The global commodity super-bubble is coming to an end. It is exactly a year since we forecast that a Great Unwinding of stimulus policies was underway, due to a major slowdown in China. As we warned on beyondbrics:
Oil and commodity prices are falling sharply as supply/demand once again becomes the key driver for prices; the US dollar is strengthening and liquidity is tightening across the world; equity markets risk sharp falls, as investors realise they have overpaid for future growth and rush for the exits; China’s economy is slowing fast as the new leadership implements the World Bank’s ‘China 2030’ plan; interest rates are becoming volatile as some investors seek a ‘safe haven’, while others worry that stimulus policy debt may never be repaid.
Today, it is clear that risks are rising in all these areas. And fewer people now believe that the problems can be magically wished away by a further round of stimulus – even if this was economically and politically possible. Read more
It was perhaps fortuitous that this month’s 70th anniversary of the atomic bombings of Hiroshima and Nagasaki followed so soon after the announcement that Iran had reached a deal with the US and others to step back from the nuclear brink. Whatever the critics say, the world’s most serious proliferation threat has been averted for now. By agreeing to reduce stockpiles of enriched uranium and accept stronger verification, Iran has extended the breakout period needed to build a nuclear weapon from two or three months to around a year, reducing the temptation for other countries in the region to take pre-emptive military action or acquire nuclear capabilities of their own.
This news is particularly welcome because elsewhere the nuclear arms control agenda has stalled and important agreements that defined the end of the Cold War have started to fray at the edges. Without a concerted diplomatic effort there is a danger that the world will slide unwittingly into a new era of nuclear competition. There is a pressing need for new multilateral initiatives and agreements that strengthen norms of restraint, co-operation and trust in the field of nuclear weapons policy. Read more
By Benjamin Sporton, World Coal Association
Over recent weeks, World Bank climate change envoy Rachel Kyte has made a number of comments claiming that coal is not part of the solution to energy poverty. Pointing to investments being made globally in renewable energy, Kyte argues that coal is a fuel of the past, which we all need to be “weaned” off.
But her comments do not match up with the numbers. The International Energy Agency (IEA) forecasts coal use in electricity generation to grow 33 per cent by 2040. Demand for coal in Southeast Asia alone is expected to increase 4.8 per cent a year through to 2035. Read more
By Neville Mandimika, Atria Africa
Since Ben Bernanke suggested that the US Federal Reserve was starting to consider slowing down its asset purchase program (QE), markets have been trying to price this in. The difficulty has always been in the timing of the ‘lift-off’ as the Fed has insisted that it all depends on the data. Read more
By David Lubin, Citi
You often hear economists and investors talk these days about the ‘broken growth model’ in emerging markets. It isn’t a terribly precise term but it’s easy to see what people mean. The problem in EM is that none of the three possible sources of GDP growth – exports, or public domestic spending, or private domestic spending – have much going for them.
Exports from EM are hobbled by a collapse in the growth of global trade and the related fall in world commodity prices. Public spending growth is weak because many governments are too nervous to loosen fiscal policy, fearing a loss of sovereign creditworthiness at a time when the outlook for capital inflows isn’t encouraging. And private domestic spending is hampered by the fact that credit markets in many countries are in ‘post-boom’ mode: neither domestic lenders nor borrowers have much in the way of risk appetite. Read more
How do you classify the countries known as emerging markets (EM)? That question has become more relevant since the FT declared the EM term unhelpful and obsolete as a definition.
So what should replace the EM term? Alexander Kozhemiakin recently argued that investors should look at the risks affecting an EM’s growth to get a sense of how safe their investments in particular markets might be.
Andrew Karolyi, a professor of Emerging Market Finance at Cornell’s Johnson School, however, also focuses on measuring risk, and has come up with a matrix to do so. In his book “Cracking the Emerging Markets Enigma”, Karolyi ranks 57 emerging markets and developed markets by averaging their score on six components. Read more
“Integration” within regional geographies has been a powerful driving force behind the macroeconomics of many emerging markets in recent years.
Perhaps the least well-known of these is the far-flung Pacific Island nations, which remain far off the radar for most investors due to their small populations that inhibit scalable businesses.
Yet the Pacific Islands – including Fiji, Samoa, Papua New Guinea, East Timor, the Solomon Islands, Tonga, and others – have plenty or reason to work together. Read more
It sometimes feels that nothing is as volatile or confusing as exchange rates. This sensation has, of course, been exacerbated by the extraordinary monetary policies pursued over the past seven years. The world’s four largest central banks have expanded their balance sheets by an approximate $8tn since the global financial crisis. That is more than the combined GDP of Germany, France and Italy.
The conventional wisdom is that monetary stimulus is good for financial asset growth and, indirectly, for economic growth, while it has a negative impact on currencies as the increased money supply leads to capital outflows as interest rates are pushed lower. Well, that may still be true in the short term but it is difficult to square it with the medium term development. Read more
By Asha Mehta, Acadian Asset Management LLC
There is no doubt that frontier equity markets are appealing as a concept. They are seen as future growth engines in the world economy, available at an entry point that may be similar to the opportunity offered by emerging markets twenty years ago.
A $100 sum invested in a broad emerging markets index in 2001 would be worth about $285 today, versus $154 for the same amount invested in developed global markets*.
So, why are investors generally not investing in frontier markets, which may offer a similar upside? Here are five probable reasons why, along with a reasoned assessment of each. Read more
Are governments prepared to invest in the world’s poorest women and girls? A resounding “yes “ according to panel after panel at last week’s UN Financing for Development Conference in Addis Ababa. At this, the first of three UN summits aimed at eliminating absolute poverty by 2030, it was clear that gender has moved from side meetings to centre stage, from a women’s issue to one supported by male leaders. The World Bank President and the UN Secretary General both described how they overcame their conservative Korean upbringing to become women’s rights advocates. Swedish Prime Minister Stefan Lofven declared, “Gender equality is not only morally right. It is also an extremely potent development and growth booster.”
