The Fed’s unexpectedly dovish position last week has sparked a rally in emerging markets — not only did the U.S. central bank’s all-powerful boss Ben Bernanke keep his $85 billion-a-month money printing programme in place, he also mentioned emerging markets in his post-meeting news conference, noting the potential impact of Fed policy on the developing world. All that, along with the likelihood of the dovish Janet Yellen succeeding Bernanke was described by Commerzbank analysts as “a triple whammy for EM.” A positive triple whammy, presumably.
Now it may be going too far to conclude there is some kind of Bernanke Put for emerging markets of the sort the U.S. stock market is said to enjoy — the assumption, dating back to Alan Greenspan’s days, that things cant go too wrong for markets because the Fed boss will wade in with lower rates to right things. But the fact remains that global pressure on the Fed has been mounting to avoid any kind of violent disruption to the flow of cheap money — remember the cacophony at this month’s G20 summit? Second, the spike in U.S. yields may have been the main motivation for standing pat but the Treasury selloff was at least partly driven by emerging central banks which have needed to dip into their reserve stash to defend their own currencies. According to IMF estimates, developing countries hold some $3.5 trillion worth of Treasuries, of which just under half is in China. (See here for my colleague Mike Dolan’s June 12 article on the EM-Fed linkages)
LONDON (Reuters) – Global borrowers are hitting the bond roadshow trail, aiming to raise hundreds of billions of dollars in cheap financing after the U.S. Fed’s surprise decision to keep its money taps open for a few more months.
As the bond issuance window unexpectedly swung wide open, a total $16.6 billion was raised on global bond markets on Thursday, leaping four-fold from the day before, Thomson Reuters data shows, while over 20 borrowers worldwide – from Italy’s Intesa to Saudi conglomerate Sabic – announced issuance plans.
Emerging stocks have rallied 3 percent today after the Fed’s startling decision to leave its $85 billion-a month money-printing in place, and some markets such as Turkey are up more than 7 percent. With the first Fed hike now expected to come in 2015 and tapering starting only from December, emerging markets have effectively received a three month breather. So will the buyers return?
A lot of folks have been banging the drum about how cheap emerging markets are these days. But imminent Fed tapering has been scaring away any who might have been tempted. Plus there is the economic growth slowdown that could knock profit margins at emerging market companies. Bank of America/Merrill Lynch which runs a closely watched monthly survey of fund managers shows just in the following graphic how unloved the sector is relative to history:
Emerging stocks are not much in favour these days — Bank of America/Merrill Lynch’s survey of global fund managers finds that in August just a net 18 percent of investors were overweight emerging markets, among the lowest since 2001. Within the sector though, there are some outright winners and quite a few losers. Russian stocks are back in favour, the survey found, with a whopping 92 percent of fund managers overweight. Allocations to Russia doubled from last month (possibly at the expense of South African where underweight positions are now at 100 percent, making it the most unloved market of all) See below for graphic:
BofA points out its analyst Michael Harris recently turned bullish on Russian stocks advising clients to go for a “Big Overweight” on a market that he reckons is best positioned to benefit from the recovery in global growth.
LONDON, Sept 17 (Reuters) – Tough times may lie ahead for
Turkish and Indian companies whose decade-long foreign borrowing
binge has culminated in a crash in the value of the lira and
rupee, significantly increasing the burden of their dollar debt.
These two markets stand out among developing nations whose
companies rushed to tap dollar financing in recent years.
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.