EMERGING MARKETS, HARD CURRENCY, AND SOVEREIGN DEBT

EMERGING MARKETS, HARD CURRENCY AND CORPORATE DEBT ARE THE THING I WANT TO LOOK AT TODAY. WE ALL KNOW THERE HAS BEEN EXTREME GROWTH IN EMERGING MARKETS IN 2016. FOR 3 YEARS PRIOR TO 2016 EMERGING MARKETS WAS LAGGING BEHIND DEVELOPED MARKETS, THAN IN THIS LAST YEAR THERE HAS BEEN A BURST. WHY? WILL GROWTH CONTINUE? EMERGING MARKET BONDS AND CURRENCIES ALSO GAINED VALUE AGAINST THE DOLLAR AND THE EURO. THE INSTITUTE OF INTERNATIONAL FINANCE SHOWS EMERGING MARKETS RECEIVED $120 BN OF FINANCIAL CAPITAL BY THE END OF SEPTEMBER. THAT’S A 20% INCREASE ON 2015.

NEGATIVE BOND YIELDS ON LARGE COUNTRY DEBT, A JUMP IN OIL PRICES, AND STABILIZATION OF THE CHINESE ECONOMY AND POSTPONEMENT OF FED RATE HIKES ALL PLAY SUPPORTING ROLES IN THIS RALLY.

THE MAIN DRIVER HOWEVER OF EMERGING MARKETS RALLY IS BETTER GROWTH POTENTIAL WHICH MAKES ASSETS CHEAP. THE IMF SAYS THAT EMERGING ECONOMIES WILL COLLECTIVELY GROW BY 4.2$ THIS YEAR AND 4.6% IN 2017WHILE DEVELOPED ECONOMIES ARE LOOKING AT GROWTH BETWEEN 1.6% AND 1.8%. THOSE ARE SUBSTANTIAL NUMBERS.

SO BEFORE WE GO TOO MUCH FURTHER LET’S UNDERSTAND THE DIFFERENCE PLEASE BETWEEN CORPORATE DEBT AND SOVEREIGN DEBT OK?

HERE IS SHORT VIDEO ON SOVEREIGN DEBT http://www.investopedia.com/terms/s/sovereign-debt.asp

CORPORATE DEBT IS SIMILAR IN STRUCTURE TO SOVEREIGN DEBT EXCEPT THAT IT IS ISSUED BY A CORPORATION AND BACKED BY THE PERFORMANCE OF THAT CORPORATION AND SOMETIMES IN THE COMPANIES ASSETS.

OK NOW LET’S MOVE ON. LET’S HAVE A LOOK AT THIS OPINION PIECE BY CONRAD DE AENLLE A WRITER FOR MARKET WATCH

Investors seeking income can find it in emerging-market bonds
http://www.marketwatch.com/story/income-seeking-investors-can-find-it-in-emerging-market-bonds-2016-10-07

A conundrum for investors during the last decade has been how to generate income in a world with little or none of it to speak of. In hindsight, they could have owned just about any asset, watched its value soar and sold bits of it along the way, but that was not a viable option for those among us who must start each day in ignorance of what will unfold.

With bond and stock yields still hovering not far from zero percent due to extravagant valuations and the extravagant central bank monetary policies that enable them, few attractive income sources exist. One that was floated recently in research by RBC Global Asset Management is emerging market debt.

It’s easy to see why that niche of the bond market would capture the firm’s attention. In the first nine months of this year, the average mutual fund that invests in emerging market bonds denominated in U.S. dollars or other hard currencies rose 13.5%, according to investment researcher Morningstar, and local-currency bond funds did even better, with an average gain of 15.8%.

Most of those returns are from capital appreciation, but the income paid by the bonds is substantial, compared to just about any other asset. RBC notes that the average yield recently was 5.1% on emerging market dollar-denominated government debt, and 6.2% on local-currency government instruments.

YOU CAN READ THE REST ON YOUR OWN BUT THE POINT I’M TRYING TO MAKE IS THERE IS A RUSH INTO EMERGING MARKETS. LOOK AT THE YIELD 5.1% ON USD DENOMINATED DEBT BUT 6.2% ON LOCAL CURRENCY DEBT.

