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Wednesday 18th of September 2019
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How the global bond rally lost its fizz @FT Africa |
A $1tn fall in the value of global bond markets this month is
rekindling one of the biggest debates in finance: is the bull run in
bonds finally coming to an end?
For decades, the only way for bond prices has been up, reaching
mind-boggling records in recent months.
By the end of August, some $17tn of bonds, about a third of the global
total, were trading at such high prices that buyers were guaranteed a
loss if they held them to maturity, rewriting the rules of fund
management.
The rally, fuelled of late by nerves over the economic impact of trade
wars and runaway expectations for central bank stimulus, has meant
that borrowers have been able to bring new debt to market at a tiny or
even negative cost, piggybacking on investors’ hunt for safe assets.
Last week, however, this all-consuming free money craze took a rare whack.
The yield on the Bloomberg Barclays Multiverse index — the broadest
bond market gauge that tracks debt with a total value of more than
$58tn — has jumped sharply this month, from a record low of 1.4 per
cent to 1.65 per cent as of the end of Friday.
In dollar terms, that translates into the global bond market losing
over $1tn of value in just 10 trading sessions. It also means that the
stack of negative-yielding bonds has shrunk by more than $3tn.
Bonds remain historically highly priced even now, but the pullback
suggests that some of the forces pushing nervous investors into the
world’s premier safe assets have been overdone.
“There is no question that Europe taught us that if we have a
recession, there really is no lower bound [in interest rates],” said
Gershon Distenfeld, co-head of fixed income at asset manager
AllianceBernstein. “But if we avoid the worst, rates are probably too
low.”
The moves have been sharp. The 10-year Treasury yield has jumped from
a low of 1.46 per cent in August to 1.82 per cent, the German Bund
yield has climbed from minus 0.71 per cent to minus 0.49 per cent, and
the UK 10-year Gilt yield has edged up from 0.41 per cent to 0.68 per
cent.
Even benchmark borrowing costs in Japan — caught in the vice of the
central bank’s “yield curve control” policy — have risen from minus
0.29 per cent to minus 0.15 per cent.
The Multiverse index has lost 1.4 per cent already in September. If
sustained, this will be the worst monthly loss in over a year, and the
13th biggest monthly decline of the past decade.
European markets have added to the sense that the rally, while not
about to reverse, is running out of steam.
Last week, the European Central Bank cut deposit rates even deeper
below zero and restarted its bond-buying programme in a fresh bid to
drag up dour inflation. Bond yields in the region, however, have not
declined further.
“Since the ECB meeting last week the market’s narrative seems to be
changing, and we tend to agree with the shift,” RBC analysts argued in
a recent note. “We recommend not to fight the yield increase.”
Investors now appear more open to believing that the global economy
will dodge a recession.
Optimists can point to upbeat US retail sales or a positive turn in
German economic sentiment, and argue that the most extreme bearish
cases for the UK and Italy now appear somewhat less likely. That all
adds up to a brightening outlook that hurts the bond market, according
to RBC.
“All these arguments are falling on fertile ground as the market had
worked itself in a negative state of mind during August. Hence, there
is likely to be a substantial amount of position adjustment still to
come once asset allocation committees have met,” the bank’s
strategists argued in a note.
China’s announcement of a bevy of policy changes at the start of the
month marked the turning point for the summer’s bond market narrative,
which had “overshot” at least partly due to technical factors such as
mortgage bond hedging, according to Ashish Shah, co-chief investment
officer for fixed income at Goldman Sachs Asset Management.
French bank Société Générale has also advised clients to lighten their
exposure to fixed income in response to what it sees as “overly
aggressive” bets on the scale of impending monetary easing from the
major central banks.
However, analysts and investors are reluctant to call the end of the
bond market’s long-term rally, given the seismic forces that power it.
Inflation — the market’s kryptonite — remains an unlikely danger, and
although a global recession might be averted, there are
disappointingly few signs of a durable upswing.
The end of the three-decade bond bull run has been spotted more often
than Elvis, but given the length of the post-crisis global expansion
and the still-simmering trade tensions between the world’s two
economic superpowers, many investors remain convinced that the
all-time low in bond yields is yet to be seen.
“We have to recognise that yields are a function of a lot of things .
. . There is still a tremendous amount of uncertainty when it comes to
economic growth, politics and trade policy,” Mr Distenfeld said.
Technical factors still underpin the fixed income market, such as
nearly indiscriminate appetite from long-term institutional investors
likely to seize on any pick-up in yields.
“You have to look at who the buyers are,” said Sophie Huynh, a
cross-asset strategist at Société Générale.
