DOCSLIB.ORG

Emerging and Developed Market Yields Part 1

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Emerging and Developed Market Yields Part 1 EMERGING AND DEVELOPED MARKET YIELDS NOT AN APPLES TO APPLES COMPARISON PART 1 Legg Mason’s Fixed Income Choice In this two-part series, we take a multifaceted look at emerging market real yields: on both short and intermediate-dated bonds as well as on an absolute and relative basis. Our goal is to explain current valuations relative to developed markets, highlight some of the thematic factors that may cause spreads to eventually compress, and balance our view with some of the risks to our current outlook. In part one, we will cover 10-year yields, and then our second instalment will cover short-dated yields and the global macro factors that should influence spreads. Emerging market real yields Secondly, there isn’t any credit growth of significance; the typical domestic drivers of inflation are absent. In fact, it’s the opposite: High real yields are core to our investment process at Brandywine conditions in Brazil are very disinflationary now. Inflation can Global. We think that in the sovereign space when comparing93.6 rise for external reasons. Energy or food prices can rise for global bond markets across countries - that in local-currency terms - the 91.5 reasons, or the Brazilian currency (real) can weaken. However, excess yield that investors get above the rate of inflation is a what drives the more persistent aspect of inflation is the state critical measure of value. That’s not just trailing inflation but also of domestic demand, and the fact that Brazil is only two years takes into consideration where inflation will go. To us, that’s one removed from its worst recession in 100 years tells us there’s a of the best measures of the value in bonds. Of course, comparing lot of slack in the economy. real yields between developed and emerging74.2 markets is not an apples-to-apples comparison. Emerging markets bear credit risks Brazil may get a bounce in inflation over the next few months beyond cyclical factors alone. Still, real yields overall offer a because the currency has weakened recently. Inflation may move powerful starting point in assessing opportunity across sovereign up from 2.8% to something closer to 4%. But, it’s not going to bond markets. last. The real would have to keep falling at that pace to keep inflation around those levels. The overall point is that inflation is Less than 1%Absolute 1% - 3%value in 3% emerging - 5% market 5% - 7%10-year yieldsOver 7% down because most of these economies are earlier in their cycles Chart 1: Emerging countries* - real 10 year bond yield and have plenty of slack in their economies. Therefore, inflation pressures are subdued. We think that inflation is going to stay at 6% Percent, as of 5/31/2018 these lower levels in emerging economies. 4.0 4% 3.5 3.0 Emerging market 10-year spreads 2% 2.5 Since US yields have risen over the past eighteen months, it 2.0 1.5 might be the case that emerging market yields need to offer a 0% 1.0 higher premium to remain attractive in relative terms. However, 0.5 emerging yield spreads are 350 basis points (bps) versus the (2)% 0.0 US and closer to 400bps if we include the remaining G3 bond -0.5 markets as the charts show. (4)% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Chart 2: Emerging countries* - real 10 year bond yield spread to US *Excludes China Percent, as of 5/31/2018 Telco (6)% Source: Haver Analytics Banks Energy Mining Property Materials 4 Financials Industrials Cons Discr Cons Healthcare Utility/Infra Chart 1 above focuses exclusively on the weighted-average Staple Cons real 3 yield across emerging markets. Although there are plenty of individual country-specificMining Services opportunities and risks, the message 2 here is that emerging market bonds, overall, have rarely offered 1 such attractive valuations over this time period on this basis. 0 We think inflation is likely to remain subdued for cyclical and -1 structural reasons. -2 Let’s start with the cyclical factors because we’re in a very -3 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 different situation today on inflation than we were for much of the last 10+ years. For example, in Brazil unemployment is *Excludes China near its highs, unlike the US which is near its lows. There is a Source: Haver Analytics tremendous amount of slack in the Brazilian economy so there isn’t any wage pressure. Brazil is a very early cycle economy. page 1 >> www.leggmason.com.au/fixed-income 1800 679 541 | [email protected] EMERGING AND DEVELOPED MARKET YIELDS NOT AN APPLES TO APPLES COMPARISON PART 1 Legg Mason’s Fixed Income Choice Chart 3: Emerging countries* - real 10 year bond yield spread to The impact of foreign financing & capital flows G3 (US, Japan, Germany) Percent, as of 5/31/2018 When we’re talking about local-currency emerging market yields, there are two additional factors that come into play: 4 1. One is their financing risk to the extent that countries have 3 large external deficits and are reliant on foreign funding. 2 1 2. The other is the global environment to offer that financing, which then has bearing on the level of yields. 