Turkey Optimism? Leopards Dont Change Their Spots

By Dimitra DeFotis

The optimism evident in Turkish assets is unjustified, Société Générale says.

The iShares MSCI Turkey ETF (TUR ) is up 0.5% today, in line with the Vanguard FTSE Emerging Markets ETF (VWO ). But month to date, the Turkey exchange-traded fund is down 14%, while the broader emerging-market fund is down 5%.

Markets cheered today after President Recep Tayyip Erdoğan met with Deputy Prime Minister Ali Babacan and Central Bank of Turkey Gov. Erdem Başçı ; the agenda that no doubt included remedies for the violent deterioration in Turkish financial markets. SocGen has been vocal in suggesting that investors take bond, stock and currency bets off the table given Erdoğans unorthodox attacks on central bank policy ahead of June elections in Turkey.

Reuters Turkeys President Recep Tayyip Erdoğan at the Presidential Palace in Ankara.

The Turkish lira responded well to the meeting, but SocGens Benoit Anne answers the obvious question: What do I want to do with the TRY at this juncture? Sell it is the answer The lira has plummeted as the dollar strengthens: one dollar is worth roughly 2.59 Turkish lira, and some fear the relationship could bottom near 2.75. SocGen Analyst Phoenix Kalen. in a report titled Turkey The Leopard Doesn’t Change Its Spots, writes:

The fundamental problem going into the meeting is the vast ideological gap between the participants beliefs regarding economic theory and relationships between various economic levers. Sadly, from what we have been able to ascertain, what transpired at the meeting failed to bridge this ideological gap.

What does she mean? In my latest column, Invesco bond portfolio manager Banu Elizondo explained the blunt reality: Erdoğan and his administration don’t believe in a secular government. They have been in power 12 years and we are only starting to see their true colors.

Kalen at SocGen continues:

What this implies then is the inevitable recurrence (perhaps weeks or months down the road) of detrimental political rhetoric, continuing challenges to the CBRT [Turkey’s central bank] and to traditional economic theory, and the risk of the disappearance of key policy makers in conjunction with the June parliamentary elections timeline. The best the market can hope for is a temporary reprieve from political pressure, with the President and leading politicians pausing their critical attacks. With the next CBRT meeting scheduled on March 17, a day before the FOMC interest rate decision, we anticipate that the CBRT now has the political leeway to maintain unchanged interest rates at this months meeting. Looking ahead, we forecast 100 basis points of cuts to the benchmark one-week repo rate in 2Q 2015 to bring the level down to 6.5%, a further 50 basis points of cuts in 3Q 2015 to 6.0%, and unchanged level of 6.0% by year-end. We continue to anticipate an asymmetric, upward skew to the interest rate corridor. Overall, we believe that the confluence of domestic politics and Fed-fuelled weakness may continue to undermine Turkish assets over the medium term.

Turkey will be one of the most vulnerable among emerging markets to U.S. Federal Reserve rate hikes, Elizondo says. See my latest column, Turkish Turmoil Sends Foreign Investors Elsewhere . (subscription required). Also see our free blog posts: As Turkey Woos Wall Street, Citi Sells Akbank; Lira, Banks Sink and Turkish Lira Hits New Low and Expect More Weakness From Fragile Three: Brazil, Turkey, South Africa .

Mar 12, 2015

Nigeria Oppositions Buhari Could Win, Disrupting Oil

By Dimitra DeFotis

There is a 60% probability that Nigeria opposition leader Muhamadu Buhari could beat President Goodluck Jonathan in this months election, according to Eurasia Group .

The Global X MSCI Nigeria ETF (NGE ), up 1.6% today, has tumbled 14% year to date and is down nearly 36% over the past 12 months. The Vanguard FTSE Emerging Markets ETF (VWO ), up 0.5% today, is down nearly a point this year, and up 3.2% over the past year.

Africa practice head and Analyst Philippe de Pontet writes today that while Jonathan was a favorite in the March 28 election, representing a victory for the countrys Christian south, the electoral map is tilting to Buhari in swing regions in the southwest and middle of the country. Buhari would be a technocrat, and investors could expect business-oriented policies, de Pontet writes, but Eurasia Group remains neutral on Nigeria for the long term, given downside risks to oil production and challenges to policy implementation. He adds:

Teneo Intelligence Nigerias Peoples Democratic Party won the south in 2011 elections.

The election will still be difficult to call, but our expectation of a narrow Jonathan win was predicated on several factors that are losing some saliency late in the campaign.

