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The Economist Intelligence Unit is relaunching its industry blog. Now known as EIU Views, the site features data-driven commentary by members of the EIU’s industry team. The approach is much the same as Daily Data Point, but the new site will feature a broader pool of editors writing about a wider range of sectors (including, of course, the financial services industry).
Please update your bookmarks and head over to www.eiuviews.com. To see only the finance posts, visit www.eiuviews.com/index.php/category/financial-services. For the finance RSS feed, use www.eiuviews.com/index.php/category/financial-services/feed.
The volume and value of initial public offerings in Hong Kong soared in the first half of the year, according to a new analysis by PricewaterhouseCoopers. Despite some companies getting cold feet and pulling planned listings in recent weeks, PwC believes the Hong Kong exchange is on track for another robust year.
Last year, the number of IPOs in Hong Kong rose by 56% and the value of funds raised increased by nearly 80%. In the first half of this year, the volume of listings rose by 55% and the value of money raised nearly tripled when compared with the same period in 2010. The number of expected IPOs in 2011—110, reckons PwC—should be roughly equal to the previous year. However, the value of fundraising, forecast at HK$380bn (US$48.8bn), is expected to fall by 15% from 2010.
Choppy markets led six firms to scrap planned Hong Kong IPOs last month, although the pipeline still looks relatively healthy. Chinese retailer Sun Art, for example, reportedly closed the books early on its HK$8bn listing. If not as lucrative as last year, the IPO market in Hong Kong still looks to be one of the busiest in the world this year.
The IMF is worried about overheating in some Latin American economies, thanks to an “excessively stimulative environment”.
Although the institution is reluctant to label current conditions in the region’s largest markets bubbly, when it comes to credit growth the IMF acknowledges that concerns are rising about whether loan growth is becoming “excessive and eventually unsustainable.” Equity prices are also showing signs of “stretched valuations” in places like Chile, Colombia and Peru.
Despite being one of the region’s most active users of “macroprudential” measures to cool its economy, Peru stands out from the pack due to its rapid recent credit growth and, especially, sky-high equity valuations.
Today, Standard & Poor’s announced a new equity index based on the CIVETS countries. The moniker, coined by the Economist Intelligence Unit a few years ago, describes a group of sizeable emerging markets—Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa—with appealing conditions for sustained high growth. Although not yet part of common parlance like the BRICs (Brazil, Russia, India and China), the CIVETS are generally the most-discussed markets in the next tier of emerging economies.
For its part, S&P describes the group as characterised by “dynamic, rapidly changing economies and young, growing populations.” Back-testing its new index, the CIVETS-based construction has recently outperformed indexes based on the BRICs as well as emerging markets in general. But this is not to say that shares in the CIVETS countries are uniformly buoyant: since the start of 2008, Colombian large caps have risen by more than 60% while large Egyptian stocks have shed more than 50% of their value. The group is an eclectic mix of political and economic systems, with financial markets of widely varying maturities. Thus, an index built from the CIVETS offers exposure to a targeted yet diversified basket of important emerging economies.
The recent performance of CIVETS shares will attract adventurous investors seeking outsized returns, much like intrepid coffee lovers who covet a rare, expensive type of bean harvested with the help of the civet, a cat-like mammal. In a less auspicious omen, civets were also linked to the spread of the deadly SARS virus.
Apologies for the light posting of late. The chart makers have been busy on a number of large projects, including exciting plans for the future of this site. Normal blogging will resume towards the end of next week.
In the meantime, as always, normal service continues at the parent site.
Saudi Arabia’s benchmark equity index soared by more than 7% in trading on Saturday, its largest daily gain in more than two years. The index has added another 4% in trading since.
Still, the oil-rich kingdom’s market is among the worst performing in the region so far this year; before the recent gains the index touched a two-year low after falling for 13 consecutive sessions. Investor unease stems from the popular unrest gripping the Middle East and North Africa, with particularly pronounced selling in Saudi Arabia last week as violent protests took place in neighbouring Bahrain and Oman.
The recent rally in Riyadh is attributed to opportunistic buyers, including official investors like the country’s public pension agency. Comments from finance minister Ibrahim al-Assaf over the weekend also helped: given attractive share prices, “I seized the opportunity to buy some shares,” he said. Some US$36bn in new spending on housing and unemployment programmes was pledged by the kingdom last month, with a view to warding off potential unrest. Speculation that further reforms may include passage of a long-delayed mortgage law has seen banks’ shares lead the recent rally.
The EIU’s finance team has received the latest Credit Suisse Global Investment Returns Sourcebook. A hard-copy only publication, it is a weighty tome in terms of both content and physical heft. The research, conducted by a group of academics from the London Business School who wrote an influential book on investment returns, crunches the numbers on asset returns for 19 countries back to 1900. This makes it an authority on the global equity risk premium.
Over the past 111 years, the annual global equity risk premium was 4.5% relative to treasury bills, the research shows. Dividends account for the bulk of the premium, with the overall valuation of shares—as measured by the price/dividend ratio—adding only 0.5% per year. This re-rating of shares is “quite modest”, the report argues, “given the improved opportunities for stock market diversification that took place over this period”.
Was a 4.5% premium what investors expected in advance? To some extent, past equity performance relied on “past good fortune and factors that are unlikely to recur”, the research asserts. Take, for example, the fact that the world dividend yield in 2010, 2.5%, is well below the 4.1% average seen over the past 111 years. This, combined with a more modest outlook for the re-rating of shares and other factors, leads the researchers to infer that investors now expect an annualised long-term equity risk premium, relative to bills, of between 3% and 3.5%.
Investors are the most bullish on equities—a net 67% of poll respondents are overweight the asset class—since the survey began in 2001. At the same time, their allocation to emerging markets has plunged, with a net 5% of fund managers overweight in February, down from 43% in January. The swing in sentiment towards America and Europe is not as pronounced, but still significant. Encouraged by such decisive shifts in investing attitudes, contrarians will now pile into bonds from emerging markets.
It’s all happening in the exchange industry. Within a matter of hours, announcements of two potential mega-mergers among large stock market operators got the, er, stock markets buzzing.
First, the London and Toronto bourses announced their intention to merge, creating an exchange with “greater scale, scope, reach and efficiencies.” Later, transatlantic giant NYSE Euronext announced that it was in advanced discussions with German operator Deutsche Börse. The deal, if consummated, would create a “true pacesetter across the spectrum of capital markets services,” boasted the press release.
The rationale behind the proposed tie-ups—including the ongoing discussions between the Australian and Singaporean exchanges—is a mixture of offense and defence. The deals bring both diversity and strength in key niches, such as natural resource companies for the London-Toronto group. The fear of upstart competitors is also a motivation, as former incumbents have steadily lost market share in rapidly commoditised, volume-dependent business lines like share trading. The scope for cost-cutting at merged exchanges is large—a purported €300m a year for the NYSE-Deutsche Börse combination. If strength/safety in numbers is the way forward, many are now asking: who’s next?
The Cairo bourse is only open for four hours each trading day. It was a particularly eventful four hours today, with the benchmark EGX 30 index shedding more than 6%, mostly within the first few minutes of trading.
Yesterday was declared a “day of rage”, with tens of thousands of Egyptians taking part in violent protests reminiscent of the Tunisian uprising earlier this month. (The stock market was closed for a public holiday on Tuesday.) As the clashes continued today, investors took flight. The Egyptian equity benchmark index is now down by nearly 12% year-to-date, making it the worst performer among major bourses in developed and emerging markets. Today’s slide pushed the index lower than the previous bottom dweller: Tunisia.