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VAM: Vietnam Market Analysis August 2013

Admist concerns on capital outflows due to U.S Fed tapering and fear of Syria war, the market retreated quite badly in August with foreign net selling of USD 41.8mn across the 2 bourses. By the month-end, VN Index lost 3.7% to close at 472.7 whilst VN30 tumbled 1.72%. HNX was the best performer of the 3 indices when it only edged down 0.49%, closing at 61.19.

Read full analysis VAM Monthly Newsletter – August 2013.

Buoyant FDI continues to support recovery

As of 20th August, registered FDI reached USD 12.6bn, soaring 19.5% from a year earlier.Thiswas backed by 768 new projects mostly focusing on the manufacturing sector. Meanwhile, the FDI disbursement edged up 3.8% y-o-y to USD 7.6bn and became a key factor contributing to the marked improvements in production activities. Indeed, while the employment index for the manufacturing sector in SOEs and private sector showed a negative growth, that in FDI sector still increased 5.6% y-o-y. Besides, FDI enterprises continued to be the main driving force to push export as they are contributing more than 60% of export and USD 2.7bn of trade surplus. YTD export turnovers advanced 14.7% y-o-y as of end August, however the YTD trade balance still suffers little deficit of USD 577mn due to a higher pace of import growth.

CPI accelerates but is still under control

The August general consumer price index edged up 0.83% m-o-m compared to previous month. Consequently, the year on year headline CPI was lifted up to 7.5% y-o-y, from 7.29% y-o-y in July. While aggregate demand was still weak, cost push effect became the primary reason for the return of inflation, in which electricity and gasoline price was adjusted up 5% and 2%, respectively. The healthcare basket, which was adjusted up remarkably in Hanoi, clearly produced the strongest effect. Fortunately, it only contributed little effect to the month-on-month CPI growth. The government’s inflation target of 7-8% would likely be met provided that there is no significant shock of gasoline price in the rest of this year.

Fast tracking VAMC

Sector-wide NPL figure at the end of 1H2013 was announced at 4.65%. This figure was indeed encouraging as NPL has fallen sharply from 8% by the end of 2012. 30 credit institutions that had NPL higher than 3% will be forced to bring down NPL level to 3% by selling bad debts to VAMC. In a recent interview, VAMC’s CEO said that in the next 2 months VAMC will issue bonds to swap for VND 10 trillion worth of bad debts of 10 banks. Banks with highest NPL will be given priority to sell bad debt to VAMC. The speedy execution of VAMC hopefully would help to clean up sector-wide bad debt more swiftly by year end.

More banking resolution to restructure banking system comprehensively

The PM signed a Resolution that allows SBV to assign financially strong banks or SBV itself, if there is no appropriate bank, to purchase stakes in weak banks which were unable to increase their capital or restructure themselves. Strong banks are requested to assist weak banks in both finance and management until their conditions come back to normal or acquired by other parties. This supportive resolution, together with VAMC formation, has clearly demonstrated the government’s determination to restructurethe banking system and tackle the NPL issue.

 More details on raising foreign ownership limit (FOL) plan available

According to the HOSE, the proposal on issuing Non-Voting Depository Receipts (NVDRs) was submitted to MoF. With the same model as Thailand NVDRs, an SBV subsidiary will buy and hold 10% of total outstanding shares of listed companies and issue equivalent NVDRs to foreign investors. Foreign investors holding NVDRs will be fully entitled to company financial benefit, but not voting rights. NVDRs will be converted to normal shares when foreign room is open. This NVDRs model will be applied to all companies. However, we do not think it will happen soon this year due to the amount of preparation required.

 Our View – 8 months of the year has passed and the economy has started showing some modest improvements. Inflation is under control and the government’s target would be likely to be met.  More affordable borrowing cost is supporting production activities and making business environment more attractive.  In addition, gold market has been gradually stabilized as the gap between domestic and global prices has been falling to half of previous high level. These improvements in economic conditions have prompted us to believe that the economy seems right on track for a gradual recovery.  Furthermore, the government’s serious effort in restructuring the banking sector and the future lifting of foreign ownership limit gave us reasons to be (cautiously) optimistic about the market despite recent pullbacks due to external factors, which actually revealed buying opportunities for some good stocks we have been watching.

Source: VAM, 11.09.2013

 

Filed under: Services, Vietnam, , , , , , , , ,

VAM: Vietnam Market Analysis – March 2013

The indices were mixed in the month of March. While the VN-Index gained 3% to close at 491, the HNX declined by the same quantum to 60.25. The VN30 edged up 0.62% to close the month at 552.3. After being net seller in February, foreigners have turned to net buyer with the value of USD55.6mn this month, suggesting that although difficulties still persist, sentiment was slightly improved.
 
Rate cuts to aid growth as inflation eased
A month after Tet, macro data indicated a significant weakness in total demand. Retail sales increased only 11.7% YoY in the first quarter, slowing from a 21.8% YoY pace in the same period last year. Besides, GDP expanded merely 4.89% YoY in 1Q2013, edging up from 4.75% YoY in the same period last year when growth was the slowest since 1999. A weak demand and noticeable deceleration in food and food stuff index caused CPI to decline 0.19% MoM in March, easing inflation to 6.64% YoY from 7.02% YoY in February. As inflation eased, the Central bank cut rates for the seventh time since the start of 2012 to spur growth. The cap on Dong deposit interest rates is reduced to 7.5% from 8% while other implemented rates such as refinancing and discount rates are lowered by 1% as well.
 
AMC plan not yet finalized; credit almost frozen
The establishment of a debt asset management company (AMC) was delayed until at least the end of April as government is skeptical about how much the company can help resolve bad debt between banks and businesses. On the other hand, the bank lending is still very weak as the credit growth only reached 0.1% YTD in the first quarter although the target for this year is 12%. While the economy is struggling with a slowdown of lending, the postponement of AMC might disappoint market further.
 
Dong still firm despite trade figures
According to GSO data, there was a trade deficit of USD300m in March, widening from a revised deficit of USD94mn in February. Nevertheless, the Dong remained stable as the year-to-date trade balance still remains at a surplus of USD481mn. After first three months of 2013, export increased 19.7% YoY while import improved 17% YoY as well. The unexpected improvement in import this month, in which imports of machinery and equipments was up 28.7% YoY should be viewed as the signal to preliminary recovery from manufacturing sector. Indeed, the HSBC PMI index posted in the positive territory at 50.8 in March, reaching the highest level since April 2011.
 
Challenging business environment
The Vietnamese Chamber of Commerce and Industry has announced the result of the Provincial Competitiveness Index (PCI) in 2012. The decline in median PCI score in 2012 reflected the slowdown in improvement of business environment across provinces. The most notable finding from the survey was that both foreign and domestic enterprises are more pessimistic about future prospect as optimism of enterprises, measure by the share of firms willing to expand in the next two years, has fallen to the historic low level of 33%. In addition, recent surprising petro price hike by 6.5% would make things more challenging as it would eat into businesses’ profit margin and hurt consumer spending.
 
Government’s effort to unfreeze the real estate market
Following the commitment to help the real estate sector, the SBV has revealed a draft of the social housing program. In which, 3% of the total loan book of 5 state owned banks will be dedicated to the social housing fund.  Buyers and developers of social houses will be provided loans with preferential interest rates in 10 and 5 years, respectively. For the first 3 years, starting from 15th April 2013, the lending rate will be 6%. The program is expected to bring some cheers to real estate developers and home buyers, however as most inventories are in mid and high end segments, the program may not be effective enough to rescue the whole troubled real estate market
 
Our ViewDespite some modest improvements, the first quarter of 2013 still ended with lackluster GDP and credit growth, coupled with a challenging business environment. Indeed, as domestic retail sales still remained weak, much of improvement was from external demand rather than from internal demand. All of these revealed that the economy is still struggling and may not have reached the bottom. Fortunately, recent effort of the government to spur growth has buoyed the stock market somewhat and hopefully it could buoy production and business activities as well.  After a sudden hike in petrol price that brings back the inflation risk, we think the scope for further rate cut is limited. Hence, in the long run, resolving the core problem (bad debt) still plays a critical role in regaining domestic confidence and recovering the stagnated economy.
We keep our cautious view on the economy and the stock market until clearer signs of recovery surface. In the mean time, as the AGM season has started, we will focus on screening for companies that still do well in the difficult time.

Filed under: News, Risk Management, Vietnam, , , , , ,

Latin America: Investor News Letter 17 November 2012

Mexico

Slim Acquires Controlling Stake in Real Oviedo, El Pais Reports

Billionaire Carlos Slim agreed to invest 2 million euros ($2.5 million) to acquire a controlling stake in Spain’s soccer team Real Oviedo, newspaper El Pais reported today.

