise, they are simply allowing international investors to enjoy the high interest rates that tighter policy brings at the existing cheap exchange rate and capital will flow in. Investors should keep this in the back of their minds. As enticing as the current economic climate is for Asian investment, any “rebalancing” in the world economy will be managed at a pace with which Asia feels comfortable. Controlling the pace will require Asian economies to follow a pro-active monetary policy, allow currencies to appreciate—or, yes, even consider capital controls. Even more reason for investors to maintain a long-term time horizon when considering investment in Asia.

Robert Horrocks, PhD
Chief Investment Officer
Matthews International Capital Management, LLC

Copyright (c) Matthews Asia

Tags: Administrative Controls, Asian Financial Crisis, Capital Inflows, Central Banks, Checkered History, China, Coercive Measures, Countries In Asia, Double Edged Sword, Fiscal Austerity, Foreign Investors, Horrocks, Hot Money, India, Low Interest Rates, Matthews International, Monetary Policies, Overseas Markets, Price Volatility, Private Capital, Property Speculation, Thai Bank
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