But women’s groups, while grateful for the rhetoric, were critical of the lack of quantifiable commitments in the action plan that emerged from Addis. Will the trio of UN summits provide any help to women like Birtukan, a widow with four children from Ethiopa’s Amhara region, who spoke up at an FfD side meeting on how uncertain rains make feeding her family difficult? Read more
Investing by acronym is popular. It is a trend that has been around for a long time, but the creation of the Brics acronym in 2001 was a milestone. Since then, new themes have mushroomed, from the Mints to the Next 11. However, this one-size-fits-all approach does not make sense for investors, who should concentrate on analysing the entire universe on a fundamental basis.
The countries within these groupings are diverse, yet retail and institutional investors continue to look at emerging markets as a homogeneous asset class. Historical, geographical and cultural differences have always existed, and economic developments across regions and countries have been vastly different. South Korea and Rwanda are both considered emerging markets, but the former has become a highly industrialised country over the past few decades with one of the highest average incomes, while the latter has one of the lowest. Read more
That export performance of the Brics has been disappointing in recent years is well known. What hasn’t been appreciated is the extraordinary lengths the governments of Brazil, Russia, India, China and South Africa have gone to boost their exports. Indeed, once such initiatives are taken into account, recent export performance is cast in a worse light, raising the question—is the Brics competitiveness problem worse than previously thought?
At the end of May 2015, the OECD published data on the first quarter’s exports and imports of leading trading nations, including those for Brics. This data showed that in US dollar terms the total value of each Brics nation’s exports was falling. Worse, the exports of Brazil, India, Russia, and South Africa have essentially stagnated over the past four years or deteriorated significantly. China’s exports appear to have plateaued at the end of 2014 (see Figure 1). Read more
The leaders of the Brics – Brazil, Russia, India, China and South Africa – held their seventh annual summit amid deep scepticism about their once-promising growth story. While Russia may have been the host of the show, the real engine behind the summit, and the changes taking place across the emerging world, is China.
Right now, the Brics face serious cyclical and structural challenges and India seems to be the only bright spot in the club. Russia, Brazil and South Africa are either in recession or dangerously close to it. China is struggling to maintain its growth momentum as it tries to rebalance its economy. All need to implement deep and difficult structural reforms if they want to increase their long term growth potential and live up to the Brics dream as it was envisioned in the early 2000s. Read more
A few weeks ago I wrote a piece for beyondbrics about what milk can tell us about the fair valuation of African currencies. While the methodology has its drawbacks, it is a basis for debating where African currencies should be relative to where they are today. The chart below shows the year-to-date performance of selected currencies against their over/undervaluation based on the price of a gallon of milk.
- Sources: S&P Capital IQ, Atria Africa Research
March 28 this year was a date for the history books. It marked the first time the Nigerian presidential election had been contested peacefully between two political parties, rather than between personalities in the same party. It was also the first time that the opposition had come to power in a presidential contest in the history of Africa’s most populous country.
The result might have been better news for Muhammadu Buhari, elected as president, than for his rival, Goodluck Jonathan, whose People’s Democratic Party had been in power since 1999, but in so far as it was peaceful and accepted by the defeated party, it marked the maturing of Nigeria’s democracy. Read more
If you think launching a start up in Silicon Valley is hard, try it in Sierra Leone, Surinam or Senegal. Emerging market entrepreneurs face extraordinary challenges to growth, including access to finance, access to markets and access to talent. Of these, talent is the most critical. Over the past few years, I have become increasingly convinced that the lack of quality managers in emerging markets is the lynchpin to unlocking the prosperity-creating potential of small and growing businesses. Yet we have seen little movement on the talent issue. And the time has come to change that.
Having qualified management teams is fundamental to receiving growth capital. Successful private equity investors look first at the team – and then consider the business plan and implementation strategy. Banks may look at financial statements first, but even a solid balance sheet is not enough if lenders are not comfortable with the management team. Read more
In August last year I received a phone call from President Koroma of Sierra Leone. His country was fast becoming the centre of the most widespread Ebola outbreak in history. He had just declared a national emergency, and he was asking for support.
My foundation, the Africa Governance Initiative, had been working in Sierra Leone since 2008. We had helped the government introduce free healthcare, push through agricultural reforms and turn on the lights in the capital Freetown. But the nation was now facing its biggest test since a brutal civil war ended a decade ago. It was clear our focus needed to change. Read more
By Gregory Chin and Kevin P. Gallagher
Former US Secretary of State Dean Acheson famously wrote that his generation was ‘present at the creation’ of the world order that ushered in US leadership. We may now be present at the unpicking of that order; the fate of the US Ex-Im Bank is set to be decided by the US Congress this month amid predictions that it may be scrapped.
After putting in place the pieces for domestic recovery after the Great Depression, the United States laid the foundation for a series of financial institutions that sought stable international economic and financial growth, and the export of American goods and values. Read more
It has been fashionable to paint Microsoft as laggards in the race for the world’s mobile users. However, two important developments this month could result in Windows being the dominant technology ecosystem in the developing and emerging markets.
The most significant was Microsoft’s launch of a $20 Nokia phone targeted squarely at aspirant consumers in the developing world. The new product has an affordable price tag and features ideally suited to places with unreliable power and limited connectivity such as a month-battery life and a flashlight. Read more