ANDBANK RESEARCH Global Economics & Markets
Alex Fusté Chief Economist
[email protected] +376 881 248
Carles Lluch Fund Picker
[email protected] +376 874 367
Working paper - 34 The Next Global Step. Some recommendations in Global Portfolio Investing. November 2012
Corporate Review
Many investment professionals feel uncomfortable talking about issues that do not relate exclusively to their local domain. Still do not know if it is because of their fear of ridicule that may cause a slip in his lectures on a remote area, or the limited desire to deepen the understanding of the global economy. Anyway, what I am sure of is that there is nothing more ridiculous than approaching problems inherent to a region … using a regional perspective.
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Chinese Communist Party celebrates the National Congress … and chooses the names of the small group of people who will run China for the next ten years. The first question any investor must ask is: Is this a positive or a negative driver for the global economy & financial markets? And looking with perspective, any investor should consider the following: This Congress often mark a significant turning points in the broad direction of Chinese economic policies … … resulting in favourable changes in the economy of the region, and thus, globally. For example. Following the 14th Party Congress (1992), Jian Zeming and Zhu Rongji pushed a wave of liberalization, culminating with the entry of China in the WTO. Or following the 16th Party Congress (2002), when Hu Jintao and Wen Jiabao gave a greater support to enterprises, reduced burdens of farmers and expanded social welfare programs …
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… When could we know if there is to be a reform agenda that ultimately will boost dynamics in the region? The Third Plenum has historically been a launching point for major initiatives (that prompted a boost not only to the region but to the global dynamism).
For example, the reform era itself started during the Third Plenum of the 11th Central Committee (1978). Pro-market reforms were also launched at the Third Plenum of the 14th Central Committee (1993), etc… The Third Plenum for the 18th Central Committee will be held during the fall of 2013. At that time, it is legitimate to think that economic reforms will continue to be (at least) incremental.
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Yes but … What kind of reforms? Obviously, what really matters today is whether China will continue with its gradual internationalization of RMB. This area of action is of utmost importance to the world economy. Let me explain why. In the absence of the appropriate amount of the reserve currency it will be hard for Asian countries to keep the appropriate level of trade. Thus, it will be hard for other regions (such as Latam) to keep a healthy pace of activity, and ultimately, will be difficult for the global economy to maintain a GDP growth above the “sonecessary-for-the-West” pace of 3%. As it happened in Europe in the 70’s (when all transactions were made in USD), whenever the US entered a recession so did Europe (because the US current account balance improvement left less quantity of USD for Europeans to trade). Europeans started to shift trade into DM, what turned out to be a very bullish development for Europe. This could already be happening in Asia. Thus, it would be very positive for the economy to find some kind of partial substitute (Eg the RMB). Considering the adaptative nature of all processes of succession (seen in recent history), and the direction of the former dome of government, we believe it is legitimate to think of a progress in this specific area (internationalization of RMB)
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At what stage are we? (I)
% over total issuance
The post-Lehman collapse (also in international trade), caused China’s leadership to realize that remaining dependent on poorly managed and worse-regulated Western banks to finance their trade made little sense…. … So China invited the likes of Brazil, Korea or Turkey to shift “some” trade from USD to RMB. What means that central banks need to keep reserves in RMB ... Which in turn meant that China needs to offer assets in RMB for these central banks. And so that is how the “dim sum bond market” was created. Today, Australia, Argentina and many other countries are entering the list.
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At what stage are we? (II) In the two years since China created the dim sum bond market, China has moved from settling 0% of its imports in its own currency to settling 13% of imports in RMB Offshore Dim Sum Bond Market Issuance and % of Total RMB issuance
Admittedly, levels in 2011 where still very low. The important point here “could” be the rapid development of this market … given the major number of countries that are entering the list of nations that settle imports in RMB. Consider that the Dim Sum Bonds represent only a 2.2% of the total RMB market (that one day could be partially liberalized).
All this suggests that there is already certain level of credibility in this currency to become a kind of currency reserve.
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Some other advantages Adding to this, China has also the advantage of having a trustworthy capital market (Hong Kong). One of the three necessary conditions to act as a reserve Fx.
