South Africa is due ratings reviews this Friday. Chances are that the Standard & Poor’s agency will cut its BBB rating by one, or possibly even two notches. Another agency Fitch has a stable outlook on the rating but could still choose to downgrade the rating rather than the outlook. What will be the damage?
It wasn’t a good year for emerging market bonds, with all three main debt benchmarks posting negative returns for the first time since 2008. But the benchmark indices run by JPMorgan nevertheless saw a modest increase in market capitalisation, and assets of the funds that benchmark to these indices also rose.
Sales of dollar bonds by emerging governments may surge 20 percent over 2013 levels, analysts at Barclays calculate. They predict $94 billion in bond issuance in 2014 compared to $77 billion that seems likely this year. In net terms –excluding amortisations and redemptions — that will come to $29 billion, almost double this year’s $16 billion.
Last week’s victory for Miss Venezuela in a global beauty pageant was a rare bit of good news for the South American country. With a black market currency exchange rate that is 10 times the official level, shortages of staples, inflation over 50 percent and political turmoil, Venezuela certainly won’t win any investment pageants.
Many investors have greeted with enthusiasm India’s plans to get its debt included in international indices such as those run by JPMorgan and Barclays. JPM’s local debt indices, known as the GBI-EM, were tracked by almost $200 billion at the end of 2012. So even very small weightings in such indices will give India a welcome slice of investment from funds tracking them.
What a half-month it has been for bond issuance! As we wrote here, many borrowers — corporate and sovereign; from emerging markets and developed — have seen this period as a last-chance saloon of sorts to raise money on global capital markets before the Fed starts to cut off the supply of free cash.
If the backdrop for global emerging markets (GEM) were not already challenging enough, there are, these days, some authorities that step in and try to make things even worse, writes Societe Generale strategist Benoit Anne. He speaks of course of Poland, where the government this week announced plans to transfer 121 billion zlotys ($36.99 billion) in bonds held by private pension funds to the state and subsequently cancel them. The move, aimed at cutting public debt by 8 percentage points, led to a 5 percent crash yesterday on the Warsaw stock exchange, while 10-year bond yields have spiralled almost 50 basis points since the start of the week. So Poland, which had escaped the worst of the emerging markets sell-off so far, has now joined in.
The received wisdom is dollar strength = weaker emerging market currencies. See here for my colleague Mike Dolan’s take on this. But as Mike’s article does point out, all emerging markets are not equal. It follows therefore that any waves of dollar strength and higher U.S. yields will hit them to varying degrees.