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Michael Baxter

Bull and bear: Emerging market bonds: what are the danger areas?

Written by: Michael Baxter on May 10th 2013

Category: Bull & Bear, News

Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories include:  Emerging market bonds: what are the danger areas? Does YouTube pose a threat to BSkyB and co? Osborne is not creating sub-prime type debacle. Companies in the news: BG, Royal Dutch Shell

Emerging market bonds: what are the danger areas?

QE is not just pushing down UK, US and other so-called safe haven bonds. The price of emerging market debt has soared too. When QE is finally lifted, some say the crash will occur in emerging market debt. The argument does make some sense and the bubble created by QE may not exist in the UK, the US and Europe at all.

But the danger seems more serious in certain countries.  Debt – that’s government, household and non-financial corporation – is more than 200 per cent of GDP in South Korea, Hungary, Malaysia and China. In China the lion’s share of the debt pertains to non-financial corporations.

Then again, compared to the developed world, none of these countries have especially alarming debt levels. In the UK, for example, the equivalent figure is nearer 300 per cent of GDP, and furthermore that ignores debt that relates to financial corporations, which is around 200 per cent of GDP in the UK.

The cause for alarm, however, relates to growth and exposure to foreign markets.

The good news is that across many of the emerging markets, foreign exchange denominated debt has fallen over the last ten years – the exception to this is Eastern Europe.

Bear:     As for growth in debt, China and South Korea have seen a massive surge in corporate debt; Brazil in household debt. In Europe, Hungary seems to be the country carrying the biggest risks. Debt is around 150 per cent of GDP in Slovakia and Poland.

Bull:         Which emerging markets seem to have modest debt levels, and have seen less growth in debt?  The total of household, government and non-financial corporate debt is less than 50 per cent of GDP in Mexico, Indonesia, Russia and Argentina.  It is a bit higher, but still only hovering around a modest 100 per cent or so of GDP in Turkey, the Philippines, and Chile.

So we say the dangers areas are: China, Brazil, South Korea and Hungary.

Does YouTube pose a threat to BSkyB and co?

For that matter does YouTube pose a threat to the BBC? YouTube is launching a subscription service, available to content producers, to sell their products to the public.

We are used to getting out TV content all under one roof. If you subscribe to BskyB, you don’t subscribe to Virgin Media and or BT’s service. We are also used to the TV supplier providing the means by which we get our content. So BSkyB provides the satellite service.

But why does it have to be that way? Why can’t content producers have their own TV stations? Why can’t supporters of a football team watch their team play on its own TV station? Can’t get to the match to watch Roy of the Rovers?  Watch it on the Rovers own Internet station instead for, say, £10.

It is moving that way anyway, of course.  But here is your question: why do we need ITV, or Sky, Channel 4 or the BBC. If we want to watch ‘Downton Abbey’, why not tune into Downton Abbey TV? Want to watch the latest HBO series? Tune into HBO. Why should ‘Doctor Who’ and ‘EastEnders’ share the same TV station?

They say content is king. If that is so, then maybe the TV stations are no longer the king makers.

The new YouTube service will offer subscriptions beginning at $0.99 a month, and will be available for a 14 day free trial. YouTube said it wanted to enable “content creators to earn revenue for their creativity”. For the time being, the selection of TV from the service is limited. National Geographic has a station. And if you are into Harley Davidsons there is a station for you, too. There are others too, but so far nothing truly mainstream.

YouTube is going head to head with Amazon, Netflix, and Hulu. But in truth it is also going head to head with BSkyB, Fox, ITV, Channel Four and the BEEB.

One of the more interesting implications of this service is that we may see more TV catering for niche markets – what the journalist Chris Anderson calls the Long Tail. Harley Davidson TV is a good example.

And maybe, we will see a backlash against those awful ads. Advertising has become more pervasive on TV. Sometimes we get no more than a few minutes of content before the ads come back on. Well, thanks to services such as this, the consumer will be able to choose, free content punctuated with ads, from paid for content.