0 -1 If a country might have low inflation but a large external deficit, -2 it may need to offer a relatively high interest rate to gain that -3 funding or financing. Keep in mind we’re in an environment 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 where the US Federal Reserve (Fed) is raising interest rates, and perhaps eventually the European Central Bank (ECB), so that’s a *Excludes China Source: Haver Analytics risk for countries. Yet there has been a material improvement in emerging markets’ external balances from where they were two years ago. The actual balances are not at the levels they were in These spreads are certainly near historical highs so there’s say the middle of the 2000s, like 2004-05 when balances were plenty of scope for them to narrow in favour of emerging exceptionally high. Nonetheless, these countries are running a markets. It’s possible developed market yields rise further and surplus overall. As a group, emerging markets don’t actually need that’s how the spread narrows - that’s one possibility. Even if that foreign funding and are in better shape than they were in 2014-15. was the case, investors would still earn the yield in emerging markets during that period. However, we think it’s more likely We like to talk about the spread versus the US (refer to Chart 2) that spreads compress from both sides, in which case, yields because it’s the country where the central bank has tightened would fall, and we’d earn both the yield on emerging markets the most, and spreads are tight in most sectors of the US fixed and the gain from the price appreciation. At these current levels, income market. US yields have risen the most and yet emerging we think we are well compensated for the credit risks that exist market yields are still cheap relative to the US. However, it’s in these emerging countries. worth evaluating emerging market spreads relative to the G3 because capital flows into emerging market bonds can come from the US as well as European and Japanese investors - and other developed markets. Part 2 will cover the spread in short-term rates. Anujeet Sareen, Portfolio Manager Brandywine Global page 2 www.leggmason.com.au/fixed-income 1800 679 541 | [email protected] Legg Mason Asset Management Australia Ltd (ABN 76 004 835 849 AFSL 240827) is part of the Global Legg Mason Inc. group. The information in this article is of a general nature only and is not intended to be, and is not, a complete or definitive statement of the matters described in it. Although statements of fact in this article have been obtained from and are based upon sources Legg Mason Asset Management Australia Limited believe to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions and estimates included in this communication constitute our judgement as of the date of this communication and are subject to change without notice. This article originally appeared on Brandywine Global’s blog, Around the Curve. Brandywine Global combines expertise in value investing with a global perspective to bring differentiated solutions and investment insights to clients worldwide. The views expressed are for informational purposes only and subject to change; this information should not be considered a solicitation or an offer to provide any Brandywine Global service in any jurisdiction where it would be unlawful to do so under the laws of that jurisdiction. Additionally, any views expressed by Brandywine Global or its employees should not be construed as investment advice or a recommendation for any specific security or sector. This content may not be republished without permission. Brandywine Global is not affiliated with any third-party sites, and is therefore not responsible for the content, terms of use or privacy or security policies of such sites. www.brandywineglobal.com.
Load more

Recommended publications
  • The Emerging Markets Investment Universe by Jan Dehn and Joana Arthur
    THE EMERGING VIEW August 2015 The Emerging Markets investment universe By Jan Dehn and Joana Arthur This is the fourth annual review of the Emerging Markets (EM) investment universe. We provide an overview of tradable debt and domestic credit markets in 54 EM countries as well as the large cap, small cap and Frontier Markets for equities. We compare debt statistics with similar metrics for developed economies to place EM in the global context. We highlight trends and discuss EM indices, the effect of regulation and USD strength, the rise of corporate bond markets, the likely implications of Fed hikes and other relevant aspects. We look towards the horizon of fixed income markets, including the growing Sukuk universe, the opening of China’s bond market, etc. We also peer into the future of EM equity markets, including the opening of markets in China, Saudi Arabia and Iran. Size and structure of global fixed income and EM countries now account for 57% of global GDP domestic credit1 As of the end of 2014, global tradable debt and domestic private on a purchasing power parity basis, but only sector credit was USD 197trn, or 255% of global GDP. Global around 20% of total debt and credit domestic credit to the private sector stood at USD 84trn, while global tradable debt was USD 113trn. The tradable EM debt universe Emerging Markets (EM) countries account for about 13% of the world’s tradable debt (USD 14.8trn) and 31% of the global The tradable EM corporate debt universe is now exactly the domestic credit to the private sector (USD 26trn).