Mexico lawmaker introduces bill to legalize marijuana
Sherwin-Williams to buy Mexico’s Comex for $2.34 billion
Mexico Third-Quarter GDP Rose at Slowest Pace in Over Year
Cemex Latam Falls in Bogota After $1.14 Billion Initial Sale
Mexican banks invest domestically
Mexico: Investors’ New China
TransCanada to build, operate Mexican natural gas pipeline; will invest US$1B

 

Brazil

Top names drop off list of Thyssen Americas bidders

FRANKFURT – Several top steelmakers are sitting out ThyssenKrupp’s auction of its U.S. and Brazilian mills and there appears little interest in the latter, suggesting the German firm may fall well short of its $9 billion asking price.

Eletrobras to take over bankrupt Brazil power utility
Cuba opens sugar sector to foreign management
Microsoft’s investment in Brazil to spur Rio research boom-execs
Telecom Italia looking at GVT, other opportunities
Wuhan Steel shelves plans to build Brazil mill
A new wave of Brazilian infrastructure investment
Brazil’s Itaqui port plans $3.2 billion upgrade
Rio Olympics, World Cup at risk with royalty bill, governor warns

 

Latin America

Paving the Way  High-­Tech Financial Infrastructure Hits LatAm

Foreign market leaders such as Fidessa, Direct Edge and Navatar are challenging local providers in the race to meet the booming region’s needs. The growth in size and sophistication of LatAm capital markets has both fueled and been fueled by the implementation of high-tech financial infrastructure in the region, as the hardware and software that have  been the foundation …

 Latin American yields fall further in a warning to bond investors
Impoverished Iberians, booming Latin America eye new relations
Africa and Latin America Still Fight Vulture Funds
More LatAm ETFs Your Broker Forgot to Mention
UN asks LatAm firms to grow with social responsibility
Private Equity Lures Pensioners as Bond Yields Sink
Argentina’s Debt Restructuring Argument Could Be Very Significant For The Global Economy
Argentina’s YPF 3rd-Quarter Profit Down 51% on Year at $159 Million
Bolivia Returns to the Global Bond Market
Chile pension fund-ordered estimate lowers Endesa Latam asset value
Chilean regulator to put new limits on pension fund investments
Germany’s Solarstrom enters Latin America with 2MW in Chile
Colombia opens criminal probe into Interbolsa collapse
Colombia’s Interbolsa brokerage to be liquidated
Public-Private Partnerships in Colombia: Scaling-up Results
Paraguay, Worst LatAm Economic Result of 2012
Peru May Invest About $5.2 Billion in Water, Wastewater Projects
Aeropuertos del Peru mulling over opportunities in Brazil and Chile
Overseeing Peru’s international appeal at ProInversión

Filed under: Argentina, Banking, Brazil, Chile, China, Colombia, Energy & Environment, Latin America, Mexico, Peru, Risk Management, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

VAM: Vietnam Market Analysis – October 2012

Another down month for the 2 main bourses

Read detailed VAM monthly  Monthly Market Analysis and Chart October 2012

The month of October saw the VN index close at 388.2, losing 0.47% whilst the HNX index fell 4.42% to close at 53.02. The VN30 somehow managed to move the opposite direction, gaining 0.82% to close at 458.56 and was again the best performer of the 3 indices.
 
CPI slowed down as price increases for healthcare and education were nearly completed
The Consumer Price Index rose 0.8% MoM in October, after jumping 2.2% the previous month due to one-off price adjustments in two major government-controlled sectors. Consequently, the YTD inflation appeared to be calmer at 6.02% as the healthcare and pharmaceutical component of the CPI basket decelerated from 17.02% to 5.94% and the education component decelerated from 10.54% to 1.88%. Although pricing pressure from food and foodstuff is seasonally higher in the last quarter, we think the one-digit inflation target of FY2012 is likely to be met. In addition, there is positive news for inflation, as the Ministry of Industry and Trade announced that input price for electricity production has declined in the last three months, and no price adjustment would be scheduled in November.
 
PMI weakened in October
The seasonally adjusted HSBC Manufacturing PMI posted 48.7 in October, down from 49.2 in September. As such, the headline PMI has remained below the critical 50.0 mark for seven months running. Partly, stocks of purchases fell further in October, as the downturn in the manufacturing sector led companies to empty out their inventory holdings. A number of firms also linked lower stocks to reduced levels of input purchasing. Weaker global demand led to a further solid reduction in new export business during October as well. Incoming new export orders have fallen in each of the past six months; subsequently, the latest decline in new export orders was the steepest in the 19-month survey history. In which, companies reported reduced inflows of new business from China, Japan and Taiwan.
 
SBV serious in solving bad debt
According to the latest SBV estimates, the level of NPLs at the end of June stood at 8.82%, which is even higher than that at the end of March (8.6%). As such, the SBV has submitted a proposal to the Prime Minister to set up an asset management company to take over the VND100 trillion (US$6 billion) worth of bad debt. Two options are: (i) to expand the role of the existing Debt Asset Trading Company under the MoF, or (ii) to set up an entirely new entity under the SBV. However it will take time to make any proposal a reality as it will need National Assembly approval which will push it to Q2 2013 at the earliest. In the meantime, banks are required to revalue their loan collaterals, and we believe this process will weigh down financial performance of lenders in the upcoming period.
 
Deadline for closing gold position extended to 30th June, 2013
After declaring the widened gap between domestic and world gold prices is primarily due to banks rushing to cover their gold positions before 25th Nov, SBV has extended the deadline to 30th June, 2013. Total gold mobilization until the new deadline must not exceed the gold needed to settle gold accounts. Since there are still 20 tons of gold needed to repay depositors and banks are not allowed to import gold, the extended deadline is meant to ease pressure on domestic gold price and help banks avoid sizable losses that would occur if they were to buy gold at peak price just to meet the deadline on 25th Nov.
 
Budget deficit in 10M2012 exceeds the whole year target
The YTD budget deficit in October rose to VND155.2 trillion from VND138 trillion last month, exceeding the VND140 trillion full-year target. As of 31st Oct, total tax revenue amounted to VND523.4 trillion, equivalent to 71% of the yearly plan. On the other hand, government spending approached VND 678.6 trillion, or 75% of the yearly plan. The budget deficit equals to 6.9% of GDP, far higher than the target of 4.8%-4.9% for the year, suggesting that room for fiscal policy to stimulate domestic growth is quite limited.
 
Trade balances returned to deficit in October. FDI disbursement unchanged year on year
The trade deficit is USD 500 million in October as imports increased 12% MoM to US$10.4 billion, whilst exports only increased 4% MoM to US$9.9 billion. With a large deficit in October, the trade balance has returned to deficit of US$357 million from a surplus of US$143 million in September. Since demand for import tends to be seasonally high in the last two months of the year, we think the trade balance by year end will likely be a larger deficit. However, the news that FDI disbursement in October reached US$900 million, unchanged year-on-year has provided some comfort that foreign investors still see investment opportunities in Vietnam. In fact, it is heart-warming that the FDI disbursement year to date (US$9 billion) has almost tracked the level achieved over the same period last year (US$9.1 billion), despite tougher economic conditions.
 
Our ViewOur view has hardly changed since last month. As Vietnam’s top leaders are debating on critical issues including proposed amendments to the Constitution and several laws, we see little clarity on the economy or stock market until all that is settled. As such, we prefer to be conservative at this time, holding high cash and only retaining our core equity holdings; companies with strong fundamentals which we have high conviction in and believe will stand the test of change. We take this opportunity to screen the market for resilient companies with little or no debt, strong market position, high growth potential, good cash flow and savvy management with integrity, for possible immediate action when the market turns.
Source: VAM, 16.11.2012

Filed under: News, Risk Management, Vietnam, , , , , , , , , , ,

VAM: Vietnam Market Analysis – September 2012

Markets declined in September
September was characterized by sideways market movements for the VN-Index, with the largest gap between the month’s high and low being approximately only 15 points. Closing the month at 392.57, the index gave up 0.87% for the month. The Hanoi exchange moved quite differently – a near downward trajectory to close the month at 55.47, down 9.7%. The VN30’s performance more closely resembled the VN-Index, with only narrow swings during the month, to close at 456.48, down 1.89% from August.
 
Market reacted to ACB resignations as developments troubled investors
In an unexpected announcement, ACB accepted the resignation of its BOD Chairman and two Vice Chairmen, this month. The resignations were initially claimed to be for personal and health reasons, yet were later announced to be connected to the arrest of ACB’s founder and the former CEO for economic violations (one of which being permission granted for approximately USD 34million to be deposited into competing banks at rates above the stipulated cap). A former BOD member of ACB, now on the Board of Eximbank, also resigned and is also to be prosecuted together with all the resigned ACB executives. Upon the dissemination of this information, the markets dropped, however only temporarily, as the news was widely expected.
 
