Thursday, December 28, 2017

"Beware the Cresting Wave of Emerging Market Debt"

"Emerging market speculation tends to appear at a juncture in the economic cycle when 
declining yields on domestic bonds combine with an excess of capital to make 
foreign investments particularly attractive."
-Edward Chancellor
Chapter 4, Fool's Gold: The Emerging Markets of the 1820's

We're talking credit here, not equity.

From Institutional Investor, December 8:

Investors buying a record volume of risky bonds from borrowers in developing economies may become filled with regret.
Governments and companies in emerging markets issued $252.7 billion of speculative-grade bonds this year through November 14, smashing the record $172.1 billion sold in all of 2016, according to Dealogic. The 47 percent jump from last year’s level may be a boon to borrowers, but it raises concern that investors will be harmed by their reach for yield.

“With the high-yield markets facing headwinds after a very impressive run, an onslaught of new issuance runs a notably higher risk of being the straw that breaks the back of elevated valuations,” says Mohamed El-Erian, chief economic adviser at Allianz. “This is a possibility that investors in the asset class would regret.”

Tajikistan — not exactly a bastion of wealth — raised $500 million in September from its first international bond sale, a sum more than 7 percent of its gross domestic product. The Central Asian country will pay an annual interest rate of 7.125 percent for the below-investment-grade debt, according to the Financial Times. In June, Argentina, which has defaulted on its debt eight times since gaining independence from Spain in 1816, sold $2.75 billion of 100-year bonds, also with a 7.125 percent coupon.

It’s difficult to blame borrowers for extracting favorable deals when markets are wide open. Eager to put their money in emerging-markets bonds on the belief that U.S. interest rates will remain very low, investors may be underestimating how much the Federal Reserve will tighten its monetary policy and the impact that will have on emerging-markets debt, according to analysts.

“This is the tail end of the credit cycle,” says Win Thin, global head of emerging-markets strategy at Brown Brothers Harriman & Co. “Borrowers are trying to push through the door as fast as possible, given that the Fed is raising interest rates.”...