Reconnaissance: Strategy Notes
Codexa Capital
By Douglas Clark Johnson
June 20, 2012
The OPEC meeting in Wien came-and-went, masked by bigger problems. Perhaps Iran, Iraq, and Venezuela decided that they would do injustice to their international standing if they aimed to tighten output quotes as Europe was on the cusp of imploding. We also look at how inexpensive emerging markets appear to be, while we consider the implication of Arab-market uncertainty on Turkey. Ghana may be an attractive story for the specialist investor.
OPEC: Truce Amid the Maelstrom
The OPEC meeting in Wien came-and-went, masked by bigger problems. Perhaps Iran, Iraq, and Venezuela decided that they would do injustice to their international standing if they aimed to tighten output quotes as Europe was on the cusp of imploding. The hawkish triad politely demurred, suggesting they would revisit the matter, if oil fell below $90 a barrel. OPEC meetings are hasty affairs; this is not a hands-across-the-water crowd.
With market estimates for the oil price in the second quarter of 2013 ranging from $85 to $128 a barrel, analysts are obviously not convinced that OPEC members have fully recovered from their divisiveness. It was just after last year’s gathering that Prince Turki al-Faisal declaimed, “Iran is very vulnerable in the oil sector, and it is there that more could be done to squeeze the current government.”
Saudi Arabia wants to project its patrician authority, not ferment rancor. The developing world will offer about 70% of global oil demand over the next twenty years, while demand from major nations will decline about 10%. The dynamic developing markets simply don’t have the same wherewithal to digest oil-price swings as the major economies.
The Kingdom is “going for growth.” It’ll be a pleasant distraction while the Al Saud sort out leadership issues. But more fundamentally, Saudi Arabia wants to bring about economic stability across the Sunni world, especially in North Africa. Vulnerable Egypt is shifting from an oil exporter to an oil importer.
Emerging Stock Markets: Safer Than You Think
In the search for safe assets, emerging-market equities seem to be toward the bottom of the list. But if safety is defined as low valuation risk—as opposed to a limited currency exposure or high credit quality—then these dynamic stock exchanges may be worth a closer look.
We compare the earnings yield on a broad emerging-market stock-price index with the interest-rate on long-term US government bonds, expressed in historical context. We use Treasuries since the comparative return on dollarized instruments is what may matter for international players. The model is a non sequitur in making investment-timing decisions, but it may help guide portfolio exposure limits.
Emerging equity markets have never been cheaper than they are today, in our view. The current rate-of-return on corporate earnings is well above what we see in another competing asset class. We mitigate our enthusiasm by acknowledging that investors have more than just two investment considerations.
Emerging markets offer a prospect for earnings recovery that’s not certain in the major markets. Once we’re out of the current rut, profits in the developing world may have a new-found trajectory, assuring a degree of reinvestment for the future growth.
Chart / Yield Gap Comparison: Emerging Stock Markets versus Ten-Year US Government Bond
Note: we use the MSCI Emerging Market Index to measure emerging markets at the aggregate level. Source: MSCI Barra, United States Treasury.
Turkey: Arab Spring Considerations
The news from Cairo is sobering. Egypt has regressed toward martial law; the presidential election caused more confusion than certainty. Gone is our expectation of returning to rational analysis for Egyptian assets. We doubt that we’re the only ones throwing in the towel, at least for a season.
Turkey will likely be a primary beneficiary of the turmoil in Egypt. The two economies are hardly comparable. But MENA-based players have to put their cash somewhere; Turkey is among the few economies large enough to absorb the reallocation sensibly, among both portfolio and direct investors. Meanwhile, the AKP-led government is widely popular at home and abroad.
Consider the Istanbul exchange, which has defied Western logic. The price return on the Istanbul Stock Exchange 100 Index is about 19% year-to-date in US dollar terms. While London- and New York-based investors have largely deferred investment there because of the current-account deficit, Arab investors have enjoyed an advantage.
We’re now less flummoxed about balance-of-payment matters, given that inbound monies, deflected from Egypt, will likely help to finance the external account. On the direct-investment front, Ankara may have had a watchful eye on Egypt when it rolled out the New Investment Incentives Program this quarter, intended to add more bounce to already strong activity.
West Africa: Ghana’s Ascent
Ghana is fast becoming a regional business hub. Oil-related GDP growth of 13.6% in 2011 was one of the best results globally. Comparisons linger with nearby Nigeria, although most specialists assert that corruption is dramatically higher there.
The direct-investment story in Ghana is alluring. If there is merit to a “follow the Chinese” approach to diversification, we highlight that Accra is now Beijing’s fourth African investment office, opened late last year. The others are in South Africa, Zambia, and Ethiopia.
The Bank of Ghana raised interest rates in mid-June by 50 basis points to help cushion the fall of the currency, but that will have less of an impact on activity than commonly believed. The country’s financial infrastructure is still developing so rate-policy transmission can be ambiguous. Meanwhile, many commodity-based players earn their revenues in US dollars so a soft currency magnifies inbound cash flows in the Ghanaian cedi.
Disclosures
This material is for general information only. Opinions and estimates reflect current judgment as of the date appearing on the article; they are neither all-inclusive nor can they be guaranteed to be complete or accurate.
(c) Codexa Capital LLC
www.codexacapital.com