Credit mobilization vastly exceeds credit growth
Credit growth from January to September 20, of this year, reached only 2.53%, much below the 8-10% target for 2012. While some banks have posted relatively high growth figures, such as BIDV and Military Commercial Jt Stock Bank, whose growth reached 13.5% and 10% respectively in the first 8 months; most of their credit growth however was for commercial bond lending. Removing commercial bond lending, loans outstanding to institutions and individuals decreased. In another example, VCB grew their credit 7.2% in the first 8 months, however savings growth was 13%. In efforts to ensure liquidity and being bound by the 9% deposit rate cap, many banks have begun to offer 13% interest for 13-month deposit terms. With dong lending rates now ranging between 13-15%, profits will come under pressure.
 
Health care and Education lead September’s CPI increase
In August, YoY inflation continued to abate to 5.04%, this month however, inflation rose to 6.48% YoY. September’s CPI rose 2.2% MoM, the highest MoM increase since May 2011. The increase is largely due to Healthcare, pharmaceutical items (17.02% increase), Education items (10.54% increase), and Transport and Telecoms (3.83%) increases. While Education’s increase was mostly due to seasonal factors, a series of rising petroleum prices played a notable role in the increase of one-off items.
 
GDP in first 9 months grew 4.73% over same period 2011
2012’s GDP growth is now expected to be 5.2%, thus requiring Q4 growth rate of 6.6%  fairly optimistic as Q3 growth was 5.35% and Q4, 2011 growth reached only 5.98%. GDP has however, been steadily improving from Q1 and Q2. Low credit growth, declining exports and slow retail sales, combine to make up slow domestic growth. Export value declined an estimated 5.8% in September, according to GSO; however, import value also dropped 4.4%, bringing the Q3 trade balance to a USD 531 million surplus. Retail revenue growth in September increased 1.08% for the month, improved over the 0.7% growth recorded in August.  For the first 9 months of 2012, nominal retail sales growth was 17% however; it reached only 6.4% in real terms. The Index of Industrial production also showed some signs of improvement, increasing 4.5% on month with increases in the manufacturing index being the largest contributor to the improved index.
   
FDI disbursement level paces 2011’s levels
Vietnam attracted approximately 73% of 2011’s January – September FDI, for a total of USD 9.52 billion. While overall attraction had declined, FDI disbursed reached USD8.1 billion, totaling 98.8% of YoY’s disbursed FDI. The Foreign Investment Agency expects disbursed FDI to reach USD 10 billion by year-end. Strong FDI disbursements have bolstered the FX reserves nearly USD 23 billion and contributed to S&P’s upgraded economic outlook and Fitch Rating’s affirmed B+ status of the dong.
 
Moody’s adjust government bond rating on banking sector weakness
At nearly the month’s end, Moody’s Investors Service downgraded Vietnam’s credit rating one notch to B2, with a stable outlook. At cause for the downgrade are the country’s banks and the risk that the government will need to partially recapitalize them given the lack of private sector solutions. The rating agency also downgraded all 8 of the Vietnamese banks it assesses due to deteriorating asset quality and profitability pressure.
 
Our ViewWith uncertainty regarding economic and banking reform still lingering around, we prefer to be conservative at this time, holding high cash and only retaining our core equity holdings; companies which we have high conviction in and believe will stand the test of change.
We take this opportunity to do our homework well, combing the market carefully for resilient companies with little or no debt, strong growth potential, good cash flow and earnest management. Although valuations of certain companies and sectors have become quite attractive, we are not rushing in just yet. Too much change is happening or expected to be happening. So we need a little more certainty before getting back into the market.

Source: VAM Vietnam Asset Management, 15.10.2012

Filed under: Asia, Banking, Exchanges, News, Risk Management, Vietnam, , , , , , , ,

VAM: Vietnam Market Analysis- August 2012

Markets declined in August
In August, the market’s ascent topped above the 437 level, but on the 21st of the month the market began a six trading day descent to a low of 385.78. After making a slight correction in the final days of the month, the VN-index closed at 396.02, losing 4.5% over the month. The Hanoi exchange faired significantly worse, closing the month at 61.43, to lose 11.2%, while the VN30 gave up 5.4% to close at 465.29.
 
Markets reacted to news and rumors, presenting some good buying opportunities
Upsetting market activity this month was the arrest of a key figure in the banking system and Vietnam football, for alleged illegal business activities in his 3 private companies. Days later, the arrest of ACB’s CEO for “economic violations” caused the SBV to add VND 23.31 trillion in liquidity to the banking sector to support the market and help ACB as its customers rushed to withdraw funds. Rumors of Masan Group’s Chairman’s arrest, while unfounded, added to the turmoil the market was undergoing as investors wondered who’s next and what are the repercussions. Also adding to market jitters was talk of a 3rd petroleum price hike of the month, for a total increase of 15% in 40 days. As sellers outnumbered buyers, the market lost USD 3.85 billion in 3 days, providing a buying opportunity which foreign investors rushed to take advantage of. 
 
Credit growth to remain at 6-8% for 2012, notwithstanding ceiling increased for some
23 of the nation’s 62 credit institutions applied to have credit growth ceilings increased, of which 10 were approved. The increased target encourages banks to spur lending to struggling enterprises dealing with high inventories and low demand. Considering growth in the first 8 months is a meagre 2%, the entire banking sector credit growth is expected to remain at 6-8% for 2012, according to the Central bank.
 
Deflation fears allayed as Inflation rises
Having recorded two consecutive month of negative inflation, deflation was concerning to some. In August however, CPI rose 0.63%, contributed by petroleum price hikes, along with increases in healthcare and pharmaceutical items, which registered the largest increase of 5.44% MoM. Despite August’s increase, inflation continues to slow from its peak of 23% in 2011 to 5.04% YoY.
 
Trade balance reflects increased demand
Reflecting increasing demand, internal and external, the positive trade balance once again turned negative for the first time in 3 months. August’s trade deficit of USD150million, combined with an average monthly export revenue increase of 17.8% YoY for the January to August period, suggests that easing of monetary policy may be reversing domestic contraction. At the same time though, an ICAEW report forecasts GDP growth for 2012 to be only 5.1%.
 
FDI disbursement level paces 2011’s levels
Vietnam attracted 66.1% of total 2011 FDI, for a total of USD 8.47 billion in the first 8 months of the year.  While overall attraction had declined, FDI disbursed reached USD 7.28 billion, totaling 99.7% of 2011’s disbursed FDI. Strong FDI disbursements have bolstered the FX reserves to nearly USD 20 billion and contributed to S&P’s upgraded economic outlook and Fitch Ratings’ affirmed B+ status of the dong.
 
Our ViewWhile the circulated rumors, both founded and unfounded, created some turmoil in the market, investor reaction was more sentiment driven rather than fundamentals driven, and as such, a buying opportunity was presented. The chain of events in August suggests that uncertainty still remains; however, we can get comfort that given some of the encouraging economic signs lately, it is probably that the eased monetary policies have begun to stimulate domestic demand. We continue to shy away from property and related sectors but are selectively adding stocks in basic industries such as Materials, Utilities and Consumers.

Source: VAM Vietnam Asset Management, 20.09.2012

Filed under: News, Risk Management, Services, Vietnam, Wealth Management, , , , , ,

Luxury Spending in China – Are the wealthy disappearing? Wealth Management Research – KapronAsia

Earlier this week, Burberry announced lower than expected earnings which largely disappointed and somewhat scared markets. Their slowdown is global, but a key challenge was declining luxury spend from Chinese consumers – which is seen by many as a bellwether for the rest of a general industry slowdown. We’ve talked about luxury spending in China in the past, but it’s worth considering the implications of a potential slowdown in the luxury industry and the implications if the slowdown is indeed an indicator of a shift in the habits of China’s wealthy.

The origins of money

If you look at the development of China’s wealthy, it really started in the late 70s with the opening up of China’s economy and then picked up speed again in the 1990s through today as China’s inclusion in the WTO gradually brought the country to become known as the ‘factory of the world’. Although cost and quality questions have arisen again recently, the ability of chinese factories to produce low-cost and medium to high quality products drove incredible revenues and profits for small and medium enterprises and, at the same time, made their owners tremendously wealthy. Due to a somewhat challenged national transport network, many of these factories were by necessity concentrated on or near the east coast of the country in order to decrease the complexity of actually exporting the goods; mainly near the port city of Shenzhen or further up the eastern seaboard near Shanghai or Beijing.

But factory owners weren’t the only ones to benefit. As China’s insatiable appetite for natural resources has increased, companies and individuals have benefited greatly as commodity prices have increased rapidly. Mine owners and processors as well anything energy related has driven another level of wealth that is not just located near the coast, but often much further in-land either to the west in Xinjiang or to the North in Inner Mongolia. Finally, although a civil service job in the west typically means ok pay, but high stability, government officials in China do quite well so many of officials and families of officials are known to be quite well off.

Show me what you got

I don’t want to make any suggestion as to whether it’s right or wrong or the meaning behind it, but the wealthy Chinese, in general, like to show off their wealth. Carrying the right bag, driving the right car or telling time with the right watch is important in both a personal and or a business context. At large dinners, people (typically the men) will fight over who pays for the bill as not paying can often mean a ‘loss of face’ (similar to respect) in the eyes of others.

