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
When a public health crisis on the scale of Ebola hits, the urgent focus is on the frontline agencies and individuals carrying out the heroic job of diagnosing and treating the sick while managing the wider emergency that follows in its wake.
At the same time, local businesses also play their own vital role. It is local businesses that often have the capacity and expertise to help response efforts. A well-functioning private sector, with firms who are able to provide these services quickly and efficiently, is a key part of a country’s resilience. Read more
For much of the past two decades, Brazil and Mexico seemed at times to be on a collision course. Diplomats from Latin America’s two largest nations were often preoccupied, if not obsessed, with a competition for an elusive role as regional leaders and players in the post-Cold War shifting global scene. The 2013 battle for the post of director general at the World Trade Organization, won by Brazilian diplomat Roberto Azevêdo over Mexican Herminio Blanco, a former trade minister, left plenty of hurt feelings. Ironically, the dispute for influence also led to convergence. The 2011 creation of the Community of Latin American and Caribbean Nations (CELAC), proposed by Mexico to affirm its Latin American identity and counter a perceived Brazilian effort to separate it from the region, was warmly embraced in Brasília as a way project leadership by promoting formats that excluded the US. Read more
Some 95 per cent of all global foreign exchange reserves are invested in just four currencies: the US dollar, the euro, the yen and sterling. The central banks of the ‘Big Four’ are all expanding their balance sheets or have been doing so for years with no sign of immediate reversal. They are all trying to convert huge debt problems into inflation problems, and when they succeed their currencies will weaken sharply.
In this currency war, EM central banks risk suffering the most collateral damage. Their reserves – so many of them held in the big four currencies – will be decimated in purchasing power terms. The world will become desperate for alternative currencies to act as replacements for the traditional reserve currencies once their currency debasement efforts really take root. Read more
By Lim Cheng Teck, Standard Chartered Bank
There was a lot of excitement recently at the World Economic Forum (WEF) in Jakarta about the Asean Economic Community (AEC), due to become a reality by the end of this year.
However, one wonders if the closer integration of the grouping’s 10 member states matters as much to Asean’s people and companies as it does to the policymakers and business leaders opining at WEF. Given the obvious potential of this powerful union of 625m citizens – the world’s seventh largest economy and one of its fastest growing – why hasn’t the idea of the AEC taken off in a big way yet? Read more
Emerging market (EM) official foreign exchange (FX) reserves have been falling steadily by an average of $58bn a month since reaching an all-time high of $8.17tn in June 2014. This has mainly been due to reductions in China and Russia, but is accentuated by declines elsewhere. Total reserves have also been falling year on year from December 2014, with the cumulative yearly decline accelerating to $385bn in March 2015 (see chart below).
Typically, reserve reductions indicate balance-of-payments pressures and/or central bank interventions in currency markets to dampen exchange rate depreciations. Greater exchange-rate flexibility across EMs and previous reserve accumulations alleviate most immediate concerns, including in China and Russia, but much depends on the direction of commodity prices and global market reactions to the eventual increase in US policy rates. Read more
The African migrant crisis is in the global headlines and rightfully so. It is high time people were talking about this dire problem and searching for solutions.
The European Union has announced its 10 point plan, focused on tackling human smugglers and with a changed approach to the migrant vessels that traffic tens of thousands heading for Europe every year, often with tragic consequences.
While these are crucial steps, African leaders should also work with the EU to make progress on another track entirely: solving the problem at its roots – making fundamental changes to the factors that contribute to these migrations. Because the problem starts here in Africa. Read more
This year, global leaders could set the world on a path to overcoming extreme poverty by 2030. Achieving this will require political leaders to prioritise the very poorest, particularly girls and women. As diplomats negotiate in New York in preparation for a global meeting on Financing for Development in Addis Ababa in July, leaders and ministers must set their ambition high for what must be a game-changing conference.
ONE’s flagship 2015 Data Report, published today, calls for a deal between developed and developing countries to help the poorest in society prosper in the coming years. Read more
In recent weeks, investors have been reminded how supposed risk-free assets, like Treasuries and bunds, can still inflict substantial losses. So far in the second quarter of this year, 10-year yields have risen by nearly 0.48 per cent in Germany and by 0.31 per cent in the US.
As a result, the JPMorgan GBI Global bond index is down 2.72 per cent in the year to date. With bond yields expected to drift higher as global growth and inflation pick up, this will continue to be the case. Puchasing bonds with wafer-thin yields means there is no cushion for capital losses.
Even locking in current bund yields of around 0.70 per cent, an investor would make a zero annual return if yields inch up by just another 0.07 per cent. A rise in yields of 0.25 per cent would be enough to erase dollar returns of ten-year Treasuries yielding 2.23 per cent today. Read more