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.
But the month so far has been different not only in the sheer volume of supply but also for the fact that issuance by governments of developing countries has surpassed emerging corporate bond sales. That’s something that hasn’t happened for a long time.
To buy or not to buy — that’s the question facing emerging market investors.
The sector is undoubtedly cheap – equity valuations are 30-50 percent cheaper than their 10-year average on a price-book basis; currencies have depreciated 15-20 percent in the space of 4 months and local bond yields have surged by an average 150 basis points. As we have pointed out before, cheapness is relative and the slowing economic and credit growth in many countries will undoubtedly manifest itself in falling EPS growth. Companies that cannot pass on high input costs caused by weak currencies, will have to take a further margin squeeze.
LONDON, Sept 11 (Reuters) – Companies and countries around
the world are rushing to tap global bond markets before
borrowing costs hurtle even higher, with many paying big yield
premiums to replenish their coffers.
With the U.S. 10-year Treasury yield – the risk-free rate
against which all assets are benchmarked – a whisker under 3
percent, money is still cheap by historical standards.
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.
But worse is probably to come. Liquidity on Polish stock and bond markets will certainly take a hit — the reform removes a fifth of the outstanding government debt. That drop will decrease the weights of Polish bonds in popular global indices, in turn reducing demand for the debt from foreign investors benchmarked to those indices. Citi’s World Government Bond Index, for instance, has around $2 trillion benchmarked to it and contains only five emerging economies. That includes Poland whose weight of 0.55 percent assumes roughly $11 billion is invested it in by funds hugging the benchmark.
LONDON (Reuters) – Newly cheap currencies may soon start to boost emerging markets’ exports but for many that will only soften the bigger blow of imported inflation and the higher interest rates needed to stabilize their exchange rates.
Currencies from the Indian rupee to the Brazilian real have lost 12-20 percent of their value against the dollar this year in a rout that has wiped billions of dollars off stock indices and put investors to flight right across emerging markets.
LONDON, Sept 6 (Reuters) – Newly cheap currencies may soon
start to boost emerging markets’ exports but for many that will
only soften the bigger blow of imported inflation and the higher
interest rates needed to stabilise their exchange rates.
Currencies from the Indian rupee to the Brazilian real have
lost 12-20 percent of their value against the dollar this year
in a rout that has wiped billions of dollars off stock indices
and put investors to flight right across emerging markets.
LONDON, Sept 5 (Reuters) – The Indian rupee’s 1.5 percent
rebound led emerging markets broadly higher on Thursday but the
growing likelihood of U.S. stimulus rollback dampened gains and
Polish assets were dented by a controversial pension reform
The rupee’s gains were driven by moves from Indian officials
to deal with the spillover from the Fed’s plans to reduce its
bond buying, while markets were also watching a meeting of the
G20 bloc of world powers for measures to combat the currency
LONDON, Sept 4 (Reuters) – Default insurance costs for a
“Fragile Five” of emerging economies have rocketed since early
May, reflecting how investors are discriminating between
countries reliant on foreign capital and their more robust
In the four months since the U.S. Federal Reserve first
hinted that its monetary stimulus may soon be reined in,
five-year credit default swaps (CDS) for Brazil, Turkey and
Indonesia have more than doubled, the following graphic shows:
LONDON, Sept 4 (Reuters) – Central bank action lifted some
emerging market currencies off lows on Wednesday but higher U.S.
yields and the likelihood of military action against Syria kept
the sector under pressure.
Emerging stock markets were flat after Tuesday’s
U.S. manufacturing data supported the view that the Federal
Reserve would start rolling back stimulus at its mid-September
LONDON, Sept 3 (Reuters) – Emerging market assets posted
modest gains on Tuesday after data reinforced evidence of
economic recovery in most parts of the world but in India,
Indonesia and Turkey currencies and stocks lost more ground.
While markets were rattled by reports of missile launches in
the eastern Mediterranean, purchasing managers’ surveys for
August have underlined growth prospects for the global economy.
Stronger Chinese services activity added to robust manufacturing
data released earlier this week.