TheChek News Flow

Standard Chartered Looks Unapproachable

You know excitement about a surge in mergers and acquisitions is growing when deal chatter spreads to the unloved banking sector. Unfortunately, one rumor—that Standard Chartered is a serious takeover target—looks like a dud. And that isn't just because Chief Executive Peter Sands has said as much. It isn't surprising Standard Chartered is the subject of speculation. The U.K. bank's focus on emerging markets, initially seen as a strength after the global financial crisis, is currently its Achilles' heel, especially after a big write-down in its Korean business last year. Its management is in upheaval following the recent announcement financial chief Richard Meddings will leave. And it is still under the shadow of a $667 million fine levied in 2012 for breaching U.S. sanctions against Iran. But for believers in the long-term advantages of developing nations, Standard Chartered might look appealing. Its shares have dropped by over one-quarter since their peak last March. Its multiple of price to tangible book has fallen to 1.2 times from nearly 1.7 times in less than a year. The problem is the other side of the equation—trying to identify a realistic buyer. Such a buyer would need deep pockets: Standard Chartered's market value is nearly $55 billion. The last time a cross-border deal of that size took place in banking was when Royal Bank of Scotland bought ABN Amro in 2007. That didn't end well. Indeed, drastic changes in regulatory and political attitudes make banking megadeals practically unthinkable. The largest banks are now required to hold more capital. There is also great sensitivity to their outright size. That alone could prove an insurmountable obstacle to any big bank with amorous intentions toward Standard Chartered, given it has assets of about $650 billion. Consider that before the crisis, J.P. Morgan Chase would have been seen as a potential suitor. Such a deal now would be implausible given the regulatory cloud over the bank, not to mention that it would swell J.P. Morgan's balance sheet to more than $3 trillion. Midsize banks looking to grow would also face problems. Say Australia & New Zealand Banking Group—one of Standard Chartered's supposed suitors—were to do the deal. The combined bank would have a core Tier 1 capital ratio of around 9.5%, Sanford C. Bernstein estimates. Catapulted to megabank status, it could have to raise that to 11.5% to meet regulatory requirements. Some hefty cost or revenue synergies would be needed to make the deal economically viable. That is before considering whether any national regulator would tolerate a bank under its purview adding a pile of emerging-market risk. China's regulator certainly seems to prefer its banks to expand abroad incrementally. European banks are still mostly in balance-sheet-repair mode, hardly the time for them to make big acquisitions. Blocking a deal for Standard Chartered would be a no-brainer for most regulators around the world. That is reason enough to temper expectations that any takeover might actually happen.

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UBM May Face Breakup as Hedge Fund Amasses Stake, Times Reports 2014-01-26 10:41:42.272 GMT

By Nicholas Larkin Jan. 26 (Bloomberg) -- Hengistbury now 2nd-biggest investor w/ 5.2% stake in GBP1.7b-valued UBM, Sunday Times reports, w/o saying where it got information. * UBM may be broken up or forced to sell PR Newswire unit * Hengistbury set up in 2011 by Stuart Powers; unclear whether it will move for disposal

For Related News and Information: First Word scrolling panel: FIRST<GO> First Word newswire: NH BFW<GO>

To contact the reporter on this story: Nicholas Larkin in London at +44-20-7673-2069 or nlarkin1@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at +44-20-7330-7304 or ccarpenter2@bloomberg.net

Stand Clear of Falling Knives

Last week's emerging-markets rout could be just the beginning.

Emerging Markets

Pick a horror flick, any horror flick, and it's likely to be an apt metaphor for emerging markets right now. But our favorite might actually be a comedy, Spaceballs, in which John Hurt, reprising his role in Alien, shouts, "Oh no, not again," as a tiny extraterrestrial pops out of his belly.

Yes, again—but this is no laughing matter. Emerging markets are once more front and center after the iShares MSCI Emerging Markets ETF (ticker: EEM) dropped 3.9% last week, its largest one-week decline since last June. Funds devoted to Chile, Turkey, and Brazil, meanwhile, fell more than 5% last week as investors headed for the exit. Sure, that looks a lot like the turmoil that hit emerging markets last year, when global interest rates started to rise after the Federal Reserve broached the topic of curtailing its bond purchases. This time, however, something worse could be brewing: A repeat of the emerging-market crises of the 1990s.

