Summary: Russell Jones and Rose Ferrer on emerging market bond risks; A renewed push for Mideast peace will boost Israel’s Ituran Location & Control ITRN; Betting on Electrovaya (EFLVF) and more international stock news follows covering GSH, VALE, ITRN, FBASF, MHG, NOK, EFLVF, OIBR, PT, FCGYF, BDRAF, MNK, COV, ALLRF, ISCHF, RDY and more…
Russell Jones and Rose Ferrer writing for LlewellynConsulting.com in London ponder emerging market bond risks:
“One useful starting point is the ‘Rule of Four’ initially proposed by Norges Bank Deputy Governor Jan Qvigstad to provide a simple-to-calculate, easily-understood portent of danger in the OECD economies. [I]t can also usefully be applied to emerging market economies as a gauge of a currency’s vulnerability to a deterioration in external financing conditions.
The Rule of Four focuses on a country’s inflation rate, and its current account and budget deficits expressed as a percentage of GDP. In advanced economies, a value of 4 or above for any variable is a warning signal.A value of more than 4 for two or more variables almost certainly spells serious trouble.
While accepting the relevance of twin deficits as a determinant of EM crises, critics could argue that, when applied to the developing world, the 4% inflation threshold of the Rule of Four is too low. In many cases they have a point. The ‘Balassa-Samuelson effect’ suggests that faster-growing emerging economies will have higher inflation rates than slower-growing, mature economies. Consistent with this, whereas the average inflation rate for the developed world [w]as a little above 2% since 2005, the equivalent figure for the rest of the world is around 7%. The IMF forecasts non-OECD inflation this year at just under 6%.
Such caveats notwithstanding, however, the various EM countries’ currency sell-offs were broadly in line with their Rule of Four scores: the higher the score, the bigger the currency decline.
Who’s in the firing line now? The largest and most worrying budget deficits are in India, South Africa, Argentina and Mexico, with the Indian government by far the most fiscally incontinent.
The largest external deficits are in South Africa and Turkey; both exceed the 4% threshold. Chile also has a current account imbalance issue.
Not surprisingly, the majority of inflation rates exceed the Rule of Four threshold. India, Argentina, and Nigeria appear to have inflation rates that are troublingly high even for developing economies.
When the outturns for the three sub-indicators are cumulated into one single reading, India, South Africa, Argentina, Turkey, Indonesia, and Brazil are flagged as the economies most at risk from disruptions in the flow of global capital.
When these overall scores are compared with those recorded in 2013, it is noticeable that, with the exception of Argentina, they have improved in all the economies deemed most at risk. This fact may perhaps temper the potential downside for their respective currencies.”
Separately, the Global Research team at Bank of America-Merrill Lynch set out to figure out which emerging markets present the highest risks. The ‘fragile five’ Alberto Ades and his team selected are: Turkey, Chile, Taiwan, The Philippines, and India. (I do not consider Chile or Taiwan emerging markets.) Sharp-eyed readers will see that the two lists overlap in bearishness about Turkey and India.
More follows starting with China, whose growth outlook is the unspoken backdrop to both of the above exercises, plus India, Spain, Netherlands, Mexico, The Netherlands, Ireland, Norway, Canada, Brazil, Portugal, Israel, and its neighbors. Plus two news items about Mozambique. There are four articles about railways and one about ferries. And two on NRIs, non-resident Indians.
