By Sergio Trigo Paz and Gerardo Rodriguez, BlackRock
Periodic phases of market volatility this year have brought back painful memories of emerging markets (EM) crises. Some of these crises – particularly those associated with US monetary policy tightening in 1994 and 1999 – caused significant damage to emerging economies and their asset prices.
But those difficulties brought a hidden blessing. The crises taught countries that their misfortunes were caused not so much by the actions of the US Federal Reserve as by the lack of policy buffers and financial flexibility in their home markets. This realisation has helped foster an improvement in the overall framework of EM macroeconomic policies. Read more
By Paul McNamara of GAM
A rise in overall emerging market (EM) debt levels and an increase in US Treasury yields is causing many investors to look for a new crisis. The argument goes that developed market (DM) central banks cut rates to zero in response to the financial crisis, and capital flowed out of these economies in search for yield.
Corporate bonds issuance in EM increased, and because EM banks were in far better shape than their developed market counterparts, credit growth soared. A common concern among EM investors is the risk that when the US Federal Reserve tightens rates, capital inflows from DM to EM could reverse, causing GDP growth to collapse.
We believe that the risk of a collapse in EM growth prompted by capital outflows is much lower than is feared. EM fundamentals have adjusted substantially already: credit growth has slowed by 9 percentage points since its peak in mid-2011. Read more
A few months ago, fixed income investors couldn’t get out of Brazil, South Africa and Turkey quickly enough.
The rump trio of the so-called ‘fragile five’ emerging market economies were at the eye of a storm that roiled financial markets in January and pummelled their currencies as weaknesses in their economies were exposed.
Things have changed. Read more
In case you missed it, here’s a great chart from Robin Wigglesworth’s Local currency bond market given revamp story: it shows how investors are missing out on emerging market corporate local debt. Read the full story here; chart after the break. Read more
The distinction between emerging markets and developed markets is eroding as EM financial systems mature. Ewen Cameron Watt, chief investment strategist at BlackRock Investment Institute, tells Long View columnist John Authers how emerging markets are growing up.
Money managers seeking access to EM domestic debt have a new option from Thursday with the launch of what is claimed to be the world’s first exchange traded fund for emerging market inflation-linked bonds. Read more
When is a BBB- borrower actually a AA+? No, this isn’t financial trickery of the kind made famous in the US subprime fiasco (and perhaps repeated in China in 2012). It’s a new facility offered by the Asian Development Bank to promote cross-border borrowing within Asia.
Under the scheme, the ADB-backed fund guarantees the debt of a corporate issuer, and effectively lends out its rating, regardless of the company’s actual rating. It’s been a year in the making, but finally the scheme has broken the seal. Read more
In a monetary world dominated by QE and zero interest rates, investor appetite for local currency EM debt has gone from strength to strength in the last few years.
In fact, EM yields have fallen from 6.8 per cent in mid-2007 to 4.7 per cent now. The question is: have they gone too far? Read more
Poland’s banks are generally well financed and solid, but one of their biggest problems is a mismatch between short-term deposits and long-term loans, many of which are denominated in foreign currency – largely Swiss francs. The mismatch has been a concern for regulators, who have pushed banks to make their asset structure less vulnerable to sudden changes in sentiment and to any turmoil in the eurozone.
Now Getin Noble Bank, one of the most aggressive forex lenders during the real estate boom which ended in 2008, has taken a step towards better balancing its assets by securitising a 1bn zlotys ($325m) portfolio of 33,000 car loans last week. Read more
By Jan Dehn of Ashmore Investment Management
Emerging market bonds have performed well this year. Sovereign debt has returned nearly 16 per cent. Corporate high yield has returned nearly 17 per cent and local currency bonds about 14 per cent. So is it time to run for the hills?
The answer is emphatically ‘no’. Read more
Among the warnings sounded by the International Monetary Fund last week was one over the dramatic surge of foreign investment into emerging market local bond markets.
As the IMF pointed out, quick inflows of capital can be followed by even faster outflows if another crisis strikes global markets. It focused on nine countries where foreign investors have been prominent since the 2008 fall of Lehman Brothers. Chart of the week picks up the trail. Read more
Hint, hint: the markets gave South Africa’s monetary policy committee a rather strong signal on Wednesday as three-year bond yields fell to a record low. The reason? Retail sales grew in April at the slowest pace for two years, at just 1 per cent year-on-year.
Yields on South Africa’s debt due in 2015 fell six basis points to 6.18 per cent, the lowest closing figure on record according to Bloomberg. Yields on the 1, 2 and 10-year benchmark bonds all fell too, as did 3-month forward rates. Read more
Good news for South Africa and it’s bond holders. On Tuesday Citigroup announced it may become the 23rd country in its World Government Bond Index later this year.
South Africa’s share of the index will be small – but its inclusion is significant. Read more
By Bernd Braasch of the Bundesbank
Reducing global real imbalances and a reform of the international financial system are still top of the international political agenda. But while a co-ordinated approach and a more market-led exchange rate system are often publicly discussed, the problem of “missing financial markets” is less prominent. Read more
There seems to be have been a small uptick in risk appetite this week towards emerging market funds, with equities in favour among investors.
Emerging-market equity funds took in $1.9bn in the week to Wednesday, while those targeting bonds attracted $172m, according to investment banks citing EPFR, the research company. Read more
What to make of this week’s fund flows? Emerging market hard currency bond funds saw a big outflow; EM local currency bonds continued to ebb away; but EM equity funds leapt up.
The hard currency number may be a blip – but the local currency data hint at bigger problems. Read more
As expected, emerging market funds continued to haemorrhage capital this week as investors looked to cut risk exposure at year’s end. EM investors’ aggressive risk-off mode wasn’t helped by a limper than hoped for European summit and the European Central Bank’s subsequently weak market interventions. Read more
Much has been made about the huge debt-pile that China’s local governments have taken on to fund infrastructure projects over the past three years. But just how big of a headache has China’s municipal debt problem become?
Big enough it seems for Beijing to finally act.
In a move aimed at giving its cash-strapped local governments a much needed funding boost (and reduce the possibility of defaults), China’s finance ministry on Thursday approved a trial programme that will allow the cities of Shanghai and Shenzhen, as well as the provinces of Zhejiang and Guangdong to issue short-term bonds. Read more
By Matt Kennard
Felipe Larraín, Chile’s finance minister, had a big smile on his face Thursday morning as he talked reporters through his country’s successful $1.35bn bond issue at Deutsche Bank’s offices on Wall Street.
He had reason to be cheerful. The Chilean government has just sold $1bn of 10-year dollar-denominated bond, yielding 3.35 per cent, the lowest borrowing costs in Latin American history for a sovereign issuer, according to Larraín. Read more