This need for showing off wealth has driven the growth of the luxury industry in China. What it has also done is created another layer of what you might call ‘wealthy aspirants’, who while not necessarily wealthy themselves, are keen to give the appearance of being wealthy or at least hip to the latest trends. For the extremely wealthy, the sign that you’ve made it is the BMW 7-series or Bentley that you pulled up in, for the rest, it’s an iphone. An iphone is a sign that you’ve made it

The iphone is a great insight into wealth or lack thereof in China: although there are iphone knock-offs out there, most of what you see when you walk around the big cities are real iphones whether bought directly from Apple, a mobile network operator, or off the grey market (HK imports). When you consider that a new iphone in China from Apple costs about US$800, even if you look at the GDP per capita in Shanghai, one of the wealthier parts of China, which is about US$13,000, that still represents about 7% of the average yearly salary for a phone. So some people are spending up to, and in many cases over, a month’s salary to have the latest and greatest from Apple.

Built into relationships

We’ll get into the implications for wealth management shortly, but one last illustration of how important wealth is in China, and again, this is changing slowly, but typically before a Chinese woman will accept a marriage proposal from a man, the man needs to have an apartment for the couple to move into. With housing prices in the major Chinese cities reaching that of London or NY, but with salaries hovering at about 15% or less of London/NYC salaries, this can be a daunting prospect. A son will often need to rely on his parents and potentially even grandparents to be able to afford a place.

So what now

So with that context in mind, what will happen with China’s wealthy? Well, there is a certain segment of wealthy customers that are unaffected by economic downturn. These are simply the ones that have accumulated enough wealth to maintain their lifestyle at the same level regardless of the economic conditions. The wealthy aspirants that we mentioned above however will likely be more negatively affected as they have less disposable income or built-up wealth, so what could we reasonably expect see if that demand for ultra luxury products (think a Hubolt watch or a Bentley) will be unaffected, but the demand for lower luxury products such as handbags and phones will likely drop – already we’re seeing increased indications of the slowdown in hiring, which would put a squeeze on the middle-class market segments.

Implications for the wealth management industry

read full article at KapronAsia WealthManagement

Source: KapronAsia, 12.09.2012

Filed under: Asia, China, Wealth Management, , , , ,

Latin America: Investors Newsletter 19 August 2012

Mexico

Diageo May Buy Jose Cuervo for $3 Billion, Sunday Times Reports
Mexico Ousts Brazil as Investors’ Top Choice in Latin America
Santander Bank’s Mexican unit files for U.S. IPO

Brazil

Overpriced Brazil to Be Profitable for Latam

Latin America and Asia

LatAm and Asia form bright spots for CitiIndia seeks to deepen trade ties with LatAm, Caribbean nationsChina to boost ties with Latin AmericaSpanish Companies Need Latin America For Economic ExpansionNo substitute for domestic strength in Latin AmericaIndia’s trade with Latin America may touch $50 billion by 2014

See also LIQ Latin America Infrastructure ALI Alternative Latin Investor  or MercoPress more information about Latin America.

Filed under: Argentina, Brazil, Chile, China, Colombia, India, Japan, Latin America, Mexico, News, Peru, , , , , , , , , , , , ,

VAM: Vietnam Equity Market – June 2012

Another month of closing down for both markets
Read detailed VAM monthly Market Analysis for June 2012
In June, the VN- index lost 1.6% to close at 422.37. The HNX declined 4% to 71.07, while the VN-30 broke below the 500 threshold to close at 497.73, down 1.85%. Liquidity also dropped with average daily trading value recorded at USD 73 mn versus USD 99 mn of May. Foreign investors turned net sellers with net selling value of USD 25 mn for the month.
 
CPI and Trade balance improved
Unseen since March 2009, CPI decreased 0.26% in June, bringing YoY and YTD inflation to 6.9% and 2.52%, respectively. 5 of the 11 commodity and services items in the CPI basket decreased, including Food & Foodstuff which make up nearly 40% of the total basket. Serving to keep inflation low was 2 reductions in the retail price of petrol (another reduction is forthcoming in early July). The World Bank has recently revised downward its official 2012 CPI forecast for Vietnam to 9.5%, while JP Morgan predicts inflation will top out at 8.1%. Also improved was the nation’s trade account. With June’s trade deficit at USD 150mn, 1H trade balance came to a deficit of USD 357mn – significantly improved over the USD 6.5bn deficit in the same period of 2011. For 1H, Exports grew 22% YoY while Imports increased at 6.9%.
 
Disbursed FDI slightly improves, while committed FDI disappoints
Committed FDI disappointed in 1H, decreasing 27.3% to USD 6.4 bn, down from the USD 8.8 bn recorded in 1H 2011. However, disbursed FDI increased 1.9% to reach USD 5.4 bn, notably better than the 1.9% decrease recorded in the same period in 2011. Japanese investors continue to be the largest contributor with 65% of the nation’s total FDI.
 
Retail Sales continues growth albeit at a slower pace
Retail sales in 1H also disappointed, growing 6.5% in real terms (19.5% in nominal terms) to approximately USD 54.6bn. While retail sales growth remains positive, it is lower than the 9.2% recorded in 1H 2011. High interest rates and stagnant production were to blame for declining YoY sales.
 
Lower remittances pressure the dong
Inward remittances to HCMC in 1H totaled about USD 1.9bn, 20.8% lower from the same period in 2011. With a dormant property market and the global economic slowdown, remittances are down nearly USD 500mn. In 2011, the 9bn dollar remittances were major contributor to the USD 2.5bn BOP surplus. Lower remittances have put some pressure on the currency. During the month, there was time when the dong traded as low as VND 21,036 per USD. The dong has since regained ground and the central bank reference rate continues to be VND 20,828, unchanged since December 2011.
 
As economy slows, further stimulus announced
While Q2 GDP growth bettered Q1 growth at 4.66% and 4% respectively, the annual 6-6.5% growth target appeared unlikely to be achieved and accordingly, was reduced to 6%. With weak Q2 earnings outlook and credit growth likely to only reach 12-13%, missing the 15-17% growth target, parts of a VND 29 trillion fiscal stimulus package in Circular 21 were enacted. Stimulus measures include a 30% reduction in the corporate income tax for SMEs; a 6 month tax exemptions for individuals earning less than VND 9 million per month; dividend tax exemption, and a 50% reduction on securities sales tax. In addition, the refinance and discount rates were each reduced by 100bp to 10% and 8% respectively. The deposit rate cap for deposits greater than 12 months was lifted, and is now 9% for deposits under 12 months.
Additionally, in an effort to boost GDP and revitalize the Property sector, an un-utilized fund of VND 120 trillion in public investments is also being disbursed. Moreover, the Property sector was also given ‘preferred group’ status, thereby giving them much needed access to lower cost borrowing.
 
Our ViewWith some improvements and some weakening in the macro picture, on a net basis overall, we dont think much progress has been made since last month. The stock market reflected that with a 1.6% fall to end the month of June at an almost 3-month low.
 
On the corporate front, the situation looks bleak with PMI (published by HSBC) down to 46.6 from 48.3 in May. What is more troubling is that output prices declined sharply while finished goods inventories have increased. This shows that despite falling prices, demand is still very weak and the inventory clearance process might take longer than we thought.
 
We therefore remain cautious on the market and will prefer to stick to defensive plays and domestic-oriented companies with strong cash flow, solid financials, strong growth prospect, and good corporate governance and cheap valuation.
Source: VAM Vietnam Asset Management, 18.07.2012

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China Insight: QDII updates, Disparated Financial Standards and new Market Reforms – KapronAsia

Overview of the QDII Program in China

The QDII (Qualified Domestic Institutional Investor) program was first launched in 2004 initially for insurance companies to invest their foreign exchange funds in the Chinese companies traded in overseas markets, with PingAn insurance company being the first institutional investor to receive a QDII quota of US$8.89 billion. Since then, the program has expanded and now allows institutional investors, including commercial banks, security companies, fund companies, insurance companies and trust funds to raise funds in mainland China and invest in offshore capital markets under the control of China’s foreign exchange regulator.

China’s Disparate Financial Standards

China’s financial standardization lags behind the relatively rapid development of the financial industry globally and has yet to meet the demands of technology innovation and business expansion. This can slow the pace of technology advancement as competing standards add layers of complexity and make it more difficult to come up with straightforward technology solutions to clients’ problems. The PBOC has realized that financial standardization does and will continue to play a pivotal role in financial informationization and regards standardization work as an important strategic measure to promote China’s financial industry.

Further Reform of China’s Stock Markets in 2012
After being stuck in a bear market for the past few years, China’s stock market hasn’t kept up with the country that has become the world’s second largest economy following the U.S.. Facing this bear stock market, Guo Shuqing, the new chairman of the China Securities Regulatory Commission (CSRC), seems confident in China’s stock market, saying that the blue chips in China’s stock market are of real value, although overhaul and reform are necessary now to move the market forward. He has raised several new ideas that may contribute to this needed reform.

