Amid gold’s 12% tumble this month, Indian consumers have been going shopping. But don’t look for their binge to support the support the price of the precious metal.
How strong has the demand for gold in India been? A local trade group expects imports to double to 70 tons in April from a month ago, while the premium above gold’s spot price that consumers pay for the precious metal has also jumped.
Nomura’s Sonal Varma and Aman Mohunta, however, don’t see Indian demand persisting without a bounce back in the price of gold. They note that the correlation between gold’s price and the import volume in India has been positive since 2009, a sign that Indian buyers have shifted from purchasing for weddings and other ceremonies to buying it for its investment merit.
That correlation has broken down in April, Varma and Mohunta note, but they call it “a temporary blip as consumers bring forward demand viewing this as a buy-on-dip opportunity.” Read between the lines and it seems that if such demand is “brought forward,” it’s unlikely to persist.
The upshot: “If the gold price continues to fall, we would expect the recent surge in demand to falter as investment demand declines,” Varma and Mohunta say.
SPDR Gold Shares (GLD) has plunged 15% this year, while Sprott Physical Gold Trust (PHYS) has fallen 16%. The Market Vectors Gold Miners ETF (GDX) has plunged 38% and Market Vectors Junior Gold Miners (GDXJ) has plummeted 39%.
Ramin Toloui, the co-head of Pimco’s emerging markets portfolio management group, touted China’s yuan and India’s rupee at a Reuters FX summit, Bloomberg reported today.
…is cheap considering its high yield and expectations of progress on domestic policy. The rupee, now around 54 per dollar, has been undermined by India’s wide current account deficit and is down 18 percent since August 2011.
“The rupee has almost a 6 percent yield in the NDF (non-deliverable forwards) and it’s a currency that has been beaten down quite severely in terms of valuation by the market,” he said.
He also likes the China’s yuan for its ultra-low volatility, despite a yield of just 2%, as well as Brazilian and Mexican bonds and currency.
He’s not alone in his good feelings for Mexico. On Friday, Nomura’s Benito Berber touted Mexico’s peso for the country’s strong growth, its reform agenda and the further boost it could get from Japanese investors seeking higher yields. He wrote:
The Japanese wave of ultra-lax monetary policy will continue to have an impact on Mexican asset prices. The MXN and the yield curve will move because of the increase in inflows…
We believe that in 2013 portfolio inflows will actually post another record level probably around US$90bn precisely due to Japanese investors’ preference for Mexico. In addition, there is synthetic flow that might not be reflected in the capital account but will exert appreciative pressure on MXN. These two flows should bode well with our strong MXN call for year-end of below 12.00.
One of the supposed benefits of owning emerging-market stocks–aside from their supposedly bright future–is the diversification they provide. That, however, has been hard to come by in recent years, according to a new paper.
According to a recent working paper by Todd Moss and Ross Thuotte, the best place to find uncorrelated returns remains sub-Saharan Africa (not including South Africa). They note that:
The majority of emerging markets have become increasingly correlated with US and European benchmarks over the course of the past two decades. Over this period, Latin American and Asian markets on average exhibited strengthening correlations with the S&P 500 and other major benchmark indices.2 For instance, correlation between Asian markets and the S&P 500 has risen from roughly zero in 1992 to 0.79 in 2010. Similarly in Latin America, regional markets’ correlation with the S&P 500 rose from 0.15 in 1992 to 0.86 in 2010.
Sub-Saharan Africa however looks much better, they write.
By contrast, the equity markets of sub-Saharan Africa (SSA) have exhibited consistently low correlation to US and European performance. SSA markets (excluding South Africa’s JSE) exhibited a weak (albeit slowly strengthening) positive correlation of just 0.22 with the S&P 500 over the past five years. In 2010, this figure increased only incrementally to 0.31.
The biggest problem: Implementation. “Several features unique to African equity markets can act as constraints for investors seeking to take advantage of any potential benefits derived from low market correlation,” Ross and Thuotte say. Perhaps the reason they remain uncorrelated?
The Guggenheim Frontier Markets ETF (FRN), which includes a dollop of sub-Saharan African nations has dropped7.6% this year, while Global X Nigeria Index ETF (NGE), which launched less than a month ago, dropped 2.1% last week.
