Asia’s bonds look shinier as Europe and China slump
By Wayne Arnold
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Asian bonds seem likely to gain from growing anxiety about Europe and China. The region’s robust finances have made its sovereign debt a safe haven as larger economies sputter. An indiscriminate sell-off would hurt everyone, but Indonesia, Japan and the Philippines all have qualities that should give them greater resilience.
Worse-than-expected economic data from China and the prospect of a Greek exit from the euro zone have sparked a stampede from risk assets. Investors fear global growth will slow, and that the sell-off will snowball. One way bleaker conditions in Europe could reach Asia is through its banks. European lenders pulled at least $135.8 billion in credit out of Asia in the second half of 2011, according to the Bank for International Settlements.
Asian sovereign bonds should benefit from weaker growth, lower inflation and lower interest rates. The safest are those that are also less vulnerable to outflows. Indonesia, for example, has public debt of less than a quarter of GDP – even Germany owes three times as much. It has relatively little short-term external debt and a much lower reliance on credit from European banks than other Asian economies. Yet the government’s 10-year bonds yield 4.7 percentage points more than Treasuries.
Japan, despite bonds that yield less than Treasuries and a government debt 1.5 times larger relative to its economy than Greece’s, is safer still. Foreigners own less than 7 percent of its bonds, which limits the potential for forced selling, and Japanese deflation has kept demand steady. By contrast, foreigners hold 80 percent of Australia’s government debt.
The most unlikely refuge is the Philippines. Though impoverished, its government has managed to build a $76 billion foreign reserve buffer, equivalent to almost six times its short-term external debt, and finances 95 percent of its public debt at home. Yet Philippine bonds still pay 4 percent more than U.S. Treasuries. Such trades are still risky – not everyone wants to go long the Philippine peso. But the worse things get elsewhere, the more palatable that risk may seem.
The pound’s climb may send the UK down
By Ian Campbell
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
British holiday-makers will welcome it. The pound is rising as the euro weakens. Sterling will rise further in the coming months if Greece exits the euro zone and exacerbates the single currency’s crisis. But the pound’s rise promises UK pain-and serious problems for policymakers.
The 4 percent rally against the euro so far this year isn’t dramatic enough to be called a problem or claimed as an excuse. The pound remains quite low. A euro now worth 80 pence is well down on its 97 pence peak but still up on the sub-70 pence that was the norm before 2008. But it won’t stay that way if the next phase of the European crisis is a euro exit – or two.
If Greece departs the zone, the resultant panic will be great. The pound would become still more of a safe haven. That 70 pence level for the euro, implying a pound appreciation of over 12 percent, could quickly be a reality. UK competitiveness in Europe would be harmed but the damage would go deeper than that.
An existential euro crisis would harm already weak European growth as investment plunges, consumers cower, banks struggle and financial markets tumble. All this euro-carnage would undoubtedly be felt across the Channel.
A half of UK exports go to the broader EU. The UK’s policymakers have been counting on rebalancing, with consumers overseas helping to pull a more competitive UK forward. Outside the EU that strategy is working. Export volumes to non-EU countries are up an annual 5.3 percent in the past three months – and by 21 percent since 2008. But in Europe a toll is already being taken by recession in weaker economies. Exports to EU countries in the three months to March are down by 3.3 percent in the past year and by 5.5 percent since 2008.
Hollande-Merkel agenda is more Greece than growth
By Pierre Briançon
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
With growth on the menu and Greece on their mind, François Hollande and Angela Merkel have reasons to dispense with the usual niceties for their first meeting. The French president chose to fly to Berlin to meet the German chancellor on the very day of his inauguration – and not simply because he wants to smooth over some of the rough edges of the electoral campaign. His trip is also an acknowledgment that there is a fire in the euro house: neither France nor Germany can afford to waste any time before trying to put it out.
The best thing the two leaders could say about Greece after their meeting is nothing. Merkel, because any utterance will only add fuel to the Hellenic conflagration. Hollande, because at this stage he could only mouth platitudes on the topic. But public silence should be matched by intense private conversation.
