Monthly Investment and Research Commentary – April 2015

Country Ranking

  • There were no changes in the Magni Country Scores from last month.
  • According to the Magni country rankings for adherence to Sustainable Wealth Creation (SWC) principles, the five highest-ranked countries remain: United Kingdom, Sweden, Canada, Norway and Germany.
  • The five lowest-ranked countries based on SWC principles remain: Taiwan, China, UAE, Qatar and Egypt.

China reduction in reserve requirement/margin curbs

  • As the Chinese government attempts to address the slowdown in their economy, their policy moves are in some ways contradictory and the moves illustrate their difficult balancing act. On the one hand, the central bank recently announced a full percentage point reduction in banks’ reserve requirement.  This stimulus is forecast to provide banks with about an additional $200 billion to lend.  On the other hand, the securities regulator had just previously limited margin trading in an attempt to contain speculative bubbles within their equity market.  Adding to the precariousness of the situation is the high level of indebtedness in many parts of the economy.  This combination of slowing growth and rising debt levels has led some, including former Treasury Secretary Hank Paulson, to conclude that it “is not a question of if, but when” China’s financial system will face widespread credit losses and debt restructurings.  As noted above, China ranks near the bottom of the Magni country rankings and we expect their lack of reform progress to catch up to them.

Greece latest developments, Apr 24 finance minister meeting in Riga

  • When just two months ago Greece agreed to develop a set of mutually acceptable reforms in order to unlock the €7.2 billion remaining in its bailout fund, the end of April seemed a manageable time frame to come to an agreement. However, the recent meeting of finance ministers in Latvia which was originally intended to agree on a new list of Greek reforms instead broke up with acrimony and recriminations.  Slovenia’s finance minister suggested if bailout talks did not progress more quickly the Eurozone should prepare for a Greek default.  The chairman of the Eurozone finance chiefs’ group ruled out almost any compromise position where the creditors might consider a half-way deal in return for Greece receiving part of the pending rescue loans.  The next possible date for a deal could be the May 11 meeting of Eurozone finance ministers; just one day before Greece owes a big payment to the IMF.  We anticipate continued volatility, as sentiment seesaws between optimism and pessimism, but in the end are cautiously optimistic that an agreement will be reached.

Saudi Arabia opening stock market to foreign investors

  • Saudi Arabia will open its stock market to foreign investors on June 15. The move is seen as a step by Saudi Arabia to try and diversify away from its heavy dependence on the petroleum industry.  Surprisingly, the Saudi index is not dominated by energy.  Their largest oil-producer Aramco, is state-owned, and about a third of the Saudi index is made up of financial-services companies, one third is materials and infrastructure-related companies, and one quarter is telecom and consumer companies.  The cash inflow from opening their market is also expected to help offset the fall in oil prices and allow the government to pursue stimulus measures such as an increase in infrastructure spending.  The Saudi stock market is one of the last large markets to continue to limit outside investment.  Magni research will be watching the progress in Saudi Arabia for possible inclusion into our SWC evaluation process.  This will not occur until we are comfortable that the country is truly investible for foreigners.

Global Stability

  • The IMF has warned that the risks to international financial stability are rising. Furthermore, they see stability risks shifting from advanced economies to emerging economies. Emerging markets are facing twin headwinds from the strong U.S. dollar and weak commodity prices.  In addition, diverging monetary policies among the developed country central banks is contributing to intensified exchange rate volatility.  Volatility has also been heightened by regulatory and market changes that have taken place since the financial crisis, which have led to a reduction in liquidity in world bond markets.  The report stresses that ensuring ongoing stability will require policy responses that go beyond monetary policy.  In particular, implementing structural reforms in the euro area and Japan, careful communication of monetary policy from the United States, and enhanced surveillance of vulnerable emerging market sectors such as shadow banking. While this information does not directly impact Magni Country Scores, we continue to believe that countries with higher scores from their adherence to SWC principles are better positioned to weather any instability.