JPMorgan’s Bharat Iyer, meanwhile, notes the falling correlations between the MSCI India and the MSCI World index, and the MSCI India and the MSCI USA have both dropped below 40%. Its correlation with the MSCI Emerging Markets index has also weakened, but still sits above 60%. That hasn’t been good news for investors, Iyer notes, as the MSCI India underperformed those benchmarks by significant amounts before April.
The iPath MSCI India Index ETN (INP), for instance, dropped 3.6% during the first three months of 2013, to the SPDR S&P 500′s (SPY) 10.5% gain. The iShares MSCI Emerging Markets Index ETF (EEM) also lost 3.6%.
China is cracking down on anti-corruption activists, the New York Times says, even as it supposedly tackles corruption on its own. An earthquake in Sichuan killed nearly 200 people. Quartz looks at China’s tea wars and compares it to Coke versus Pepsi. The Shanghai Stock Exchange Composite Index fell 0.1% today.
India plans to spend some $20 billion on water management, including sewage treatment, irrigation and recycling, during the next five years, Bloomberg says. The S&P BSE India Sensex Index rose 0.8%.
South Korea’s foreign minister cancelled a trip to Tokyo after members of Japan’s government were seen visiting a shrine seen as a symbol of that nation’s belligerent past. The Korea Stock Exchange KOSPI Index rose 1%.
Malaysia’s opposition says it can root out corruption and make the country more competitive, Reuters reports. The FTSE Bursa Malaysia KLCI Index gained 0.02%.
Thailand’s initial-public offerings are expected to grow to $4.2 billion in 2013, up from 4.03 billion last year. The Stock Exchange of Thailand SET Index climbed 0.5%.
beyondbrics offers more evidence that Brazil made a mistake when it hiked rates. The Bovespa stock index has gained 0.2% in early trading today.
Emerging Market Stocks on the Move
LG Display’s (LPL) is expected to generate about 40% of its profits from Apple (AAPL) this year, the Wall Street Journal says. The company reported a profit of $3.1 million during the first three months of 2013.
McDonald’s (MCD) was downgraded to outperform, from buy, at Credit Agricole, according to Briefing.com.
JPMorgan and Jefferies downgraded Wipro (WIT) today, Briefing.com said, following last week’s disappointing earnings.
The number of cases of bird flu found in China rose to 83. China’s The Shanghai Stock Exchange Composite Index rose 0.3% today.
North Korea insisted the U.S. remove nuclear weapons before the start of any talks. The Korea Stock Exchange KOSPI Index fell 1.2%.
How much do investors love Philippine stocks? Shares of LT Group rose 4% a day after a follow-on offering raised $920 million, beyondbrics says. The Philippines Stock Exchange PSEi Index rose 0.1%.
Malaysia’s prime minister warned the nation that his loss would bring “catastrophic ruin” to the country. The FTSE Bursa Malaysia KLCI Index fell 0.3%.
Nomura likes Thailand’s refiners following their recent commodity-driven drop. The Stock Exchange of Thailand SET Index climbed 0.5%.
Brazil’s central bank raised its benchmark interest rate a quarter of a percentage point to 7.5% in an attempt to bring down inflation. The Bovespa stock index has dropped 2.1% in early trading today.
Emerging Market Stocks on the Move
LDK Solar (LDK) lost money–again–and said it is working with banks to solve its cash problems that resulted in default on some convertible bonds. The stock has dropped 13.9% to 93 cents before the market open.
Taiwan Semiconductor (TSM) beat earnings and expects smartphones and tablets to boost its second-quarter profits, the Wall Street Journal says. Its shares have gained 6.7% to $18.23 pre-open.
Vale (VALE) said steel production fell 3.5% to 67.5 million metric tons during the first quarter, below analyst forecasts for 68.3 million, but said it remains on track to its target for 2013. The stock has gained 2.1% before the market open.
China’s municipal debt is “out of control,” according to the vice chairman of China’s accounting association, The Shanghai Stock Exchange Composite Index fell 0.05% today.
Gold’s plunge has Indians shopping for the precious metal. The S&P BSE India Sensex Index dropped 0.07%.
South Korean pension funds have been buying that nation’s stocks, despite North Korea’s threats, Bloomberg says. The Korea Stock Exchange KOSPI Index rose 0.1%.
The Philippines central bank is getting ready to roll out measures aimed at weakening its peso. The Philippines Stock Exchange PSEi Index rose 0.9%.
