EM Credit
Hi all,
I'm trying to research a bit about EM credit. are there any links/PDF's people could link up..?
My very simplified view for EM credit going is that in a general rising IR environment, the outlook is negative. Demand for HY products in the EM region will surely be dampened as the FED begins to normalise rates..
But if anyone can help out with some more depth - that would be great.
Cheers
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You are right in saying that as US rates normalize, EM credit will struggle. I disagree with the above poster that EM is an under allocated asset class, it is in fact very crowded, because of loose monetary policy in developed markets, which has pushed real rates down baby down...
Since 2010, EM has seen huge inflows in both hard and local currency currency, because of the attractive yield pick up, and declining treasury yields (Hard ccy debt). Just look at the rally in US 10Y and most importantly the 30Y last year. If you are a real money debt investor, and you are benchmarked to some index, EM credit made a lot of sense the last years. Which is why in 2012, hard currency EM credit performed really well, particularly on the long end, you can look at EM debt fund performances for an idea. Now, as US rates (and particularly real rates) normalize, EM has come under a lot of of pressure. As rates go up, the dollar is rallying against most EM currencies, from MXN/BRL to TRY/ZAR, and Asia. This means that on a total return basis, local debt (and even hard ccy) is flat to negative YTD.
EM FX really has to perform well for credit to be a worthy investment, and since around May-June, when people started talking about Fed tapering, the dollar has rallied hard against EM currencies, and that is not just due to Fed policies, but also because of structural problems with many emerging economies, such as big current account deficits (see India, Turkey, South Africa) & stagnating exports (due to China, Europe and the characteristics of the US recovery).
While the space has seen outflows in the past weeks, it is not near the amount that has poured in in the last years, so more outflows could put more pressure on total returns, which might start a vicious cycle where investors start pulling out massively. That is not to say that you cannot find opportunities there; many EM companies have low leverage, high interest coverage and FCF. A lot also benefit from explicit (and implicit) government guarentees (Gulf countries and Russia, for example) for when shit hits the fan. If you had to go into EM credit, mid-term hard ccy debt is probably your best bet atm, unless you can find a way to hedge your FX and still make it worthwhile. The bonds have decent coupons, and there are a lot of IG and quasi-sovereign companies, and even HY if you're feeling adventurous, that provide a nice pick up over developed market yields.
FitandProper is right, Vagabond is wrong. EM credit is hurting due to the Fed-triggered duration sell-off, fund outflows, FX flight to safety, illiquidity stemming from the effects of new regulations on broker-dealers and their clients, and in many cases, questionable macroeconomic fundamentals.
First off, it depends a great deal on what sort of credit you are looking at. Are you talking about EM credits or credits issued in EM currencies? Credit issued in EM currencies is of course purely a currency bet.
I tend to agree with FitandProper. The trade is defo crowded and all though everyone involved have been slaughtered lately (we are talking 15%+ losses on AAA issuers in some currencies), I don't think the trade is anywhere close to under crowded. It is indeed driven by risk appetite so I agree that it is more similar to HY than anything else.
You have no idea what you're talking about.
Also, you guys are missing the fact that half of the reason for investing in EM assets is the carry trade. The whole EM bubble over the last 3 years is one massive carry trade being unwound as the Fed raises rates.
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Managed to sit in on an interesting meeting with the Global head of Derivs stratetgy who was basically saying the same as above. The tightening of liquidity and illiquid assets that have predominately been driven by central banks, I.e High Yield, EM Credit, EM FX etc.. is going to take the biggest hit. Investors are positioning themselves in more liquid, robust names. the rotation out of EM into developed names.
Was just wondering.....are there desks out there that trade Credit tranches on EM corperates? Thinks like the IG9 basket etc.
Hi all,
Sorry to bring this thread up again..was just wondering if there were any banks in particular where EM Credit was pretty strong? From what I have heard GS, JPM and BAML are the strongest in EM credit.
Cheers
Citi is a top player in EM if not #1
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