    [Show full text]
  • Investing in Emerging and Frontier Markets – an Investor Viewpoint
    Contents Acknowledgements .............................................................................................................................................................................1 1. Executive Summary ........................................................................................................................................................................2 2. Introduction ........................................................................................................................................................................................3 3. Overview of Foreign Investor Activity ...................................................................................................................................4 4. Methodology ......................................................................................................................................................................................9 5. Discussion of interview findings ........................................................................................................................................... 13 Reference list .......................................................................................................................................................................................26 Investing in Emerging and Frontier Markets – An Investor Viewpoint Acknowledgements This research was only possible because of the willingness of investors to be interviewed for this report and to speak openly with
    [Show full text]
  • Developed Markets Outlook 2021
    Uncertain recovery Developed markets outlook 2021 Investment Outlook TLIM Due to the COVID-19-related lockdown measures, 2020 will go into the record books as the year that saw the deepest global recession in peacetime. For 2021, we expect global economic activity to rebound, although the recovery will likely be slow amidst recurring restrictive measures. Pre-pandemic activity levels can only be reached once a vaccine has become widely available. Despite positive vaccine trial results, we don’t expect this to happen before the final quarter of 2021. In the meantime, further stimulus will be needed. Bold policy choices need to be made so that the recovery can become sustainable and inclusive. This could be a vital first step towards a new economic system, one that is equipped to address the challenges of our time: climate change, biodiversity loss and inequality. Developed Markets Outlook 2021 An uncertain recovery: divided US suits the global status quo Joeri de Wilde The US is still the largest economy in the world, with Global economy: growth rebound with unable to reach pre-pandemic activity levels before This trend may very well to continue in 2021, a worrying over 24% of global GDP. The change of leadership in much uncertainty the final quarter of 2021, when a substantial part of realisation. Washington could, in theory, be the spark that ignites their citizens have been vaccinated. In our outlook the much-needed global reset of our economic system. In 2020, we project global economic activity to for 2020, we warned about the ultra-loose global For 2021, we expect global economic activity to President-elect Joe Biden wants the US to ‘lead the contract by an astonishing 4.1%.
    [Show full text]
  • S&P Dow Jones Indices' 2020 Country Classification Consultation
    CONSULTATION S&P Dow Jones Indices’ 2020 Country Classification Consultation NEW YORK, AUGUST 19, 2020: S&P Dow Jones Indices (“S&P DJI”) is conducting its annual country classification consultation with market participants. S&P DJI’s global equity indices are divided into three major country classifications – developed, emerging, and frontier. Certain countries do not fall into one of these three categories and are considered “stand-alone” countries for index construction purposes. A number of factors are used in determining each country’s classification, both quantitative and qualitative in nature. Additionally, the opinions and experiences of institutional investors are critically important in determining whether a market should be classified as developed, emerging, or frontier. In that regard, S&P DJI is seeking feedback on the countries and markets covered by this consultation. Your participation in this consultation is important as we gather information from various market participants in order to properly evaluate your views and preferences. Please respond to this survey by October 15, 2020. After this date, S&P DJI will no longer accept survey responses. Prior to the Index Committee’s final review, S&P DJI may request clarifications from respondents as part of that review. To participate in this consultation, please visit the online survey available here. For further information about this consultation, please contact S&P Dow Jones Indices at [email protected]. Please be advised that all comments from this consultation will be reviewed and considered before a final decision is made; however, S&P DJI makes no guarantees or is under any obligation to comply with any of the responses.
