Archive for the ‘finance’ Category

Brazilian Banking, a tale of IPO’s & ADR issues

banco do brasilState controlled banking behemoth Banco de Brasil has been involved in a three way battle with it’s private peers Itau-Unibanco (NYSE:ITUB) & Banco de Bradesco (NYSE:BBD) for some time for dominance in the growing domestic banking sector. Having surpassed ITUB in the second quarter, mainly due to lower interest rates attracting borrowers, Banco de Brasil has now announced that is looking to change it’s stance regards international stockholders.

Yesterday, a spokeswoman for the company revealed that the bank is now looking to double the potential foreign ownership in Bovespa traded shares from the current 11% by raising it’s free float of shares to 25%.

On the same call, she also advised that the bank has appointed an advisory bank regards launching an ADR offering on the NYSE, similar to it’s two biggest rivals, the programme could be launched by the end of this year.

“We are talking about two movements that aim to improve the attractiveness of the shares,” Marco Geovanne Tobias da Silva, said in a telephone interview with Bloomberg. “We are increasing the number of potential investors to our shares.”

Banco de Brasil has performed well this year, having outperformed the Bovespa average by some margin. As we have discussed in previous articles, the banking sector in Brazil has been going through a wave of consolidation & the state bank has just added to its growing portfolio via the acquisition of a 49.99% stake in Banco Votorantim for 4.2 billion reals ($2.3Bn) earlier this month.

Meanwhile, Spain’s Santander (NYSE:STD) is now looking at a local IPO that should see an initial raising of $200 million (equivalent to 15% of current valuation) that will be used to expand its reach across the country. At the same time, Santander also said that it will launch an ADR programme for the local listing.

With only a single IPO so far this year with Visa affiliate VisaNet, Brazil now has 12 companies that have registered since the end of July for potential listings. The VisaNet launch was hugely oversubscribed & raised a Brazilian record of $4.5Bn in its sale, much to the benefit of Bradesco.

Much of this is fuelled by local retail interest, as the Brazilian middle classes are growing, however, there are also signs that foreign investors are looking at Brazil as the next BRIC economy to really get going, with Credit Suisse (NYSE:CS) coming out with a bullish statement yesterday.

“Brazil is in style for foreigners,” said Ilan Ryfer at Credit Suisse Hedging Griffo, Brazil’s biggest hedge fund. “Everyone thinks it’s a bull market again and the party’s back. Investors have short memories.”

Much of the excitement around Brazilian stocks is fuelled by its BRIC partner China, as the Chinese economy starts to lift again, commodities are very much back in vogue. South Africa’s Investec Asset Management is looking at Brazil & neighbours Chile & Peru to lead the way in South America, as Chinese demand for raw materials is set to grow.

So Viva Brasilia !! & being a bull on emerging markets & Brazil in particular, I am looking forward to the Banco de Brasil & Santander IPO’s with great interest.

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Brazilian banking, a two horse race

itau-unibancoBrazilian banks have been on a tear this year, with both Itau-Unibanco & Banco de Bradesca returning more than 100% year to date. As the “B” in BRIC, Brazil is thought  to be coming out of it’s recession, with The Economist stating that the country could see a return to 4%-5% in 2010, as Brazil is less dependant on the US as an export market & is forging ties in Asia, notably with China on energy accords.

Over the last month however, ITUB & Bradesco, the number 1 & 2 private banks, have been dragging, with ITUB being hit yesterday by the general market malaise, shedding 2.3% over the session. The overall negative sentiment on Brazil in August was not helped by President Lula‘s much discussed plan for the government to take greater control of oil reserves via the worlds fourth largest oil company Petrobras, which has seen some investors pulling back on Brazilian ADRs.

There are reasons to be bullish however, as Finance Minister Guido Mantega commented last week that Moody’s Investors Service is signalling that it may upgrade Brazil to investment grade. The banking system has been going through a wave of consolidation, with state owned Banco de Brasil jostling with ITUB & Bradesco for the top spot, all helped along by an 8.5% interest rate.

Bradesco has done well with it’s half year results, beating analyst estimates, mainly propped up by it’s sale of a partial stake in VisaNet, the Brazilian Visa affiliate, which provided the bank with a much needed $1.5Bn cash injection. Bradesco still retains a 26.5% stake in VisaNet after the IPO.

“The worst might be over in terms of defaults,” Chief Executive Luiz Carlos Trabuco Cappi said in a conference call with journalists. “With the formal economy and wages growing, the trend for default rates after reaching the peak is to edge lower.”