Source: KapronAsia, 10.04.2012

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Mexican Market Leaps Forward – FIX, Technology, Co-Location and Regulation

In the last 12 months dramatic changes have occurred at Mexico’s stock exchange and among its brokerage clients. Cross border partnerships, technology upgrades, new FIX infrastructure and business friendly regulatory changes have opened the Mexican market to high frequency trading (HFT).

While US regulators can be seen to scold HFT firms, the Mexican market has opened its arms. The Mexican Exchange (BMV) and its brokerage firms have upgraded their infrastructure and sought business opportunities north of the border. Earlier this year after the CME Group and the BMV signed their partnership, high frequency traders on the CME Globex trading system began to route orders to the Mexican Derivatives Exchange or MexDer. Today 90 percent of average daily volume on the MexDer comes from high frequency traders north of the border.

Mexico’s brokerage firms have completed significant infrastructure upgrades. Last spring only a few brokers in Mexico could handle a highfrequency hedge fund client and many Mexican brokers could process no more than one connection to the Bolsa Mexicana de Valores (BMV) at a time. The landscape has changed quickly and improvements in broker and exchange systems have ushered in a new capacity for speed in the transmission and execution of orders in Mexico.

Over the summer a major milestone occurred for the industry. Working with the BMV, Mexico’s brokers completed an industry-wide upgrade to FIX 4.4. The top 25 brokers are now certified with FIX 4.4 to the BMV. Leading the way, are brokerages like GBM, Interacciones, Actinver, UBS Mexico, IXE and others.

Now that Mexican brokers speak FIX 4.4, all of the order routing to the BMV can now be done through FIX allowing the BMV to retire the antiquated SETRIB protocol. The only way the BMV will allow Mexican brokers to continue to use SETRIB is by paying excessive fees, and even this will not be allowed by the end of 2011. Retiring SETRIB sets the stage for more positive changes in the industry and at the BMV.

Work is already underway to upgrade the BMV’s trade matching engine. The existing engine was built in the 1990s for a Tandem mainframe. Retiring the Tandem has many benefits. Faster order matching and processing is high on the list. In addition, more choices for application and software vendors and significant cost savings are expected. Retiring the mainframe will also eliminate the scheduling nightmares associated with the limited availability of the central mainframe for testing with the broker community. The new matching engine will be hosted on modern Unix based hardware. The release of the new matching engine and infrastructure is planned for the first quarter of 2012.

Another important milestone is the availability of a state-of-the-art co-location facility at KIO Santa Fe. The BMV infrastructure is located here and starting in October it will be easy for brokers and third party providers to collocate order routing and market data in this hosting facility leading to high throughput low latency services.

While all of the infrastructure and matching engine upgrades are momentous, they would bear no fruit without the simultaneous modernization of Mexican regulations. The initiative to modernize Mexico’s regulations, called RINO, began a year ago and phase two is due to rollout in the fall of 2011. The goal of RINO is to conform Mexican regulations to international standards. By converging with international standards, regulators hope to bring more international order flow and greater liquidity to the market, resulting in increased investment in the Mexican market.

While regulations in the US like Sarbanes Oxley and Dodd-Frank can be seen to drive businesses offshore, the regulatory changes in Mexico are removing handcuffs from businesses and facilitating opportunities. The first step forward occurred early this year with RINO I. RINO I allowed brokers to have multiple channels to the BMV’s electronic trading system. Previously all orders were in a single queue. Multiple access points per broker provides more flexibility in executing strategies and handling client requests, including separate BMV channels for program trading and orders called into the trading desk. RINO I also eliminated sizebased criteria from order management,  thus leveling the playing field in the processing of orders. RINO II takes effect on October 10, 2011, bringing more modernizations including pegged orders, improvements in crossing operations, average price operations, price delivery regardless of volume, and decimal bids for fixed income securities.

Crosses, in which a brokerage carries out a transaction through the stock exchange between two of its clients, were permitted previously but the rules were very arcane. Starting in October, the crossing operations will be vastly simplified allowing clients to simply choose whether to cross inside or outside the spread. With this modernization, the BMV hopes to repatriate orders that brokers would previously carry out in the US, where crossing orders was possible using ADRs in dark pools or at the NYSE.

In addition the RINO II regulations a very important new mid-point hidden book order. The orders execute at the midpoint, broker anonymity is guaranteed and the order priority is determined by volume. This is effectively a dark pool. Similar to Xetra, this new BMV order helps the market participants and simultaneously protects the BMV from  providers toying with moving into the Mexican marketplace.

As the regulations modernize and the FIX infrastructure hardens, opportunity beckons. Brokers are beginning to push for more high frequency trading algorithms, more efficient routing of international orders, and more sophisticated risk controls, all of which will attract even more international business. As the need for speed grows, co-location previously offered by the exchange may become more strategic, particularly to brokers wanting to attract high frequency traders.

All of this progress was made possible in large part because of the exchange’s demutualization and subsequent listing in 2008. The demutualization coincided with rule changes allowing Mexico’s pension funds or AFORES to invest. Before the rule changes, the AFORES were forced to invest almost entirely in short-term government paper. Today, Mexico’s pension funds are allowed to invest up to 25 percent, in individual stocks and shares and 12 percent in a hybrid of corporate debt and equity capital to allow companies to raise funds to expand businesses.

Considered together, regulatory improvements and infrastructure updates have morphed the BMV and the Mexican brokerage community into a thriving and modern marketplace. The BMV reported a 22 percent jump in earnings last year, with operating income increasing 70 percent in the last three months. A record six initial public offerings made it to market last year and overall trading volumes rose 50 percent in 2010. This year Mexico’s IPC index has tested and hovered near record highs.

In 2011 there are fewer IPOs, but trading volume remains strong. The order-routing agreement signed with Chicago’s CME Group has opened Mexico’s derivatives market to the world. Now, electronic trading infrastructure and investor friendly regulations have set the stage for act two.

Latin America has enjoyed a strong recovery for the most part it has sailed through the recession without lasting damage. Boosted by capital inflows, by record prices for commodity exports, by sound policies and by a heady expansion in domestic credit, the region saw economic growth of 6% last year and is on course to notch close to 5% this year. The region faces slower growth but not disaster. To up the pace, now is the time for reforms to boost productivity.

The main engines for growth in Latin America are China’s demand for minerals, food stuffs and raw materials – this looks set to continue – and consumption as tens of millions edge out of poverty and benefit from newly available credit.

Source: FIX Global Trading, 15.09.2011

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Brazil: BM&FBOVESPA – News October 2011 – Nr.21

BRIC exchanges announce alliance

The exchanges of the BRIC emerging markets bloc announced a joint initiative on October 12, during the 51st AGM of the World Federation of Exchanges (WFE) in Johannesburg, to offer investors access to their dynamic economies. Initially the exchanges – which accounted for over 18% of all exchange-listed derivative contracts traded by volume worldwide as of June this year – will cross-list benchmark equity index derivatives on the boards of other alliance members. Following this, the alliance will develop innovative products to track the BRIC exchanges.

The seven exchanges are:

  • BM&FBOVESPA – Brazil
  • MICEX – Russia
  • RTS – Russia
  • Hong Kong Exchanges and Clearing Limited (HKEx) – China
  • Johannesburg Stock Exchange (JSE) – South Africa
  • The National Stock Exchange of India (NSE) – India
  • BSE Ltd (formerly known as Bombay Stock Exchange) – India

These seven exchanges represent a combined listed market capitalization of USD9.02 trillion, equitymarket trading value/month of USD422 billion and 9,481 companies listed.

BM&FBOVESPA new trading hours

In view of the start of daylight saving time on October 16, 2011, since October 17, 2011, the new trading hours (Brasília Time) for the BM&FBOVESPA markets – BOVESPA and BM&F segments – will be as follows:

Regular session: 11:00 a.m. – 6:00 p.m.

- After-Market: 6:30 p.m. – 7:30 p.m. (pre-opening phase to trading phase);

- Blocking / Exercise on the stock options market
Days prior to expiration: 11:00 a.m. – 5:00 p.m. (exercise of holder position).
Expiration date: 11:00a.m. – 12:30 p.m. – trading of the expired series to the offset of the position, that is, the sale for the holder of the position and purchase for blocking for the writer of the position / 12:30 p.m. – 2:00 p.m.: exercise of the holder position;

- Blocking / Exercise on the Index Options Market:
Days prior to expiration: 11:00 a.m. – 2:00 p.m. (exercise of holder position).
Expiration date: 11:00 a.m. – 2:00 p.m. – trading of the expired series to the offset of the position, that is sale for the holder of the position and purchase for blocking for the writer of the position / After 6:00 p.m. – automatic exercise of the expired series which fit the following situations: call option (settlement index higher than the exercise price; and put option (settlement index lower than the exercise price).

- Over-the-Counter Market: 11:00 a.m. – 6:00 p.m.