For content producers, this is an outstanding opportunity.

Or is it? Do we need editors of TV stations to filter our content for us?  Paradoxically, will we see less variety as we just focus on our niche channels, and are not introduced to new ideas? Will the TV content that is pushed at us conform to our preconceived notions, reinforcing our bias.

The BBC seems to have more critics than ever these days. They say that it is not as objective as it claims to be. Its news is so superficial that it is not even skin deep. Well, will a more open market provide better or worse content?

Or will users choose, say they prefer free, and opt for advertising filled content?

And what about the rest of the Internet?  Is the age of free coming to an end? More newspapers are going down the premium route. Is the psychology changing?

The future shape of content on the Internet, whether it is text, video or both, depends on the answer to these questions.

Osborne is not creating sub-prime type debacle

Ray Boulger of mortgage adviser John Charcol has been talking about our George and his plans to kick-start the UK housing market.

Critics of his help to buy scheme say George Osborne is just creating another bubble in the housing market. Mr Charcol is not so sure.

He said: “Suggestions from some economists that this scheme will result in the return of the sub-prime mortgage demonstrate a remarkable lack of knowledge about the current state of the mortgage market. There may be good reasons to criticize the scheme but claiming it will result in a return to sub-prime lending merely devalues the criticism as coming from someone who doesn’t understand how the mortgage market actually works. The reality is that even with mortgage insurance there will be many more hoops to go through to secure a 95 per cent LTV mortgage than one with a bigger deposit.”

The Help to Buy scheme actually comes in two forms. Firstly, the government is going to help first time buyers, via a shared equity scheme in which the government contributes up to 20 per cent of the deposit on a new build. Note that ‘on a new build’ is the key point. Mr Charcol said: “The increased demand will incentivize builders to complete current developments more quickly, thus allowing them to bring forward the opening of new sites, subject to planning constraints. Thus it looks promising that progress is being made on the Government policy to increase the rate of house building, although more needs to be done.”

The second form of Help to Buy is more controversial. The Government plans to offer mortgage insurance to lenders wishing to offer 95 per cent LTV [loan to value] mortgages.  But Mr Charcol said: “The timing of this part of the announcement in the budget seems to have been driven almost solely by the desire for a good Budget headline rather than after undertaking a serious consideration of the wider implications and the logistics of implementation.”  He added: “There remain many questions over how this scheme can be successfully implemented and there remains a big learning curve for the Government. “

The real nub of the matter though, according to Mr Charcol, is that the regulator does not allow lenders who buy mortgage insurance to obtain capital relief. He said: “This appears to be the only rational reason for the Government to get involved in offering mortgage insurance.”

“Rather than nationalising high LTV mortgage lending criteria, which is effectively what the Government will have to do if it offers mortgage insurance,” argued Mr Charcol “perhaps a better solution would be to address the root cause of the problem, which is the very large amount of capital lenders are required to hold against high LTV mortgages…If the Government believes the Basle 3 and other regulatory capital rules it has signed up to are appropriate, taking the wider economic implications into account, it is illogical for it to introduce a scheme to get round rules it has adopted. On the other hand if it believes the current capital rules are too strong it should introduce less stringent requirements, thus eliminating the need for for its ”Help to buy” scheme.”

Companies in the news

Bull:       Both Questor in the ‘Telegraph’, and Tempus in the ‘Times’ were on bullish form today. Questor took a look at Royal Dutch Shell and said the shares were a “buy for income”.

Tempus reviewed BG Group. The company has its strategy day coming up, and Martin Waller, the editor of Tempus, said this day may prove a catalyst for the shares. He said: “Buying the shares before could be a canny move. Long-term, even if the meeting fails to move the market, I do not believe that investors will regret it.”

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: BG Group, Debt China Brazil South Korea, Help to Buy housing bubble, QE crash emerging market debt, Royal Dutch Shell, YouTube subscription, YouTube versus ITV BSkyB

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