“The pension funds, the insurers, they don’t have a choice, and that
is not going to change tomorrow. You are still going to have the
flows.”
Before one can call the bottom in global bond yields, investors need
to see the economy weaken significantly, markets sell off and the Fed
embrace a full rate-cutting cycle, said Priya Misra, head of global
rates strategy at investment bank TD Securities. “We are nowhere close
to the bottom in rates.”
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24-JUN-2019 :: Wizard of Oz World Africa |
Eventually, it is revealed that Oz is actually none of these things,
but rather an ordinary conman from Omaha, Nebraska, who has been using
elaborate magic tricks and props to make himself seem “great and
powerful”.
The US two year note which is at around 1.75% is the financial
instrument which is the purest signal.
We are in ‘’nose-bleed’’ territory. This is ‘’Voodoo Economics’’ and
just because we have not reached the point when the curtain was lifted
in the Wizard of Oz and the Wizard revealed to be ‘’an ordinary conman
from Omaha who has been using elaborate magic tricks and props to make
himself seem “great and powerful”’’ should not lull us into a false
sense of security.
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03-JUN-2019 :: Bond Yields in "Tilt" Mode Africa |
Whilst I accept that its a 20/80 [US Consumer absorbs 20%, China will
have to absorb 80%] of the Tariff Price increase, nevertheless even
20% of a 100 is inflationary. The US Rates and Bond Market looks
seriously overcooked to me.However, what we also know is that Mar-
kets can stay irrational longer than anyone can stay solvent.
Home Thoughts
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"The Doper's Dream - Thomas Pynchon, Gravity's Rainbow Africa |
Last night I dreamed I was plugged right in
To a bubblin' hookah so high,
When all of a sudden some Arab jinni
Jump up just a-winkin' his eye.
'I'm here to obey all your wishes,' he told me.
As for words I was trying to grope.
'Good buddy,' I cried, 'you could surely oblige me
By turning me on to some dope!'
With a bigfat smile he took ahold of my hand,
And we flew down the sky in a flash,
And the first thing I saw in the land where he took me
Was a whole solid mountain of hash!
All the trees was a-bloomin' with pink 'n' purple pills,
Whur the Romilar River flowed by,
To the magic mushrooms as wild as a rainbow,
So pretty that I wanted to cry.
All the girls come to greet us, so sweet in slow motion,
Mourning glories woven into their hair,
Bringin' great big handfuls of snowy cocaine,
All their dope they were eager to share.
We we dallied for days, just a-ballin' and smokin',
In the flowering Panama Red,
Just piggin' on peyote and nutmeg tea,
And those brownies so kind to your head.
Now I could've passed that good time forever,
And I really was fixing to stay,
But you know that jinni turned out, t'be a narco man,
And he busted me right whur I lay.
And he took me back to a cold, cold world
'N' now m'prison's whurever I be...
And I dream of the days back in Doperland
And I wonder, will I ever go free?”
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Benjamin @netanyahu left vulnerable by inconclusive Israel election @FT Law & Politics |
Benjamin Netanyahu’s political future hung in the balance as Israeli
voters delivered another inconclusive election result, with no clear
path to a majority for either the four-term prime minister’s Likud
party, or his rivals in the Blue and White alliance, exit polls run by
local television channels said.
The muddled outcome in one of the most divisive elections in Israeli
history — seen both as a referendum on Mr Netanyahu, and on the role
of Judaism in Israeli public life — threw up a limited range of
options.
These include: a fragile unity government between the parties,
brokered by the secular, rightwing party Yisrael Beiteinu; a third
election in the midst of rising tensions with Iran, Hizbollah and
Hamas; or a spate of defections between the parties to form a narrow,
opportunistic coalition.
Neither would guarantee a record fifth premiership for Mr Netanyahu,
Israel’s longest serving prime minister, who has energised the economy
and forged ties with world leaders, including Donald Trump, US
president, and Vladimir Putin, Russian president, while deepening the
divides in Israeli society with anti-Arab rhetoric and biblical claims
to the occupied Palestinian territories.
“We are witnessing quite a dramatic outcome — for the first time in a
decade, there is a high likelihood that Netanyahu will not serve as a
prime minister,” said Yohanan Plesner, the director of Israel
Democracy Institute, and a former member of parliament. “This is
unprecedented.”
The exit polls — official results will take hours to tally — indicate
Mr Netanyahu’s rightwing Likud winning between 31 and 33 seats in the
Knesset, while Blue and White, led by the popular but politically
inexperienced former chief of the military, Benny Gantz, were neck and
neck with a slightly higher haul predicted.
