Latin America: Are emerging market indices telling the right story?

By:
Rob Dwyer
Published on:

The popularity of some seemingly high-risk frontier bond issues suggests investors are driven by the need to fill index allocations rather than issuer quality. It also suggests the traditional market-capitalization approach of indices needs reconsideration.

Recent low issue prices of bonds from new, frontier credits have surprised many long-standing fixed-income bankers and investors, who are pondering why demand has been so strong despite the obvious risks associated with some of these transactions. Some are now asking: if fundamentals do not reflect the risk-reward relationship, is the once-marginal bookbuilding issue of technical, index-driven demand perhaps responsible for some of the over-subscription? And, if so, could investor behaviour be about to lead to even greater technical-demand issues as investors look away from traditional market-capitalization-based indices towards other, less liquid, bond indices?

"Did you read the list of disclaimers in the Bolivia prospectus?" asks one senior Latin America DCM banker. "It reads like a list of possible horror stories, and yet they priced at 5% [actually 4.875%]." It’s not just the pricing level of new Latin American frontiers such as Bolivia and Paraguay that have had some scratching...