> Complete information of the new trading hours (Circular Letters 009-2011-DO-Ofício Circular)

The trading hours for the BOVESPA and BM&F segments are available at this link

Market Makers for Options on the Stock of Banco Bradesco, Gerdau and Banco do Brasil

BM&FBOVESPA announced on August 3rd the start of the bidding process to select up to three market makers for options on stock of Banco Bradesco S.A. (BBDC4), Gerdau S.A. (GGBR4) and Banco do Brasil S.A. (BBAS3). This is the third stage of the Competitive Bidding Process to select market makers in equity options and BOVESPA Index (Ibovespa) options, developed by BM&FBOVESPA. The institutions (including nonresident) that wish to participate have until November 29, 2011 to deliver proposals and the winners will be announced on December 14, 2011.

> More info

Market Makers for Options on Ibovespa and on Stocks of BM&FBOVESPA and Usiminas

BM&FBOVESPA announced on October 11 the winning institutions in the second selection process for market makers for options on stocks and on the BOVESPA Index (Ibovespa). The market maker obligation shall last twelve (12) months as of December 12, 2011. Banco Citigroup Global Markets Limited, Banco Itaú BBA S.A. and Timber Hill LLC shall be market makers for options on the BOVESPA Index (IBOV), complying with a maximum volatility spread of half a percentage point (0.5%). The institutions selected for options on stocks in BM&FBOVESPA S.A. (BVMF3) were Citadel Securities LLC, Citigroup Global Markets Limited and Morgan Stanley Uruguay Ltda, which shall be market makers complying with a maximum volatility spread of four percent (4%). Meanwhile, the institutions selected for options on stocks in Usinas Siderúrgicas de Minas Gerais S.A. (USIM5) were Banco BTG Pactual S.A. and Morgan Stanley Uruguay Ltda, which shall be market makers complying with a maximum volatility spread of twenty percent (20%).

> More info

Options on OGX Petróleo and Itaú Unibanco rise with Market Maker activity

The trading volume for options on the stocks of OGX Petróleo and Itaú Unibanco rose significantly in September, strongly influenced by the fact that they have had Market Makers since September 9. The Exchange launched the Market Maker program for stocks this year in order to encourage trading in options and increase their liquidity, as well as to stimulate longer expiries on these contracts. Options on the stocks of OGX Petróleo and Itaú Unibanco now have three Market Makers.

Comparing the average daily volume in September to that of January to August, there were the following increases: OGX Petróleo ON 51.9% (BRL 13.7 million against BRL 20.8 million) and Itaú Unibanco PN 205.6% (BRL 1.7 million against BRL 5.1 million).

ETF financial volume more than doubles in the past two months

BM&FBOVESPA Exchange Traded Funds (ETFs) reached BRL 1.4 billion financial volume in August and September, at 78,809 and 75,740 trades respectively. This is more than double the BRL 668 million financial volume and 31,997 trades in July.

Common Shares in Desenvix Energias Renováveis start trading on BOVESPA MAIS

The shares of electricity company Desenvix Energias Renováveis S.A. begin to be traded on October 3 on the BOVESPA MAIS segment of the BM&FBOVESPA Organized OTC Market, under the DVIX3M ticker symbol.

USD11 billion in public offerings and follow-ons in 2011

In the year to October, 15, BM&FBOVESPA registered USD11 billion in public offerings and follow-ons. There were eleven Initial Public Offerings (IPOs) in 2011: AREZZO&CO (ARZZ3), SIERRA BRASIL (SSBR3), AUTOMETAL (AUTM3), QGEP PART (QGEP3), IMC HOLDING (IMCH3), TIME FOR FUN (SHOW3), MAGAZINE LUIZA (MGLU3), BR PHARMA (BPHA3), QUALICORP (QUAL3), TECHNOS (TECN3) and ABRIL EDUCAÇÃO (ABRE11).

BM&FBOVESPA on Twitter

BM&FBOVESPA launched its Twitter account in English last week. Please access this link

2011 EVENTS

 The World Cup of ETFs and Indexing Latin America

BM&FBOVESPA is lending its support to the World Research Group’s “World Cup of ETFs and Indexing Latin America.” The event aims at providing attendees with the best practices for ETF use, as well as a comprehensive analysis of market structure, regulations and current and future opportunities. The expected audience includes pension funds, hedge fund managers and investors, investment advisors, financial consultants, and other market participants. A BM&FBOVESPA representative will talk about the Exchange’s ETF products.

Location: São Paulo (TBC)
Date: October 17-18, 2011.
> Full Agenda and Registration

2nd FX Growth Markets Series: Brazil – Profit & Loss

BM&FBOVESPA will join the Profit & Loss FX Growth Markets conference on October 20, 2011 at the Tivoli Hotel in São Paulo. Profit & Loss has been operating its highly successful series of Forex Network and FX Growth Markets conferences for more than 10 years, with regular annual events held in London, New York, Chicago, Singapore, Brazil, Mexico, Colombia, Chile, Shanghai and Toronto, and comes to Brazil for the second time. A BM&FBOVESPA representative will talk at the event.

Location: Tivoli Hotel São Paulo, São Paulo, Brazil
Date: October 20, 2011.
> Full Agenda

2nd Brazil–China Capital Markets Forum

BM&FBOVESPA and the Shanghai Stock Exchange are coordinating the Second Brazil–China Capital Markets Forum. This event follows the First Brazil–China Capital Markets Forum, which occurred in February in São Paulo, Brazil. At the event, the Shanghai Stock Exchange shall bring 300 to 500 Chinese asset and insurance managers and representatives of listed companies.

Location: Xijiao State Guest House Shanghai, China
Date: October 27, 2011.

Volumes and trades by Direct Market Access (DMA)

BM&F Segment
In September, BM&F* market segment transactions carried out through order routing via Direct Market Access (DMA) registered 35,144,357 contracts traded and 4,311,865 trades. In August, the volume reached 41,417,494 contracts traded and 4,431,750 trades.

The volumes registered by each access modality in the BM&F segment were as follows:

  • Traditional DMA – 12,583,334 contracts traded, in 1,366,264 trades, in comparison to 17,540,231 contracts and 1,306,241 trades in August;
  • Via DMA provider (including orders routed via the Globex System) – 13,976,949 contracts traded, in 374,992 trades, compared to 14,088,756 contracts and 435,281 trades in August;
  • DMA via direct connection – 2,636 contracts traded in 447 trades, against 4,210 contracts and 830 trades in August;
  • DMA via co-location – 8,581,438 contracts traded, in 2,570,162 trades, compared to 9,784,297 contracts and 2,689,398 trades in August.

In September, transactions carried out by foreign investors presented by CME to BVMF (who use the Globex-GTS order routing system or access BVMF markets via co-location) totaled 4,685,186 contracts traded, in 1,164,510 trades, compared to 5,308,308 contracts and 1,235,349 trades in August.

BOVESPA Segment
In September, order routing via DMA in the BOVESPA* segment totaled BRL 111.41 billion and 14,298,483 trades, from BRL 138.52 billion and 17,021,408 trades the previous month.

Trading volumes per type of DMA in the BOVESPA segment:

  • Traditional DMA – Volume of BRL 95.77 billion and 11,763,618 trades from BRL 120.45 billion and 14,098,638 in August;
  • DMA via co-location – Volume of BRL 14.29 billion and 2,357,270 trades from BRL 16.69 billion and 2,755,498 in August;
  • DMA via provider – Volume of BRL 1.34 billion and 177,044 trades from BRL 1.37 billion and 167,272 in August.

* Direct access to the BM&FBOVESPA market segments is carried out through DMA models 1, 2, 3 and 4. In model 1 or traditional DMA, the client accesses the GTS or Mega Bolsa through technological intermediation of a brokerage house. In model 2 or via DMA provider, the client does not use the technological intermediation of a brokerage house, but rather connects to the system through an authorized access provider. DMA via order routing with CME Globex is also a form of DMA model 2. In model 3, the client connects to the system through a direct connection. In model 4 or via co-location, the client installs its own computer within the Exchange’s facilities.

Notes:

The volumes registered by access modality include both buy and sell sides of a trade.

The volumes by access modality for both the BM&F and the BOVESPA market segments have been reported in a consolidated manner in the BM&FBOVESPA statements since May 2009.

MARKET RESULTS

BM&F Segment September 2011

Derivatives markets in the BM&F segment (including financial and commodities derivatives) totaled 59,365,524 contracts and BRL 4.35 trillion in volume in September, compared to 78,606,873 contracts and BRL 5.23 trillion in August. The daily average of contracts traded in the derivatives markets in September was 2,826,930, in contrast to 3,417,690 in August. Open interest contracts ended the last trading day of September with 36,620,797 positions, compared to 37,821,302 in August.

BOVESPA Segment September 2011

In September 2011, the equity markets (BOVESPA segment) financial volume totaled BRL 131.437 billion, in 13,551,487 trades, with daily averages of BRL 6.25 billion and 645,309 trades. In August, financial volume totaled BRL 177.906 billion, the total number of trades 16,234,673, and the daily averages BRL 7.73 billion and 705,855 trades respectively.

