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Investors find new hedges against a US election sell-off

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Investors are facing a conundrum in the run-up to what is expected to be a uniquely turbulent US presidential election: how to insulate their portfolios from a stock market sell-off.

Traditional safe assets have recently served investors poorly as an equity hedge, with government bonds barely moving and gold prices falling during September’s stock market wobble.

Ahead of a potentially disputed result on November 3, fund managers are casting around for new harbours to shelter from a potential storm. Popular strategies include using currencies that mirror stock movements, derivatives that provide insurance against falls and emerging market bonds that offer a higher yielding, though riskier, hedge for equity holdings.

“Relying on the traditional safe havens is like skydiving with a ripped parachute,” said Pilar Gomez-Bravo, director of fixed income for Europe at MFS Investment Management. “Since the summer we’ve looked for alternatives to US Treasuries.” 

Ms Gomez-Bravo has bought options that would profit from a decline in the Australian dollar and Norwegian krone — currencies that tend to move in tandem with risky assets such as stocks. Betting on them falling against the Japanese yen, which typically rises when equities come under pressure, amplifies the effect. Both these trades helped protect her portfolio in the September sell-off.

In the past, government bonds have tended to rise in value when stocks declined, cushioning losses in one part of a portfolio with gains in another. But the huge intervention in bond markets by the Federal Reserve and other central banks since the outbreak of coronavirus has damped this effect. 

“If you are a multi-asset manager, the traditional approach that you’ve taken to investing is certainly being challenged,” said Michael DePass, global head of Treasury trading at Citadel Securities. “It is requiring you to think differently.”

Investors have sought protection by snapping up insurance against equity market turbulence in the weeks surrounding the election, sending the price of futures contracts for the Vix volatility index — also known as Wall Street’s fear gauge — soaring. But the rising cost of such protection has added urgency to the search for alternatives.

Buying options on the S&P 500 “becomes very expensive very quickly”, said Scott DiMaggio, co-head of fixed income at AllianceBernstein, who also prefers to use short positions in currencies, including the Australian and New Zealand dollars, whose values fluctuate closely with the price of certain commodities.

Another popular trade involves emerging market currencies. According to Bob Michele, chief investment officer at JPMorgan Asset Management, the new “flavour du jour” is placing bets on the likes of the Mexican peso, Turkish lira and Indonesian rupiah to depreciate as a hedge against sell-offs in equities, high-yield credit and other risky assets. “It is a correlation that is recent and looks very strong,” he said.

For Pramol Dhawan, head of emerging markets portfolio management at Pimco, alternatives are also available in the fixed income space.

“While by no means a substitute for US Treasuries, Chinese bonds do contain similar hedging properties albeit with an elevated risk profile,” he wrote in a recent note co-authored by Ran Duan, a quantitative research analyst. 

Unlike five-year Treasury notes, which have already gained significantly in value since financial markets became unglued in March, Chinese bonds — which now constitute the world’s second largest bond market and have seen a significant uptick in foreign participation — have moved higher by a much smaller magnitude. As such, the Pimco analysts see “ample room” for a rally.

Beyond China, Mr Dhawan singles out government bonds issued by Poland, the Czech Republic, Israel, Singapore, South Korea, Peru and Chile as other candidates to counter equity risks. Rather than wagering on individual countries, however, he advocates a “basket approach” that bundles together 10 high quality EM bonds, arguing that this more closely tracks the behaviour of US Treasuries during times of stress.

While many fund managers have sought new strategies that thrive during an exodus from risky assets, most are reluctant to abandon government bond markets — particularly US Treasuries — entirely. At a yield of roughly 1.5 per cent, ultra-long 30-year Treasury notes offer some value, says Mr DiMaggio, especially given the Fed’s reluctance to intervene as heavily in such long-term debt.

Moreover, investors cannot look past the fact that the $20tn Treasury market offers unparalleled liquidity, making it easier to jump in and out of trades. Despite the plunge in yields to all-time lows this year it still offers investors a positive yield on their hedge — just — unlike strategies that require investors to pay a premium. Bets such as Chinese bonds, meanwhile, offer useful diversification. But with their relatively short record as a haven asset, few investors believe they will be the safest corner of financial markets in an acute crisis.

“If we put 20 per cent of our portfolio into China, our risk guys would have something to say,” said Luca Paolini, chief strategist at Pictet Asset Management. “At the end of the day, you can’t avoid holding US Treasuries.”



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Israel conflict rattles rapprochement with Arab countries

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When the United Arab Emirates shocked the Arab world by normalising relations with Israel it said the move would help ease the protracted Arab-Israeli conflict. But nine months later, the wealthy Gulf state finds itself in a difficult position as its newest ally bombards the impoverished Palestinian territory of Gaza.

