Latin American debt: When US rates begin to rise
A large part of the debate on Latin American debt issuance will be resolved by what happens to the high level of liquidity that is available to Latin American issuers today when higher yields are available from the developed markets, and in particular in the US. Will the demand from international investors rotate back into developed market assets or will it stay emerging market focused?
Mark Howard, managing director and head of US credit strategy for BNP Paribas Securities in New York, believes that the shift into emerging markets and Latin America from international fixed-income investors is a secular trend.
"One of the fascinating things that has happened in the last two years, that hadn’t happened with some of the sovereign crises in the past that affected [some EM nations such as] Mexico, Thailand and Russia, is that investors have had a total rethink about the sovereign linkage to their corporate credit portfolios," he says. "I think EM is now benefiting from the fact that now big investors – when they think of a big telephone company in Italy for example – also have to think very closely about the Italian elections, as well as Italian central bank and ECB policy."
Howard believes that the deteriorating credit fundamentals in the developed markets and the strengthening of many of the emerging markets have repriced EM risk. "There was a false sense of complacency [about developed market risk] that has largely gone away. It may return but I think that any risk premium you were getting from Latin America and Asia is now looked at in a global context. I think this is an exciting maturation of the emerging markets and it makes global investors really think about relative value through a different lens."
The rally in risk assets since September peaked in early January when the two main high-beta industries, Mexican housebuilders and Brazilian meatpackers, attracted big demand.