Mr Gantz told cheering supporters in Tel Aviv that he was open to a
unity government, but he has ruled out supporting Mr Netanyahu as
prime minister if he is indicted on corruption charges.
“Starting tonight, we will work to form a broad unity government that
will express the will of the people and of a majority of [Israeli]
society. A government that will set the order of priorities as we
think it should be. Netanyahu did not succeed in his mission. We, in
contrast, proved that the idea known as Blue and White, succeeded big
and it is here to stay.”
Mr Netanyahu, speaking after Mr Gantz, told a vocal crowd of a few
hundred supporters, that the results showed that Israel “is at a
historic point”. He listed the danger from Iran, called Mr Trump his
good friend on the verge of releasing a peace plan that would shape
Israel for generations, and assailed the Arab political parties as
supporters of terrorists.
“We will enter negotiations to create a strong, Zionist government,”
he vowed, without acknowledging the results of the polls.
Avigdor Lieberman, the leader of Yisrael Beiteinu (Israel Our Home),
described the results as a “national emergency”, and repeated his
calls for a unity government that would exclude the two parties that
represent the ultraorthodox, a deeply religious Jewish minority, and
the extreme rightwing parties that have formed the core of Mr
Netanyahu’s coalitions.
“We have only one option — a national, liberal, broad government,” Mr
Lieberman told supporters in Jerusalem, after emerging as the
predicted kingmaker with between eight and 11 seats forecast by the
exit polls.
Final results are not expected until Wednesday morning, and the exit
polls have had a wide margin of error in the past.
Mr Netanyahu and his allies were closer to a majority than the Blue
and White alliance, with either 56 or 57 seats, but if the polls are
accurate in predicting that one potential coalition partner, the
racist, anti-Arab Jewish Power party, did not cross the 3.25 per cent
of the national vote threshold, he has run out of traditional allies
with which to form a government.
That leaves Mr Lieberman, a one-time ally of Mr Netanyahu’s who broke
with the prime minister over concessions to the ultraorthodox, holding
a crucial role. He appears to have doubled his seats in the Knesset
after running an election seeking the support of secular rightwingers.
The two ultraorthodox parties have together won either 16 or 17 seats,
the polls said, but might be forced into opposition despite a
near-record turnout.
Other centrist and leftwing parties could win about a dozen seats,
bringing the Blue and White alliance and its potential allies to about
44 or 45 seats, according to the exit polls.
The Arab Joint List, reunited after a dismal showing in the April
election, won either 11 or 12 seats, but the Blue and White leadership
has ruled out sitting in government with its leaders.
Mr Lieberman is expected to exact a dear price for his support. In
previous governments with Mr Netanyahu, he has served as defence
minister and as foreign minister. With 11 Knesset seats for this
party, he is expected to ask for more cabinet positions before
choosing which way to lean.
But his hand is weakened by the fact that if Likud and Blue and White
resolve their rivalries, he could be left out of government completely
— the two parties would collectively have some 68 seats in the
120-seat Knesset.
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When @realDonaldTrump discovered the real Middle East @FinancialTimes Law & Politics |
Hurt us and we’ll hurt your friends. That’s been the apparent Iranian
strategy since the US launched into maximum pressure mode, tearing
apart the 2015 Iran nuclear deal and crippling the Iranian economy
with debilitating sanctions.
Incapable of retaliating against the US — or, more likely, too scared
of the consequences — Iran has punished American allies in the Gulf,
with Saudi Arabia its main target.
The objective has been to demonstrate that the pain of US penalties
will be spread around. If Iran can’t sell oil, other producers, and
the market, will suffer too.
That strategy appeared to work for a while: tankers in the Gulf were
attacked, Saudi oil pipelines sabotaged and pumping stations damaged,
all through carefully calibrated attacks by Iranian proxies and at
little cost to Tehran.
In June, a planned military strike by the US, in response to the
shooting down of an American drone, was called off by Donald Trump, a
US president more interested in ending wars than starting new ones.
On Saturday, however, Iran’s playbook was torn up. In a brazen attack,
an Iranian-backed group struck at the jewel in the Saudi crown, the
Abqaiq processing centre that handles half of Saudi production, as
well as an oilfield.
The impact was devastating, knocking off 5 per cent of global oil
supplies and driving oil prices up 10 per cent. It was likened by some
to the shock of Saddam Hussein’s 1990 invasion of Kuwait.
Whether the apparent drone strikes were launched from Yemen, as the
Iran-backed Houthi rebels have claimed, or from Iraq by Iranian-allied
militias, as some in the US claim, or even from Iranian territory is
yet to be determined.
