Tuesday, June 11, 2013

TMM's Essential Mix: Emerging Markets

Coming live to you from Tanjong Beach Club in Singapore TMM, described as "the Swedish House Mafia of macro - minus the musical talent or good looks" will be bringing their mix of emerging market breaks  - mostly of the fixed income variety.

And breaks are what TMM are seeing out here. More "going Pete Tong" than TMM. The emerging markets selloff which started out all groovy and house music  (you know, gradual normalization of policy, markets with bad fundamentals doing vastly worse than those with good fundamentals ) but has instead turned into something that sounds like a Skrillex set with a bunch of scratched records. In short order we've seen a lot of EMFX blowup from ZAR to IDR. Now some people have observed that this is partly due to some forced deleveraging by CTAs and the like which should, all things being said, be temporary. Swap spreads should not be blowing out if the problem is the local markets as opposed to banks as in 2008. The problem is that this selloff appears to be gathering pace and, with an acute lack of risk appetite at dealers, it is hard to say where things are going to clear if redemptions come.

In addition, we are seeing some truly daft behavior from central banks most notably Bank Indonesia which is engaging in QE in a market with 6% inflation, good growth and no incipient signs of a credit slowdown. If the recent price action is the best they can do with regards to stabilization it is tantamount to waving a red cape at the likes of Druckenmiller and Scott Bessent at Soros both who a) know this game and b) won it last time.

In that context TMM are finding things fairly hairy out here. The possible good news would be measures to slow credit growth in places like Thailand where it appears to be going into the condo market more than anything else or, perhaps some of that long awaited reform in India. Or, perhaps, some real SOE reform in China. Instead when TMM talk to strategists pushing us to cover shorts in this space we find ourselves glazing over, imaginging we are talking to Vladimir and Estragon and in all fairness the daydream is not far from reality. 

To that end, TMM are pretty happy staying underweight to short particularly in yield proxy equities and yield sensitive names.

Now, there is something TMM need to consider here and that is the underlying assumption of this whole market - decoupling, which ended *Really* badly last time. TMM are looking at USTs and equities and wondering just whether the rest of the world has given much thought to how likely a taper is given the S&P 500s international earnings and what they might look like if things got ugly.  

EM isn't a rounding error any more and with US tech services at risk from foreign reactions to FISA and the Patriot act the risk reward does seem to be changing fast.

12 comments:

abee crombie said...

Fx is where its at. I however am covering here my AUD short and taking a little more in the MXN. Its a tough call, to either continue with the trend (lower) or play the bounce.

ASEAN markets were so over bought since Nov 12, not surprising to see big dump now.

Good point about dealer inventories, that for sure is playing a role.

Key for me is still the yen, JGBs which dont inspire that much confidence ..yet

Leftback said...

We talked about this long ago, especially with all the USD denominated debt in EM Land. It took forever to happen but EMB has been killed and EM bank equity is predictably going down with credit.

EM equity trading is clearly approaching babies and bath water time. Russia is trading at one year lows, Brazil hasn't been this low since 2009. As for China, we wouldn't touch it with yours, TMM.

The key from here is probably to wait and see whether we have the usual dump of all things energy-related in July. We are staying away from things like PBR for this reason.

There is a bit of collateral damage out there at the moment. For example, NZT is cheap for no other reason than because the Kiwi got taken down with AUD - as usual. Brazilian utilities are dirt cheap, even as their raw material input costs are falling. So it's close to time for the Kevlar Gloves™ in a few well chosen locations. It is worth recalling that the intimate relationship between Russia and Europe's natty gas needs is a long term one that is now structurally embedded, so we like Gazprom.

mREITs were down again predictably this morning, MORT now yielding well above 9%, but the preferreds are not being sold, which tells you a lot about what the smart money thinks about rates.

Anonymous said...

Within equity land EM remains largely a rounding error.

And to Leftback, I love your optimism in Russia. Maybe when Sochi has been and gone, the World Cup is done and dusted and whatever other pet projects are completed you can get excited about the intimate nature of of Gazprom's relationship with Europe, until then.......

Leftback said...

Anon... why so emotional? You have to take that amygdala out of your brain during trading hours, it is preventing you from thinking clearly. For some of us, the complete lack of any optimism whatsoever in anything remotely Russian is one of those contrarian signs that it's time to don the Kevlar.

There are times when you have to say, look, here's a company that is trading at 2 times earnings, that supplies a large number of landlocked countries lacking natural resources of their own with essential heating fuel. Most of these countries experience a phenomenon known as "winter" at regular intervals that average about 12 months, when nat gas usage increases.

The dividend yield is 8% here. Nobody knows exactly where the bottom is in these kinds of stocks, but when nobody wants to touch 8-10% yield in energy it's a sign that the bottom is nigh. As an example, we bought TOT and ÖMV last year when they were yielding 6% or so, and that worked out pretty well, although many Europhobic commenters here clearly hated the idea at the time. The principle of mean reversion can make you a lot of money (or lose a lot if you don't observe it).

Anonymous said...

Rampagingruss says: While EM has been clobbered I think its a bit early to don the kevlars yet. RUB has barely broken out its recent range. Think you want Ruble around 35 to be donning the Kevlars IMHO

Leftback said...

Very good point, RR, although in past Falling Knife™ descents, there have usually been selected equities that find a floor ahead of the local currency.

NZT at 12 month lows today (in USD not NZD terms), similar case, not all that much wrong with the actual business, shares being sold because of NZD and AUD falling, yield getting quite tasty at 7.62%.

Of course the EM trend can and may well continue. So it's a question of a Kevlar-covered finger or toe, for now, picking up slivers here and there as we did last year in Europe with things like OTE, ÖMV and BBVA. High pain threshold required...

abee crombie said...

I think for many, the best way to play the EM in the past 2 years was to buy to corporate debt. PBR, Gazproom etc arent run for stockholders, but many doubted they would default on debt as they wanted to be seen as legitimate companies.

When confidence returns in their bonds, I'd take a look at their equities.

Interesting potential 'hammer' in MXN, UST and I'm sure some others.

Br Real isnt inspiring much confidence. I cant understand how that economy is still going given how expensive it is there, but it is and rates and valuations are starting to get interesting

Gnome of Zurich said...

It's hard to find relatively uncorrelated and underhyped investments in today's EM. I prefer more and more to look into the submerging PIGS instead. Is anyone else here fooling around in the Greek bank recapitalisations with all these free warrants?

abee crombie said...

I've been trying to do some digging into AGNC and the other mREITS. According to the sell side, they see current BV at the low end at just .9x Book. AGNC paid up for prepayment protection, which now is likely not worth a lot but at some point that drag will go away. Forward looking, MBS spreads looking better than they have been.

But are there more Mom and Pop investors who will continue to sell regardless and will the Fed let long rates and MBS rates move up meaningfully from here? I took a little but not that confident yet

Leftback said...

LB is often early to don the Kevlar which accounts for the many strangely misshapen fingers and toes.

A few thoughts on rates. How can rates be rising inthe face of a frankly disinflationary environment? 10y10y break-evens are falling....

10y10y breakevens

The answer? Central bank distortions and the hedge funds who love them...... but it's temporary.

Leftback said...

Mom and Pop always always always sell REITs at exactly the wrong time (after the HFs are done selling) because the media yaps about rising rates and just as they bottom out the insties snap them up. It's the way the world works....

Nico G said...

"For some of us, the complete lack of any optimism whatsoever in anything remotely Russian is one of those contrarian signs that it's time to don the Kevlar."

there are no free markets in Russia, so you should adjust your size and stop accordingly (remember RTX futures in summer 2008... gulp)