NOW LET’S LOOK AT THIS A LITTLE CLOSER AND LOOK AT ANOTHER SCENARIO. THE WALL STREET JOURNAL IS THINKING THAT HARD CURRENCY IS OUTPACING LOCAL CURRENCY WHICH IS SIGNALING MONEY IS CHASING YIELDS RATHER HAVING FAITH IN GROWTH. SUGGESTING INVESTORS ARE FICKLE.

Why Investor Enthusiasm About Emerging Markets Could Be Fickle
http://www.wsj.com/articles/in-emerging-market-bond-rush-local-currency-debt-gets-scant-interest-1475771287

For all the investor enthusiasm about emerging markets, there are signs money may be blindly chasing yields rather than putting faith in these countries’ growth stories.

Emerging-market funds received net inflows worth $35 billion during the third quarter of the year, figures by fund-tracker EPFR Global show, compared with $10 billion in the second quarter and a net outflow of $3 billion in the first.

Some economists argue that these investment flows are justified by improving sentiment regarding more market-friendly governments in countries such as Argentina and Brazil and a small rebound in commodity prices that is set to help exporters like Russia and South Africa.

But investors seem primarily motivated by ultralow yields in developed nations, especially after the U.S. Federal Reserve signaled during the summer that interest rates would remain low for longer than previously believed.

“A lot of the money that has come to emerging-markets has just bought anything with an emerging-market label on it,” said Pablo Goldberg, fund manager at BlackRock.

On Wednesday, Argentina sold two euro-denominated bonds to borrow a combined €2.5 billion ($2.8 billion). Investors couldn’t get enough of them, demanding as much as €6.3 billion. The Latin American nation only recently returned to international markets after years of legal spats with bondholders following its default on more than $80 billion in 2001. In April, Argentina placed a record $16.5 billion among investors.

The structure of the Argentina deal highlights another feature of the rush into emerging markets: In the three months to September, only 39% of fund flows have gone into local-currency funds. Those that invest only in assets denominated in hard currency like dollars or euros have received 52% of the inflows, the rest belonging to blended funds that invest in both.

Strong demand for hard-currency assets is also visible in the widening gap between their yields and those on local-currency assets. This gulf widened in September to its highest since July 2014, indexes by J.P. Morgan Chase & Co. show. While emerging-market hard-currency bonds yielded 5% on average in September, local-currency ones returned 6.2%. Bond yields move in the opposite direction as prices.

Right now, “you get people that are daring enough to get into dollar assets, but not daring enough to get into local currencies,” said Didier Saint-Georges, a member of asset manager Carmignac’s investment committee.

The French firm has increased both kinds of emerging-market investments, but is cautious about these countries’ outlook.

BlackRock highlighted that U.S.-based investors have almost exclusively bought dollar emerging-market assets during the third quarter, while European investors were interested in local currency as well, according to a report to clients Tuesday,

This would support the idea of a knee-jerk reaction by U.S. investors looking for somewhere to place their money.

LET’S RE-READ THIS OK? U.S. INVESTORS ARE LOOKING FOR SOMEWHERE TO PLACE THEIR MONEY. REMEMBER THIS WE WILL BE COMING BACK TO IT. THIS IS WHAT I CONTINUE TO TRY TO CONVEY TO YOU AND IN MY OPINION IT IS NOT JUST U.S. INVESTORS SPECIFIC RIGHT NOW EVERY INVESTOR IS LOOKING FOR SOMEWHERE TO PLACE THEIR MONEY.

Fund-flow data also reveal that retail investors, who tend to be flightier than institutional players, were the ones showing a clear preference for hard-currency assets over the past few months, while actually slashing their exposure to local currency.

Hani Redha, fund manager at PineBridge Investments, believes it is likely that part of the inflow into dollar and euro assets is “much more fickle and chases returns,” instead of showing faith in the economy of these nations.

“If the Fed were to surprise markets, given the lower level of sophistication of the investors, there is risk of a reversal,” added Mr. Redha, who has made selective investments into local-currency paper.