Whether the strike was more devastating than intended or deliberate
and ordered for maximum effect by Tehran might never be known. But
whatever the answers, the responsibility will fall on Iran. This
provocation was a step too far.
Yet the crisis should have been foreseeable, if only Mr Trump was not
learning about the Middle East on the job. His withdrawal from the
nuclear deal, the region’s only diplomatic achievement in decades, was
motivated by a mistaken conviction that a deal struck by his
predecessor, Barack Obama, was deeply flawed and that only he, the
master dealmaker, could produce a better outcome.
His move ignored the Iranian regime’s ability to absorb pressure. It
also failed to grasp that Iran goes on the offensive when it feels the
need to defend itself. Its appetite for risk is greater than that of
its neighbours.
And the proxies it can use — from Yemen to Iraq, Syria and Lebanon —
provide leverage that cannot be matched by Gulf states.
Indeed, the attack on Saudi oil facilities has exposed not only the
vulnerability of Saudi oil infrastructure.
It has underlined the disastrous failure of Riyadh’s four-year
military campaign in Yemen, intended to crush the Houthi rebels who
may be behind the latest attack.
Some in the US administration, including the recently sacked national
security adviser, John Bolton, might have had an endgame in mind:
pressure would either collapse the Iranian regime from within or lead
to a military campaign that accomplishes the same.
That was never a realistic outcome. Mr Trump, moreover, was not in
agreement with the plan, preferring to threaten war but not to fight
one. His assumption has been that Iran will fold and agree to
negotiations on his own terms.
Iran’s reaction has been to gain as much leverage as possible, prove
that it will not be cowed and ensure that if it were to return to the
negotiating table it would not be on Mr Trump’s terms.
That prospect looked more likely in recent weeks, with France leading
efforts to bring the parties back to the table.
Whether by design or accident, Iran has now over-reached. So grave has
the attack been that the US — and Saudi Arabia — have not rushed into
a response. A military retaliation could come at any time but it would
also expose Saudi Arabia to more attacks.
An uncontrollable Middle Eastern conflict is not what Mr Trump wants
just as he heads into a re-election campaign. Not a student of history
or a man of details, he is discovering the hard way that it is easier
to start a crisis in the Middle East than to control it, let alone end
it.
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Saudi oil attack highlights Middle East's drone war @FinancialTimes Law & Politics |
Long before the attack on Saudi Arabia’s oil facilities that knocked
out half of its oil production, the kingdom knew it was vulnerable to
assault from armed drones.
Houthi rebels in neighbouring Yemen have often used this new type of
aerial weapon, alongside missiles, to target Saudi airports,
desalination plants and crude facilities in the past 18 months.
The rising threat has prompted numerous Saudi agencies — from Saudi
Aramco, the state oil company, to air defence, ports and civil
aviation authorities — to scout the US and Europe for adequate defence
systems, said one defence industry executive.
“They’ve been in a panic [over drones] since the new year,” the
executive said. “It’s come down from the top — protect the nation. If
you tell me [your system] can do it, get it here now.”
The details of last weekend’s attacks on Abqaiq, a crude processing
centre, and the Khurais oilfield, remain murky: On Sunday, Houthi
rebels said they had used 10 drones to conduct the assault.
But Washington has blamed Iran, which is accused by the US and Saudi
Arabia of smuggling arms to the Houthis, including missiles and
drones.
US media reported that US intelligence indicated many of the strikes
were launched from the Islamic republic and could have involved
missiles. Saudi Arabia has not yet backed up such claims. Iran has
denied any involvement.
Either way, armed drones have become the latest weapon of choice
across the Middle East. And as tensions between the US and Iran have
ramped up, the Iranian-aligned Houthis have escalated attacks across
Saudi Arabia’s southern border.
The cheap, nimble weapon that can easily evade air warning systems is
posing a novel defence challenge for the world’s largest oil exporter
— also one of the world’s biggest arms buyers — and other countries in
the region.
“This is the advent of 21st-century drone warfare in the Middle East,”
said Bilal Y Saab, director of defence and security at the Middle East
Institute in Washington, and a former adviser at the Pentagon.
“In this race, the advantage is to the adversary, because our
responses are not efficient.”
Last month, the Houthis were blamed for a drone attack on Shaybah
oilfield in eastern Saudi Arabia and in May, the rebels claimed they
had used drones to attack Saudi oil pumping stations and a vital
pipeline deep inside the kingdom.
Elsewhere in the region, the Israeli military last year said it shot
down an explosive-laden Iranian drone as it flew over the Sea of
Galilee.