    [Show full text]
  • A Vision for the Development of the Luxembourg Financial Centre Contents
    LUXFIN A VISION FOR THE DEVELOPMENT OF THE LUXEMBOURG FINANCIAL CENTRE CONTENTS Foreword by Pierre Gramegna, Minister of Finance 2 Executive Summary 4 01 Luxembourg’s development as a leading financial centre 6 02 The Luxembourg and European financial services industries 16 03 Core growth ambitions for the Luxembourg financial centre 04 26 Luxembourg’s growth enablers 34 05 Growth plans and potential in each sector of the financial centre 41 2 FOREWORD Foreword Over the course of the last three decades, Luxembourg has been able to build a financial industry which is uniquely specialized in cross-border activities. This is a common feature throughout the entire range of services provided in Luxembourg, whether Pierre Gramegna, in investment funds, wealth management, capital market Minister of Finance operations or advisory services. Enabling investors to connect November 2015 with different markets has become our trade. The success of the Luxembourg financial industry has not only benefited Luxembourg but Europe more generally. Luxembourg’s leading position in the investment fund area is foremost a success story of a European investment product, the UCITS. The assets raised in the fund industry through Luxembourg are assets that benefit companies all over Europe as they are being reinvested in various countries and help finance economic activity. Luxembourg’s expertise plays the role of enabler of this investment. Luxembourg has grown economically with the completion of the Single Market of the European Union where goods, people, services and capital can move freely. This Single Market has spurred trade and thus ensured growth. It is imperative not only to preserve it but also to continue to work for its completion.
    [Show full text]
  • INVESTING in JAPAN Japan’S Relevance to the Global Economy Japan Is an Established Global Economic Leader Across a Wide Variety of Measures
    November 2020 White Paper INVESTING IN JAPAN Japan’s Relevance to the Global Economy Japan is an established global economic leader across a wide variety of measures. It is the third largest economy in the world, behind only the United States and China1. Known for its economic diversity and sophistication, Japan has consistently ranked as the most complex economy in the world by Harvard studies2. It is home to leading companies in both production and technological advancements across a variety of industries. In addition to being the fourth-largest exporter in the world3, Japan also has a strong domestic economy powered by the third largest consumer market in the world4. Across various measures, Japan is an economic power to be reckoned with. Figure 1: Japan’s Economic Rankings: 10 Largest 10 Largest by 2019 GDP 10 Largest by 2019 Exports of 10 Largest by 2019 Household (US$ trillion) Goods and Services (US$ trillion) Consumption (US$ trillion) US $21.4 China $2.6 United States $14.0 China $14.7 US $2.5 China $5.4 Japan $5.1 Germany $1.8 Japan $2.8 Germany $3.9 Japan $0.9 Germany $2.1 India $2.9 UK $0.9 United Kingdom $1.9 UK $2.8 France $0.9 India $1.6 France $2.7 Netherlands $0.8 France $1.5 Italy $2.0 Korea $0.7 Italy $1.3 Brazil $1.8 Hong Kong $0.6 Brazil $1.2 Canada $1.7 Singapore $0.6 Canada $1.0 Source: World Bank as of 2019 Source: IMF as of 2019 Source: World Bank as of 2019 The Japanese equity market is no less significant.
    [Show full text]
  • Wealthmanagement SOLUTIONS for YOUR LIFENEEDS™
    April 2012 WealthManagement SOLUTIONS FOR YOUR LIFENEEDS™ Market Insights A periodic newsletter from Idaho Trust The focus on the European debt crisis has eased which is now allowing indebted European countries more time to continue to deal with their unsustainable debt levels. After the successful installment of a second bailout, Greece has once again avoided default. So far, the Year of the Dragon has not been kind to the Chinese economy which is slowing and projected to stay below its average growth rate. Developed Markets It appears that the recession in Europe—that was triggered by the European debt crisis—has not yet or may not heavily influence the rest of the developed world’s economies. The European recession has disrupted export activity, as expected, but we have yet to see other developed economies being pulled into a recession due to their exposures to troubled European economies. The U.S. has recently reported a string of economic indicators signaling its economy is continuing to grow. Recent GDP figures have not been robust, but they have been increasingly positive. Japan’s struggling economy has had some good news recently, but don’t expect things to turn around any time soon. Japan’s debt to GDP ratio just reached a new high of 205%. Japan is also supporting one of the oldest and declining populations in the world. That certainly doesn’t help spur economic growth which will be needed in the long-run to support the country’s debt burden. To put this into perspective, the US’s debt to GDP ratio is currently close to 102%.
