As the plan Message 29232689 did not work this time: reports of the death of emerging markets have been greatly exaggerated.
“This year Latin America was very affected by emerging market outflows after [Federal Reserve chairman] Bernanke warned about tapering.
As the plan did not work this time: reports of the death of emerging markets have been greatly exaggerated.
“This year Latin America was very affected by emerging market outflows after [Federal Reserve chairman] Bernanke warned about tapering.
High spirits in Latin America help stem fears of leaner times
By John Paul Rathbone
Growth spurt: some believe value is starting to emerge in Brazil
To paraphrase Mark Twain, reports of the death of emerging markets have been greatly exaggerated.
Yes, investors threw a “taper tantrum” in May and yanked billions of dollars out of emerging markets on worries that the US Federal Reserve was about to end its tapering programme, effectively marking the beginning of a period of higher US interest rates.
Yes, there are questions about how much longer China will continue to grow as fast as it has been, which has implications for commodity prices and thus especially Latin America, which has profited hugely from the Asian-fuelled commodity price boom of the past decade.
And, yes, Latin America has just suffered its largest ever corporate default after Eike Batista, the Brazilian entrepreneur, declared bankruptcy, meaning no payment on $6bn of his companies’ bonds.
Even so, capital remains abundant in the region – for now. Debt issuance is heading for a record year, with $129bn of bonds placed in the first nine months of 2013, according toDealogic. Equity capital markets are ticking over, with $28bn of issuance in the year to September compared with the $25bn annual average over the past five years.
Mergers and acquisitions are holding steady, with $72bn of deals – not quite last year’s bumper tally of $110bn over the same period, yet only just short of the five-year average.
“Last year, markets shut down with the Greece scare in May and then opened up again in September with huge volumes,” observes Antonia Stolper, head of the Latin American capital markets practice at Shearman & Sterling, the law firm.
“This year Latin America was very affected by emerging market outflows after [Federal Reserve chairman] Bernanke warned about tapering. But markets only closed for a few weeks –it was a much shorter shutdown.”
Market performance bears her out. The MSCI index of Latin American stocks dropped 22 per cent in the weeks following Mr Bernanke’s comments about Fed tapering. It has since recouped most of that loss to stand just 9 per cent down.
Bond yields have performed in similar fashion. The spread of JPMorgan’s Latin America emerging markets bond index over US Treasuries started the year at 317 basis points (bps), drifted higher and jumped to 463 bps at the end of June. Spreads have since drifted lower. At the end of October, the spread had shrunk to 402 bps.
“There was a very slow second quarter but in September and October we had a lot of issuance with a number of important transactions from major names,” says Roberto D’Avola, head of Latin American debt capital markets at JPMorgan.
“True, base rates are no longer the same as they were at the start of the year, but if you step back there are still good opportunities for issuers. I think issuance is going to continue.”
There are several reasons why issuance should continue. First, international interest rates remain attractive, even if no longer as rock bottom as they were.
“Issuers adjust their plans according to the cost of debt,” notes Mr D’Avola. “It’s a dynamic process.”
Second, national pension funds continue to support local markets, especially in the most developed markets such as Colombia, Chile, Mexico and Brazil. At the start of November, for example, Grupo Aval, Colombia’s largest financial group, announced a $1.3bn rights issue – all of which will be placed locally.
And third, international and local companies continue to see attractive opportunities inside Latin America. Dealmakers say US companies are starting to look south to deploy their huge cash piles.
Bankers add that Asian companies are beginning to expand their interest in the region from beyond resource-based companies alone and into consumer goods and financial services, too. European companies are also seeing a chance to crystallise value in their Latin American businesses. The biggest example is the Brazilian operation of Telecom Italia, which may come up for sale in a deal putatively worth $9bn.
If anyone believes that Latin America is immediately heading into lean times, official forecasts and market prices have not caught up with them. It is true that the era of ever-risingcommodity prices, from which the region has gained so handsomely over the past decade, may be coming to a close.
Yet, commodity prices remain considerably higher than during the golden years of the mid-2000s. International capital flows remain abundant.
The Institute of International Finance estimates private inflows into Latin America will top $300bn this year, three times the amount that came into the region, on average, between 2003 and 2008. “If you are an issuer and looking at a long-term horizon, 10-year rates still look good now,” says Shearman’s Ms Stolper. “In fact, if you are operating in an economy like Peru’s that is growing at 5 per cent plus and have market access, borrowing rates remain beyond your dreams.”
None of this is to say the region will always enjoy the same relative abundance of recent years, and certainly not across all markets.
Exotics – such as Honduras, which has issued a debut $500m bond at 7.5 per cent – may no longer attract the same buyers as they did this year when some investors were desperate for yield pick-up. (Although Venezuela still seems to be able to tap China for funds, having secured another $5bn loan from the China Development Bank in September.)
Brazil also remains out of favour with investors – although some believe value is now starting to emerge. In addition, Brazil’s coming year will be truncated by the World Cup in June and July, and presidential elections in October. Mr Batista’s default, although widely viewed as an isolated case, may also add a few points to Brazil’s risk premium.
Other markets remain hot favourites, especially reform-minded members of the so-called Pacific Alliance, which groups Chile, Colombia, Mexico and Peru. Of those countries, according to a fund manager survey by Latam Confidential, a sister publication of the Financial Times, Peru and Mexico are the top preferences.
Nonetheless, Mexico remains expensive, with a stock market trading on 18 times forward earnings, versus a Latin American average of 14 times.
For now, the big questions for 2014 are twofold. First, will Mexico drive forward with its reform agenda and liberalise its energy sector? If so, that could unleash a wave of cross-bordermergers and acquisitions and capital markets activity, bankers say.
Second, what will happen when US interest rates start to rise, as they surely will at some point?
“Emerging markets began, as an asset class, in the mid- to late-80s and since then have accompanied a long-term trend of falling US interest rates,” says Chris Gilfond, co-head of Latin American credit markets at Citi.
“The big question is what happens when that long-term interest rate cycle turns,” adds Mr Gilfond.
“Will Latin America return to the 1980s? I don’t think so, as there have been too many fundamental changes. But it will be a test.” |