In August, Hizbollah, the Iran-allied Lebanese militant movement,
accused Israel of using a drone to strike its media office in Beirut.
Iraq, Saudi Arabia and the UAE import drones from markets such as
China; meanwhile Israel, Iran and Turkey manufacture their own.
The Middle East is particularly vulnerable to drone attacks “because
it has a lot of centralised economic assets which are critical”, said
Jack Watling, a research fellow in land defence at the London-based
Royal United Services Institute.
“Their countries are dependent on oil and have relatively
badly-protected installations,” he said. “It’s a target-rich
environment with existing conflicts occurring across large swaths of
the region.”
The asymmetry between strike and response is notable. Israel has used
Patriot missiles costing $3m to $4m to take down quadcopter drones
costing about $1,000.
Mr Watling’s research has uncovered details of Syrian opposition
forces making drone bodies from plywood covered with plastic sheeting,
the wings and tails constructed from expanded polystyrene.
He describes Iranian-designed drones manufactured in Yemen by Houthi
groups on 3D printers, fitted at the last minute with Iranian
electronics. “These are not particularly sophisticated,” he said.
Anti-drone defence infrastructure is expensive to build, including GPS
jammers to neutralise drone navigation, search and track facilities to
identify incoming drones, and missile and radar-guided canon
interceptors to destroy them.
Richard Gill, managing director of the UK company Drone Defence, is in
discussions with Aramco.
“I would be looking at multiple layers of sensing technology . . .
radars, cameras, microphones, radio-frequency scanning technology,
electronic warfare and then the full range of countermeasures that go
with that,” he said.
“But it’s military-grade technology and it’s massively expensive. To
install a defensive system is extremely complex and the threat is
evolving at such a rate that it’s very hard to keep up to date,
because the adversaries change the type of technology they use in a
way that almost renders the defence moot.”
The costs of these defences is exacerbated by their relative scarcity.
“Industry is not geared up to provide the numbers that are required to
protect these facilities,” Mr Gill said. “These sensors are made by
very few people in very small numbers.”
Saudi Arabia — which already has US-built Patriot anti-missile systems
— in particular has a vast number of targets: oil refineries,
desalination facilities, air ports, military air bases, and religious
sites such as Mecca — spread over a huge geographical area.
Effective protection on the scale of the Abqaiq facility, which spans
several kilometres, is almost impossible.
“There is no technologically perfect solution to this,” admitted Mr
Saab, who said his former bosses at the Pentagon were at a loss over
how to manage the proliferation of drone warfare.
He compared the current defence gap to the strategic threat faced by
US forces encountering IEDs after the Iraq invasion.
Mr Saab said worse is to come. “They [the militias] are only just
scratching the surface of what drones can do.”
He warned of drone swarms, techniques to manipulate flight paths, and
masking of radar signals. “Expect more of those,” he said. “This is
the tip of the iceberg.”
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.@MoodysInvSvc downgrades Hong Kong outlook to "negative" as protests go on Law & Politics |
rising risk of “an erosion in the strength of Hong Kong’s
institutions” amid the city’s ongoing protests.
The move follows Fitch Ratings’ downgrade earlier this month on Hong
Kong’s long-term foreign-currency-issuer default rating to “AA” from
“AA+”.
“Moody’s has previously noted that a downgrade could be triggered by a
shift in the current equilibrium between the SAR’s (Special
Administrative Region’s) economic proximity to and legal and
regulatory distance from China,” Moody’s said in a statement.
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"Over half the increase in Chinese household savings since the 1970s can be attributed to the one-child policy," said @RencapMan chief economist at Renaissance Capital @FT Law & Politics |
Mr Robertson’s thesis is that, broadly speaking, “people with lots of
kids don’t save money”. This is not only because they have more
dependants to support and therefore less ability to save, but also
because people with fewer children need to save for retirement because
they are less able to rely on their offspring to provide for them in
their dotage.
As a result, he said there was a “surprisingly high correlation
between fertility rates and bank deposits to GDP – a correlation which
holds in the 1990s as well as today – and across a great many
countries.”
RenCap’s analysis found a 53 per cent correlation between a country’s
fertility rate, measured by the number of children per woman, and its
bank deposits-to-GDP ratio, as seen in the first chart.
This finding is strikingly similar to that of an IMF working paper
published in December that found that in China “demographic shifts
alone account for half of the rise in household savings, suggesting
that it has been the most important driver”, as the savings rate rose
from 5 per cent in the 1980s to 23 per cent today, 15 percentage
points above the global average.