To be sure, investors could also be making a rational decision in disliking emerging-market currencies, which have had a bad run over the last two years.

“I think it is all about past performance,” said Michael Biggs, manager of an emerging-market local-currency fund at Swiss money manager GAM Holding AG.

SO LET’S DIGEST THIS FOR NOW AND I WILL BE BACK WITH MORE ON EMERGING MARKET BONDS. I WANT TO CONTINUE ON EMERGING MARKETS FOR A LITTLE WHILE AND WHEN EVERYONE IS ON THE SAME PAGE WE CAN MOVE ON TO TIE EMERGING MARKETS IN THE NEW FINANCIAL SYSTEM.

SO PLEASE IF YOU HAVE QUESTIONS ASK ME, AND IF YOU ARE FEELING LOST TELL ME. WE ALL MOVE ALONG TOGETHER IN HERE OK? I WANT TO HERE FROM YOU DROP YOUR COMMENTS AND IN THE BOX BELOW AND PUSH THE SEND BUTTON.

THANKS AND LET’S HAVE FUN WITH THIS….ML

BE SURE TO FOLLOW US ON TWITTER AND LIKE US ON FACEBOOK AND SUBSCRIBE TO US ON YOUTUBE…THANKS

9 thoughts on “EMERGING MARKETS, HARD CURRENCY, AND SOVEREIGN DEBT

  • Memphis

    Thanks again ML for pointing us towards some well written discussions!

    There is certainly a lot of capital moving across the globe and I particularly liked your observation that these are not EVER linear discussions such that we can point to A and conclude that it led to B.
    With new regulations everywhere and central planning at a level never before seen? The search to find value is certainly one that will require us to “sharpen our ax” in the days ahead!

    In reading this I could see much support for the position that much of this capital is simply “passing thru” with no intent for the long term.
    By way of example, we can so mply look at last week’s new regulations on the money market industry and the resultant flow of over $1T that came IN ANTICIPATION of the change. All these $ had to park somewhere!

    Good stuff, keep it coming!
    Blessings, Memphis

  • Lonestartxcowboy

    “EVERY INVESTOR IS LOOKING FOR SOMEWHERE TO PLACE THEIR MONEY”…..and every penny has its place. As for me, that is away from Wall Street. Great info, My Ladies! This is one to sit back with a hot cup of coffee and indulge. So great is the info….This is my third time reading it!

    Keep it coming! 🙂

  • Dave

    Hi ML
    Can you expand on this is point to the article Memphis refers to? Thanks Dave
    By way of example, we can so mply look at last week’s new regulations on the money market industry and the resultant flow of over $1T that came IN ANTICIPATION of the change. All these $ had to park somewhere!

    Good stuff, keep it coming!
    Blessings, Memphis

    • MY LADIES

      DAVE SORRY FOR THE DELAY FRIEND IN ANSWERING YOU, I WILL DO A POST NOW ON WHAT MEMPHIS WAS TALKING ABOUT.THANK YOU FOR REACHING OUT

  • Memphis

    Hi Dave,
    To answer you I would have to refer back to my preceding sentence that read:
    “In reading this I could see much support for the position that much of this capital is simply “passing thru” with no intent for the long term.”

    So my example that your asking of was just one point to try and illustrate that capital is being tossed to and fro like a cannon on the deck of a ship in a sea tossed tempest.

    This quote was made famous nearly 100yrs ago when Herbert Hoover applied them to the economic storms of his day and in answer to you I imagine that at present there is much capital passing thru emerging economies that is in no way wed to the long term growth of that nation.

    If this is not the direction you were headed with your question then be more specific and I will follow!
    blessings, Memphis

  • Reni

    And looky over here, seems now Saudi Arabia is taking advantage of ‘where to park your cash”
    http://www.wsj.com/articles/saudi-arabia-to-offer-international-investors-17-5-billion-in-bonds-1476876478

    • MY LADIES

      YES RENI SAUDI IS AN EMERGING MARKET TOO, BE SURE TO CATCH MY NEXT POST PLEASE ABOUT EMERGING MARKETS.

Leave a Reply

Your email address will not be published.