Chief among them is the incumbency and financial advantages of the ruling Peoples Democratic Party (PDP). While this still helps Jonathan, its impact is blunted by the intensity of support for Buhari, lackluster grassroots campaigning by the PDP, and new anti-rigging measures by the electoral commission. New permanent voting cards and card readers will sharply reduce the level of rigging seen in 2011, when Jonathan beat Buhari in a landslide

While we expected the electoral map to favor Jonathan, current trends suggest that the swing regions may side with Buhari, including the Christian-majority and heavily-populated southwest around Lagos. That could be the decisive demographic factor in the election

A local think tank, the Center for Public Policy Alternatives, gives Buhari a 58% to 32% lead in Lagos state, where Jonathan won the last election. Eurasia Group thinks Jonathans approval rating is below the 40% threshold under which incumbents have a hard time getting reelected.

Despite some important military gains against [the Islamic terror group] Boko Haram in the northeast, and a partial exoneration of its oil revenue management in a recent PWC audit, [Jonathan’s] Peoples Democratic Party is starting to look desperate. [But] it is not clear that Buhari has a strong economic policy orientation. This uncertainty is a chief risk for investors.

Jonathan is likely to contest an unfavorable outcome, especially a close election, and that could mean protracted violence.

The reason we aren’t upgrading Nigeria’s outlook to positive, however, rests in the potential for an oil disruption and the likely pushback to Buhari’s policy agenda in a highly polarized political climate. His victory is likely to unleash a resurgence of militancy in the Niger Delta (Jonathan’s home region) that targets the oil sector. Former Delta militants have threatened to blow up oil pipelines, platforms, and personnel as in the past when they routinely took up to 500,000 barrels per day offline. There is likely some bluster in their threats

Mar 12, 2015

12:48 PM ET

Ukraines Debt Crisis & $3 Billion Russia Bond

Ukraines new IMF program was approved this week and Deutsche Bank assesses the risk for bondholders.

No surprise, Ukraine faces liquidity and a solvency crisis, writes Deutsches Chief Economist Robert Burgess along with strategists Hongtao Jiang and Winnie Kong. They add:

Agence France-Presse/Getty Images Ukrainian police cadets in Lviv.

Significant external support is needed to enable Ukraine to rebuild reserves and meet its external financing obligations. A deep recession and a collapse in the hyrvnia have pushed government debt to levels that now call into question that sustainability of that debt.

A debt operation will form a key part of the government’s attempt to resolve these issues. Following the approval of its new IMF program yesterday, we now know that the government is looking to raise USD 15bn from bailing in the private sector. It hopes that the operation will also reduce the government debt ratio by about 9% of GDP.

To achieve these goals it will need to extend the maturity of its debt, probably beyond 10 years in order to avoid a spike in private debt service payments during the period when it will start to repay the IMF. We think it also implies an upfront reduction in principal of some 35-40% of the stock of sovereign and quasi-sovereign bonds.

These targets also suggest that the $3 billion bond owed to Russia would be included in the debt operation, which could prove problematic should Russia not cooperate. We see balanced risk/reward at the moment and remain neutral on Ukraine credit for now, but look to reduce to underweight should the debt operation prove disorderly.

The Market Vectors Russia ETF  (RSX ) is  down 0.2% today, while the iShares MSCI Emerging Markets  Eastern Europe  ETF  (ESR ) is up 0.4%.

Mar 12, 2015

10:35 AM ET

India GDP Accelerating to 7.5% in 2015, IMF Says

The International Monetary Fund expects Indias economy to expand at a faster clip in the current fiscal year and now sees growth of 7.5% in the next 12 months.

India Prime Minister Narendra Modi.

The IMF now sees 7.2% gross domestic product growth for India in the current fiscal year, which ends March 31, instead of the 5.6% it previously predicted. For the coming fiscal year, the IMF revised its India growth estimate upward to 7.5% from 6.3%, The Wall Street Journal reports .

The adjustment follows the Indian governments adjustment to GDP calculations ; those call for 8% growth in the coming fiscal year.

U.S.-traded shares of Indian companies are higher today: HDFC Bank (HDB ) and Icici Bank (IBN ) are each up 1.6%. Infosys (INFY ) and Tata Motors (TTM ) area each up more than 2.2%.   The iShares India 50 ETF  (INDY ) is up 1.5%. The Wisdom Tree India Earnings ETF (EPI ) is up 1.8%, the WisdomTree Indian Rupee Strategy Fund  (ICN ) is up 0.6%, and the EGShares India Consumer ETF  (INCO ) is up 1.7%.