Both leaders are challenged by the new crisis. Hollande must go beyond the campaign rhetoric about the need for growth-friendly policies in Europe: the initiatives he has in mind are irrelevant to the immediate risk of a messy Greek exit from the euro zone. For Merkel, the challenge is to avoid making her rigid stance on Greek austerity the main obstacle to the formation of a new government in Athens.
A productive conversation would lead to an either/or agenda. Either the Greeks can at last form a government able to negotiate with its creditors – in that case France and Germany should design the outlines of a face-saving deal – or an agreement proves impossible and Greece finds itself outside the euro. Then a contingency plan must be ready.
A deal will be difficult to achieve if it creates a precedent for unhappy governments willing to renege on the commitments made in exchange for aid. But Merkel’s Social Democrat opponents, emboldened by their recent electoral victories, are asking for some growth-friendly policies themselves. So the chancellor might be willing to make some concessions.
China has strongest hand in Philippine stand-off
By Wayne Arnold
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
China’s stand-off with the Philippines over disputed islands in the South China Sea puts Manila in a difficult spot. While the Philippines has the support of U.S. military muscle, China is its number-three importer, and it needs China to help fund new mines and fill new casinos. Whoever gets to tap the oil and gas beneath the South China Sea, China would be the biggest buyer. That argues for a peaceful, face-saving solution.
What’s at stake is an atoll called Scarborough Shoal, roughly 200 kilometres from the Philippines and four times as far away from China. China has 13th century records it says establish its claim to the shoal, the entire South China Sea, its fish, and the 2 quadrillion cubic meters of natural gas it estimates lie beneath it – 30 percent of proved global reserves. Its trawlers already have free roam, and the sea’s claimants have agreed to exploit its hydrocarbons jointly. So China already has what it wants in function if not in form.
Manila has taken advantage of Washington’s recent tilt toward East Asia to reaffirm military ties. That buys it insurance and can mollify local nationalists. But Beijing is unlikely to react well to any real sabre-rattling: with its Politburo in transition, leaders can’t afford to seem weak on sovereignty. China hasn’t yet overplayed its hand, but that doesn’t mean it won’t.
Economic threats can be equally potent. China is already discouraging tours to the Philippines and threatening trade and investment. China’s $790 million in direct investment into the Philippines in 2011 was tiny, but stands to grow as Manila tries to double mining exports by 2016. China’s $6.1 billion in imports make it the Philippines’ third-largest export destination. And developers are building four casinos in Manila to lure Chinese gamblers.
Even if the Philippines managed to shoo China from Scarborough’s undersea riches, it would ultimately have to negotiate with China to buy them. Manila thus needs a way to defend its claim without demanding China abandon its own. As the Middle Kingdom expands, its economic heft will inevitably chafe its neighbours. Its challenge will be to create as little offence as possible; for neighbours it will be to avoid taking any.
Chongqing won’t be allowed to fail with Bo
By Wei Gu
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
China’s most populous city won’t be allowed to fail the way its disgraced former leader did. With Bo Xilai ousted, a bailout is already being assembled, with new funds from the country’s main policy bank, and help from state-owned firms. Chongqing’s debt-financed growth model is discredited, but the need for stability and growth prevails.
Bo’s dramatic removal as party secretary in March is a turn-off to foreign investors. Korea’s Samsung Electronics in April chose another western city, Xi’an, over Chongqing for its new flash memory factory. And U.S. private equity firm TPG Capital, which has been raising funds for investment in Chongqing, is considering shifting more resources to Beijing and Shanghai, according to the South China Morning Post.
The city’s stretched finances look even more worrying. With Bo gone, the risk is that his pet projects may also be abandoned, leaving Chongqing with lots of unfinished buildings, and lenders waiting to be repaid. Much of the city’s 26 percent nominal GDP growth in 2011 was funded by debt. The local government’s fiscal deficit was 11 percent of GDP in 2011, far more than Beijing and Shanghai’s 3 percent.
The central government is stepping in. China Development Bank signed a memorandum with Chongqing in May to provide more capital for roads and social housing. This may look risky now, but makes long-term economic sense. The west presents better catch-up growth opportunities compared to the maturing east, and should helps promote healthy consumption, as poor people tend to consume more of their income than the rich.
