We mentioned Icelandic bonds the other day. They’re an intriguing investment because yields are exceptionally high. Obviously, wherever you get high rewards, it is a good idea to look around to find out why; there’s bound to be a reason. Mr. Market never gives our favors without strings attached. The cord attached to this particular yield leads right to the krona – which fell 22% last year. Even if you can get an inflation adjusted, or real, yield of 5% on Icelandic bonds, another drop like that in the currency would leave you deep in the hole.
We put the question to a team of investment managers from HSBC. Here is their reply:
“There is obviously a chance that all the pessimism over debt and default is over done and that the bonds are a good buy at these prices. HSBC PB (Private Bank) wouldn’t recommend it as a strategy. The main reason is that our view is that the bust in credit will take a long time to correct and has significantly further to go. The market has to come to a point that it is willing to lend to Icelandic banks again. This is unlikely for the foreseeable future. As I am sure you know the mainstays of the economy are fishing (70% of exports!), aluminum (the country has a developed a large amount of geothermal electricity) and to a small extent tourism – not particularly inspiring given the scale of the problem.
“Rather than re-visiting an old bull market story, such as Iceland, we would prefer to look to the future. That would mean that we would be looking at different sectors which will grow or protect investors money because they are working in high-demand areas. Because the developing economies of Russia, China, Latin America and the Middle East are cash-rich on the back of the commodities boom, we prefer to invest, generally, in those economies.”
*** Finally, speaking of Latin America. We got an update from colleague Horacio Pozzo on what is happening in Argentina (for which we are bound this afternoon):
“Today in Argentina, it’s a holiday, the anniversary of the beginning of the Malvinas War (known in the UK as the Falklands War). But yesterday, I thought for a moment that the holiday had been moved forward. Because my neighborhood bakery and butcher were both closed. The crisis of the countryside has arrived in the city…shortages are beginning to appear.”
The crisis of the country is simple enough to explain: reacting to record grain prices, Argentina’s farmers planted as much as they could. Now, it is autumn in South America…and the crops are being sold. But along comes the government with a tax on grain exports of up to half the proceeds. Naturally, the farmers were hacked off. And then President Cristina Fernandez de Kirchner made an aggressive speech, which made them even madder. Soon, they had mounted a siege operation against Buenos Aires, blocking 400 roads into the capital, hoping to starve the city into submission.”
It was a showdown that threatened violence and disruption. Too bad for the Argentines, who have been enjoying an economic growth rate only slightly behind that of the Chinese. But no day is ever so sunny that politicians can’t find a way to make it rain. We’ve seen that all over the world…and throughout all history. And now in Argentina.
We called our son in Buenos Aires on Friday.
“What’s going on…what’s the latest…if I come down there this weekend, will I be able to get something to eat?”
“Dad, don’t worry about it. This is Argentina. The Argentines are a bit theatrical. But life goes on – at least in this part of the city. Besides, they’ve called off the blockades and both sides have agreed to a 30-day cooling down period. That ought to give them time to figure out a way out of this mess without losing face.”
And so…we’re off…catching a cab…then a plane…trains and automobiles, too!
Markets and Money