The gap between India’s government-owned and private-sector banks is getting wider, favoring the latter including  HDFC  and Axis Bank, Credit Suisse said in a recent note. Also see mention of India banks in our Q&A on India equity strategy with State Street Global Advisors  Strategist Gaurav Mallik  on equity strategy in light of India’s new budget.

See this reporters Barron’s  emerging markets column, “Four Winners From India’s Reform ,” (subscription required.) Also see our recent post, 6 Emerging Market Funds Still Betting On India .

Mar 12, 2015

9:57 AM ET

Cowen Lowers Price Target On Brazils Petrobras

With the corruption scandal at Brazils state-controlled energy giant Petrobras and the crash in oil prices, Cowen analysts lowered their price target to $9 from $11.

Petroleo Brasileiro (PBR ), up 3% today to $5.60 in U.S. trading, is a play on the massive oil potential in Brazils deep water. But the offshore contract drilling market is reeling from an oversupply of rigs and declining crude prices, say a nalysts Asit Sen, J.B. Lowe, James Crandell, Tanner Strunk, Roland Morris and Peter Hatfield. They  want to see more operational, financial and strategic clarity from Petrobras. They  write:

Agence France-Presse/Getty Images

The key questions going forward for PBR investors –1) Will the new management team gain investor credibility by publishing audited financial results and in rooting out corruption, 2) will the government finally relax local contractor quotas (local content rules >50% one of the most restrictive in the world) and 3) will PBR emerge from this crisis stronger – less state-centric and with better governance?

The only silver lining in all this has been the steady ramp up in pre-salt Santos production. While PBR’s strategic plan talks about “partnerships and business model restructuring”, new laws enacted in 2010 to regulate pre-salt exploration and production activities are restrictive, limiting the company’s maneuverability. The key question remains will a changing global energy landscape ( Mexico opening up to investors and ramp in U.S. shale ) necessitate change in Brazil’s upstream policy

Petrobras had already been slashing rig activity since mid-2013 (going from 70 operated rigs to 56 currently). Paragon Offshore (PGN ), Diamond Offshore (DO ) and Transocean (RIG ) are the most at risk for further PBR activity reduction through 2017 [They also note Ensco (ESV ) has

16% of its backlog tied to Petrobras.]

Petrobras needs significant capital to develop Brazil’s massive offshore resource base with anticipated annual spending of $44 billion under the current five-year business plan (2014-18). The recent Moody’s debt downgrade and related developments, however, create significant hurdles in accessing the international credit markets. Recently, 2015 capital spending was lowered to $31-$33 billion level (down 27%) while asset sale target was raised to $13.7 billion. Based on its recent projections (presented on January 29), Petrobras sees no need to visit the debt market. We remain skeptical pending more details. Petrobras has announced an increase in its asset sales program from $5-11 billion in the 2014-18 business and management plan to $13.7 billion in 2015/16.

Mar 11, 2015

4:54 PM ET

Greece, Bankrupt, Cant Seek German WWII Reparations?

The rhetoric is flying between Greece and Germany, as much-needed financial aid sits in a vault.

Agence France-Presse/Getty Images Greek Finance Minister Yianis Varoufakis (center).

Now its a German documentary televised this week that presumably contains dated interviews. In it, Greek Finance Minister Yanis Varoufakis  described Greece as the most bankrupt country in the world, and one that was never likely to repay debts, Reuters reports.  The language cannot sit well with Eurozone leaders this week as they seek more concrete plans for Greek austerity and reform.

The questions remain: Can Greece save money, make debt payments and stay afloat? Is Grexit in the cards?

The Global X FTSE Greece 20 ETF (GREK ) fell 1.7% Wednesday. Among bank stocks, Piraeus Bank (BPIRY ) fell 5% and Alpha Bank (ALBKY ) fell 4.4%, while National Bank of Greece (NBG ) rose 1.6%. Hellenic Telecommunications (HLTOY ) fell 1%.

UPDATE: Meanwhile, the Wall Street Journal is reporting that Germany reiterates that World War II reparations have been dealt with legally and politically and that Germany Won’t Negotiate With Greece Over Compensation for Nazi Atrocities . The BBC notes that Germany did pay compensation of 11 million Deutsche marks in 1960, as part of an agreement with several European countries for the Nazi occupation. But Greece says the 1960 deal did not cover key demands, including payments for damaged infrastructure, war crimes and the return of a forced loan exacted from occupied Greece .

Mar 11, 2015

4:21 PM ET

Brazil Plane Maker Embraer: Hitting Turbulence?

