25 Nov 2015
Global disinflation and structure of EM balance sheets point to value in EM duration - Nomura
FXStreet (Delhi) – Research Team at Nomura, suggests that the last two years have seen significant pressure on EM assets, but EM local rates have generally been resilient.
Key Quotes
• “There have been specific areas of tension in local bonds, with Brazil the best example. But most EM local curves have been resilient, despite pressure on EM FX, credit, and equity markets.
• The resilience of EM local debt was particularly impressive in Q3, when selling pressure of EM assets was otherwise fairly indiscriminate.
• Structural global forces continue to be broadly favorable for high-grade fixed income instruments. For example, the FOMC recently recognized that the equilibrium real interest rate (r*) is lower in this cycle than in past cycles.
• Moreover, China is facing a cyclical downturn, driven by a significant moderation in industrial and property market activity. This is set to be a powerful global disinflationary force over the next few years.
• At the local level, we continue to note that emerging market balance sheets (at the country level) have a very different structure today than they did in the 1980s and 1990s. In particular, the exposure to hard-currency debt looks manageable in most countries. Importantly, this means that currency depreciation does not feed into rising default risk on EM sovereign debt in the way EM markets have typically seen in the past.
• For global investors, the opportunity to take advantage of bond bullish forces (disinflationary and low real yield drivers) in major markets is limited, simply because nominal yields are already at historically low levels (although some would argue that the U.S. may be an exception to this).
• These arguments imply that EM bond markets are an obvious place to look for returns (and hedges) related to a low-growth / low-inflation global equilibrium in coming years.”
Key Quotes
• “There have been specific areas of tension in local bonds, with Brazil the best example. But most EM local curves have been resilient, despite pressure on EM FX, credit, and equity markets.
• The resilience of EM local debt was particularly impressive in Q3, when selling pressure of EM assets was otherwise fairly indiscriminate.
• Structural global forces continue to be broadly favorable for high-grade fixed income instruments. For example, the FOMC recently recognized that the equilibrium real interest rate (r*) is lower in this cycle than in past cycles.
• Moreover, China is facing a cyclical downturn, driven by a significant moderation in industrial and property market activity. This is set to be a powerful global disinflationary force over the next few years.
• At the local level, we continue to note that emerging market balance sheets (at the country level) have a very different structure today than they did in the 1980s and 1990s. In particular, the exposure to hard-currency debt looks manageable in most countries. Importantly, this means that currency depreciation does not feed into rising default risk on EM sovereign debt in the way EM markets have typically seen in the past.
• For global investors, the opportunity to take advantage of bond bullish forces (disinflationary and low real yield drivers) in major markets is limited, simply because nominal yields are already at historically low levels (although some would argue that the U.S. may be an exception to this).
• These arguments imply that EM bond markets are an obvious place to look for returns (and hedges) related to a low-growth / low-inflation global equilibrium in coming years.”