How Argentina came in from the cold

Upon assuming office in 2015, President Mauricio Macri and his economic team immediately set about reforming Argentina’s economy – dismantling capital controls, allowing the currency to float freely and settling a long-standing dispute with creditors. Argentina now reaps the benefits of these reforms with growth and confidence returning once more.

These reforms have also led to positive developments for Argentina’s debt markets, a fact that was perhaps most clearly observed last year when Argentina announced its return to the international bond market with a record-breaking US$16.5 billion dollar-denominated issuance.

Less observed, however, has been the development of, and increased demand for, Argentinian peso-denominated paper as the government’s efforts to rebuild the local currency bond curve start to bear fruit.

We think investors will remain willing consumers of these bonds as long as they can continue to hedge the currency exposure with no impediments to capital repatriation. While for Argentinian corporates, the ability to issue in domestic currency eliminates liability currency mismatches.

Argentina’s debt markets have undergone a remarkable transformation against a backdrop of profound economic and political change. The confluence of development of sovereign, local currency, corporate and foreign exchange markets provides a unique opportunity for investors to gain exposure to this improving story and access what we think constitute some of the most attractive and compelling yields around.

Oliver Williams – Insight, a BNY Mellon company

Upon assuming office in 2015, President Mauricio Macri and his economic team immediately set about reforming Argentina’s economy – dismantling capital controls, allowing the currency to float freely and settling a long-standing dispute with creditors. Argentina now reaps the benefits of these reforms with growth and confidence returning once more. These reforms have also led to positive developments for Argentina’s … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Could these EM challengers displace Silicon Valley?

Could US tech stocks be eclipsed by a new wave of emerging market (EM) challengers? We think that’s a key question for the coming months and years as China and India pick up the pace in their adoption of new technologies.

We note, for example, that China has some 40% of the world’s artificial intelligence (AI) scientists as well as five of the 10 most highly valued tech ‘unicorns’.*

Global internet usage and e-commerce statistics paint a similar picture. In 2015, for example, India displaced the US as the second largest internet user population. India is also building a global lead both in its number of smartphone users and the number of e-commerce sales transacted on mobile phones.

We think this highlights an important point. For all their status as the darlings of Wall Street, the current crop of US tech leviathans face a serious challenge. As EMs create their own centres of expertise, we believe investors may be well served by looking beyond the narrow confines of Silicon Valley to a wider world of global innovation.

Drew Guff – Siguler Guff, a BNY Mellon company

* Unicorns’ are defined as unlisted tech companies with a valuation above US$1bn.

Could US tech stocks be eclipsed by a new wave of emerging market (EM) challengers? We think that’s a key question for the coming months and years as China and India pick up the pace in their adoption of new technologies. We note, for example, that China has some 40% of the world’s artificial intelligence (AI) scientists as well as … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Can China maintain its role as an engine of global growth?

Since its accession to the WTO in December 2001 China has accounted for an increasing share of the global economy. Helped by fast export and investment growth it remains an engine of trade and is expected to generate some 35% of global growth over the next two years, according to the World Bank’s latest forecast.

The country is also plagued by structural challenges however, most notably the uncomfortable legacy of a massive state-inspired credit expansion in the wake of the global financial crisis. As such, it’s attempting a tricky transition from a credit-fuelled growth model that is overly reliant on investment to one more driven by private consumption and services. It remains unclear how the dynamic between cooling credit growth and supporting GDP growth will ultimately unfold.

The good news is that China’s economy has been gradually but demonstrably rebalancing towards a growth model that is less reliant on investment, with new industries coming to the fore. Our base case is therefore for China to continue to slow down structurally, with growth being supported as necessary by the authorities as they manoeuvre policy settings to bring this about gradually.

We believe this provides an opportunity for investors to gain exposure to companies benefitting from China’s rapidly expanding services industry and fast-growing middle class. We remain cautious on banks given the probability that asset quality becomes more problematic as the cycle continues.

Douglas Reed – Newton, a BNY Mellon company

Since its accession to the WTO in December 2001 China has accounted for an increasing share of the global economy. Helped by fast export and investment growth it remains an engine of trade and is expected to generate some 35% of global growth over the next two years, according to the World Bank’s latest forecast. The country is also plagued … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
The remittances spike and its impact on global capital

Remittance flows have become an increasingly important element of global capital flows. As labour markets have become more globalised, workers move from developing countries in order to obtain higher salaries in the developed world. Often these workers continue to support family members in their country of origin and regularly send a portion of their salary to them. In countries such as Mexico and India, governments have worked with the banking industry to lower transaction costs and make the process more efficient. As labour markets in developed countries tighten, so the upward trend should resume. One danger is that the size of these flows is now drawing political attention in some developed countries and could become a discussion target for trade negotiations if imbalances become too high. That said, we don’t believe we are quite at that stage yet.

Colm McDonagh – Insight, a BNY Mellon company

Remittance flows have become an increasingly important element of global capital flows. As labour markets have become more globalised, workers move from developing countries in order to obtain higher salaries in the developed world. Often these workers continue to support family members in their country of origin and regularly send a portion of their salary to them. In countries such … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Which US states have greater GDP than other nations?

Unlike many countries where public infrastructure is planned, financed, construct and maintained by national governments, the majority of US infrastructure is the responsibility of states, cities, counties and public agencies. Each can issue their own bonds, which gives investors opportunities to invest in quasi-sovereign debt from jurisdictions whose economic output rivals that of many countries. This map shows how the individual states’ GDP equals the national GDP of various countries. With sovereign debt yields around the world remaining stubbornly low, higher yielding US municipal bonds can present an attractive, higher yielding, quasi-sovereign option for global investors.

Standish, a BNY Mellon company

Unlike many countries where public infrastructure is planned, financed, construct and maintained by national governments, the majority of US infrastructure is the responsibility of states, cities, counties and public agencies. Each can issue their own bonds, which gives investors opportunities to invest in quasi-sovereign debt from jurisdictions whose economic output rivals that of many countries. This map shows how the … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Emerging Markets: busting the myths

The introduction of India’s first infrastructure investment trust, called IRB, in May underscores the expectation infrastructure spend will be a key driver of the country’s growth over the next few years.

The IRB trust, which holds six toll roads, features a 10-12% yield and it is likely to be the first of many such listings. To put this in context, just 10% of the Indian market’s large cap stocks yield more than 3%.

The government has plans for some US$20bn infrastructure spend on roads but we think trusts like IRB may benefit from more than just increased government spending.

Aviation, for example, is another key focus for the government. In 2016 there were some 150 million domestic flight journeys in India, compared to c900 million in the US and around 500 million in China. Air travel may cost more but it takes around 1/6th the time. As such we expect to see the number of airports increase and they are likely to go private (as public-private partnerships).

Naomi Waistell – Newton, a BNY Mellon company

Register for the upcoming live panel debate on Emerging Markets

The introduction of India’s first infrastructure investment trust, called IRB, in May underscores the expectation infrastructure spend will be a key driver of the country’s growth over the next few years. The IRB trust, which holds six toll roads, features a 10-12% yield and it is likely to be the first of many such listings. To put this in context, … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Why we’re still living through extraordinary economic times

Despite all the recent discussion about rate rises and normalisation of monetary policy, the investment backdrop remains unprecedented. Through their quantitative easing programmes, for example, central banks are now the backstop for the world’s economy.

Added together, the balance sheets of the Bank of Japan, the Bank of England, the European Central Bank and the US Federal Reserve come to some US$14.4 trillion. To put this in some kind of context, the same four banks’ combined balance sheets stood at just US$2.2 trillion as of the 1 January 1999.  This means the balance sheets of central banks have ballooned by more than 650% in under two decades.

The unintended consequences of this kind of intervention by central banks in markets are legion. In fixed income, for example, a full US$8.8 trillion of the world’s bonds trade continue to trade with a negative yield. While this is below the 2016 peak where nearly 30% of the fixed income universe was on a negative yield, we still think it’s staggering to consider how many investors are willing to pay to take on risk.

The potential for rising interest rates, coupled with low and negative yields, makes it all the more important to embrace a new approach to investing.  We see the evolution of the multi-asset investment universe that looks beyond the traditional 60/40 equity/bond split as key. By broadening the investment horizon, we believe we are potentially much better placed to weather the economic vagaries of a still uncertain world.

Paul Flood – Newton, a BNY Mellon company

Despite all the recent discussion about rate rises and normalisation of monetary policy, the investment backdrop remains unprecedented. Through their quantitative easing programmes, for example, central banks are now the backstop for the world’s economy. Added together, the balance sheets of the Bank of Japan, the Bank of England, the European Central Bank and the US Federal Reserve come to … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Steel in the ground: making the case for US infrastructure renewal

US infrastructure is overdue for upgrade. Chronic underspending on roads, bridges, water, energy and senior housing has resulted in an infrastructure unable to withstand the strain of a growing, mobile and ageing population. For the first time in decades, cyclical, secular and structural trends are aligning, which we believe will usher in a period of investment not seen since the Eisenhower administration. We forecast over US$1 trillion in projects that could be built over the next 10 years. In our view, President Trump’s forthcoming infrastructure plan and emphasis on deregulation, combined with the readily apparent economic need, provide the near-term catalysts necessary to open the floodgates.

Brock A. Campbell, James A. Lydotes, William J. Adams – The Boston Company Asset Management, a BNY Mellon company

US infrastructure is overdue for upgrade. Chronic underspending on roads, bridges, water, energy and senior housing has resulted in an infrastructure unable to withstand the strain of a growing, mobile and ageing population. For the first time in decades, cyclical, secular and structural trends are aligning, which we believe will usher in a period of investment not seen since the … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Busting myths of EM debt

Emerging market debt issuers are often assumed to be inherently less creditworthy than their developed market counterparts, but in our experience the reality tells a different story.

For one thing, in recent years emerging market (EM) default rates have not been materially greater than those in developed market, (DM) and the formers’s bond covenant quality has also tended to be higher on average.

Within the high yield (HY) area of EM debt, fundamentals are also improving and default rates are expected to decline this year.

Comparing default rates for EM corporate HY issuers with those of their US equivalents since 2000, two observations are worth highlighting. First is the close similarity in trend between the two series which suggests global cyclical factors, rather than regional idiosyncrasies, explain a large part of the default experience for both EM and US corporate issuers. Second, the magnitude of default rate has been broadly similar across cycles, with 2002 the only meaningful exception in the period surveyed.

Similarly, when we consider EM Sovereign defaults we can see how credit events have become more of a rarity. Using JPMorgan’s Emerging Market Bond Index (EMBI) Global benchmark to represent the investable hard currency EM sovereign issuers accessible to international investors, only seven EM sovereigns in the index have defaulted since 2000. The adoption of flexible exchange rates, strengthened external balances, reserve accumulation and a move from external to local currency debt issuance go some way toward explaining this shift.

Rodica Glavan – Insight Investment, a BNY Mellon company

Emerging market debt issuers are often assumed to be inherently less creditworthy than their developed market counterparts, but in our experience the reality tells a different story. For one thing, in recent years emerging market (EM) default rates have not been materially greater than those in developed market, (DM) and the formers’s bond covenant quality has also tended to be … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Brazil’s economy rises above the political storm

In our view, the extraordinary thing about Latin America’s largest economy is not the political turmoil that has more or less been par for the course in recent years – but rather the country’s resilience in the face of such upheavals. Far from hitting the buffers, the economy continues to make headway, while capital inflows have remained steady. Year-to-date, for example, Brazilian equities returned 21.1%, while over 12 months the return has been 24.6%. This compares well with both developed market equities (the UK, for instance, returned 11.8% year-to-date and over 12 months) and many other emerging market countries (Colombia, for example, with 14.4% year-to-date and 11.0% over 12 months)[1].

Two things have helped steady the ship. First, timely action from the Central Bank of Brazil brought inflation under control. Second, a reform programme under the auspices of Henrique Meirelles, finance minister, has done enough to give investors confidence in Brazil’s forward trajectory. Here, a key step is a plan to overhaul the country’s generous pensions system. Should Congress approve the plan, this should help address Brazil’s budget deficit and provide a boost to the economy.

Rogério Poppe – ARX, a BNY Mellon company

[1] FTSE All World Index, US$ as at 31 August 2017

In our view, the extraordinary thing about Latin America’s largest economy is not the political turmoil that has more or less been par for the course in recent years – but rather the country’s resilience in the face of such upheavals. Far from hitting the buffers, the economy continues to make headway, while capital inflows have remained steady. Year-to-date, for … read more

  • Download
  • Print
0 comments | Join the conversation, comment now