RBC Capital Markets lowered its price target on Brazil airplane manufacturer Embraer Wednesday in the face of margin pressure.

Shares of Embraer (ERJ ) fell nearly 0.4% Wednesday to $32.11 in U.S. trading. RBS lowered its price target to $36 from $39, saying that while Embraer is well positioned longer term, pricing and profits will be weaker this year. Embraer is the fourth largest aerospace manufacturer globally and commercial airplane sales account for more than half of its revenue. Earnings growth is what will determine future stock price appreciation, but growth catalysts are limited, write RBC analysts Derek Spronck and Walter Spracklin :

Agence France-Presse/Getty Images

Extraneous factors are putting pressure on margins and free cash flow, with what we see as limited upside (or relief) in the near term. Factors largely outside the control of management, including a difficult pricing environment and a weakening fiscal/political situation in Brazil we are pushing an anticipated earnings/FCF ramp out to 2017, with what we see as limited earnings and valuation upside in the near term.

We have now readjusted our margin expectations lower, leading to our 2016 Ebitda estimate at $949 million (from $1,079 million) 2015 [will] be a transition year for the companys busines jet portfolio Commercial as stable, we no longer see an upside bias. We point to the 100+ seat regional jet segment, which remains depressed from an order standpoint. Furthermore, we now know how competitive the pricing environment was for the resulting US carrier orders in the 80 seat regional jet segment.

We were surprised by managements cautious tone with regards to the Brazilian fiscal/political situation and the potential negative effect for Embraers defense segment. This was clearly echoed in 2015 guidance, in which management is pointing towards a double digit decline in defense revenue growth. Part of the weakness is due to foreign currency exchanges; however, the still developing domestic situation warrants a more cautious position.

The iShares MSCI Brazil Capped ETF  (EWZ ) rose 0.5% Wednesday. State-controlled energy company Petroleo Brasileiro (PBR ), whose U.S.-traded shares rose 2%, was again the source of negative headlines; more construction companies were named in the expanding Petrobras corruption investigation. Also on Wednesday, Brazils government announced a plan to cut taxes for the poor. See Brazil: Avoid Sovereign Debt, Corporate Bonds, Invesco Says .

Mar 11, 2015

3:10 PM ET

Brazil: Avoid Sovereign Debt, Corporate Bonds, Invesco Says

The key for markets will be Brazils ability to deliver on promised fiscal adjustments.

The government instead today finds itself bowing to political demands resulting from the scandal  at state-controlled Petroleo Brasileiro  (PBR ). The latest announcement: Brazil is lowering tax brackets for the poor. The result will exempt some from taxes and will reduce collections by at least 6 billion reais ($1.92 billion) this year. But Finance Minister Joaquim Levy said the government still can achieve a primary surplusa measure of government savings before interest paymentsequal to 1.2% of gross domestic product this year, according to a Dow Jones Newswires report.

Associated Press Brazil Finance Minister Joaquim Levy and President Dilma Rousseff.

Since President Dilma Rousseff took office in 2010, the fiscal balance has gone from a deficit of 2.5% to 6.7% at year-end 2014. Gross debt has increased from 56.4% in 2006 to 63.4% of GDP at the end of 2014 . [Welcome steps include] new taxes on fuel, personal loans, imported goods and cosmetics [and increases in] Brazil’s long-term interest rate target [But] the broader issues are not being addressed. Unemployment programs encourage an artificial unemployment rate of 5.1%, labor mobility remains rigid, and government payroll and social security benefits remain outsized

Invesco fixed income believes downside risks remain on Brazilian sovereign bonds, given the effects of the deteriorating macro environment, political risks, the corruption investigation into Petrobras   and weather-related shocks. At current levels, we prefer to be underweight hard currency and local currency debt instruments. Given our negative view of sovereign bonds, we believe it is best to avoid many of the higher-quality Brazilian corporates that are most sensitive to sovereign bond movements

Shares of Petrobras have rallied 2.4% today despite the widening bribery scandal. The reasons may be two-fold: the U.S.-traded shares took a big hit Monday, and todays announcement that more construction companies may be involved in the Petrobras scandal draws attention to other players. The iShares MSCI Brazil Capped ETF  (EWZ ) is up fractionally today. Shares of Itau Unibanco Holding (ITUB ) are up 2%, while airline GOL Linhas Aereas Inteligentes (GOL ) shares are up 5.7%. In the red: Oi (OIBR ), Gerdau (GGB ), Vale (VALE) and BRF (BRFS ) are each down roughly 2%.