LatAm Letter: Of faith and harmony
A recommendation to help EM market participants face macro headwinds
No doubt, it’s been a tough year — not least for emerging markets bond buyers. But GlobalCapital has a recommendation to help EM market participants face the music of macro headwinds.
Graham Stock, partner and head of EM sovereign research at BlueBay, gave himself the task of compiling an A-Z playlist of the EMBIG bond index countries. You can listen to the result here, and will find a few crackers. Reimagining the EMBIG as a musical journey through genres, languages and cultures is certainly a comforting reminder that EM is nothing if not an extremely diversified asset class.
One of the LatAm Letter’s personal favourites on the list is number 13, from legendary Colombian composer Lucho Bermúdez, which cheerily hums “Colombia tierra querida, himno de fe y armonía…” (Colombia beloved land, anthem of faith and harmony…).
Bond market eyes are firmly focussed on Colombia after a feisty and polarising election won by leftist Gustavo Petro in June, who has spoken scathingly about the country’s previous leaders. And Petro seems to be taking the classic cumbia folk song to heart.
On his pre-inauguration victory lap, Petro has shown plenty of desire for faith and harmony, last week appointing a moderate, well respected finance minister and even inviting his long-time bitter opponent former president Álvaro Uribe for a chat and a photo opp as he appears to seek consensus across the political spectrum.
One investor admits to being worried that Petro’s apparent moderation “looks too good to be true”. But there are certainly plenty who feel that Colombia — where bonds have been suffering for months from Petro fears — might be at enticing values.
The EMBIG playlist is a soothing listen as you get down to picking out the bargains that inevitably emerge every time global volatility gives emerging markets one big collective kick.
The question is when exactly to buy these bargains. GlobalCapital reported last week on two of Latin America’s most volatile sovereigns having a horrid time.
There was at least some resemblance of harmony in Ecuador on Thursday, as the organisers of 18 days of demonstrations agreed to end their protests — but only after squeezing several concessions out of conservative president Guillermo Lasso and leaving him severely weakened. Some of Ecuador’s dollar bonds are 18 points below where they were a month ago.
Ecuador’s entry in the EMBIG playlist invites the listener to “give me your hand and come with me to Ecuador”. But bondholders seem to have about as much faith in the country’s bonds as we do that the techno beat underpinning the song is an authentic reflection of Ecuador’s musical heritage. Analysts thought Ecuador was cheap with bonds in the 80s, yet here it is, with some notes in the low to mid 60s.
There is no sign of faith, either, in Argentina, where sovereign bond prices continue to reach new historic lows, and are now circling 20 cents on the dollar.
This is despite some investors saying that Argentina has been “silly cheap” for weeks. Sure, (yet another) default in a couple of years or so looks inevitable, but today’s levels more than price this in — and are in fact way below any reasonable expectations of recovery values.
The piling on of pain in both countries is probably a reminder of just how difficult technicals are right now — even before you tackle the fundamental credit challenges.
Petar Atanasov at Gramercy told GlobalCapital that markets overreacted to Ecuador’s protests “probably because any noise gets amplified by broader concerns around EM and global outlook”.
As Nathalie Marshik at Stifel said this week, when there are outflows, cash really matters.
“When choosing to put money to work, at similarly distressed prices, higher carry bonds will be more attractive than no-carry bonds like Ecuador and Argentina.” In these troubled times, “it’s hard to say what the floor is” when a sovereign’s bonds start to sell off, she added.
On a happier note, congratulations to Danilo Castañeda, who will be well known to anyone who has worked on a Santander Chile bond issue in the past decade. Danilo is leaving his position as head of asset and liability management at the bank to enter the sell-side. From August 1, he will be head of global markets Chile at Santander.
Like any self-respecting playlist involving Colombian music, the EMBIG playlist of course includes ‘Cali Pachanguero’, Grupo Niche’s homage to Danilo’s home city back in Colombia.
Put that track on and salsa your way into the rest of the week, but only after you’ve been in touch for a free trial to access all of GlobalCapital — if you’re not already a subscriber.
This is GlobalCapital's LatAm Letter, written weekly by Latin America reporter Oliver West. If you enjoy it, sign up free in a matter of seconds here and feel free to pass it on to colleagues and contacts.
The best of this week’s LatAm and EM bond coverage: