By John Bates, Head of Fixed Income at Silk Invest
We believe it is time to bank with the unbanked, avoiding sovereign credit concerns and enjoying structural improvement in sovereign balance sheets as the new emerging economies industrialise.
Most agree that the developed world looks set to face steep barriers for growth for the foreseeable future thanks to funding problems in banking institutions and developed world sovereigns.
Frontier fundamentals remain robust in comparison; although the resulting multiplier effects of the weaker developed markets will likely continue to cause a drag effect on the EMs and Frontiers.
You can run but you certainly can’t hide from the global financial crisis. That said, the frontiers never participated in the binging on debt that the banking institutions and developed world sovereigns did.
It is this lack of leverage that has insulated frontiers market bonds from the selloff in developed markets.
Yields remained relatively unscathed in recent months. A nice example is the USD 2021 Nigerian sovereign bonds which have maintained overall yield contraction of 17% YTD.
Meanwhile credit spreads in the EMs and Frontiers have widened, largely due to the fall in US treasuries witness over the last quarter.
This shows that the bond world is in a risk off mode as far as frontier corporates goes, but is happy to support unleveraged economies.
This presents a great entry opportunity for those seeking yield, and after last month’s collapse of yield in core Europe, there are now a lot more of those about.
During this period of low trading volumes amid global uncertainty, there are a number of factors which we believe will assist in maintaining resilience in frontier markets.
- Global cash levels are high and growing. As the world has gradually grown more and more defensive, so have the cash holdings grown. More than ever before the EMs and Frontiers have a place in the minds of investors compared to the prior crises of 1998/2001, when EM’s were viewed as an almost exclusive asset class. The world is much smaller today.
- Banking models in the frontier remain simple and not very leveraged.
- Other disparities from the past are that nominal interest rates as well as borrowing costs are by and large lower. At the same time commodity prices are generally higher, and these regions have better official reserves positions as well as lower debt levels.
- The development of the domestic bond markets in many of these countries has supplied a financing cushion for when external resources and/or sentiment dry up.
- In a number of isolated cases the global slowdown is providing a proverbial bucket of water to cool down overheating economies. This is notably the case in Turkey and the UAE.
In conclusion, we believe it is time to bank with the unbanked, avoiding sovereign credit concerns and enjoying structural improvement in sovereign balance sheets as the new emerging economies industrialize.
Click on the link to listen to our Frontier fixed income webcast here we discuss the above in more detail.
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