October 08, 2007
Emerging Markets Sexy, sexy, sexy... Dubai rah rah ... overbought
Something about the HSBC move to open a brokerage in the Gulf aimed at international portfolio investment struck me as just not the great news that say the typical Gulf paper coverage would pimp it as. Of course, there is no bad news in the Gulf. Merely rumours of bad news, whispered or blogged (rarely).
HSBC is to become the first international bank to launch its own brokerage services in the United Arab Emirates to satisfy growing international interest in accessing these booming oil-backed economies.
The new firm, HSBC Middle East Securities, will offer institutional investors access to the Abu Dhabi Securities Market and the Dubai Financial Market, which are jointly capitalised at more than $165bn, opening to retail investors next year.
“The Middle East is increasingly valuable and important to investors,” said Neil Foster, HSBC’s head of global markets for the Middle East, and chairman of HSBC Middle East Securities.
Record oil prices continue to underpin the booming economy of the UAE and other Gulf states, with international investors increasingly shrugging off concerns about poor corporate governance as they identify value in some listed companies on these exchanges – which lost up to 50 per cent last year after the stock market crash in the region.
Hedge funds are particularly interested in Middle Eastern markets, because of the perception that the oil-rich Gulf is relatively sheltered from the credit squeeze and runs on a different cycle to global markets. Within the Gulf, the UAE’s markets are most favoured by international investors. Dubai and Abu Dhabi boast enough companies that are open to foreign investment, while other markets – such as regional giant Saudi Arabia – are still relatively closed. HSBC has offered UAE brokerage services via third parties.
What I am all in favour of the argument that the US credit crisis exposed some clay feet, "shrugging off" mediocre governance standards and paying high prices for limited publicly traded paper....
I seem to recall rewinding about 15 years something similar.
A fine way to lose money really. Again, there is value in emerging markets but public paper is thin, and... hot money is oft dumb.
A further item
Because of the UAE companies’ law, HSBC has had to launch the firm with a local partner owning a majority 51 per cent stake. Mr Muzzammil said the new company aims to raise its legal ownership as high as possible – perhaps to 100 per cent – once the government passes a new law that is set to allow greater foreign ownership of firms.
Fine bit of extortion that 51%.
However, the overall message is in line with my observation during the height of the credit crisis' first wave, that Emerging Markets looked ironically like a safe haven.
Taking FT Funds recent comment as my illustration (but also noting that again here, it's public markets (exchanges) that are the subject)
Emerging markets often retreat in moments of crisis but since July’s credit squeeze they have defied the financial turmoil and exhibited strong performance.
And as the repercussions of the US subprime mortgage blow-out work through the financial system, investors are increasingly looking to equity markets outside the developed economies.
Emerging market equities did slide 17.7 per cent between July 23 and mid-August, according to the MSCI EM Index, but have since rallied 30 per cent to record highs.
“Emerging market economies are less correlated to the slowdown in the US but we have not seen a slowing in emerging market economies, resulting in strong earnings growth for companies,” says Michael Konstantinov, head of emerging markets at RCM, a company of Allianz Global Investors.
“We are seeing a decoupling [between developed and developing economies] as the growth in emerging markets is becoming more important in the global context,” he adds. “They are a bigger contributor to global GDP growth.”
While I am a fan, evidently, of finding value in emerging markets, the idea of decoupling when much of growth is driven by export to developed economies is just stupid. Lagging, sure, decoupling? Bollocks in my opinion.
Investors’ perceptions of the relative risk of emerging markets have also been impacted by the sight of a bank run in a leading developed economy – the UK.I think rather the US created/led/driven credit crisis and its particularities, such as illustrating that some of the fun stuff's transparency was entirely illusory.
As investors largely turned their backs on funds exposed to developed markets, net inflows into emerging markets equity funds hit an 85-week high of $5.5bn (£2.7bn, €3.9bn) in the fourth week of September, according to EPFR Global, which monitors fund flows. Asia ex-Japan equity funds were responsible for 53 per cent of these inflows, while broad global emerging markets funds accounted for 29 per cent.
“Asia has the potential to deliver independent growth as global economies rebalance,” says Nidhi Mahurkar, co-head of emerging markets at Pictet Asset Management “There is still growth ahead for Asia.” She sees the Bric economies (Brazil, Russia, India and China) playing a large part in this, particularly the latter two.
So where is this money coming from? Largely, US, Japanese and European equity funds suffered from the outflows that have flowed back into emerging markets funds, say EPFR. Combined redemptions from these three sectors totalled more than $13bn in the fourth week of September as dollar weakness and fears over the fallout from the turmoil in the US subprime loan market continued to weigh on sentiment. Flows out of money market funds accounted for a modest $310m.
“You can argue that investors are finally fleeing to safety by moving money out of the US and Europe, whose banking systems have the greatest exposure to subprime-linked debt, into emerging markets that offer little or no exposure and, in many cases, much better fiscal discipline,” says Cameron Brandt, global analyst at EPFR.
In the last month, Allianz’s Mr Konstantinov has seen inflows into emerging funds from retail investors, while institutional investors have taken longer to make strategic decisions. Bric and global EM funds benefited equally from these inflows at RCM.
The rise of domestic investors in the Bric economies is also continuing “as people grow in saving and spending power in these economies”, says David Curl, chief investment officer at Charlemagne Capital, the long-only and hedge fund manager specialising in emerging markets.
At Threadneedle, Julian Thompson, head of emerging market equities, says inflows in emerging markets were flat in June but picked up in July. “People have been relatively cautious. This indicates the money [invested] is more long term and not hot money,” he says.
The growth prospects of emerging markets continue to look attractive, fund managers argue. “We’ve had seven good years but we still think we’re in the early stages of growth as consumer demand in these markets is strong and infrastructure investment is growing,” says Mr Thompson. He believes investors “will be willing to pay a premium for emerging markets”. Mr Konstantinov sees a continuing strong long-term outlook for emerging markets based on their growing economic clout.
But is this surge into emerging markets likely to create a bubble? When it comes to Asia, Ms Mahurkar does not see bubble territory. “We expect Asia’s outperformance to continue as the case for equities and currencies remains intact,” she says.
When does an Equity Pimp ever call a bubble?
But my fourth or fifth favourite FT commentator (hard to count you know) notes:
If the dollar starts to fall again, it may reach a point where the Fed feels obliged to step in. To do this, it would have to abandon rate cuts. That could end the liquidity-fuelled party in the emerging markets.
Shshhhhhhh, I say, shhshshsh.
Posted by The Lounsbury at October 8, 2007 10:58 PM
Filed Under: Biz - Private in MENA
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China's eventual revaluation of the renminbi --a probable trigger?
Posted by: matthew hogan at October 10, 2007 04:49 PM
Will there be one?