Malaysian consumer prices rose 1.6% in March, in line with economist forecasts. The FTSE Bursa Malaysia KLCI Index gained 0.6%.
The trial of Russian blogger Aleksei Navalny, who has helped reveal corruption among that nation’s leadership, has been delayed a week. Navalny faces charges of embezzling $500,000 from a timber company. Russia’s Micex stock index has dropped 1.2%.
South African consumer prices rose 5.9% in March, unchanged from February but near the top of its central bank’s comfort zone. The FTSE/JSE Africa Top40 Tradeable Index has fallen 1%.
Emerging Market Stocks on the Move
China’s stock market bounced back from yesterday’s disappointing GDP data, but it has entered a period of slower growth, the Financial Times says. The Shanghai Stock Exchange Composite Index rose 0.6% today.
India is targeting manufactures that sell below cost with new taxes, Reuters says. India The S&P BSE India Sensex Index gained 2.1%.
South Korea unveiled a fiscal stimulus package, Bloomberg reports. The Korea Stock Exchange KOSPI Index rose 0.1%.
China warned nations not to expand their military presence in Asia, a veiled threat to the U.S., which has been boosting military ties with the Philippines, among others. The Philippines Stock Exchange PSEi Index fell 0.75%.
Indonesia might hike gas prices for private-car owners by as much as 56% to reduce fuel subsidies, Bloomberg reports. The Jakarta Stock Exchange Composite Index gained 1%.
Oil’s plunge has Russia reconsidering its export duties on crude. Russia’s Micex stock index has risen 0.2%.
A South African central bank governor called gold’s precipitous drop “extremely concerning,” Bloomberg reports. The FTSE/JSE Africa Top40 Tradeable Index has gained 1.25%.
Turkey’s central bank cut interest rates by half a percentage point today to boost growth and weaken its lira, Reuters said. Turkey’s Istanbul Stock Exchange National 100 Index has climbed 0.5%.
Emerging Market Stocks on the Move
Maxim Group reiterated its sell on Baidu (BIDU) on declining market share.
For the world’s stock markets, today was all about China’s slowing growth and the commodity selloff that followed the announcement. The iShares Gold Trust (GLD) fell 8.8% to $131.13, while the iShares MSCI Emerging Markets Index ETF (EEM) dropped 2.4% to $40.86.
And that trumped much of the local news for individual developing nations. Brazil’s bond yields rose today, as investors bet that its central bank would hike rates this week. But the iShares MSCI Brazil Capped Index ETF (EWZ) dropped 3.8% because mining stocks like Vale (VALE) dropped 6.2% to $16.39.
There was some bad news, but most of it was ignored as the commodity stocks plunged. Peru said its economy grew at a 4.9% clip in February, well below 5.7% forecast by economists, according to Reuters. The iShares MSCI All Peru Capped Index ETF (EPU) dutifully fell 3.6% to $41.29, but again, it was the miners who dragged the index down, as gold-miner Compania de Minas Buenaventura (BVN) plunged 9.1% to $21.40 and Southern Copper (SCCO) fell 7.5% to $32.18.
Nations with little news–but heavy exposure to commodities– also plunged. The iShares MSCI Mexico Capped Investable Market ETF (EWW) fell 4% to $72.45, led by base-metal miner Grupo Mexico, which fell 7%. The Market Vectors Russia ETF (RSX) plummeted 4.3% to $25.94, led by miner Mechel (MTL), which dropped 8.4% after missing earnings.
Nothing to do except take a deep breath, wipe the slate clean and start again tomorrow.
Emerging markets are plummeting today, but some have been able to weather the selling. Perhaps unsurprisingly, they’re the ones that have some of the weakest ties to China and little exposure to commodities.
The iShares MSCI Emerging Markets Index ETF (EEM) has plummeted 1.8% to $41.13 today, and the SPDR Gold Trust (GLD) has plunged 7.8% to $132.69. Investors interested in these kind of things can blame China’s poor economic data, which was flame that lit the fuse for two assets that were primed for further drops.
The hardest hit emerging markets have been the commodity producers. The Market Vectors Russia ETF (RSX), for instance, has plummeted 3.9% to $26.06, while the iShares MSCI South Africa Index ETF (EZA) has dropped 4.7% to $60.27.
