A JP Morgan research report last year said that bank expects net supply of EM bonds to come down to $4bn in 2020 from nearly $100bn in 2019. Redemptions will rise by $49bn to $248bn, while low growth will restrict many issuers’ borrowing activities.
Add to that that many borrowers completed refinancing last year, and it’s a recipe for a great deal of cash chasing a diminished pool of bonds.
But the money is rolling right in. The Institute of International Finance said that EM debt inflows reached $29.7bn in January — almost as much as the 2019 Q4 total of $31.4.bn.
Such buoyancy looks has already encouraged EM investors shrug off events that would normally cause market turmoil. The brief prospect of a US-Iran war over the assassination of Qasem Soleimani in January gave the markets early pause, but a buying spree began at the first sign of a diplomatic de-escalation.
Similarly, the coronavirus outbreak should worry investors in Lat Am and CEEMEA markets, if only because the relative value of their assets versus those in Asia may start to look poor. But investors have been keen to emphasise that surviving Sars, bird flu and swine flu outbreaks in recent years means this virus is not a reason to stop buying.
This is an argument that seems less rooted in facts than emotion — after all, this is a different disease and the warnings of its spread are dire.
It is easy to see an alternate scenario where investors, less bullish, would deem this kind of newsflow enough to shut down markets for months. But it seems that the technical factors have made optimists of them.
None of this means that the EM bond business is indestructible. A hard enough blow will prompt EM investors to take their cash and run. But right now, that would need to be a real knockout punch.