History, as Mark Twain may or may not have drily observed, does not repeat itself but it does rhyme. The recent sell-off, slump, unrest. or even carnage if you want to be dramatic in emerging market debt echoes the sell-offs, slumps and unrests of earlier years. They will happen again. This are emerging market bonds we’re talking about after all, not the Bund.
The CEEMEA market can be a scary place, populated by countries with deep underlying problems in their economies and political systems. Barricades in capital city squares and central banks burning through foreign reserves in futile attempts to shore up suspect exchange rates are a function of the emerging aspect of emerging markets.
But the CEEMEA set also includes stable parliamentary democracies with low debt to GDP ratios and decent export sectors. Slovenia drew $16bn in orders for its $3.5bn dual-tranche bond on Monday. Sure the country might have some structural problems, but there’s also a strong argument that it shouldn’t trade wide of Italy and Spain. How far the Argentinean peso falls and how many burning cars there are in Kiev doesn’t affect Slovenia’s credit worth.
But what about those CEEMEA names that don’t happen to be Eurozone sovereigns. Perhaps appetite for riskier low rated corporate credit really will start to fade. Not judging by the reception for single-B rated Kazakh oil and gas company Nostrum, which raised $400m on the same day as Slovenia despite an aggressive starting spread. Emerging market bond buyers have done what they always do, shaken off the volatility and gone back to putting cash to work.
When the slumps come they pull everything wider in their wake, and close the market for even the best of credits. The jury is still out on just what caused the latest round of volatility, which left few EM markets untouched. But whatever the proximate cause the underlying appetite for EM bonds is unaltered. The networks of institutional accounts with EM specific funds are still there, and they are still buying. They are not going to abandon Slovenia and buy Portugal because the lira and the rand are losing value. Nor will they avoid high yielding commodity corporate issuers in central Asia because of protests in Ukraine or Venezuela.
At some point the CEEMEA market will snap shut again, whether due to US rates policy, political unrest or some new and as yet unforeseen factor. Spreads will widen, and people will worry about current accounts, credit quality and contagion. But let’s remember that bar a catastrophe, when stability returns so does the bid for EM bonds, albeit maybe at an elevated level. Judging by this week, investors are recovering faster than ever.