Bond investors bet on emerging markets as ‘QE’ begins to travel

Emerging market debt investors are betting the rally that pulled sovereign bonds out of their March lows will accelerate, as the Federal Reserve’s and other stimulus efforts spread across borders and local decision-makers are launching imitation measures.

More than a dozen emerging market central banks have purchased local currency government bonds or other assets under special programs to combat the effects of Covid-19, including in Indonesia, Poland and the United States. Philippines. Countries with weaker financial bases, such as South Africa and Turkey, have also done so.

Alejo Czerwonko, strategist at UBS Global Wealth Management, noted that these purchases differed slightly from the “quantitative easing” programs used after the global financial crisis. Indeed, in many participating countries, interest rates were not yet zero and relatively small transactions did not have fixed targets for purchases. But he said the policy, if used with caution, could help strengthen countries’ recovery by “protecting[ing] the functioning of national bond markets ”.

QE-type efforts around the world have “supported the market and. . . lower funding costs, ”said Paul Greer, Emerging Markets Portfolio Manager at Fidelity International.

Sovereign bonds in the benchmark JPMorgan EMBI Global Diversified index have risen nearly 20% in value since March 23, while the additional yield demanded by investors to hold debt versus US Treasuries has fallen. reduced by more than 30% compared to the worst of the sale -disabled. Emerging and developing economies have also been able to gain massive access to international capital markets since April, raising more than $ 83 billion, according to data compiled by the Institute of International Finance.

According to Greer, the turning point at the end of March came after the Fed triggered a “mega QE and essentially put a floor under risky assets,” pledging to buy corporate bonds and an unlimited amount of public debt, among other measures.

Prior to this show of support, which was accompanied by additional spending programs from governments around the world, the Fed had cut rates to zero, opened swap lines with 14 central banks to lower the cost of the dollar to zero. international scale and put in place programs to ensure that businesses and households can access credit. The US central bank has since introduced more emergency facilities and has promised to do more if necessary.

“These global liquidity operations don’t stay within borders – they spill over into the developing world,” said Eric Baurmeister, head of emerging markets fixed income at Morgan Stanley Investment Management.

March’s massive sell-off, coupled with sweeping action by global policymakers, created what Uday Patnaik, head of emerging market debt at LGIM, said was one of the best opportunities to increase market exposure. emerging markets that he had seen in his 30 years of experience.

“If you want to do it, now is,” he told customers who had shown interest in emerging markets before the global pandemic. Mr Patnaik said the company significantly increased its investments in dollar-denominated sovereign and quasi-sovereign bonds issued by India, the Philippines and Panama about three months ago, and continued to see room for gains. from Egypt and Qatar. Kevin Daly, portfolio manager at Aberdeen Asset Management, for his part pointed to Nigeria, Ghana and Kenya as offering value.

Many investors seem optimistic about the effects of the virus. Capital Economics recently noted that the number of new confirmed infections in India, Saudi Arabia, Egypt, Latin America and sub-Saharan Africa was almost equivalent to the rest of the world combined. Yet many of these regions are moving forward with plans to gradually reopen. More cases of Covid-19 will follow, but investors say it could be less economically damaging than keeping strict lockdowns in place.

“Ultimately, all emerging markets have realized that a pause in reopening is prohibitive,” said Polina Kurdyavko, Head of Emerging Markets at BlueBay Asset Management.

Beyond the risk of a worsening pandemic, Mr. Greer of Fidelity said the current crisis and government spending to combat it will create a new set of vulnerabilities in the future.

JPMorgan is already forecasting a default rate of 16% over the next 18 months, based on its study of 41 emerging countries at risk, as the debt-to-GDP ratio of more than a third of the countries analyzed reaches around 80% or more. By the end of 2021, the bank expects the default rate in these countries to reach 34%.

“The idea of ​​a heavy debt burden is not going to go away today or tomorrow,” Mr. Greer said. “He’s here to stay. “

Nonetheless, he said the near-term outlook for emerging markets was “positive,” supported in part by central banks around the world who are now buying back assets.

Carol M. Barragan

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