State-owned companies have also offered symbolic support. The heads of China’s top 117 SOEs were set to meet on May 17 in Chongqing, according to local government officials. That raises the possibility that Chongqing may get preferential access to key inputs like power. The city’s bid to become a new technology manufacturing hub has been held back by energy shortages.
Euro stocks discount lion’s share of new fear
By Robert Cole
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
It’s hard to be bullish about European equities. The economies look weak both inside and outside the euro zone and the single currency’s crisis only seems to get worse. But the share prices may be discounting even more bad news.
The STOXX 50 index of leading euro zone shares has lost all the tentative gains made in the first part of this year and is standing at not much more than half the level of five years ago. The total return since then, including reinvested dividends, is a depressingly high loss of 35 percent. In the United States, the total return of the S&P 500 over the same period is slightly positive.
Some underperformance is justified by Europe’s weaker economic performance and by the euro zone’s problems. The relative weakness on the eastern side of the Atlantic is reflected in earnings expectations for 2012. Thomson Reuters data indicate a 5 percent gain in the euro zone and 10 percent in the United States. The most recent economic news suggests the gap could widen.
But European share prices may reflect too much pessimism. European equities have usually been cheap by American standards; right now the discount of forward earnings multiple is above the post-1987 average. And not only is the 9.5 price-earnings ratio one-quarter less than the equivalent U.S. figure, it appears to discount no earnings growth at all in the next five years and no increase in valuation.
There could be big rewards for those brave enough to buy. If euro stocks’ earnings rise at half the post-2005 annual rate of 10 percent over the next five years and p/e ratios move only halfway back to the long term norm, then investors will earn inflation-adjusted annual returns of 11.6 percent.
Murky U.S. bribery law gets a dose of clarity
By Reynolds Holding The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
America’s murky bribery law is finally getting a dose of clarity. Morgan Stanley showed last month how to avoid legal charges for infractions by one of its executives, and an appeals court will soon define whose palm cannot be greased. That’s good news for multinationals sweating unpredictable enforcement of a confusing statute.
The problem isn’t the Foreign Corrupt Practices Act so much as how broadly prosecutors have been interpreting it. And with few companies willing to risk an indictment by testing that interpretation in court, it becomes the law by default.
The definition of “foreign officials” is Exhibit A. The FCPA says they’re employees of a foreign government or its “instrumentality” and can’t be bribed. While the Department of Justice insists “instrumentality” includes private companies owned in part by the state, accused bribers say only firms that perform government functions qualify. Legislative history supports the accused. But a federal judge sided with DoJ last year – until he tossed the case for prosecutorial misconduct.
A federal appeals court will soon weigh in for the first time, deciding whether to uphold the bribery convictions of U.S. telecommunications executives who paid employees of Haiti Teleco, partially owned by the National Bank of Haiti. The court’s ruling will be the most authoritative statement yet on what constitutes “foreign officials.”
Most companies, of course, try to dodge trouble before it happens, often by creating costly FCPA compliance programs. But prosecutors have never said what sort of programs might forestall charges. That changed last month, when DoJ and the Securities and Exchange Commission let Morgan Stanley off the hook for a managing director’s bribes because its anti-bribery policy was so strict and comprehensive. By listing the policy’s features, the watchdogs finally gave firms a blueprint for avoiding liability for the actions of a few bad apples.
But it shouldn’t be up to prosecutors to make the law. That’s Congress’ job. It still needs to amend the FCPA to define “foreign officials” more precisely and, like the UK and other countries, make top-notch compliance programs a defense to bribery charges. Unfortunately, legislation to that effect has stalled and is even less likely to pass since bribery allegations emerged against Wal-Mart in Mexico. Lawmakers say they don’t want to appear soft on bribery. They prefer, apparently, to look merely irresponsible.
Jewellers needed to ease gold bugs’ pain
By Kevin Allison
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Gold has a dual personality. Many think it is the ultimate hard currency. Others like it because it looks pretty. And while its price climbed high as investors have sought shelter from the financial crisis, gold has behaved more like a risk asset recently.
