The sell-off in emerging markets does not pose a serious threat to the asset class, according to investors and analysts. Political uncertainties and higher US inflation pose risks, but, given their sound economic fundamentals, emerging markets should be able to weather the storm. "This is really an exogenous correction," says Enrique Bustamante, head of Latin American debt origination at Dresdner Kleinwort Wasserstein. "The potential for returns for the asset class might be smaller, but the liquidity is still there and the underlying fundamentals are still solid."
Richard Fox, senior director of Fitch Ratings's sovereign team, agrees: "This is a reaction to changes in sentiment towards US inflation rates and changed perception of the global environment." This week, JP Morgan's EMBI+ rose to 390bp over US treasury bonds, up from 344bp at the beginning of March.
Deteriorating market conditions have led Venezuela and Ecuador to cancel plans to come to the international capital markets. But Mexico is believed to be considering a return to the yen market, possibly as soon as next week.
"Mexico is visiting institutional investors in Japan to see whether there is a market to tap," says Bustamante. "It makes all the sense in the world for them to see what the reaction of Asian investors will be."
Japanese investors have stayed clear of Latin American borrowers ever since Argentina defaulted on its debt in late 2001. But they are mulling over the possibility of buying higher yielding assets, given the given the low interest rate environment in Japan. "Japanese investors are scrambling for yield," says Ed Gutierrez, emerging markets portfolio manager at Deutsche Asset Management. "They will be a steady but small source of funding for Latin America."
"Japan has been inactive for Latin American issuance for a while," says Bustamante. "Now that the region is more stable and Mexico is investment grade, they can re-approach that market."
With political risk set to increase as the presidential election move closer, this might be the right time for Mexico to issue, despite widening spreads in the asset class. "It looks like the political cycle is starting early in Mexico and it has caught investors off guard," adds Gutierrez. "There are a lot more non-dedicated investors in the asset class today, who have not experienced a political cycle before. It's a brave new world for them."