Source: BM&FBOVESPA, 18.10.2011

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Brazil: High Frequency Trading in Brazil: Mirage or Miracle?

Christian Zimmer, Head of Quantitative Trading and Research, and Hellinton Hatsuo Takada, Quantitative Trader, of Itaú Asset Management reveal the truth about high frequency trading in Brazil.

Conference panels, discussions and articles on High Frequency Trading (HFT) generally start with its definition. The term HFT is like ‘Cleopatra’ – sexy and mysterious and everyone is keen to know more about it. But the term HFT speaks for itself, so is it wasting time to go over it again?

Probably, because the term ‘high’ only has meaning relative to an external point of reference, just like cold, hot, sweet or other adjectives. This subjectivity is all the more interesting, as it is extremely difficult to measure an investor’s  brief holding period in most financial markets and, therefore, determine if it really is ‘high’. Unlike in the US, where the exchanges do not register the origin of the trade, Brazilian regulation allows BM&FBOVESPA to identify the final client on every trade. Consequently, it is much easier to measure the holding period of an investor for each asset. Also, this rule is the means by which the exchange determines whether an investor’s trade is classified as a ‘day trade’ and is thus eligible for reduced fees.

Naturally, BM&FBOVESPA does not classify a trader opening a position in the morning and closing it at the end of the day as a high frequency trader. There should be far more trading than this to qualify as HFT.  But how much more? It depends on the exchange’s criteria and reference point for ‘high’.

Figures for HFT published by BM&FBOVESPA in their April 2011report show 3.9% of the BM&F segment is high frequency and 5.9% of the BOVESPA segment. Consequently, the reduced fees are presented to the Brazilian trading community as less of an issue, as they say there is evidence of HFT taking hold. But HFT volume is not really increasing and is still far off the US figures which are often cited at around 60-70%. After carefully observing BM&FBOVESPA market prices, it is easy to conclude that it would take some time (possibly hours) to have a change in the prices sufficiently large enough to pay the transaction costs.Remember that HFT strategies are very sensitive to transaction costs.

Our suggestion is to step away from making subjective references to ‘high frequency’. Instead, one should look at the underlying trading strategies. The incentives an exchange should create to attract flow must be adjusted to the strategies that are really needed. Each strategy deserves a different set of policies and this will help the diversification of the traders’ strategies.

A trader using a market maker strategy can live with exchange fees as long as the bid-ask spread is sufficiently high. If the spread narrows, the costs become crucial and the exchange must lower the fees in order to keep this client in the market. On the other hand, a directional trader has different issues; if the fees are high, a trader must wait longer for a relevant price move so that they can capitalize on their position. Contrary to the market maker, the directional trader loves to see narrow bid-ask spreads. There would be no need to lower fees when the spread is close. The same is true for the statistical arbitrage traders.

When looking at the third party analyses of HFT in the international markets, we often see that the most common strategy is the market maker approach. This fact is strongly influenced by market fragmentation, which we do not have in Brazil. Fragmentation creates new intermarket trades, which could qualify as arbitrage trades, but not necessarily as market maker trades. Fragmentation also makes exchanges and other venues compete for the customers that provide liquidity and, as a result, give incentives to market makers. As mentioned above, Brazil does not have a fragmented market and BM&FBOVESPA does not see it necessary to ask for more liquidity. At least not as long as international capital flows are strong and increasing. Liquidity is needed in second tier shares and below.

It remains to be seen whether the inventive BM&FBOVESPA program to exempt the officially designated market makers from exchange fees will be enough to stimulate other participants to trade. At least theoretically, this provides an entry/ exit point for statistical arbitrage traders. However, as long as the allowed spreads can be as large as 1%, the strategy might not be necessarily profitable. At this moment it is worth noting that most of the Brazilian statistical arbitrage trades are longshort trades in stocks focusing on preferred-common stock relationships (in Brazil they are known as PNON, with PN standing for preferred stocks and ON for common ones).

It is also interesting to look at statistical arbitrage trades that are latency dependent, i.e. true arbitrage trades. Are these the ‘true’ high frequency traders? If there are only a few trading opportunities per day, it does not seem as if BM&FBOVESPA could classify them as high frequency. Latency sensitive traders typically use what the exchange refers to as the DMA3 (clients directly sending orders through a connection to the exchange) or DMA4 (co-location) categories. Trades through these categories can easily be measured. Unfortunately, the ability to measure the latency sensitive flow is lost because the DMA3 category is also used for any direct sponsored customer trades, so all that remains is to  measure the flow from the co-location model.

If we use the DMA4 numbers as the reference point for HFT, then we reach a HFT participation figure of 2.8% in the BM&F segment and about 2% in the BOVESPA segment (as at April 2011). The BM&FBOVESPA DMA4 measurements are significantly lower than their HFT percentages. This suggests they accounted additional strategies into this pool, such as market making strategies. Theoretically market makers could have contributed to this figure, but because of a very narrow spread in the high volume stocks and high fees, it is reasonable to assume that the market making strategy does not contribute too much to the HFT volume.

One might argue that there are still the directional trades. Yet, as this strategy needs a certain price move before it can make money and the number of trades per day is limited. On the other hand, the number of traders that might be using this strategy is not limited, as the models are nearly all different. There are only about ten Brazilian players able to successfully run intraday directional trades. Perhaps we should conclude that the international players have better models or a better understanding of the market?

Recently, BM&FBOVESPA announced a new pricing model for high-frequency traders, which uses the Average Daily Trading Value (ADTV) to calculate fees in its equity market. Fees range from 0.019% for R$20 million ADTV up to 0.01% for firms trading over R$500 million ADTV. Ironically, almost no firms were able to qualify as ‘high frequency’ players within the exchange’s cost reduction program.

Source:FIXGloabalTrading, 15.06.2011

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Brazil: BM&FBOVESPA – News September 2011 – Nr.20

Launch of the first stage of the BM&FBOVESPA PUMATrading System

BM&FBOVESPA announces the conclusion of the first stage of development and integrated tests with the market of its new trading platform, named the BM&FBOVESPA PUMA Trading System. This is a multi-asset electronic trading platform that has been developed by BM&FBOVESPA and CME Group. BM&FBOVESPA PUMA Trading System will replace the Global Trading System (GTS), Mega Bolsa, BOVESPA FIX and SISBEX, integrating them into a single system with greater processing capacity, extremely low latency, and new functions. The implementation will occur in stages:

  • 1st Stage: Substitution of GTS (derivatives and spot foreign exchange);
  • 2nd Stage: Substitution of Mega Bolsa (equities and equity derivatives);
  • 3rd Stage: Substitution of BOVESPA FIX (fixed-income corporate securities) and SISBEX (government securities).

The Exchange implemented the BM&FBOVESPA PUMA Trading System in the spot foreign exchange market on August 29, 2011. The other stages will be executed in the following weeks, at dates to be announced at an opportune moment. As part of the GTS replacement effort, instruments will migratein four-stages. At each stage, orders sent to the Exchange for these contracts will be processed exclusively by the new system. The migration stages are:

  • 1st Migration: Spot foreign exchange contracts.
  • 2nd Migration: Agricultural derivatives.
  • 3rd Migration: Financial derivatives (interest rates, foreign exchange, inflation indices, gold etc.), except for derivatives based on stock indices.
  • 4th Migration: Derivatives based on stock indices.

Automated solution for market surveillance, operation and market oversight

BM&FBOVESPA and BOVESPA Market Supervision (BSM), the Brazilian self-regulatory organization in charge of inspecting and supervising transactions and trade authorizations, announced on September 15 that they will use NASDAQ OMX’s SMARTS Integrity market surveillance platform to monitor trading across their equities and commodities platforms. Using SMARTS Integrity, BM&FBOVESPA and BSM will have a comprehensive portfolio of alert scenarios for market behavior.

> More information

BM&FBOVESPA and BNDES present new portfolio for the Carbon Efficient Index

BM&FBOVESPA and BNDES announced on September 5 the composition of the theoretical portfolio of the Carbon Efficient Index, valid from September to December 2011. The ICO2 is an index composed of stocks in IBrX-50 index companies that have accepted involvement in the initiative, adopting transparent practices as regards greenhouse gas emissions (GGEs). The calculation of shares in the ICO2 index takes into consideration the greenhouse gas emissions and free float of companies.

The portfolio valid as of today can be viewed here.

New head of BM&FBOVESPA for UK

BM&FBOVESPA announces that Sergio Gullo has been hired as the new chief representative for BM&FBOVESPA in London. He will report to BM&FBOVESPA International Business Development Officer Lucy Pamboukdjian and be responsible for operations with the European, Middle Eastern and African markets. Sergio Gullo has been active in the financial market for more than 27 years. He was Business Development Manager in the United Kingdom for BGC Partners and has worked in financial institutions such as Banco Votorantim and Renaissance Capital, specializing in emerging markets and always in commercial areas with a focus on fixed income and structured products. He also held a wide range of positions at Lloyd’s TSB Bank for 19 years, in both Brazil and the UK.

