Pakistan

Pakistan has been taking a beating by Moody’s and S&P since emergency rule has been established. Bond holders tend not to like when single military ruler decides he needs to fight the “terrorists” and suspends democratic elections when things don’t go his way. The major issue in this case isn’t even a question of whether or not he government will renegade on it’s bonds, it’s unlikely since they will need to borrow money again sooner or later, but whether or not the economy will be sustainable. Equity investors are not pouring money into projects in the country reducing taxes to the State.

Here is where the debt investors can get play for their dollars. Pakistan, while unstable, is a partner to the United States in their war on terror. The US might not like the current powers that be, but they have to work with him. Being that the country possesses nuclear power, it is hard to imagine the US not intervening before the case gets out of hand.

Pakistan sovereigns might be worth a look right now. Why there is clearly a high political risk embedded in them now, it seems that they are largely oversold. As Bloomberg notes the yields on June 2017 have risen over 250 bps. There is no clear indication that this is indeed the bottom but it seems unlikely that the current government would allow for continual decline in social unrest. General social unrest provides difficulty for the country since they are multi-faceted entities whereas the risk being undertaken by a singular government gone rogue is quantifiable and more easily fixed.

Making music in Indonesia

So President Susilo Bambang Yudhoyono of Indonesia on the campaign trails does not mention anything about the problems of trade stangnation, diminished trade relations with the rest of Asia, the fact that their natural gas resource which has been holding the GDP up, is depleting, what does he talk about? His new album!

Apparently he’s hoping that his collection of love ballads will beat out the love ballads of his rival, Army Chief Wiranto.

Indonesia has several investment grade whole loans that came out this year. Companies to look at include

Indorama international (Textile)
PT Ultrajaya Milk Industry and Trading Co (Food & Beverage)
PT Austindo Nusantara (Mining)

I am interested in how PT Bakrie Telecom will fare in the future. They took out a fairly high leveraged loan in July (5 year tenor). Sales are down 7% though.

I’m still a fan of telecom in the emerging markets. Aside from possible nationalizing or tanks rolling over them, there is little political risk that would result under civil unrest – people still need to call each other right?

According to the IMF, the problem with Indonesia is that it hasn’t really found a way to increase market share in the export market. Indonesia has an open trade policy with little or no tarrifs making it a relatively open economy. Yet it seems to have it’s focus in the wrong place. It is currently over trading with Latin America, the Middle East, and Africa. It is under-trading with the US, EU, and the rest of Asia.

As it stands now, it may be worth getting into these short term corporates that are paying extremely high yields in Indonesia. I certainly would not want to invest in the sovereign paper nor it’s equities unless you really know where to look. The macro fundamentals in Indonesia do not seem poised for growth unless its leaders push for increased trade with China, EU and the US. Currently it’s Debt/GDP is on par with Argentina, and we already been down that road.

Apples with Oranges

The one great thing about EM debt is the fact it simply follows B-school fundamentals. Credit, liquidity, political risks are more or less priced in. Investors know more or less exactly what they are getting into. It's no secret if your bond has a guy in power who is looking to nationalize everything, build a nuclear bomb, or make cheezy movies. Unlike fishy accounting - riots, civil wars, high inflation, etc., are all laid out in the open. Everyone invests in China, people has heard of China, buy lead painted Chinese toys, and eats kung pao chicken. But is China really making clear the risks involved to you? Plus firms like Cnooc and PetroChina are borrowing at 4-5%, doesn't make for attractive bargins.

Is investing in a current war zone any worst than investing in an American bond? Now I don't mean munis but some of current exotic corporates out there. For example, take MTN's tied to something. Toyota has priced several of these MTNs tied to caps, swaps, it's most recent CMS, claiming a interest target of 9%. Now I'm pretty lazy when it comes to options, if you are using CMS to hedge durations, that's fine, it what it's intended for, but they're talking about a serious arb move.