China’s bank deposits are equal to 210 per cent of GDP, compared with
33 per cent in Kenya, a typical frontier market country in this
regard.
Indeed, a 2018 Bank of England working paper went further still,
concluding that demographic change could explain three quarters of the
210-basis point decline in interest rates in advanced economies since
the early 1980s.
The correlation is, admittedly, not particularly strong, yet Mr
Robertson said that, barring Vietnam, “all countries with bank
deposits above 90 per cent of GDP have low single-digit interest rates
and all countries with one-year interest rates above 5 per cent in
2017 have bank deposits below 90 per cent of GDP, so high nominal
interest rates that deter investment only occur in countries with a
low level of bank deposits”.
Perhaps more importantly, the relationship between bank deposits and
real interest rates is somewhat stronger, with those countries with
deposit-to-GDP ratios of at least 60 per cent in 2013 having average
one-year real interest rates of 0.9 per cent between 2014 and 2018,
compared with 2.1 per cent for countries with deposits of between 20
and 30 per cent, as the second chart shows.
“The unfortunate reality is that countries with high fertility rates
have the lowest share of bank accounts, the highest real interest
rates and the lowest investment rates, so it is particularly hard for
them to begin the development process,” Mr Robertson said.
For many emerging nations the message is positive, however. RenCap’s
analysis suggests that the biggest jump in bank deposits occurs when
the fertility rate falls below three, depicted in the third chart.
As such, Mr Robertson said there was scope for “a big rise in bank
deposits in countries such as Argentina, Mexico, Romania and Ukraine,
while “we should expect to see low interest rates and high lending to
GDP ratios in Morocco, Jordan and Vietnam and scope for a big shift
towards high lending to the private sector in Egypt”.
Egypt, alongside Ghana, Kenya and Pakistan, could see bank deposits
double to at least 60 per cent of GDP over the next 20 years, assuming
fertility rates continue to fall by about 0.4 points a decade, as has
happened in the past 10 years, potentially leading to a more than
halving of real interest rates.
“As a result, these countries in the next decade or two might become
less reliant on external financing, or be able to sustain very high
growth as domestically-fuelled lending is added to external
financing,” Mr Robertson said. “Egypt already looks well placed to
fund its own investment, when lower government borrowing stops
crowding out the private sector.”
Countries with higher birthrates, such as Ethiopia, Ivory Coast,
Rwanda, Senegal and Tanzania, are less likely to see a sharp rise in
bank deposits, he argued, but more modest growth from about 20 per
cent of GDP to about 30 per cent is “plausible” over the same time
period, which would be “helpful but not a game changer”.
This analysis suggests investors’ should, though, be cautious of
Nigeria and Angola, two of the three largest economies in sub-Saharan
Africa, which have fertility rates of five or more, according to the
UN.
For Angola and Nigeria, it will take 20 years before their fertility
rates decline to four, so until then we should not expect a big
increase in the share of bank deposits,” Mr Robertson said.
“The implication is that bank deposits will not become the source of
higher investment these economies need. We should be more wary of
these countries increasing their external debt.”
“According to our estimates, demographic drivers can explain the
6.2-percentage point increase in EM household saving rates between
1980 and 2015. Between 2015 and 2040, we see a further 1-point rise,”
Mr Sterne said.
Moreover, given expectations that EMs will continue to account for an
ever larger share of world GDP, Oxford Economics calculates that the
global savings rate will be up to 1.3 percentage points higher in 2040
than now, bearing down on real interest rates.
“Those expecting a demographic-led reversal of global saving rates
will be disappointed,” Mr Sterne concluded. “Our microscopic trawl
through demographic trends suggests that the impact of retiring baby
boomers will be swamped by other global demographic trends.”
International Markets
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@WeWork bond prices tumble after it shelves IPO @FT World Currencies |
WeWork’s bond prices tumbled on Tuesday after the property group
shelved its initial public offering, in the clearest sign yet of the
financial strain afflicting the lossmaking company.
The company’s $702m of junk debt is one of the few gauges that
investors have to judge WeWork’s financial condition.
The yield on the debt, which rises when its price falls, surged to a
high of 8.9 per cent in early trading on Tuesday, according to bond
trading platform MarketAxess. When the company borrowed the $702m last
year, it yielded 7.875 per cent.
The group’s parent, We Company, late on Monday evening delayed the
listing after it received a frosty reception from the institutional
investors who can make or break an IPO.
WeWork had planned to launch its roadshow for the listing this week
before selling shares to the public next week. The company said it now
expected to clinch the multibillion-dollar listing by the end of the
year.