Who’s held up the best? That would be Turkey and India. The iShares MSCI Turkey Investable Index ETF (TUR) has gained 0.1% to $71.91, while the WisdomTree India Earnings ETF (EPI) has dropped just 0.3% to $17.36 (India’s S&P BSE Sensex Index rose 0.6%).
Neither country is much of a commodity producer, and neither has outsized links to China. Both countries have news today. India reported that it’s rate of inflation has dropped below 6% for the first time since 2009, a dip that if sustained could give its central bank more room to boost its sluggish economy. Barclays’ Siddhartha Sanyal and Rahul Bajoria write:
While the central bank guidance still remains cautious, we believe that that the flow of macroeconomic data – continuous downside surprises in inflation prints, a more benign trade deficit, and weak growth indicators – is creating meaningful room for further monetary easing in the coming months. We strongly reiterate our long-standing view of a repo rate cut of another 50bp by mid-2013, despite very cautious guidance from the central bank.
Turkey‘s unemployment rate rose to 10.6% in January, and that will do little to change investors minds about the likelihood of a rate cut from that nation’s central bank tomorrow. Here’s Merrill Lynch’s Turker Hamzaoglu on the inevitability of falling Turkish interest rates.
CBT appears close to implementing round-robin scheduling, where it deals with its multi-goals in a rotating, time-sharing framework. We believe growth has moved to the top of this circular queue lately, asking for lower rates and moderately weaker TRY. Since CBT reshuffles policy priorities constantly, breaking the traditional policy smoothing inertia of central banking, a rapid shift to lower rates at the next meeting would not surprise us given capital outflows are no longer a policy constraint.
We believe the CBT is likely to lower the corridor to 4.0-7.0%, and cut the policy rate to 5% from 5.5% in measured steps in 2Q13 (ie, 25bp cuts). If the CBT cuts the ON policy rate further and continues to give TRY liquidity just as much as the market needs, that would bring down the TRY funding costs as well. In our view, the market and consensus have not priced in such further easing, and it has yet to be reflected on the short end of the yield curve in the near-term.
How much longer can they stay aloft?
China’s gross-domestic product rose just 7.7% during the first three months of 2013, down from 7.9% during the 4th quarter of 2012 and below economist forecasts for 8%. The Shanghai Stock Exchange Composite Index fell 1% today.
India’s wholesale-price index, a measure of inflation, rose 5.96% in March, down from 6.84% February and the slowest rise in 40 months, Bloomberg said. The S&P BSE India Sensex Index rose 0.6%.
The U.S. has offered to hold direct talks with North Korea, the Wall Street Journal reports. The Korea Stock Exchange KOSPI Index fell 0.2%.
The World Bank raised its growth forecasts for Malaysia and Thailand–and no one cared. The FTSE Bursa Malaysia KLCI Index fell 0.04%, while the Stock Exchange of Thailand SET Index climbed 0.7%.
Russia’s industrial production rose 2.6% in March. Russia’s Micex stock index has dropped 1.8%.
Turkey’s seasonally adjusted unemployment rate fell to 9.4% in January, down from 9.5% in December. Turkey’s Istanbul Stock Exchange National 100 Index has climbed 0.6%.
Nicolás Maduro, Hugo Chavez’s handpicked successor, won Venezuela’s presidential election.
Emerging Market Stocks on the Move
The price of gold is falling and emerging-market gold miners are getting hammered. Harmony Gold (HMY) has plunged 9.1% to $5.00 after being downgraded to sell from neutral by Citigroup analysts, while Gold Fields (GFI) has dropped 5.7% to $6.40, despite being upgraded to neutral from sell.
Infosys (INFY) could feel more pain as companies cut spending due to U.S. budget cuts, Bloomberg reports, while the company was downgraded to Outperform from buy at Merrill Lynch, according to Briefing.com.
Emerging markets are expected to power 60 percent of the world’s economic activity by 2030 and have become synonymous with growth. But the near-term outlook is murky, at best. Countries like Brazil, India and China that have arguably emerged now face a host of issues –from infrastructure bottlenecks to worries about credit expansion.
Barrons.com’s Emerging Markets Daily blog analyzes news, data and research out of these markets, pokes holes in conventional wisdom and helps readers navigate the investment landscape from China to Colombia.
The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.
Write to Ben at Ben.Levisohn@barrons.com.