The graph from JP Morgan shows the Yield for Emerging Market Investment Grade sovereigns relative to several other sovereign or investment grade bond classes. Taken from the end of September, it nonetheless highlights the yield pick up available for investors able OR willing to make the shift into the Emerging Market space. With “low for longer” going to be driving Fed and ECB policy for sometime to come, this shift may continue in both the EM IG as well as the EM HY space.
The new normal for investors has become the reality of negative yielding debt. Not only is this now a mainstay of many European Government Bond markets but investment grade debt, adjusted for inflation, is now also beginning to move into the same category. Paying a borrower to own their credit risk is something many emerging market borrowers would dearly wish for, but many are benefitting already from the absolute fall in global interest rates. This, plus the continued demand from investors for positive yields has gone some way to mitigate some of the Covid 19 related risks of lower GDP, lower tax revenue and higher fiscal deficits. As always, not all emerging market borrowers are equal and understanding both the economic and political dynamic has become more important that ever.
Bloomberg is the source of the data.
Turkey is one country we are currently watching with interest. The precipitous fall in US $ Foreign Exchange Reserves as well as the recent decline of the currency through 8 to the US dollar, is making many investors sit up and take notice.
Not only has Coronavirus decimated the tourist industry, a significant source of foreign exchange, but it is also putting the Government fiscal situation under increased strain.
The on-going adventurism of Turkish foreign policy, sabre rattling, or merely a tactic to divert domestic attention away from the unravelling economy, is creating a stir in Europe, Russia and the United States. One argument is that this is a land grab ahead of the expected change in President in the US and a likely re-set of relations under Biden.
Either way, the geo-political dimension to Turkey is creating some very interesting potential trades.