With apologies for the angelic imagery, here’s BNP Paribas on Wednesday (our emphasis):
In our analysis, six EM sovereigns are at risk of becoming fallen angels this year or next. Three of these we consider ‘high risk’. As much as USD 259bn of sovereign and corporate bonds is at high risk of being cast down into speculative grade perdition. This accounts for 9% of all EM bonds outstanding (USD 2.87trn).
… it is little surprise that the peak of credit quality for EM appears to be over. After having hit the BBBthreshold in 2013 and improving another 1/6th of a notch over2013 (Figure 2), the credit quality of the EM benchmark has begun to slide downward. Already it has lost 1/6th of a notch and we forecast the index to slide another half notch by the year end.
Money managers have been stung hard this year due to US government bonds not performing the way their traditional mean-reverting strategies suggested they would. Taper was supposed to imply sell-off. That didn’t happen. And now everyone is trying to understand why not.
At FT Alphaville we’ve presented the flow explanation on a number of occasions. The theory is that taper talk prompts dumb money to sell safety, and the smart money — which knows there’s no such thing as underpriced principal safety these days and that taper implies risk-off — to pile into safety at an even faster rate.
In this theory the whole process is then exacerbated by a feedback loop. Sellers of safety buy risky assets, like emerging market debt, instead. But the sellers/issuers of that debt then recycle that cash back into safe US dollar securities, rather than goods or services in the emerging market. So every risk-on signal from the Fed only ends up creating more buyers for dollar denominated bonds. Read more
It’s been a tough day for EM. But just in case you were tempted to bundle the whole region together to make a sweeping generalisation about future performance, it’s worth reading through the following note from Capital Economics on Friday.
As they explain, EM is no longer the place it used to be. There are clear divisions emerging, and understanding which countries influence into each other more directly than others matters now more than ever:
Market turbulence in Turkey, Ukraine and now Argentina has led to talk of a new crisis sweeping emerging markets (EMs). But the emerging world has become a far more diverse place over the past decade. The real lesson from recent events is that the need for investors to discriminate between individual EMs has never been greater.
That’s what this chart, released on Friday by Citi’s municipal bond team, apparently suggests:
In a whopping report out Monday, Citi’s Willem Buiter and Ebrahim Rahbari call time on ‘Emerging Markets’ and ‘BRIC’ labels.
And not a moment too soon, we reckon. Read more
Barclays Capital may not be too hot on some emerging-market credits (ahem, Hungary) but they certainly make a stirring case for EM bonds overall.
Or rather, they make a stirring case for the rise of emergification. Read more
While Europe’s sovereign debt crisis has grabbed the attention of global markets, inflation is again clawing its way back in emerging economies, as Philip Poole of HSBC notes on the FT’s Beyond Brics blog. China provided more evidence of this trend on Tuesday, with the release of CPI data for April which showed inflation continuing to move higher.
As the FT reported, both Chinese inflation and housing price rises continue to quicken, with consumer price inflation rising to 2.8 per cent in April from 2.4 per cent the month before – its highest in 18 months, although still short of the government’s 3 per cent target – while factory-gate inflation jumped to 6.8 per cent from 5.9 per cent. Read more
Alongside sterling’s weakness and a smattering of M&A, one of the reasons the UK has shown a clean pair of heels to its peers in Europe since the start of the year is its relative internationalisation.
By that, we mean the growing number of UK-listed companies which generate a large chunk of their income overseas, particularly in the fast-growing emerging markets of Asia and Latin America. Read more