New office in London

The BM&FBOVESPA office in London has moved to One New Change, 4th floor (London, EC4M, 9AF, United Kingdom). The London office may be contacted by e-mail at sgullo@bvmf.com.br and by telephone at (+44) 203 379 3978.

BM&FBOVESPA and Shenzhen Stock Exchange Sign Memorandum of Understanding

BM&FBOVESPA (BVMF) and the Shenzhen Stock Exchange (SZSE) signed on September 26 a memorandum of understanding (MOU) which includes personnel exchange, mutual training and information and experience sharing. Ms Song Liping, President of the Shenzhen Stock Exchange, and Mr. Edemir Pinto, CEO of BM&FBOVESPA, signed the MOU last month during the 5th International, Financial and Capital Market Conference in Campos do Jordão, in the state of São Paulo.

BM&FBOVESPA’s options and capital raising activity

According to the WFE (World Federation of Exchanges), BM&FBOVESPA is ranked as #1 in volume of Stock Options contracts trades and #4 in IPOs (Capital Raised). These and other regulated exchange industry numbers are available at: http://www.world-exchanges.org/statistics

Securities Lending

In August, the total number of securities lending transactions reached a record 141,721 compared to the previous record of 121,971 in May 2011 and to 114,989 in July. Financial volume was BRL 62.63 billion in August from BRL 52.16 billion the previous month.

Ibovespa and other index portfolios, valid for September-December 2011

BM&FBOVESPA has announced the Ibovespa theoretical index portfolio, which will be valid from September 5 to December 29, 2011, based on the closing of the September 2, 2011 trading session. The new portfolio now includes common shares in BR Malls and Cia Hering, which brings its total to 68 stocks in 63 companies.

> More information

BM&FBOVESPA launches app for Google Chrome web browser

BM&FBOVESPA announced on September, 16th that users of the Google Chrome web browser can download a free app that allows real time monitoring of the share prices of companies traded on BM&FBOVESPA and of the directions taken by the main capital market indexes. This tool allows users to customize their share portfolio, storing in the “Favorites” tab the companies that they wish to monitor daily. The app includes films that explain stock investment, wealth creation, and financial education. It also contains messages that are sent to the BM&FBOVESPA twitter channel @Info_BMFBOVESPA

To obtain the BM&FBOVESPA Google Chrome app, please access the Google Web Store and download the file at: https://chrome.google.com/webstore.

2011 EVENTS

Family Office Summit – Latin America

BM&FBOVESPA is currently sending invitations for this event promoted by the World Research Group and which will be held in São Paulo September 26-28. A BM&FBOVESPA representative is scheduled to talk about alternative investments. The summit will present current trends for optimizing effective strategies and alternative methods to produce investments for single and multi family offices in the Brazilian capital market. There will be a special networking session bringing together managers, single and multi family offices, advisors and consultants.

Location: Intercontinental São Paulo – Alameda Santos, 1123, São Paulo , SP.
Date: September 26-28, 2011.

> Full Agenda and Registration

2nd FX Growth Markets Series: Brazil – Profit & Loss

BM&FBOVESPA will join the Profit & Loss FX Growth Markets conference on October 20, 2011 at the Tivoli Hotel in São Paulo. Profit & Loss has been operating its highly successful series of Forex Network and FX Growth Markets conferences for more than 10 years, with regular annual events held in London, New York, Chicago, Singapore, Brazil, Mexico, Colombia, Chile, Shanghai and Toronto, and comes to Brazil for the second time. A BM&FBOVESPA representative will talk at the event.

Location: Tivoli Hotel São Paulo, São Paulo, Brazil
Date: October 20, 2011.

> Full Agenda

BM&FBOVESPA at Chicago’s FIA EXPO

BM&FBOVESPA will exhibit at FIA EXPO 2011. The event attracts approximately 5,000 people from more than 30 countries, from senior staff at brokerage firms and exchanges to floor traders, pension fund managers, corporate treasurers, CTAs and CPOs, and individual investors. BM&FBOVESPA staff will present the Exchange’s products, connectivity, DMA access via Globlex, co-location and others.

Location: Hilton Chicago, USA
Date: October 10-12, 2011

> More info

The World Cup of ETFs and Indexing Latin America

BM&FBOVESPA is lending its support to the World Research Group’s “World Cup of ETFs and Indexing Latin America.” The event aims at providing attendees with the best practices for ETFs use, as well as a comprehensive analysis of market structure, regulations and current and future opportunities. The expected audience includes pension funds, hedge fund managers and investors, investment advisors, financial consultants, and other market participants. A BM&FBOVESPA representative will talk about the Exchange’s ETF products.

Location: São Paulo (TBC)
Date: October 17-18, 2011.

> Full Agenda and Registration

Volumes and trades by Direct Market Access (DMA)

BM&F Segment
In August, BM&F* market segment transactions carried out through order routing via Direct Market Access (DMA) registered 41,417,494 contracts traded and 4,431,750 trades. In July, the volume reached 20,009,841 contracts traded and 2,417,398 trades.

The volumes registered by each access modality in the BM&F segment were as follows:

  • Traditional DMA – 17,540,231 contracts traded, in 1,306,241 trades, in comparison to 7,440,774 contracts and 797,002 trades in July;
  • Via DMA provider (including orders routed via the Globex System) – 14,088,756 contracts traded, in 435,281 trades, compared to 7,040,432 contracts and 258,881 trades in July;
  • DMA via direct connection – 4,210 contracts traded in 830 trades, against 3,691 contracts and 977 trades in July;
  • DMA via co-location – 9,784,297 contracts traded, in 2,689,398 trades, compared to 5,524,944 contracts and 1,360,538 trades in July.

In August, transactions carried out by foreign investors presented by CME to BVMF (who use the Globex-GTS order routing system or access BVMF markets via co-location) totaled 5,308,308 contracts traded, in 1,235,349 trades, compared to 2,897,744 contracts and 688,862 trades in July.

BOVESPA Segment
In August, order routing via DMA in the BOVESPA* segment totaled BRL 138,522,096,000.00 and 17,021,408 trades, from BRL 95,030,778,000.00 and 11,225,193 trades the previous month.

Trading volumes per type of DMA in the BOVESPA segment:

  • Traditional DMA – Volume of BRL 120,451,427,000.00 and 14,098,638 trades from BRL 87,674,861,000.00 and 10,091,956 in July;
  • DMA via co-location – Volume of BRL 16,691,370,000.00 and 2,755,498 trades from BRL 6,381,361,000.00 and 1,007,081 in July;
  • DMA via provider – Volume of BRL 1,379,299,000.00 and 167,272 trades from BRL 974,556,000.00 and 126,156 in July.

* Direct access to the BM&FBOVESPA market segments is carried out through DMA models 1, 2, 3 and 4. In model 1 or traditional DMA, the client accesses the GTS or Mega Bolsa through technological intermediation of a brokerage house. In model 2 or via DMA provider, the client does not use the technological intermediation of a brokerage house, but rather connects to the system through an authorized access provider. DMA via order routing with CME Globex is also a form of DMA model 2. In model 3, the client connects to the system through a direct connection. In model 4 or via co-location, the client installs its own computer within the Exchange’s facilities.

Notes:

The volumes registered by access modality include both buy and sell sides of a trade.

The volumes by access modality for both the BM&F and the BOVESPA market segments have been reported in a consolidated manner in the BM&FBOVESPA statements since May 2009.

MARKET RESULTS

BM&F Segment August 2011

Derivatives markets in the BM&F segment (including financial and commodities derivatives) totaled 78,606,873 contracts and BRL 5.23 trillion in volume in August, compared to 44,199,125 contracts and BRL 3.35 trillion in July. The daily average of contracts traded in the derivatives markets in August was 3,417,690, in contrast to 2,104,720 in July. Open interest contracts ended the last trading day of August with 37,821,302 positions, compared to 30,716,596 in July.

BOVESPA Segment August 2011

In August 2011, the equity markets (BOVESPA segment) financial volume totaled a record BRL 177.906 billion, in a record 16,234,673 trades, with daily averages of BRL 7.73 billion and a record 705,855 trades. This was in comparison to the prior total volume record of BRL 155.55 billion in October 2010, the prior total trades record of 11,172,707 in May 2011 and the prior daily average trades record of 544,88 in February 2011.

Source:BM&FBOVESPA, 20.09.2011

Filed under: BM&FBOVESPA, Brazil, FIX Connectivity, News, Trading Technology, , , , , , , , , , , , , , , , , , , , ,

Alternative Latin Investor: Premium Launch Issue Nr 11.

Alternative Latin Investor August 2011 – Issue 11 Premium Launch Issue

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Latin American Venture Capital: Lessons Learned from China

Be careful What You Wish For- A Brazilian Cautionary Tale

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