20150105-杰富瑞-Global_Emerging_Markets__The_Good,_The_Bad_and_The_Ugly__IV__16页_965kb

Global Equity Strategy Summary: Global Emerging Markets - The Good, The Bad and The Ugly (IV)

Core Content Overview

This report provides an analysis of the emerging markets (EM) credit crisis, highlighting the impact of a strong US dollar, rising US 2-year note yields, and falling commodity prices on EM financial stability. It emphasizes that while EM credit issues are significant, they are not uniform across all countries, and the crisis is more a corporate funding problem than a sovereign one.

Key Points

1. Credit Market Impact

• A "perfect storm" of a strong US dollar, higher US yields, and falling commodity prices has affected both US and EM credit markets.
• The impact on EM is more pronounced, with local bank balance sheets under pressure due to high real interest rates and inverted yield curves.
• EM credit markets are underweight in the portfolio compared to long US mid and small caps and Japanese banks.

2. Credit Cycle Unwinding

• The analysis suggests that the credit cycle unwinding is still in its early phase.
• Despite macro conditions similar to the 1994-98 crisis, there are three major differences:
  • Corporates (non-financials) are more exposed than governments.
  • Fewer central banks use fixed or quasi-dollar currency pegs, meaning exchange rates will absorb more of the pain.
  • EM debt has been "mutualized" or unitized to overseas retail investors seeking yield.

3. Debt and Refinancing Risks

• EM non-financial companies issued over US$89 billion in new debt during 1H2014, with total EM international bond issuance since the GFC reaching over US$690 billion.
• The true figure could be closer to US$1.3 trillion when including offshore debt.
• Many of these debts are in US dollars, increasing refinancing risks as foreign currency borrowing becomes more expensive.

4. Corporate Debt and Solvency

• Companies with weak balance sheets and high debt-to-equity ratios are highlighted in Exhibits 21-23.
• These include companies in sectors such as Materials, Capital Goods, and Real Estate, with low interest coverage ratios and high net debt.
• Some companies are rated as "Underperform" or "Buy" based on their financial health and potential for recovery.

5. Currency and Market Performance

• Asian currencies have underperformed the US dollar despite high savings rates.
• The US dollar has been exceptionally cheap over the past three years, drawing capital into EM assets offering higher yields.

6. Bond Issuance and Redemption

• EM bond issuance continued in 2014, with energy and industrial sectors dominating.
• The projected redemption of foreign currency-denominated bonds is a long-term issue, with the pain expected to persist for years.

7. Market Sentiment and Risk Factors

• EM corporate spreads have widened, but the relationship with the VIX is less strong compared to the past.
• The reach for yield has become a self-fulfilling prophecy, leading to increased exposure to EM debt.
• Investors have turned net sellers in EM equities, indicating a shift in sentiment.

Conclusion

The EM credit crisis is a complex issue driven by external macroeconomic factors, particularly the strong US dollar and rising US yields. While the crisis is not uniform, it is primarily a corporate funding challenge, with many non-financial firms facing significant refinancing risks. The debt structure and investor behavior have contributed to the crisis, and the long-term implications suggest a slow-burning issue that will continue to affect EM markets for some time. The report underscores the importance of monitoring corporate debt sustainability and the potential for continued market volatility.