In this week’s bulletin:
- Cypriot banks reopen amid efforts to implement tough austerity measures, with restrictive controls imposed to prevent a bank run.
- Spain and Italy see bond yields rise as worries reappear for the Eurozone, while other peripheral nations are looked at in more detail.
- Western equity markets look back on a successful quarter, particularly in the US.
- Investors in developing markets are encouraged to focus on the long-term, looking beyond the traditional ‘BRIC’ economies
European dominoes wobbling
- Cypriot banks reopen amid efforts to implement tough austerity measures
- Spain and Italy see bond yields rise as worries reappear for the eurozone
- What about other peripheral nations?
When Cypriot banks reopened on Thursday after being closed for more than a fortnight, restrictive controls were imposed to prevent a bank run. In addition, savers with more than €100,000 in the two largest banks, Bank of Cyprus and Laiki, still face losing a large proportion of their money with some media forecasting as much as 80% being confiscated. Among the various bank controls placed after reopening, Cypriots using credit or debit cards abroad will be limited to €5,000 per month, people leaving Cyprus can only take €3,000 with them, and cash withdrawals have been limited to €300 per day. These restrictions are due to last for seven days but it is widely thought this will be extended by the European Commission if deemed necessary, with the Cypriot foreign minister Ioannis Kasoulides saying that the measures could last “about a month”.
Of more local concern is the fate of the 50,000 or so UK-based savers in the Bank of Cyprus who have an estimated £910 million on deposit (Source – The Sunday Telegraph 31.03.2013). In 2012, the bank joined the Financial Services Compensation Scheme (FSCS), covering up to £85,000 per individual. The bank still maintains that the crisis in Cyprus will have no effect on its deposits in the UK. In contrast, Laiki Bank UK is not a member of the FSCS and it is still unclear how much cover UK savers have, and indeed whether their deposits could be treated similarly to those in Cyprus.
Over the weekend, the President of Cyprus, Nicos Anastasiades, stated the country had no intention of leaving the euro and slammed eurozone leaders for treating the island nation as an “experiment”. The president, who was elected barely a month ago, said the risk of bankruptcy had been contained but he still believed that the unprecedented demands from the eurozone were unreasonable.
With all the media coverage of the Cypriot bailout (much of it in disagreement), it is difficult to make any concrete judgement over the broader implications for the eurozone area and the global economy. It also raises further questions over other countries with economies heavily dependent on their banking systems. As Cyprus continues to toil in its efforts to put in place tough austerity measures to meet bailout conditions, as well as try to prevent a run on its banks, the debt problems of other countries were once again thrown into the spotlight. During last week, Italy’s 10-year bonds touched 5.15% with significantly lower demand than in previous months, while 5-year bonds are at their highest yield since October. With investors seemingly looking back into ‘safe havens’, the spread between Italian and German debt (10-year Bunds touched 1.27%) is at its highest level of 2013; while elsewhere, Spain and Greece saw their yields increase significantly. To put this into context, when Spain and Italy were at the height of their respective crises, their yields were above 7%; but increasing attention is being paid to other smaller eurozone nations such as Slovenia, Malta and Luxembourg. The three largest Slovenian banks are thought to have ratios of bad debt of around 20% and it is thought the government will need to raise €1 billion sooner rather than later. Malta looks similar to Cyprus with a massive dependency on its banking system and non-resident depositors accounting for more than 60% of bank funding. Meanwhile in Luxembourg, the problem may be more acute as banks amount to over 2,000% of the GDP of the country.
Equity markets shrug off concerns
- Western equity markets look back on a successful quarter, particularly in the US
- Investors in developing markets are encouraged to focus on the long term
Despite the on-going concerns of Europe, global equities ended a difficult week on a positive note, with the reassurance offered to investors of scenes of relative calm once Cypriot banks opened. Indeed, the S&P 500 Index in the US managed to set a fresh record high from the level set in October 2007, rising 0.8% for the week having been buoyed by an improving economic outlook. Since March 2009 when the index touched an intraday low of 666.79, the broad measure of US stocks has rallied around 135% to its current level of 1,565, boosted by aggressive monetary easing by the Federal Reserve and record profits from the 500 constituents of the index. At the time of writing on Tuesday, Wall Street stocks had retreated slightly after unexpectedly poor US manufacturing data.
In the UK, the FTSE 100 closed the trading week at 6,411 (slightly lower) as predictions of a new property boom helped push house builders to five-year highs. Bellway, Persimmon and Barratt Developments all rose to pre-credit crunch levels after J.P. Morgan Cazenove forecast that mortgage subsidies, the centrepiece of the recent Budget, would trigger a rise in activity and prices, particularly at the lower end of the market. Their forecast was that house prices would increase by 5% in both 2015 and 2016.
In contrast to Western optimism, when looking back at the returns of traditional emerging markets, there seems to be a touch of disappointment for investors. In all four of the popular ‘BRIC’ countries (Brazil, Russia, India and China), each benchmark equity index is lower than at the start of 2013, as weaker-than-expected growth dampened investor enthusiasm. Brazil is down 7.8% for the quarter, India 3.0%, Russia 2.6% and China 1.4% after the government took steps to cool the property market. The relative underperformance of emerging market investments shouldn’t discourage those long-term investors with a diversified portfolio of assets. As we have often reminded investors, access to the economic growth story in emerging markets can be easily accessed via well-respected stocks listed on mainstream equity markets.
The case for a diversified portfolio is unchanged, and while no-one can forecast accurately what will happen in the coming months, it is extremely difficult not to make a case for some emerging markets exposure over the long term. However, as with any equity market, it pays to be selective and choose the right fund manager who knows their respective market well. Jonathan Asante of First State, manager of the St. James’s Place Global Emerging Markets fund, believes it wrong to class all emerging markets as one large sector, recently pointing out one of the key differences between the various countries and highlighting that it is not just about the ‘BRIC’ nations. “The main reason [traditional] ‘value investing’ may not work in all global emerging markets (GEM) is that a way to change the management of poorly run companies simply does not exist in many developing countries. Under these conditions, companies listed on the stock market can remain cheaply valued for very long periods of time. Surprisingly the only market in GEM where independent financial institutions are powerful enough to change underperforming management teams is South Africa. In this market, long-term-focused ‘value investing’ seems to have worked well. Currently the most fashionable theme in South Africa has become companies with exposure to the rest of Africa which have performed strongly. Sadly this has meant we have been forced to sell Shoprite, one of our most successful investments of the last three years, as it became increasingly popular and expensive.”
Overall, the close of the first quarter of the year sees most investors looking back with fondness on equity markets, particularly in developed economies. However, this prompted the Financial Times to run a comment piece with the headline “Think big, but beware the onset of euphoria”, echoing the words of the renowned investor Sir John Templeton’s famous quote, “Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria”. The commentator points out that while we can’t predict short-term movements, it is difficult to class current market conditions as ‘euphoric’, especially compared to 1999 and 2007.