EM analysts face some new problems — and some old ones
Emerging market investors are increasingly focusing on the eurozone crisis. And with good reason, as those events are moving the bonds of the emerging markets. But traditional company-specific risks also remain high. Investors and analysts need to be careful to avoid the distractions of the macro picture elsewhere.
Who'd be an emerging markets strategist right now, facing the double pressure of all the usual EM considerations as well as a eurozone crisis that is starting to feed into the asset class? Smaller funds say their strategists are stretched, having mostly emerging market backgrounds but now out of necessity being forced to acquaint themselves with the political situations and dynamics of the eurozone countries as well.
Some country-specific events seem to be moving bonds less than might be expected. News of Ukraine’s pension reforms that make the IMF’s release of the next tranche of its funding more likely were this month met with little enthusiasm by the market. Analysts said at the time that changes in sentiment surrounding each emerging market country were being eclipsed by broader concerns of how bonds might move on the back of the eurozone crisis.
But last week saw a reminder of the sort of company-specific shock that can rattle EM credits — an exchange offer for €10m of Bulgarian Petrol AD’s bonds for a price of 85, a month before the maturity of the notes. The move shows that EM investment risks can be high and are typically not associated with the debt problems of the developed world.
This is worth remembering as there are now many funds holding EM bonds that did not two years ago, drawn to the asset class by its low debt volumes, promises of high growth and high yields and relative lack of exposure to western Europe. These new entrants to the market are less familiar with the pitfalls of EM and have typically favoured the higher end of the credit spectrum — Poland and its credits, for example.
Bulgaria is part of the EU, and when Petrol AD's bond was issued in 2006, the company was the country’s largest fuel distributor. This is the sort of credit that would have appealed strongly to these new investors in the emerging markets. But now, after rows between the company and Russia’s Lukoil and the moving of money out of the entity, several analysts are recommending taking the 85 being offered only a month from maturity. Earlier this year the bonds traded as low as 70.
The higher yields on offer from emerging markets are there for a reason. Those holding emerging market paper must now track eurozone events closely, but not at the cost of classic credit-specific analysis. The new problems have not replaced the old ones: they have just added to them.