Similarly, Itau-Unibanco had a healthier than expected half year, with profits only dropping by 14%, mainy due to bad debt provisions,, which had doubled on 2008. Lending is expected to expand 10% to 15% in 2009 and should grow as much as 25% next year as Brazil emerges from recession, Chief Financial Officer Silvio de Carvalho said in a conference call with journalists.

“We have clear signs that credit has become an important factor in the economic recovery now underway,” Carvalho said. “Everything leads us to believe that the crisis is behind us.”

Looking at both of these stocks, they have both been recording higher lows & higher highs for the last 6 months, which to me makes them aln attractive prospect. Add in the positive sentiment from Moody’s, Fitch & Standard & Poor regards the Brazilian economy & there is certainly a feeling of comfort there.


Looking at ITUB in particular, their ambitions to become a full service provider in all aspects of financial services took a step further last week when the bank merged it’s fledgling insurance business with specialist firm Porto Seguro, allowing it to now offer health & life insurance products to it’s 50 million customer base, this only 3 days after Bradesco & Porto had ended similar talks.

“The two companies have a lot to explore together,” said Kelly Trentin, a banking analyst at the SLW brokerage in Sao Paulo. “Financial stability in Brazil and rising family income make it more likely that people will look for more insurance products.”

So for me, Itau-Unibanco is the horse to back in this race right now.

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It’s taken a while & it’s been an interesting experience, but am pleased to say that we released into public beta. For me personally, there have been a few challenges, “assisted” along the way by re-locating with my family from Switzerland to Slovakia.

The team at Connection Services who have designed & support the MSV platform have been excellent, especially when responding to an ever changing set of requirements. MyStockVoice started as this WordPress blog, where I could muse on my views on Emerging Markets & BRIC economies. A conversation with a friend who works in the City (London) encouraged me to look at doing something a little more. The original format, was a forum, then a newswire service & now it’s a fully fledged blog publication platform. So you can imagine how happy my colleagues at CSL were, when I tripped back every few months & said “right, this is what we are doing now”

Our aim at MSV is to provide an ever widening audience with value insights into what is rapidly becoming a major topic for hedge funds, investment managers & retail investors alike : BRIC & Emerging Markets. International stocks traded on US exchanges are becoming ever more popular, especially via Depositary Receipts (ADR,ADS,ADN) , for the more cautious or long minded, a number of ETF (Exchange Traded Funds) have sprung up to service the appetite to take part in these growing economies.

Covering all the major regions, MSV provides focussed channels into a variety of sectors & also specific categories for Macro Econmics, ADR & ETF investing. We are pleased to be working with some well established names from the investment community, along with faculties such as Knowledge at Wharton, the Economics Faculty at Beijing University, Skolkovo Business School in Moscow & Cranfiedl University in the UK.

Our strapline is “your community … your voice”  & to reflect this, we will be bringing our readers plenty of new unique content. Much of my time in the last two to three months has been spent contacting individual bloggers & also online media services that are based in the regions covered. In this way, we can present a “blend of thought”, that will allow our subscribers to formulate informed opinions on their own particular areas of interest.

So, enough jawing from me, but to close, Alex, Chris & myself would like to thank the team at CS & all the people that have had input into the project. We sincerely hope that you enjoy the MSV experience & are always open to new ideas, partnership opportunities & most of all feedback.

Many thanks


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More pressure on copper as commodities start to fade

FCXFollowing on from my post last week “What goes up  must come down” , where I looked at the two largest producers of copper, Chile‘s Codelco & also the American firm Freeport McMoRan, I have spent some time over the weekend researching the copper market & looking to see if I could find anymore signals that would show market direction.

Re-capping on the trade, FCX so some very significant selling volumes from the open on Friday &  the trade triggered as FCX fell through the 65 mark, where I commited to 50% of my planned exposure, the remaning 50% was then entered at 64.25 & I rode this down to 63.06.  I am looking to repeat this trade as a swing this week & here are some of the reasons why.

As previously stated on Freeport McMoRan, the company has scaled back copper production & has increased gold production to an all time high. Freeport is making some serious cutbacks & cost management is a major theme, as with many other major stocks, so I am still bearish on FCX as a whole from a fundamental standpoint.

Whats more interesting, is looking at some other factors that help bear out (nice pun) my thesis that we are looking at short term oversupply of copper. First let’s have a look at the copper Exchange Traded Fund : JJC, it has seen a strong uptrend  since early this year, returning a tad over 100% year to date, however looking at this technical chart, it would seem to be overbought & is signalling this.