Market cap by country (USD bn) India, 1,176 Australia, 1,249 Germany, 1,398
Switz, 1,131
Brazil, 1,093 Spain, 514 Mexico, 491
France, 1,491
Chile, 300
Canada, 1,925 China, 2,636
In essence it could take to you about fifty years building a credible financial market. But Britain left this little “gift” … … A very nice financial center built during the last 50 years (that became the 4th equity market by capitalization)…
HK, 3,071 UK, 3,154
Japan, 3,423
US, 16,037
Gentlemen. Considering all these (and with some degree of positivity) one could end up thinking that everything is ready to contemplate the emancipation of Asia.
Where is the catch? (indeed, not every thing can be so beautiful)
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All this can happen only if China is able to deliver a credible currency and a reliable bond market … Two aspects only compatible with low inflation … … What means that PBoC can NOT embark in significant monetary easing! To some extent, policymakers must sacrifice a portion of growth (and equity markets) to ensure the credibility of the RMB and its bond market. Do you understand why we recommend increase exposure in your portfolio to the entire RMB world?
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The recommended assets and instruments
Fixed Income & Fx Instruments
Schroder ISF RMB Fixed Income Fund A – CNY (LU0845698876) Schroder ISF RMB Fixed Income EUR – A (LU0845699254) Schroder ISF RMB Fixed Income USD – A (LU0845699502) Goldman Sachs Growth & Emerging Markets Debt Local Portfolio E Acc - EUR (LU0302284640) Goldman Sachs Growth & Emerging Markets Debt Local Portfolio A Acc - USD (LU0302283246) Invesco Emerging Local Currencies Debt Fund Class A USD Accumulation - USD (LU0275062247) Invesco Emerging Local Currencies Debt Fund Class E EUR Accumulation – EUR (LU0275060464) BlackRock Global Funds - Asian Tiger Bond E2 – USD (LU0147399801) ING (L) Renta Fund Asian Debt Hard Currency X USD Acc – USD (LU0546914242) Legg Mason Western Asset Asian Opp. Fd - Cl A Euro Acc – EUR (IE00B2Q1FK59) Allianz Renminbi Fixed Income A USD – USD (LU0631904975) Schroder ISF Hong Kong Dollar Bond A Acc – HKD (LU0149525270) db x-trackers II Markit iBoxx ABF Singapore Govt 1C – SGD (LU0378818560)
Equity Instruments Andbank Equity Fund Top Exporters EUR - A Andbank Equity Fund Emerging Markets –A (USD) Andbank Equity Fund Emerging Europe –A (EUR)*
* This region is also included within our most preferred areas of investment.
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All the sections in this publication have been prepared by the team of analysts from the financial institution. The views expressed in this document are based on the assessment of public and private information. These reports contain evaluations of a technical and subjective nature on economic data and relevant social and political factors, from which the financial institution’s analysts have extracted, evaluated and summarized the information they believe to be the most objective, subsequently agreeing upon and drawing up reasonable opinions on the issues analysed herein. The opinions and estimates in this document are based on the market events and conditions that took place before the publication of this document, and therefore cannot be determining factors in the evaluation of future events that take place after its publication. The financial institution may hold views on financial instruments that differ completely or partially from the general market consensus. The market indices chosen have been selected following the exclusive criteria that the financial institution regards as most appropriate. The financial institution cannot in any way guarantee that the predictions or events given in this document will take place, and expressly reminds readers that any past performances mentioned do not in any circumstances imply future returns; that the investments analysed may not be suitable for all investors; that investments can fluctuate over time in terms of their share price and value; and that any changes that might occur to interest rates or currency exchange rates are other factors that may also make it unadvisable to follow the opinions expressed herein. This document cannot be regarded, under any circumstances, as an offer or proposal to buy the financial products or instruments that may have been mentioned, and all the information herein is for guidance purposes and should not be regarded as the only relevant factor when it comes to making a decision to proceed with a specific investment. This document does not, therefore, analyse any other determining factors for properly appraising the decision to make a specific investment, such as the risk profile of the investor, his/her knowledge, experience and financial situation, the duration or the higher or lower liquidity of the investment in question. Consequently, investors are responsible for seeking and obtaining the appropriate financial advice in order to assess the risks, costs and other characteristics of any investments they wish to make. The financial institution cannot accept any responsibility for the accuracy or suitability of the evaluations or estimates of the models used in the valuations in this document, or any possible errors or omissions that may have been made when preparing this document. The financial institution reserves the right to change the information in this document at any time, whether partially or in full.
