How quickly things change in emerging markets.
In early 2016, EM asset prices tanked as investors fretted about developing countries' and corporations' ability to service their debts, especially those denominated in U.S. dollars, with warnings emanating the Bank for International Settlements and prominent analysts. Fast forward nine months, and EM investors seem to have given birth to a fresh bout of optimism thanks in part to a stable greenback and ultra-low interest rates in developed markets — all of which have combined to help ease pressure on emerging market counterparts.
Emerging market companies have been taking advantage of the sharp turnaround in sentiment to sell more dollar-denominated debt with year-to-date issuance totaling $153 billion, according to Citigroup Inc. estimates of index-eligible bonds, or 7 percent higher than the same period last year. Meanwhile, risk premiums in emerging market bonds have also compressed as a global search for yield encourages investors to look for returns in far-flung destinations such as El Salvador, Mongolia, and Zambia.
"Investors who can remember back to the dark days of [the first quarter of 2016] will recall that the ability of the EM asset class to refinance its peak maturities in 2018-2020 was a large concern and one of the core reasons for the gapping out in spreads," wrote W.R. Eric Ollom and Ayoti Mittra, Citi emerging market credit analysts. "How different the world looks."
So-long as appetite for such debt continues unabated then EM companies should be able to handle their need to roll over their bonds and loans, Citi argues. This need peaks in 2020 with $117 billion worth of corporate debt maturing — a figure handily surpassed by the $214 billion average annual issuance sold over the past four years.
Still, Citi argues, the EM debt rally looks driven by return-seeking investors with valuations appearing stretched as portfolio managers facing few choices for yield-generating investments are assuming smaller compensation in exchange for taking on EM risk.
"The TINA trade ('There Is No Alternative') remains a strong force in the market as investors search the world for higher yields in a low rate universe," they conclude. "We recommend investors remain long the asset class."