Global Investing

Happy birthday EMBI! The index group, the main benchmark for emerging market bond investors, turns 20 this year.  When officially launched on Dec 31 1993, the world was a different place. The Mexican, Asian and Russian financial crises were still ahead, as was Argentina’s $100 billion debt default. The euro zone didn’t exist, let alone its debt crisis. Emerging debt was something only the most reckless investors dabbled in.

To mark the upcoming anniversary, JPMorgan – the owner of the indices – has published some interesting data that shows how the asset class has been transformed in the past two decades.  In 1993:
- The emerging debt universe was worth just $422 billion, the EMBI Global had 14 sovereign bonds in it with a market capitalisation of $112 billion.
- The average credit rating on the index was BB.
- Public debt-to-GDP was almost 100 percent back then for emerging markets, compared to 69 percent for developed markets.
- Forex reserves for EMBI countries stood at $116 billion
- Per capita annual GDP for index countries was less than $3000.
Now fast forward 20 years:
- The emerging debt universe is close to $10 trillion, there are 55 countries in the EMBIG index and the market capitalisation of the three main JPM indices has swollen to $2.7 trillion.
- The EMBIG has an average Baa3 credit rating (investment grade) with 62 percent of its market cap investment-grade rated.
- Public debt is now 34 percent of GDP on average in emerging markets, while developed world debt ratios have ballooned to 119 percent of GDP.
- Forex reserves for EMBIG members stand at $6.1 trillion
- Per capita annual income has risen 2.5 times to $7,373.

What next? The thinking at JPM seems to be that the day is not far off when a country “graduates” from the EMBI and joins the developed world.  To be excluded from the EMBI group of indices, a country’s gross national income must exceed the bank’s “index income ceiling” (calculated using World Bank methodology) for three years in a row or have a sovereign credit rating of A3/A- for three consecutive years.

The boom in emerging corporate debt is an ongoing theme that we have discussed often in the past, here on Global Investing as well as on the Reuters news wire. Many of us will therefore recall that outstanding debt volumes from emerging market companies crossed the $1 trillion milestone last October. This year could be shaping up to be another good one.

January was a month of record issuance for corporates, yielding $51 billion or more than double last January’s levels and after sales of $329 billion in the whole of 2012. (Some of this buoyancy is down to Asian firms rushing to get their fundraising done before the Chinese New Year starts this weekend). What’s more, despite all the new issuance, spreads on JPMorgan’s CEMBI corporate bond index tightened 21 basis points over Treasuries.

JPM say in a note today that assets benchmarked to the CEMBI have crossed $50.6 billion, having risen 60 percent year-over-year.  Interest in corporates is strong also among investors who don’t usually focus on this sector, the bank says, citing the results of its monthly client survey. One such example is asset manager Schroders. Skeptical a couple of years ago about the risk-reward trade-off in emerging debt, Schroders said last month it was seeing more opportunities in emerging corporates, noting: