Trade association meetings are interesting things. If you’re the International
Swaps and Derivatives Association, you hosted a huge general meeting this week
in Boston, complete with worthy speeches from the likes of Jean-Claude
Trichet about the
systemic risks of credit derivatives.
On the other hand, if you’re EMTA, the trade association for the emerging markets,
your spring forum this year
was a much more intimate event. The reason is that in emerging markets, it would
seem, there really isn’t anything to worry about. Which is weird, considering
that prices are even higher than they were a couple of years ago, when everybody
was very worried about frothiness and overvaluation in the markets.
But the world is very different now, and it’s no longer a place where the classical
concept of what "emerging markets" are even makes sense. For the past
couple of decades, emerging markets were first and foremost sovereign debt markets
– big developing countries such as Brazil, Mexico and Argentina would
borrow billions of dollars from US and European banks and bondholders, who in
turn would worry about whether or not they were likely to default.
Today, there’s only one big sovereign borrower in the world, and it’s the USA.
Brazil and its ilk have become not debtors but creditors, ramping up their foreign
reserves – which means buying Treasury bonds, which means lending money
to Uncle Sam.
There are still default worries in the emerging markets, but they’re confined
to places like Ecuador and Venezuela, where a default is likely to have few
if any systemic consequences. (If Argentina can default on $100 billion of debt
and cause barely a ripple in the international capital markets, Ecuador should
be able to default on $6 billion with the rest of the markets barely noticing.)
Meanwhile, emerging-market corporate debt and equity issuance is soaring, and of course
some of those corporations will themselves default. But most are still under-leveraged,
and in any case corporate defaults are almost never a source of serious concern
to people who don’t hold the bonds in question.
Jim Barrineau of AllianceBernstein told the EMTA meeting that
"in five years, emerging markets is not going to be an asset class; it’s
going to be a subset of global investing". Certainly the trading ideas
of yesteryear, where fund managers and sell-side analysts would rattle off a
list of countries where you could buy the bonds and make a fortune, were nowhere
to be seen. Instead, investors are reduced to relative-value plays: betting
that the spread between Colombia and Mexico will narrow, for instance, or that
the spread between Russia and Ukraine will widen.
There’s also an interest in buying default protection on names such as Mexico
and Venezuela, which is certainly cheap. That kind of play might be able to
make a lot of money if the oil sector in those countries underperforms, which
is likely. But the thing about buying default protection is that even if it
is cheap, it has a negative carry, which means that if the CDS price rises only
a little bit, then you still lose money.
Emerging markets used to be an exciting, wild-west asset class. It now trades
a long way through US high-yield debt, and is fast converging on US investment-grade
spreads. In other words, it’s becoming boring. Which is great for the economies
concerned, but does engender no little nostalgia at gatherings such as the one
yesterday.