Honestly who would trust something like this :

"

The Notes will bear interest from and including the Original Issue Date to but excluding the Interest Payment Date on October 31, 2008 at the Initial Interest Rate of 9.00% per year. The Notes will bear interest from and including the Interest Payment Date on October 31, 2008 and each Interest Payment Date thereafter to but excluding the following Interest Payment Date until the Interest Payment Date on October 31, 2017 (each, a “First Interest Calculation Period”) at a rate equal to the Initial Interest Rate of 9.00% per year multiplied by the Barrier Amount. The Notes will bear interest from and including the Interest Payment Date on October 31, 2017 and each Interest Payment Date thereafter to but excluding the following Interest Payment Date until the Interest Payment Date on October 31, 2022 (each, a “Second Interest Calculation Period”) at a rate equal to 10.00% per year multiplied by the Barrier Amount. The Notes will bear interest from and including the Interest Payment Date on October 31, 2022 and each Interest Payment Date thereafter to but excluding the following Interest Payment Date (or Maturity, as applicable) (each, a “Third Interest Calculation Period”) at a rate equal to 20.00% per year multiplied by the Barrier Amount.
“Interest Calculation Period” means each First Interest Calculation Period, Second Interest Calculation Period and Third Interest Calculation Period, and “Floating Interest Rate Period” means collectively the First Interest Calculation Periods, Second Interest Calculation Periods and Third Interest Calculation Periods.
“Barrier Amount” means an amount calculated in accordance with the following formula:
n / N
Where:
“n” is the total number of calendar days in the applicable Interest Calculation Period on which the difference between the 30-Year CMS Rate minus the 10-Year CMS Rate (the “Spread”) sets greater than or equal to 0.0%; provided however, that the Spread determined on the fifth U.S. Government Securities Business Day (as defined below) prior to each Interest Payment Date (or Maturity, as applicable) shall apply to such U.S. Government Securities Business Day and each of the remaining calendar days in the related Interest Calculation Period; and
“N” is the total number of calendar days in the applicable Interest Calculation Period.
No interest will accrue on the Notes with respect to any calendar day on which the Spread is determined or deemed to be less than 0.0%. For each calendar day in an Interest Calculation Period that is not a U.S. Government Securities Business Day, the Spread for that calendar day will be the Spread determined on the immediately preceding U.S. Government Securities Business Day."

Now granted that CMS Rates are not specifically pegged like other interest rate swaps but this involves too many ifs. It boggles my mind as to who actually invests in stuff like this. At least if I'm investing in Sri Lanka, the war zone is paying me my 325 bps. It's clear on where the risks are and posts a huge sign in front it's crumbling infrastructure, warning the buyer to beware.

Loving it long time

Peter Ryder is hardcore. He chugs agent orange with his kool-aid in the morning to wash down the mountain yak he had for breakfast. His skin richly tanned from working in the trenches, he believes in Asia so much that he not only invests there, he lives there. Who are you going to trust to invest in Asia - This guy or that pale and pasty asset manager investing Asian ETF money into Australia?

Why does an Asian ETF invest in Australia? Are the pickings among us gooks so slim that we are investing in a continent that has a growth rate of 2.7%? I think its because the prospectus are in English as opposed to Vietnamese.

I love Vietnam, the food is good, the women beautiful, and it has one war with the West that we didn’t lose! Now granted there are not as many stocks on the Vietnamese stock to actually put in a singular ETF but it should at least be part of the portfolio. If nothing else a good Asian ETF should incorporate some Vietnamese corporate bonds. While credit risk is still a little shaky, at least there’s little political risk unlike say a war zone like Sri Lanka.

Vietnam Shipbuilding Industry Corp (VINASHIN) has borrowed, to date, $4.5 billion for an average life of 10 years at an average coupon of 10%. Vietnam Electricity Construction Joint Stock Corp took out a 5 year issue for 10.15%.

There are lots of good issues from solid companies that would provide healthy yields for ETF dividends. It seems strange that we are investing in Asia only through equity when there is so much debt that can be had for solid risk adjustments.

Plus if nothing else, you gotta love a country that is this enterprising:

‘…investors must maintain constant vigilance, as Ryder found while clearing land for a golf course at China Beach. Regulations require a payment of about $2 for every tree cut down or removed. The rule led to a flurry of planting by locals, some of whom stuck large branches into the ground hoping to pass them off as bona fide trees deserving compensation. Ryder greets such antics with a philosophical shrug: It would take something far worse to drive him from his adopted country. "The only way I'm leaving this place," he says, "is feet first.”’