The slowing Chinese economy and unwinding of US quantitative easing have squeezed emerging market bonds. However, Brett Diment at Aberdeen Asset Management sees an opportunity in local currency EM debt, as he explains to FT’s EM editor James Kynge.
By Michael Power, Investec Asset Management
“Are we nearly there yet?” Most of us have faced – and in our younger days probably asked – the same question. As with children on long car journeys, this question is also posed by investors who cannot wait for bear markets to be over.
Commodity investors – and recently this has expanded from the metals and coal complexes to include oils – are wondering aloud when their recent ordeal will all be over. The same can be said for investors in those commodity-rich countries, as they survey their currency-ravaged portfolios. And this phenomenon is not confined to emerging markets (EM) – investments in Australia, Canada and even Norway have suffered the same fate.
By Ian Dixon of Investec
Following his government’s first budget there has been much debate about the amount of change Narendra Modi, India’s new prime minister, will be able or willing to achieve. His supporters counter such scepticism by arguing that the government is just three months old and to expect radical change in such a short time after 10 years in opposition was always unrealistic.
On international debt markets, however, we have already begun to see a step change in attitudes towards Indian debt, particularly among UK investors.
Hyun Song Shin, head of research at the Bank for International Settlements, has been sounding alarm bells over the debt issued by emerging market corporates since last year. His latest research, presented to the BIS AGM last month, explains how investors’ hunger for yield has put them on a hair trigger for selling should anything go wrong.
Shin’s paper shows how many more long-duration EM bonds asset managers are holding than they were in 2008.
The rush of emerging markets into euro-denominated debt continued on Friday, with Morocco issuing a €1bn 10-year bond with a 3.5 per cent coupon, priced to yield 215 basis points above midswaps, the benchmark euro bond rate.
Mohamed Boussaïd, Morocco’s finance and economy minister (pictured), told beyondbrics that while market conditions had been favourable, the deal was above all an endorsement of Morocco’s economic and political reforms and of its success in steadily reducing the government’s budget deficit.
Is it 1997 all over again? EM bulls scoff at the idea: this time, they say, is different, and for solid reasons.
Two things especially have changed, according to this view. Emerging markets no longer have such high levels of debt relative to GDP.
And whereas in the 90s many EMs had a lot of dollar-denominated debt backed by local-currency revenues (the so-called “original sin”), much of this has been replaced by local-currency debt.
But have things really changed that much?
Global bond sales from emerging markets have defied all odds to hit a record high in 2013.
Despite the market turmoil caused this summer by concerns over the US Federal Reserve’s plans to scale back its monetary stimulus programme, EM bond issuance jumped to $506bn last year, surpassing the record $488bn in 2012, according to data from Dealogic.
Few expected September to be a record month for sovereign debt auctions. Ever since the US Federal Reserve first hinted in May at a possible “tapering” of its massive bond buying programme, emerging market countries have found borrowing much tougher and more expensive. Borrowing costs soared and issuance shrunk accordingly.
But then Fed decided to keep the printing presses whirring and EM yields settled down a bit. Not surprisingly countries took the opportunity to issue debt. The result? September ended up being the best month for EM sovereign debt issuance this year.
The party is back – thanks to Ben.
Over the past two days, borrowers from Colombia to Sri Lanka have rushed to take advantage of the window of opportunity created by the US Federal Reserve’s decision to keep the QE punchbowl flowing, raising at least $5.3bn on the international bond markets.
What's the yield on that?
What’s the going rate for a Kardashian? A yield of 6.25 per cent, according to Armenia’s bond issue.
The “Kardashian”, as it has been dubbed by Standard Bank’s head of emerging markets research Timothy Ash, will be issued in Armenia’s first international sovereign debt sale. Named after Kim Kardashian, a US celebrity whose family (see left) is originally from the country, the dollar bond is the latest exotic asset to have attracted investors’ gaze.
Hungary shows all the signs of joining the emerging markets rush to tap bond markets before the onset of any tapering gains effect, gearing up for a US bond issue of up to $5bn, according to a shelf registration filed with the Securities and Exchange Commission in New York on Tuesday.
We have said it before and we will say it again: reports of the death of emerging markets have been greatly exaggerated.
Two major bond issues from Russia and South Africa this week, totalling $9bn, offer further proof that, despite the sharp sell-off in EM assets during the QE taper talk since May, there is still appetite from investors for EM debt – if the price is right.
Remember those Genghis bonds?
Back in November, eyebrows were raised in the emerging markets debt investment community when Mongolia – a country that has been rescued five times in the past 22 years by the International Monetary Fund – managed to raise $1.5bn at a price below Spain’s borrowing costs.
At the time, many took the sale – equal to nearly one-fifth of the size of Mongolia’s economy and akin to the US borrowing $2.5tn in one go – as yet another sign that investors, flushed with cash and desperate for yields, were jumping into markets that they don’t fully understand.
Fast forward eight months and the skeptics appeared to have been proved right.
It’s a sign of the times. Ghana on Thursday raised $750m from the sale of 10-year eurobonds, but the deal did not come easy.
With investors more cautious about lending to frontier countries with shaky finances following June’s violent market rout, Ghana had to pay a premium to get the deal off the ground.
To paraphrase that famous quote from Mark Twain, the reports of the death of investor interest in emerging market bonds appear to have been greatly exaggerated.
For proof, look no further than the spate of issues so far this month. This week, Bahrain successfully sold $1.5bn of bonds, joining Indonesia, Nigeria and Mexico’s Pemex in tapping the market following June’s market rout.