I’m at the Fitch Latin America Sovereign Hotspots conference at the technologically-challenged Warwick Hotel this morning, where the irrepressibly quotable David Rolley, of Loomis Sayles, just appeared on a panel. Rolley’s always interesting, partly because he doesn’t confine himself to emerging markets: he sees them in the context of credit opportunities across the globe.
Recently, one of Rolley’s top picks was about as far away from emerging markets as it’s possible to get: the new 10-year bonds recently issued by Bear Stears. In a sign of how much the world has changed over the past year those bonds had a higher interest rate than the EMBI Global yield – the standard benchmark for emerging-market sovereign bonds. If you want to be safe these days, don’t take your money to the bank: take it to Mexico or Russia, instead.
Indeed, says Rolley, the main emerging-market credits at risk these days are those countries reliant on bank debt to finance their current-account deficits: Latvia, for instance. In general, if a country is big enough to issue bonds rather than borrowing from banks, it’s likely to be in pretty good shape. Emerging markets are now something of a safe haven, and in countries like Mexico domestic local-currency interest rates go down when when the economy slows, rather than going up as international investors require a higher risk premium on their bonds. "That’s counter-cyclical," says Rolley. "That’s what an OECD country does, and Mexico is an OECD country."
I used to write a great deal about Latin America in a previous life, and some things never change, primarily the perennial discussion about whether and when Brazil might ever get itself an investment-grade credit rating. Rolley, tongue only slightly in cheek, has an elegant solution to that problem which kills two birds with one stone:
If we could get Vale to build the new locks on the canal instead of buying Xstrata, we could upgrade Panama and Brazil simultaneously.
The problem with Panama getting itself an investment-grade rating, you see, is the fact that it has just embarked upon a $5 billion plan to upgrade the Canal. And as Rolley, who comes from Boston, well knows, $5 billion construction projects have a nasty habit of becoming $15 billion construction projects. Unless they’re run by a super-efficient private corporation like Brazil’s Vale, of course. Clearly Rolley, a bond investor, would much prefer Vale to stick to its extremely-profitable strengths rather than embark upon risky $76 billion hostile takeover bids.