Despite the fresh mess in the euro zone, gold dropped to a four-month low, below $1,600 an ounce. Scared investors are moving into dollars, Treasuries and Bunds. But not gold. With the greenback’s rise against the euro keeping gold bugs on the sidelines, it may fall to physical buyers to put a floor under the price. But jewellers and other buyers who like gold “because it’s pretty” are feeling the pinch too. Especially in India and China, the world’s biggest consumers of the metal.
Political upheavals in Greece and fresh pressure on Spanish banks have pushed euro zone policymakers back into crisis mode. In recent years that sort of pressure has been positive for gold, but this time there is little evidence that it’s led to an uptick of fear-driven buying.
Asian buyers may be attracted by the lower prices. Shanghai trading picked up as the price fell below $1,600. Gold demand in India was twice the usual daily average on May 9, according to UBS. But that was helped by the lifting of a controversial excise tax on precious trinkets and the Indian government’s attempt to shore up the rupee.
More aggressive physical buying may eventually put a floor under prices. But gold’s 18 percent slide from its September 2011 peak of $1,920 an ounce needs to be seen in proper context. Years of elevated gold prices have pushed jewellery demand down by a quarter over the past decade. The metal still trades at more than double what it cost before the financial crisis kicked into high gear in 2008.
Property slowdown leaves China on shaky ground
By John Foley
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
China’s property chickens are coming home to roost. Last week’s economic data shows that a year of falling prices is finally changing developers’ speculative behaviour.
After years of boom, most developers, like many investors, have acted as if the downward move were no more than a blip. When barred from getting bank credit, many property companies found funds elsewhere, notably through so-called trust companies, which make loans funded by short-term retail funding. Throughout 2011, developers merrily continued to add new floorspace at the same rate as they had a year earlier.
April’s data shows there has been a rude awakening. The amount of housing floorspace completed dropped off 56 percent from the total figure for January and February, months usually lumped together to account for the New Year’s holiday. The shift is more than seasonal – the drop off was a milder 35 percent in the previous two years.
Space under construction also failed to show its usual post-New Year spike. Overall, residential real estate investment grew 4 percent year on year in April – a tenth of the rate of a year before. Adjust for inflation, and that’s equivalent no growth at all.
Since new property development accounts for about a tenth of China’s GDP building, a modest slowdown will be enough to cause overall economic activity to sputter. Then there is the second-order effect – local governments depend on proceeds from land sales to fund spending on infrastructure projects. According to the official data, the value of land sales in April was only a little more than half that of March – and was a third of the monthly average for 2011.
Contemporary art becomes the gold of the new rich
By Richard Beales
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Contemporary art is becoming the gold of the new rich. This week’s strong auction sales in New York brought record bids for Rothko, Klein, Lichtenstein and several other post-war artists. Scarcity is part of the allure, along with taste and the spending power of the global plutocracy. One thing to please at least the financiers among them is that contemporary art has inked good returns, too.
Mark Rothko’s “Orange, Red, Yellow” fetched nearly $87 million at Christie’s, topping the bill at the auctioneer’s $388 million sale, its biggest ever. That’s a sign that the Contemporary category – albeit increasingly not an accurate description – has the upper hand these days, even if the all-time record, set by Sotheby’s with Edvard Munch’s “The Scream” last week, was officially in the firm’s Impressionist and Modern sale.
That’s further underlined by the trajectory of prices. Artnet’s Contemporary 50 index is up more than five-fold since 2001, against a mere 60 percent gain for the Impressionist 25 benchmark – and that’s before this week’s sales. Contemporary art dipped in 2009 with the global financial crisis, but recovered by 2011.
Like, say, high-end London property, expensive art is now a global market – it’s not like the end of the 1980s when Japanese buyers, who dominated auctions for Impressionist works, suddenly disappeared. If European collectors are cautious – as might be expected with financial tremors still rumbling around the region – there are plenty of U.S., Middle-Eastern, South American, Russian and Asian buyers to take their place.
And the super-rich aren’t short of cash. In fact, some of them have the luxury of not knowing what to do with it all. The financially-minded may not admit it, but they like the idea of art that can hang on the wall (even, or especially, at the office) or stand in the courtyard for a few years and then be sold at a profit. With a few exceptions, the records set this week were largely for works by famous deceased artists with a tried and tested market – not by risky relative newcomers.
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