Bad things come in threes, so they say, and this week began with expectations of (at least) a third Emerging Market domino: following Turkey’s and Argentina’s continued fall from grace. Right on schedule, South Africa stepped up, entering its first recession in nine years, then the following day bolstering the disappointment with factory output data down the most in over two years. The slowdown in the agricultural sector was a major driver of the economic weakness, but political and policy uncertainty were also major unquantifiable factors.
Last week the New York Federal Reserve released their quarterly report on US ‘Household Debt and Credit’. US household debt rose to $12.58tn, with increases in credit card, auto, student and housing loans. This represented a 1.8% increase from the previous quarter and after gradually rising over recent years is now back to 2008 levels in absolute terms. In 2016 US households borrowed a further $460bn in aggregate. On its own this figure is hardly a warning signal, especially as household debts as a percentage of GDP remain well below the ~90% levels of 2008.
All Hallows’ Eve beckons; traditionally a night to remember past loved ones but now mostly a chance for children, and also celebrities it seems, to dress up, party and frighten their neighbours, armed with toilet paper and extorting for sweets (bad news for florists but good business for costume retailers, confectionists, dentists and perhaps those needing toilet paper on the walk home from a few too many drinks).
For many of us, today also marks something more worrying than Halloween - the end of another terrible month for the British pound. Sterling weakened a further 6.2% in October making it the worst performing currency; this after already falling 8.6% in June and further in July, August and September. In fact unless one is planning to travel to Angola, Nigeria, Venezuela, Mozambique or Suriname (and not use dollars) a Brit will find themselves worse off anywhere in the world compared to the end of 2015.
Those in America looking to see the possibilities of electing a hold-no-punches president need only to look to Philippine’s President Rodrigo Duterte of late, who since taking office little more than 100 days ago has helped cause the deaths of around 3,600 suspected drug dealers and users. His flaunting of judicial process - accusing and hurting innocents (and even long deceased) as well as lawbreakers – is complemented by his ornery diplomacy. He has called President Obama and the Pope both ‘son[s] of a whore’ (Obama should he interfere with domestic policy and the Pope simply for causing traffic in Manila). Other amusing expletives include calling Singapore, ‘A garrison pretending to be a country’.
Back in April we wrote about the inflated concerns over the decline of Chinese foreign exchange reserves. Since then China’s reserves seem to have stabilised around the USD 3.2tn level. As we argued, this should be more than sufficient to counter capital flight and attacks on the currency due to China’s overall creditor position, relatively low levels of liability dollarization, diversified export economy and exaggerated level of M2 money supply and liquidity. Given such considerations the simplistic IMF formula for estimating the adequacy of emerging country reserves should be adjusted substantially lower for China. Combining such an adjustment with the stabilising trend of the last 6 months should provide confidence that Chinese officials have the financial and policy resources to achieve their objectives as they move towards becoming an official global IMF reserve currency in 3 months’ time and beyond.
The erosive effects of international trade and transaction sanctions on Russia have now persisted for over 2 years; they were first enacted in March 2014 in response to the annexing of Crimea.
Not that we always agree with the conclusions of rating agencies (who for example tend to treat currencies and interest rates as stable when assigning ratings) but a recent Standard and Poor paper on “Global Ageing” highlights a number of risk implications (or potential opportunities) from the effects of ageing populations which are worth considering in relation to global bond investing. Notably, their forecasts on the rising public cost of pensions and healthcare that will come with global ageing (rising to 9% of GDP by 2050) and how this COULD affect sovereign debt levels, yields and long-term sovereign ratings distributions.
Whenever there is heightened global stress there is always a flight to quality. Investment grade bonds perform better than other credits in these times due to the issuer’s ability to pay its debts. We only hold investment grade bonds and at present have an average credit rating of A3 across the portfolio’s. We feel that in times of stress it's vitally important to invest in investment grade bonds from countries and companies that have the greatest ability to pay back their debts.