Turning to a shorter term chart & looking at volumes on JJC, we can see that it hit & refused it’s upper Bollinger on Thursday 13th & saw some very aggressive selling in high volumes on Friday. If we then look closer at the history of the ticker, it has a habit of withdrawing back to it’s 20 Day Moving Average, which would give a reasonable bottom at 36.90 on any significant breakdown. So, I am looking to take another short position in JJC (if I can, it’s pretty illiquid) & see if I can’t double up on my FCX trade.

JJC 3 month

Another indicator that all may not be well is the performance of the Base Metals ETF : DBB, which holds an equal 33.33% in copper, aluminium & zinc. DBB has also had quite a years so far, with a return rate of 53%, on Friday this started to look fragile & there was fairly spikey activity in the ticker all through the day, finally closing 3.8% down, so not a bright day for metals at all. Again looking at a 3 month chart, we can see that DBB has been hitting it’s head against the upper Bollinger since mid July & at the latter end of last week also refused. Needless to say that Friday saw some volumes selling off, although not as heavily as FCX & JJC. The reasoning behind this is that DBB is held by select financial institutions & they are unable to un-reel their positions very quickly.


So to summarise, FCX still looks weak, JJC in my opinion is looking to implode & the major ETF in this sector is on the retreat. Again, I’ll be looking at shorting Freeport down, as per the tactics from my last post & if I can get in on JJC, I’ll be tapping into a short there too, looking for an exit at around 38.50. If the sell off continues, next stop for me is the 34.20 mark, so I’ll look to drop the short at 34.50. Add to all this the negative sentiment on China  & commodities right now, I think these swings could be real earners for this week.

Author has no current holdings in any stock mentioned

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Swedbank opens kimono on Baltic Lending … not a pretty sight

SwedbankSwedbank, Sweden’s fourth largest lender & one of the biggest banks in the Baltic region, revealed the full scale of Swedish exposure to economic turmoil in Eastern Europe last week. The bank posted dismal figures due to large losses on loans made to firms in the troubled Baltic region.

Swedbank was the first in a series of Swedish and other Nordic banks scheduled to announce results in coming days as the region’s lenders count the cost of aggressive expansion in Latvia, Lithuania and Estonia. Nordic banks piled into the former Soviet states after their entry into the European Union in 2004 and initially prospered from rapid growth in the region.

The bank revealed a surge in bad loans from the Baltic States and Ukraine. Investors were reassured by the bank’s insistence that it could weather the storm without raising fresh capital, pushing the stock up more than 11 % after a day of volatile trading. At the same time, it announced that it would slash 16% of its workforce. However, it closed on Friday up 21.5% as investors were reassured that it would not raise extra capital.

The worse-than-expected second-quarter losses show that Sweden’s banking sector is still facing a barrage of bad loans from the Baltic States, even as the country is hailed as a financial role model after its recovery from a banking crisis in the 1990s. Bank’s aggressive lending has backfired in recent months as the Baltic economies have plunged deeper into recession than anywhere else in the EU.

Swedbank, the largest lender in the Baltics, posted net losses of SKr 2, 01bn ($257m), compared with net profits of SKr 3,6 bn a year earlier. It was the bank’s second consecutive quarterly loss and much worse than the SKr 1,27 bn deficit forecast by analysts. Loan losses soared from SKr 423 mln a year ago to SKr 6,67 bn, with about two-thirds of the amount in the Baltic States and a third in Ukraine. In response, the bank said it planned to reduce staff by 3,600, about 16 % of its workforce, by this time next year, with most of the cutbacks in the Baltic States.

“The most recent quarter has been marred by continued uncertainty about the future of the economy,” the bank’s Chief Executive, Michael Wolf, said in a statement. “The recession is now making itself more visible, and all signs are that the downward trend will continue for some time.”

Faced with mounting losses on loans in recession-hit economies, where bad loans have shot to highs of 18% of total lending in Latvia and 24% in Ukraine, Swedbank is trying to cut costs and lower its risk profile to secure funding and ride out the storm. Swedbank will continue to close branches and increase staff cuts as it takes a defensive stance, in anticipation of further economic hardship in the region, having followed a more aggressive path of expansion, the bank will be returning to more traditional practices.