    [Show full text]
  • Five Reasons to Own More Emerging Markets Equities
    Lazard Perspectives Five Reasons to Own More Emerging Markets Equities Every sell-off tells a story about an asset class—a story about what investors believe the assets are and what they are capable of becoming, for better or worse. As COVID-19 spread around the world and global growth prospects dimmed, many investors sold emerging markets equities. We believe this sell-off told the story of an asset class driven by the energy and materials sectors and populated by countries and businesses that are recipients of trickle-down demand from strong global growth, rather than drivers of that growth—the businesses that support the developed world, rather than strong markets in their own right. Not every story is accurate, however, and we believe this view is not a true reflection of emerging markets today. We strongly believe that emerging markets remain a powerful investment in 2021— so much so that we think investors ought to be considering how best to increase their allocations, rather than selling their holdings. Here are five reasons why: 2 1. Composition: Emerging markets are much less dependent on energy and materials than they once were, while Exhibit 1 MSCI EM Index Composition: Now and Then entrepreneurial information technology and internet-related (%) businesses are ascendant. 50 2. Innovation: Emerging markets have leapfrogged the developed 1995 2008 2021 42% 39% world in several key technologies, while spending on research 40 and development in China, in particular, rivals that of the US. 30 29% 3. Driving Force of Global Growth: Emerging markets account 20 for almost 60% of global growth, a proportion due to rise given 15% 13% 12% 12% their relatively young populations and ongoing urbanization.
    [Show full text]
  • Country Report Poland 2019
    EUROPEAN COMMISSION Brussels, 27.2.2019 SWD(2019) 1020 final COMMISSION STAFF WORKING DOCUMENT Country Report Poland 2019 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2019 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2019) 150 final} EN EN CONTENTS Executive summary 3 1. Economic situation and outlook 7 2. Progress with country-specific recommendations 15 3. Reform priorities 20 3.1. Public finances and taxation 20 3.2. Financial sector 24 3.3. Labour market, education and social policies 26 3.4. Competitiveness and investment 33 Annex A: Overview Table 45 Annex B: Commission Debt Sustainability Analysis and fiscal risks 49 Annex C: Standard Tables 50 Annex D: Investment Guidance on Cohesion Policy Funding 2021-2027 for Poland 56 References 61 LIST OF TABLES Table 1.1: Key economic and financial indicators — Poland 14 Table 2.1: Assessment of implementation of 2018 country-specific recommendations 17 Table 3.2.1: Financial stability indicators of the Polish banking system 24 Table C.1: Financial market indicators 50 Table C.2: Headline Social Scoreboard indicators 51 Table C.3: Labour market and education indicators 52 Table C.4: Social inclusion and health indicators 53 Table C.5: Product market performance and policy indicators 54 Table C.6: Green growth 55 LIST OF GRAPHS
    [Show full text]
  • Frontier Markets: a Comparative Analysis by Cliff Quisenberry, CFA®
    A reprinted article from November/December 2018 Frontier Markets: A Comparative Analysis By Cliff Quisenberry, CFA® © 2018 Investments & Wealth Institute®, formerly IMCA. Reprinted with permission. All rights reserved. NOVEMBER DECEMBER FEATURE 2018 Frontier Markets: A Comparative Analysis By Cliff Quisenberry, CFA® merging-market investing has (UAE) that had GNI per capita measures have one of their own,6 the number of grown substantially in the past two greater than the United States but were countries with access to a stock decades, but investors have yet considered frontier by most index pro- exchange exceeds 150, of which more E 2 to widely adopt its smaller counterpart, viders until fairly recently. Instead, the than half would be considered frontier. frontier-market investing. Yet frontier main frontier index providers MSCI, markets share many positive attributes FTSE Russell, and S&P Dow Jones3 (for- One driver of investor interest in that have attracted long-term investors merly S&P/IFC) have various methods emerging-market equities has been the to emerging markets such as fast- to define whether a country is a frontier, prospect of capturing the growth of these growing economies, relatively cheaper emerging, or developed market based markets’ underlying economies. In that valuations, and a source of diversification upon criteria including foreign investor regard, the average frontier country to U.S. equity investments. However, access, size and liquidity of the market, shares similar growth prospects as its frontier markets also exhibit unique custody, and the results of consultations larger emerging-market counterpart, characteristics and challenges that set with institutional investors. and both beat the developed markets by them apart.