But it was unclear if WeWork would be able to complete an offering
this year, after investors raised concerns over WeWork’s growing
losses, its complex corporate structure and the sway co-founder and
chief executive Adam Neumann had over the company, according to people
briefed on the matter.
The subinvestment grade bonds were trading heavily after the company
decided to shelve the listing.
The price of the bond hit a low of 95.5 cents on the dollar, down
sharply from the 103 cents on the dollar it had traded hands on
Monday.
John McClain, a portfolio manager at Diamond Hill Capital Management,
said he could not remember another unicorn — a privately held start-up
valued at more than $1bn — having “zero support from either debt or
equity investors”.
“Their borrowing model is seriously in question at this point,” he
added. “There is not a level that we could become interested in owning
this company based on the business, the governance, and the financial
statements.”
WeWork has burnt through capital as it has plotted a global expansion
that has taken its co-working spaces to more than 110 cities.
In the first half of 2019, the company reported cash outlays of nearly
$2.6bn to operate and invest in its business, nearly matching its cash
spend on the two in the entirety of 2018.
Its losses have swelled alongside its growing sales base; the company
lost roughly two dollars for every dollar of revenue it generated last
year.
WeWork faced pressure from its largest backer, Japan’s SoftBank, to
delay the listing after the company’s bankers at JPMorgan Chase and
Goldman Sachs struggled to drum up broad investor interest in the
listing.
The lacklustre interest persisted even after the two banks tested a
valuation on the group of between $15bn and $18bn, far below the $47bn
valuation placed on WeWork by SoftBank in January.
WeWork had sought to address some of the issues investors raised to
finalise the IPO before the end of September, a deadline Mr Neumann
had set for the company and his advisers.
The group reduced the power of Mr Neumann’s high vote shares, which
give him control of the company, and agreed to add a new member to its
board.
However, investors said the tweaks did not go far enough and that they
did not offset their concerns with the group’s business model of
renovating and releasing office space owned by other landlords.
Commodities
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DRC: Felix Tshisekedi in Brussels to turn the page on Kabila years @TheAfricaReport Africa |
The Congolese president landed in Brussels on Monday for a four-day
state visit with a tight schedule.
After several years of tensions between Belgium and the DRC under
Joseph Kabila, Félix Tshisekedi hopes take advantage of this move to
mark a break with the positions of his predecessor.
While there were question marks over potential visit to Paris in
mid-September, it is finally to Brussels – where he lived for a long
time – that Félix Tshisekedi will make his first official visit to
Europe as Head of State.
It has been greeted with great fanfare by the Belgian authorities. And
shows the importance given by the Congolese president to his relations
with the kingdom.
The Congolese President’s programme, which runs until 20 September,
includes a meeting on Tuesday with Belgian Prime Minister Charles
Michel, as well as with members of the government, including
Cooperation Minister Alexander De Croo and Deputy Prime Minister and
Minister of Foreign Affairs and Defence Didier Reynders.
These interviews will be followed by an audience with the royal couple
at the Palais before closing the day with a dinner at the
Belgian-Luxembourg-Africa-Caribbean-Pacific Chamber of Commerce,
Industry and Agriculture.
The rest of the trip will be divided between Antwerp and Wallonia for
meetings with officials from the diamond sector and the Institute of
Tropical Medicine – where the Ebola epidemic may well be discussed –
as well as exchanges with entrepreneurs and members of the diaspora.
The visit will end with a meeting with Jean-Claude Juncker and
Federica Mogherini, respectively President of the European Commission
and High Representative of the European Union (EU) for Foreign
Affairs.
A thorough programme, therefore, and a strategically important visit
for the Congolese President who, although only holding a minority in
the Senate, the Assembly and the new government, is taking advantage
of his travels abroad to mark a break with the positions of his
predecessor.
In Washington, for example, in April, the head of state claimed to
have come to power to “disrupt the dictatorial system that was in
place”.
This is also a Félix Tshisekedi in search of diplomatic support –
Brussels counts in the European diplomatic ballet in the DRC – as well
as financial backing.
Since his inauguration last January, Félix Tshisekedi has stepped up
his courting of the Belgian administration. During his trip to
Washington, he was able to talk to Didier Reynders.
As a reminder, before taking note of the election of Félix Tshisekedi,
the Belgian Minister, in the midst of the controversy over the
election, asked for “the publication of the minutes”, considering
“that a recount may be necessary afterwards”.
On the Belgian side, it is stated that the election page has now been
“turned”, but it is specified that the two countries “are not starting
from scratch” and that this visit is being organised “with a certain
caution”.