Israeli war planes and artillery have been pounding Gaza while Hamas, the group that controls the territory, has fired rockets into Israel. On Sunday morning, death toll in Gaza stood at 181, including 83 women and children, local health officials said.

Ten people have died inside Israel, including two children, local medics have said.

While almost a third of Arab countries now have relations with Israel, this week’s bloodshed shows that diplomatic ties ushered in by last year’s so-called Abraham Accords have given them little leverage and done nothing to ease the root cause of the protracted crisis — the Jewish state’s conflict with the Palestinians.

“They [the UAE] are clearly in a very difficult position. On one hand, the UAE’s interests with Israel are long term and strategic, so ideally their relations should be resilient to shocks,” said Cinzia Bianco, a visiting fellow at the European Council on Foreign Relations. “At the same time, the UAE obviously claimed that the Abraham Accords would give them leverage to also support the Palestinians and rein in Israel’s aggressions against them.”

So far, Israel has rejected all international efforts pushing for a ceasefire. But Bianco said Abu Dhabi could still deploy diplomatic leverage to pressure the Jewish state to limit the scale of its retaliation. Such intervention, however, could jeopardise progress on joint projects of strategic value to the UAE, she added. 

Recent collaborations include plans for Emirati and Israeli defence manufacturers to develop a system to counter drones.

The normalisation of relations between Israel and the UAE under the Abraham Accords was quickly followed by similar moves from Bahrain, Sudan and Morocco, that marked a radical departure from the established Arab stance towards the Jewish state.

The Arab position before the accords was that they would recognise Israel only if there was a just settlement with the Palestinians that led to the creation of a viable Palestinian state. The transactional deals brokered by the Trump administration, which pursued an overtly pro-Israel stance, left the Palestinians feeling isolated and betrayed. Critics said Arab states had given up a bargaining tool and gained little in return, warning the moves would be exploited by more militant Palestinian factions.

Like other members of the Arab League, the UAE endorsed an appeal on Tuesday to the International Criminal Court to “investigate war crimes and crimes against humanity” committed by Israel against the Palestinians.

“The UAE stands with the rights of Palestinians, for the end of the Israeli occupation and with a two-state solution with an independent Palestinian state with East Jerusalem as its capital,” said Anwar Gargash, diplomatic adviser to the UAE president, this week. “This is a historic and principled position that does not budge.”

The UAE foreign ministry was last month quick to condemn Israeli plans to evict Palestinians from their homes on land claimed by Israeli settlers. And when clashes broke out between armed Israeli police and rock-throwing Palestinian youths, the UAE urged Israeli authorities to reduce tensions.

The UAE’s clear public stance has given cover for Emiratis and residents in the autocratic state to condemn Israeli actions and express support for the Palestinians, after any local anger at the earlier decision to normalise relations was suppressed at the time. Apart from a fringe of Emirati online activists who have sided with Israel, most social media reaction — even from some ministers — has been pro-Palestinian.

“Normalisation [of relations] is irreversible but it is very difficult to defend and even talk about in these circumstances,” said Abdulkhaleq Abdulla, a Dubai-based political science professor.

After the UAE signed its accord, there was speculation about whether Saudi Arabia, Israel’s main prize, would follow suit. Like Abu Dhabi, Riyadh has been covertly co-operating with Israel on intelligence and security matters as they share the goal of countering Iran.

But this week’s Israeli assault on Gaza makes that appear ever more remote. Saudi foreign minister Prince Faisal bin Farhan on Sunday said the kingdom “categorically rejects the Israeli violations against Palestinians”, while calling for an immediate ceasefire. 

In Morocco, which established relations with the Jewish state in October in return for US recognition of Moroccan sovereignty over the disputed territory of Western Sahara, the foreign ministry said it was watching events “with deep concern”.

In 2014, during the last major war between Israel and Hamas, thousands of protesters, including government ministers, took to the streets across Rabat, the capital. This time Moroccan police dispersed a small pro-Palestinian protest in the city this week. The newly formed Morocco-Israel Business Council was also reported to have postponed a virtual meeting aimed at encouraging Moroccan investment in Israel.

Public sentiment in the Arab world remained strongly pro-Palestinian, said HA Hellyer, senior associate fellow at the Carnegie Endowment for International Peace. “The absence of protests isn’t an absence of the desire to protest but an absence of permission to protest.”

Restrictions on freedom of speech across the region made it harder to gauge the extent of public anger, Hellyer said, but social media and the extensive coverage on mainstream television showed the “Palestinian question” was still close to Arabs’ hearts.

“Almost half of the messages I received on Thursday for the religious festival marking the end of Ramadan, show pictures of the Dome of the Rock in Jerusalem,” he added.



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Chilean voters prepare to elect country’s constitutional legislators

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Chile will this weekend vote in the legislators who will draw up its new constitution, with the country’s centre-right government facing a battle to maintain its grip on power ahead of a presidential election in November.