    [Show full text]
  • Redalyc.POLAND in the EUROPEAN UNION. TEN YEARS
    Revista UNISCI ISSN: 2386-9453 [email protected] Universidad Complutense de Madrid España Kolodziejczyk, Katarzyna POLAND IN THE EUROPEAN UNION. TEN YEARS OF MEMBERSHIP Revista UNISCI, núm. 40, enero, 2016, pp. 9-26 Universidad Complutense de Madrid Madrid, España Available in: http://www.redalyc.org/articulo.oa?id=76743646002 How to cite Complete issue Scientific Information System More information about this article Network of Scientific Journals from Latin America, the Caribbean, Spain and Portugal Journal's homepage in redalyc.org Non-profit academic project, developed under the open access initiative Revista UNISCI / UNISCI Journal , Nº 3 9 ( Enero / January 2016 ) POLAND IN THE EUROPE AN UNION. TEN YEARS OF MEMBERSHIP Katarzyna Kolodziejczyk 2 University of Warsaw Abstract : Twelve years have passed since the Polish entry into the European Union. For Poland the date of 1 May 2004 is the culmination of a transformation process launched at the end of the Cold War in 1989. One of the priorities of Polish foreign policy, the expansion of the political, economic and cultural relations with Western Europe and the United States has been met. This approach has been described as ‘the return to Europe’. Membership in the European Union c hanged the Polish economy and the new politics opened up new opportunities for businesses and citizens. The aim of the article is to analyze the balance of the Polish membership in the European Union in the economic, financial, political and social dimensi ons . Abstract : Poland, European Union, e conomic adjustments, exports and imports, financial flows, Polish presidency of the EU, Eastern Partnership, economic and social benefits .
    [Show full text]
  • Construction Rules for the Morningstar® Global Markets Indexsm
    ? For Professional Use Only Construction Rules for the Morningstar® Global Markets IndexSM Morningstar Indexes June 2019 Contents 1 Overview 2 Index Construction Overview 2.1 Assigning Stocks to the Index The Morningstar® Global Markets IndexSM consists of liquid equities that provide investors with accurate 2.2 Index Weighting benchmarks for performance measurement, as well as offering discrete building blocks for portfolio 3 Index Maintenance and Calculation construction. These indexes provide an accurate, comprehensive depiction of the performance and 3.1 Index Maintenance and Corporate fundamental characteristics of global equity markets through a comprehensive portfolio of accessible and Action Treatment 3.2 Index Calculation and Price data liquid stocks. 4 Methodology Review and Index The Morningstar Global Index is designed with the following key objectives in mind: Cessation Policy × Transparent and objective rules: The construction of indexes should be governed by a clear and 5 Data Correction and Precision transparent set of well-documented rules for security selection and exclusion, reconstitution, and 5.1 Intraday Index Data Corrections adjustments for corporate actions. 5.2 Index-Related Data and Divisor Corrections × The right balance between comprehensive market coverage and full investability: Indexes should reflect 5.3 Computational and Reporting the actual investment opportunities available to active and passive managers. At the same time, they Precision should reflect the overall economic importance of the company—the larger and more liquid the security, 6 Appendixes the more weight it deserves in the index. The goal is to find the right balance between completeness and 6.1 Glossary investability. 6.2 Developed- and Emerging- markets Classification × Nonoverlapping and hierarchical: Indexes should include all qualified stocks in the broad market index.
    [Show full text]