“We are taking the necessary steps to right-size business units to reflect the lower economic activity in the banking sector as a whole,”  said Wolf  “We expect impaired loans to increase in the second half but it will be less than in the first half”

The negative results came after a mission from the International Monetary Fund visited Latvia recently in order to negotiate the release of a € 200 mln ($283m) tranche of a €7.5bn emergency loan agreed late last year. The IMF has held back the funds while it seeks commitments from the Latvian government over structural reforms, increasing nervousness that the rescue package could unravel.

Swedbank assured investors that it was strong enough to absorb its Baltic losses, quashing fears it would have to raise fresh capital. The bank’s chief financial officer, said the bank had “a very resilient capital situation”

Another Swedish bank – SEB, the second-biggest banking group in the Baltic region after Swedbank, is to report activity results next week. Analysts forecast that its operating profits will be down more than 40 %.

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Global Expansion of Emerging Multinationals: Post-Crisis Adjustment

SkolvokoThe SKOLKOVO Institute for Emerging Market Studies has released an analytical survey “Global Expansion of Emerging Multinationals: Post-Crisis Adjustment”. The survey reviews the activities of the active participants of this process – Russian and Chinese multinational companies (MNCs) – and analyses the impact of the economic slowdown on expansion, performance and role of these companies under the new conditions.

The last decade was characterized by impressive growth of outward foreign direct investments carried out by companies from emerging countries, including those of China and Russia, which has led to visible changes in global investment flows. Chinese and Russian companies were given ample opportunities for international expansion in the beginning of 2000s. The key role in this process belonged to the changes in policies of both countries and to the public support given by their governments to investment abroad. The main tendencies characterizing the entrance of Russian and Chinese companies to foreign markets are presented below.

Russian international expansion has been carried out mainly by private companies, whereas, in China, on the contrary, under the government’s auspices, the most large-scale activity has been shown by state-owned enterprises. Europe has become the main target region of investment for the Russian companies, whereas the Chinese companies have concentrated on Asia-Pacific. At the same time, USA market has been equally attractive both for Russia and China.

Growth of Russian and Chinese companies’ foreign investments started from roughly similar levels; however, the number of Chinese running projects has been growing considerably faster. 2008 became a record year for Chinese companies-investors. According to different estimates, in 2008, the Chinese multinationals spent abroad US$35 to US$46 billion on company mergers, whereas the Russian MNCs – around €12 billion.

The impact of the crisis on the expansion of Russian and Chinese companies differed depending not only on sector, but also on strategic model of expansion. Entrance of Russian extractive companies, such as Norilsk Nickel and Rusal, to foreign markets was carried out, primarily, to increase the scale of activity; these companies in particular have been the most severely affected by the crisis. At the same time, a number of large Russian mining and energy corporations (such as Lukoil, Gazprom and others) have been implementing a strategy combining entrance to new markets with vertical integration towards the clients. A tendency for creation of value-added products (and services) has to some extent reduced their dependability on volatile raw materials prices. Thus, as regards investment capability, they are in a better position, which is confirmed by the deals carried through the last half-year.

Most of the largest Chinese multinationals also belong to the resource sectors, such as oil and mining. However, unlike other Russian multinationals from extractive industries, they are mainly importers rather than exporters, and most of their outward investment is directed towards securing the access to strategic natural resources and, as a result, national safety. Apart from the extractive companies, government-controlled companies, which implement large infrastructural projects, also take an active part in international activity. Due to China’s solid financial standing and its aspiration to invest abroad, virtually all of these resource and infrastructure concerns are in a better position to withstand the crisis and actively continue to seek for attractive objects for investment all over the globe, all the more so as the prices have decreased.

Market seeking expansion into emerging countries is typical for the leading Russian companies working on consumer markets, such as telecommunications, retail, food products and entertainment; this process has somewhat slowed down due to hindered access to financial resources, but certainly has not stopped.  Chinese manufacturing companies, which have been using their advantages in cost price for conquering the developed markets for several years now, currently are starting to pay more attention to the emerging markets.

A distinct group of investors is comprised of Russian and Chinese manufacturing companies, which hold on to the “product-line import” strategy. It involves purchasing relatively smaller but technologically more advanced manufacturers in developed countries and localizing the production of their main lines in Russia and China. Such projects were actively carried on in 2008, however, presently, in conditions of the weakened market, they seem much less profitable and are curtailed on many instances.