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Uganda's oil ambitions delayed as deals stall @FT @thomas_m_wilson Africa |
France’s Total, UK-listed Tullow Oil and the China National Offshore
Oil Corporation jointly control three oil blocks in Lake Albert, a
giant stretch of water on Uganda’s border with the Democratic Republic
of Congo.
Ugandan officials have long hoped that investment in Lake Albert —
home to Africa’s fourth-largest oil reserves — would accelerate
economic growth in the region from 2020.
But 13 years after the first discoveries were made, Total said it was
stopping technical work on the oilfield and pipeline project following
the collapse of a deal to buy additional equity from Tullow and the
failure of talks with the Ugandan government to agree legal terms for
the investment.
Oil executives said the decision to stop work had been discussed with
the government but Uganda’s oil minister, Irene Muloni, said she had
not been informed and denied the project had reached an impasse.
“They have not given any formal communication [of an intention to
cease work],” Ms Muloni told the Financial Times. “The discussions on
the various issues are ongoing and we hope to reach an agreement very
soon.”
The pause in activities after years of negotiations is the latest
setback for a complex project whose upstream development costs are
estimated at $10bn and which requires the construction of a 1,443km
electrically heated pipeline — the longest in the world — to get the
oil from landlocked Uganda to the Indian Ocean.
Tullow confirmed the commercial viability of the oil blocks in 2009
but a final investment decision has been delayed multiple times.
Total told the Financial Times that the partners could make no further
progress until they had “a clear and stable legal framework and
clarity on the project shareholders”.
There has been an over-optimism in the market both about the ease and
time needed to develop east Africa’s big discoveries
“Consequently, we are obliged to scale down certain technical
activities associated with the project, whilst keeping personnel
mobilised to agree on [the] overall business framework,” a Total
spokesperson said in a written response to questions.
Total and Cnooc had each agreed to acquire an additional 11 per cent
in the project from Tullow in 2017 in a $900m deal. That would have
allowed the smaller Tullow to reduce the amount it needs to contribute
to fund the project but the deal collapsed in August following a
disagreement with the Ugandan government over taxes.
Tullow has said it will look for another buyer to reduce its stake
from a third to 12 per cent. But this could be difficult, according to
Jon Lawrence, an analyst with Wood Mackenzie's sub-Saharan Africa
upstream team.
“Our view is that other buyers are likely to be dissuaded because a
potential buyer knows that this deal is a challenge to close,” Mr
Lawrence said.
Uganda and the partners disagree on other legal and tax points too, he
said. “There is a fundamental capital gains tax issue on this project
but also a raft of other issues [to be resolved] before an investment
decision can be made.”
Tullow declined to comment on the decision by Total to scale down
activities but said it remained confident Uganda would become an oil
producer even though the final project decision had been delayed.
Cnooc didn’t respond to request for comment.
Uganda is not alone in east Africa in struggling to realise its oil
production ambitions. Kenya, Uganda, Tanzania and Mozambique have all
made commercial hydrocarbon discoveries in the past decade and
struggled to advance their respective projects quickly.
“If we look historically at the timelines that have been proposed on
those projects there has been an over-optimism in the market both
about the ease and time needed to develop east Africa’s big
discoveries,” said Wood Mackenzie’s Mr Lawrence.
“These are not simple developments . . . It’s a big ask for any new
oil and gas producer to get all of the necessary elements in place.”
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.@KenyaAirways chairman @michaelj2 calls for professional board after nationalisation @ReutersAfrica Africa |
The loss-making airline, which is 48.9% government-owned and 7.8% held
by Air France-KLM, was privatised 23 years ago but sank into debt and
losses in 2014. Lawmakers voted to re-nationalise it in July.
Chairman Michael Joseph said the requirement for professionals to be
put in charge of the airline is being built into draft laws that will
guide the renationalisation.
“It must be run in a commercial way,” he told reporters on the
sidelines of an aviation meeting.
“We do not want to create a situation that we had before, where you
nationalise the airline and all it becomes is a department of
government. The board of directors is loaded by friends of
politicians.”
Under the model approved by lawmakers, Kenya Airways will become one
of four subsidiaries in an Aviation Holding Company.
The others will be Jomo Kenyatta International Airport (JKIA), the
country’s biggest airport, an aviation college and Kenya Airports
Authority, which will operate all the nation’s other airports.
“We want to make sure that if you create a nationalised airline that
it will operate as a semi-autonomous airline,” Joseph said.
Joseph said such developments left Kenya without any choice but to
renationalise its airline, in order to cut costs and survive in the
crowded Africa aviation market, where carriers have the weakest
finances and emptiest planes of any region in the world.
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