Gubernatorial, mayoral and municipal polls that were postponed because of the pandemic will also take place on Saturday and Sunday, alongside the election to populate the constitutional assembly.

Chile has not been spared the coronavirus second wave that has hit Latin America despite it having the highest vaccination rates in the region. Confirmed infections reached their highest ever level last month, although numbers have since declined.

“Chile is doing several historic and unprecedented things at the same time . . . in the middle of the economic and health crisis brought on by Covid-19,” said Robert Funk, a political scientist.

The most important vote will select members of the constituent assembly charged with rewriting the constitution drawn up during the 1973-90 dictatorship of General Augusto Pinochet — which most Chileans regard as illegitimate.

Nearly four-fifths of voters opted in favour of reforming the constitution in a referendum in November.

“These elections will probably define Chile’s institutional course over the coming decades,” said Gloria de la Fuente of Chile’s transparency council. “The vote will have a profound effect on Chile’s political system and civil society . . . electing the authorities to bring the country’s agenda forward.”

Yet turnover is predicted to be lower than the referendum. Some 58 per cent of Chileans who took part in a recent Ipsos poll said they were less likely to vote due to the pandemic, while less than half knew they would be voting for four different positions.

Chile has in recent decades become one of Latin America’s wealthiest nations, even if the deep inequality that sparked widespread social unrest in 2019 is far from resolved.

The low approval ratings for President Sebastián Piñera since those demonstrations have been exacerbated by defeats for his government in Congress, notably over pensions reform.

While the leftwing coalition that dominated Chile for most of the past 30 years has disintegrated since Piñera returned to power in 2018, his unpopularity could allow the left and centre-left to secure the two-thirds majority in the constituent assembly required to pass each article of the new document.

“If the right gets more than 30 per cent [in the assembly], it will be a tremendous victory,” said Lucia Dammert, a sociologist at the University of Santiago.

Despite the relative success of its vaccine rollout, Chile has been hard hit by the coronavirus crisis. Last summer’s peak of a weekly average of 352 daily cases per million was surpassed last month, reaching 383. Cases have since fallen back to about 280 cases per million.

However, Piñera’s government has been able to offer more generous Covid-related subsidies than most other countries in the region.

A feature of this weekend’s polls has been the emergence of independent candidates, Dammert said. Yet although the traditional parties had been badly wounded by the political turmoil, it would be “an uphill battle” for the independents to gain recognition, she said.

There are also wild cards such as Pablo Maltes — husband of Pamela Jiles, a populist presidential hopeful — who is running for governor of the metropolitan region of the capital Santiago.

“If Maltes wins, then there’s definitely something going on with Jiles,” said Funk, as it would suggest she was a strong contender for the presidency.

Jiles, who has championed measures to withdraw funds from Chile’s vaunted private pension system, is one of a number of presidential hopefuls, with no single candidate on the right or left enjoying a clear lead.

Electoral reform under the previous leftwing government of Michelle Bachelet that increased proportional representation means Chileans will for the first time also elect regional governors in a country where power has traditionally resided firmly in Santiago. The elections will also renew nearly a third of local authorities.



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China lands spacecraft on Mars

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China has landed a spacecraft containing a rover on Mars, according to state media, in a further sign of its bold ambitions in the sphere.

The rover was part of the Tianwen-1 unmanned mission launched in July last year. Tianwen means “questions to heaven” and was named after a poem by Chinese poet Qu Yuan.

The mission, which was described by Chinese media as a “new major milestone” and the “first step in China’s planetary exploration of the solar system”, was intended to match the US by successfully landing on the red planet.

The Global Times reported that the lander and the rover from the Tianwen-1 probe reached a plain on Mars called Utopia Planitia on early Saturday morning local time, citing information from the China National Space Administration.

The Tianwen-1 probe’s lander and rover separated with the orbiter at about 4am, after which it had a three hour flight before entering Mars’ atmosphere, according to the newspaper.

The spacecraft then “spent around nine minutes decelerating, hovering for obstacle avoidance and cushioning, before its soft landing”. The rover is named Zhurong after a Chinese god of fire, and is 1.85m and weighs 240kg. It is expected to transverse the planet for about 92 days.

The probe was launched into space on July 23 by the Long March 5 rocket from the Wenchang launch pad in Hainan province, in the south of the country.

The achievement of the Mars landing is part of a wider expansion of China’s space programme. The country’s engineers launched the first part of its permanent space station into the Earth’s orbit late last month.

In 2018, China for the first time launched more vessels into orbit than any other nation.

The US views China’s efforts in space in strategic terms. “Beijing is working to match or exceed US capabilities in space to gain the military, economic and prestige benefits that Washington has accrued from space leadership,” according to the annual threat assessment published by the office of the US director of national intelligence.



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