It is apparent, that owing to international investing, both Chinese and Russian companies acquire knowledge and new skills, expand their managerial capabilities, create global brands and enhance their competitive advantages on the global market. The overwhelming majority of both Chinese and Russian companies, that had led the foreign expansion in the previous decade, were able to preserve their organizational integrity and position on the key markets under the conditions of the global crisis. Moreover, currently there is an opportunity of acquiring potentially interesting foreign assets with price considerably lower than before. But whether the Russian and the Chinese companies would be able to continue their active investing and to take an advantage of the emerged opportunities depends on their ability to solve their primary domestic issues exacerbated by the current economic situation.

Professor Sam Park, President of SIEMS:

“The time has passed that emerging economies offer nothing but cheap input materials. The world has seen a fast surge of emerging multinationals from Russia, China, India, and other newly developing economies that are reshaping the global competitive dynamics. It was the Japanese multinationals in the 1970s and other Asian multinationals in the 1980s that changed the global market structure. The 21st century is now filled with new breeds of emerging multinationals mostly from BRIC countries. SKOLKOVO research examines this new, but critical, phenomenon in global competitive structure. Following the ranking survey of Russian multinationals over the last two years, the current report presents a comparative overview of these multinationals from China and Russia, along with an in-depth analysis of their strategic motivations. It further examines whether there have been noticeable changes in their global expansion due to the current financial crisis. There will be a follow-up report later that examines the challenges these multinationals often run into in their global operations, which should also be able to provide valuable insights on how to address them.”

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China : first to bottom – first to bounce

renminbiThe global financial crisis has forced Canada to rethink the received wisdom about fiscal management. It should also force a rethink of the international economic order and how we must position ourselves for a post-crisis world. Can we count on our traditional ties with the U.S. to sustain long-term development? If the crisis marks a shift in economic power toward emerging countries, especially China, what are the implications for international policy?

The current crisis has blunted the more extravagant claims of emerging market ascendancy: China, India and Brazil are facing the same challenges as the rest of the world. The notion of “decoupling” – that emerging markets are no longer subject to Western business cycles – has been debunked. In the case of China, a precipitous fall in exports has led to the closure of thousands of factories and added millions to the ranks of the unemployed.

To put it crudely, the U.S. is suffering from excessive debt and China is suffering from excessive savings. But there is a world of difference between a downturn precipitated by bad debt and one due to domestic under-consumption. When the toxic assets have been finally excised from U.S. balance sheets, Americans will be saddled with a massive debt. This will mean higher interest rates and below-potential growth for the foreseeable future.

China is also feeling the pain of a downturn, but the similarity ends there. Unlike the U.S., Beijing can afford a massive stimulus package. Relative to national income, the $600-billion (U.S.) spending boost announced by the Chinese last year is the largest of any major country. In terms of contributing to global reflation, China has done its share and more.

The critical question is whether the Chinese response represents a change in the country’s economic model. Skeptics say China is merely buying time for its exporters and will continue to pursue mercantilist policies (such as a weak currency) in a bid to gain global market share.

But the early signs point in the opposite direction: Beijing has recently expanded social programs and transfer payments for the needy, and introduced reforms to health insurance that increase coverage for an additional 400 million citizens. The expansion of social safety nets will reduce the need for precautionary savings at the household level, and result in increased discretionary spending. Given the low levels of debt in China and the huge pent-up demand for consumer goods, private consumption is destined to play a much larger role in Chinese growth. This will be good for China, and good for the world.

For these and other reasons, there is a growing consensus among experts that China will be the first to find the bottom of the economic crisis, and the first to come out of it.

It is surprising, therefore, that there is so little awareness in Canada about the impact of the global recession on China’s economic rise. The federal stimulus package did not give any hint that Canada has to build stronger economic ties with China. Bay Street, for its part, is looking to Washington for salvation, in the form of trickle-down from the U.S. rescue packages.

Paradoxically, the global crisis has emboldened China skeptics, who point to the fallacy of decoupling as proof of fatal flaws in China’s economy. This argument is sometimes conflated with the view that Beijing should be blamed for the crisis and that protection against Chinese imports must be part of a recovery strategy.

A more insidious argument is that the crisis exposes the fundamental weaknesses of Chinese authoritarianism, and will lead to the collapse of the Chinese Communist Party. Setting aside the obvious objections to this notion of “performance legitimacy,” the proposition that China is facing a crucial test of leadership may be instructive in thinking about China’s role in a changing world order.

If Beijing is able to keep domestic peace and China emerges from the crisis as a stronger player in the world economy, will we have any excuses left to not take seriously the rise of this new global power?

Yuen Pau Woo is President and CEO of the Asia Pacific Foundation of Canada

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