Last week began with few signs of trouble. In fact, it appeared as if emerging markets might actually be strengthening—the EEM was up 1.1% on the week through Wednesday. On Thursday, however, an indicator of Chinese manufacturing strength showed activity contracting, Argentina stopped trying to prop up its peso, and Turkey tried but failed to support its lira—and the rout was on. Noticeably missing was the fear of rising rates that hit emerging markets last year. The response to the emerging-markets selloff has been to buy bonds issued by the U.S., Germany, and Japan. As a result, the U.S. 10-year yield has dropped to 2.74% from 3.05% at the beginning of the year.

THAT'S A SIGN THAT WHAT'S happening in emerging markets has more to do with local conditions than what's going on overseas. Brazil, for one, reported Friday that its current account deficit widened to $8.7 billion, bringing its 2013 deficit to a record $81.4 billion. Turkey's own current account deficit is dwarfed only by a corruption scandal that has already made investors wary of investing. And the fear is that the problems of a few emerging markets will tar the entire asset class, despite differences in their economies and financial situations. "This is a domestically created problem," says Michael Shaoul, CEO of Marketfield Asset Management. "And we haven't seen anything like this since 1998."

The currency market will be key. Last week, Argentina's peso plunged 15%, Turkey's lira dropped 4.2%, and Russia's ruble fell 2.9%. The problem: Currency weakness is often a prelude to a larger economic crisis. Credit tightens, property values fall, and economic growth slumps. And that could leave emerging markets facing a crisis like the mid-to-late '90s, when currencies plunged, companies defaulted, and it took years to recover. "Currency volatility is anathema to foreign investors," says Robbert van Batenburg, director of market strategy at Newedge. "Foreign investors run for the doors."

It's tempting to look at the MSCI Emerging Market index's 8% drop this year and consider it a buying opportunity, especially now that the emerging markets trade at a multiple of 11.3 times earnings, compared with 16.8 times for the Standard & Poor's 500. Consider, however, that at the end of the 1990s emerging-market slump, U.S. stocks traded at 22 times earnings, while the MSCI Emerging Market index had a multiple of 3.5.

No one's saying it's going to get that bad, but it could get a lot worse than it is now. Unless you're dollar-cost averaging, don't try to catch this falling knife.

Concerns about the vulnerability of some emerging economies and gyrations in financial markets over the past few days should not dent "cautious optimism" about the global economy this year, leading central bankers and officials said on Saturday. In the big closing session of the World Economic Forum in Davos, they recognised risks existed and badly run emerging markets might be vulnerable to shocks, but concluded that the outlook was brighter than it has been for many years.

Haruhiko Kuroday, the Japanese central bank governor said: "I think we can be cautiously optimistic about the global outlook. "The US economy is likely to grow by 3 per cent plus this year as well as next year. "Europe is finally recovering. Japan is also making significant progress. And emerging economies like India, China as well as Indonesia and others, their economic growth rates is likely to be maintained at high levels or likely to accelerate," he said. Larry Fink, chief executive of BlackRock struck a note of more caution about market movements. "The experience of the market place of this past week will be indicative of this entire year; I think we are going to be in a world of much greater volatility. That doesn’t mean we end up in a bad place . . . but there will be quite a bit of disruption". The disruption Mr Fink talked about came, he said from an expectation in markets of always rising equity prices and the ease with which badly-run emerging economies could blame the Federal Reserve’s tapering of monetary policy on a natural desire of capital to move away. Montek Singh Ahluwalia, the deputy chairman of India’s planning commission, said that India did not fear a Fed taper despite the difficulties cause last year. He said India was now in a much better place to withstand any withdrawal of US monetary stimulus. "I feel that while interconnection is there, well managed economies will be able to withstand the shock". Christine Lagarde, managing director of the International Monetary Fund, said apart from the recovery she expected this year, she was concerned about two other "Rs". The first was "risks" where she thought some old risks such as the need to finalise financial sector reforms were as important as risks over US tapering, and new concerns such as deflation in the eurozone. She also said that in the longer-term the other "R" was "reset", by which she explained that monetary and fiscal policies around the world still had a long way to go before they could be classed as normal. "The final reset is those structural reforms that are necessary in all corners of the world," she added. The consensus of cautiously optimistic sentiment has not been seen at the World Economic Forum since 2007 and it has been shared by policy makers, politicians and business leaders in Davos this week.