Risk appetite is in full flow, led by Turkey’s remarkable return to the international bond markets on Wednesday, just weeks after a currency crisis had thrown the country, and through it the emerging markets asset class, into a tailspin.
Not only did the sovereign raise US$1.5bn, it did so through a 31-year bond as investors cast aside doubts about Turkey’s vulnerable political and financial situation – on Thursday the country posted a 33.7% increase in its current account deficit for 2013 to US$65.4bn, its second worst in history.
Instead, they took the opportunity to gain exposure to a high-yielding security in what is still a low interest-rate environment. The new notes priced to yield 6.70%, a small premium over Turkey’s secondary curve.
The deal illustrates how even despite last month’s turmoil, which was largely in the currency and local rates markets, fixed-income fund managers have remained committed to emerging market credits, waiting for the right opportunity to re-invest.
“The market is just awash with cash looking for high-quality credit,” said Nick Darrant, head of CEEMEA syndicate at BNP Paribas, which co-led the Turkey deal with Bank of America Merrill Lynch and Goldman Sachs.
Another banker agreed that the credit market is being cushioned by strong technicals. “At some point people will have to wake up to the fundamentals but the market is overly-liquid and there’s scarce supply.”
Despite more than US$20bn of outflows from emerging markets bond funds since 2013, which have mostly hit retail accounts, money continues to pour into fund managers’ coffers through bond redemptions and coupon payments.
And given that large swathes of the secondary market are too illiquid, investors have little choice but to bid big in primary to deploy their cash.
Turkey’s transaction attracted not just dedicated emerging markets accounts, but also high-grade investors, with demand peaking at US$7bn.
Even before Turkey issued there were strong signs of how keen investors were to get back buying new emerging markets deals. On Monday, Slovenia raised US$3.5bn through a dual-tranche offering comprising new five- and 10-year notes.
At its peak, the order book hit a staggering US$18.5bn. It was later reconciled to just over US$16bn, but was still more than enough to reprice Slovenia’s dollar and euro secondary curves tighter.
Buoyed by the Slovenian government’s decision to start recapitalising its troubled banking sector last year, investors see the sovereign as an undervalued credit within the eurozone.
The new five-year note priced at 280bp over US Treasuries, roughly double the spread of Spain’s March 2018 dollar bond. This despite the fact that Slovenia (Ba1/A-/BBB+) is higher rated than Spain (Baa3/BBB-/BBB) by Standard & Poor’s and Fitch.
The search for yield is also being reflected in parts of the corporate sector. On Thursday, Dubai Investments Park, a real estate company, rated BB by Standard & Poor’s, drew US$4bn of orders for a debut US$300m five-year sukuk. Almost half of the sukuk were allocated to European investors. Even the lead managers were stunned by the response. “It was an astonishing level of demand,” said one.
Remarkably, at a final level of mid-swaps plus 265bp, DIP sold its five-year notes at a slightly tighter spread than Slovenia, reflecting the big skew in the balance between supply and demand in the Gulf.
FURTHER WOBBLES
Bankers, though, are careful not to get too carried away, especially as market sentiment remains vulnerable to short-term macroeconomic and politically-driven headlines.
“There will be further wobbles. The election schedule is quite crowded and tapering will continue to be a theme. Primary markets will likely face further volatility and issuers will need to be nimble and opportunistic with picking a good window,” said Stefan Weiler, head of eastern Europe, Central Asia and Africa debt capital markets at JP Morgan.
Others see more deep-rooted problems facing many countries, especially structural imbalances. “Stepping back and looking at emerging market growth models, some of the main drivers of EM growth of the past decade – rising commodity prices, cheap labour, global growth – are gone. As a result, growth is structurally slowing down in many EMs since 2013,” said SG analysts in a research note on Thursday, entitled Why emerging markets could crash further.
And while acknowledging that not all countries have the same risks – after all Ukraine’s crisis is very different from events in Turkey – the report added that “excessive credit growth in several emerging markets threatens the stability of their financial systems.”.-Reuters
