A mixed bag this week on emerging policy and one that shows the growing divergence between dovish central Europe and an increasingly hawkish (with some exceptions) Latin America.
The past 24 hours have brought news of more fund launches targeting emerging corporate debt; Barings and HSBC have started a fund each while ING Investment Management said its fund launched late last year had crossed $100 million. We have written about the seemingly insatiable demand for corporate emerging bonds in recent months, with the asset class last month surpassing the $1 trillion mark. Data from Thomson Reuters shows today that a record $263 billion worth of EM corporate debt has already been underwritten this year by banks, more than a fifth higher than was issued in the same 2011 period (see graphic):
The currency war is back.
Since last week when the Fed started its third round of money-printing (QE3), policymakers in emerging markets have been busily talking down their own currencies or acting to curb their rise. These efforts may gather pace now that Japan has also increased its asset-buying programme, with expectations that the extra liquidity unleashed by developed central banks will eventually find its way into the developing world.
Jim O’ Neill, creator of the BRIC investment concept, has been exasperated by repeated calls in the past to exclude one or another country from the quartet, based on either economic growth rates, equity performance or market structure. In the early years, Brazil’s eligibility for BRIC was often questioned due to its anaemic growth; then it was the turn of oil-dependent Russia. Over the past couple of years many turned their sights on India due to its reform stupor. They have suggested removing it and including Indonesia in its place.
The Olympic medals have all been handed out and the athletes are on their way home. Which countries surpassed expectations and which ones did worse than expected? And did this have anything to do with the state of their economies?
So India has not joined emerging central banks’ rate-cutting spree . After recent rate cuts in Brazil, South Korea, South Africa, Philippines and Colombia, and others signalling their worries over the state of economic growth, hawks are in short supply among the world’s increasingly dovish central banks. But the Reserve Bank of India is one.
Japanese mom-and-pop investors’ penchant for seeking high-yield investments overseas is well known. Mrs Watanabe (as the canny player of currency and exchange rate arbitrage has come to be known) invests billions of yen overseas every year via so-called uridashi bonds, debt denominated in currencies with high yields. Data shows the lira has suddenly become the red-hot favourite with uridashi investors this year.
It’s turning out to be a great year for emerging debt. Returns on sovereign dollar bonds have topped 10 percent already this year on the benchmark EMBI Global index, compiled by JP Morgan. That’s better than any other fixed income or equity category, whether in emerging or developed markets. Total 2012 returns could be as much as 12 percent, JPM reckons.