June 27, 2010 8:07 pm

Emerging markets set pace for debt issuance

Emerging market corporate and sovereign bonds have been issued at a record pace so far this year in a sign of growing investor interest in opportunities outside the developed world following the financial crisis.

Borrowers, including governments and companies, have raised almost $300bn to date, a 10 per cent increase on the same period in 2009, which itself led to a record year, according to data from Thomson Reuters.

Institutional investors said the inflows demonstrated a shift in perceptions of risk in those developed markets hit hardest by the crisis, and clients’ growing willingness to seek out less mainstream opportunities.

“It’s not that people suddenly think emerging markets are a lot safer, it’s that they’re realising risk is everywhere and they can’t just assume the developed world is safe,” Jerome Booth, head of research at Ashmore, the emerging markets investment manager, said.

Emerging market corporate bonds

Emerging market corporate bonds

Emerging markets have been subject to inflows of hot money in the past, hitting their economies hard when the money left as quickly as it arrived. However, investors believe the financial crisis and shift in risk perceptions mean that this time it is different.

“Debt-to-GDP ratios in the developed world are about double those in emerging markets, and they’re growing,” said Sam Finkelstein, head of emerging markets debt at Goldman Sachs Asset Management.

“This makes emerging markets interesting because you’re picking up incremental spread [higher interest rates compared with developed world rates], and in return you’re actually taking less macroeconomic risk.”

Goldman’s dedicated emerging markets debt assets grew from $3.3bn in March last year to $13.2bn in March 2010.

“I can’t say all fund inflows are long term, but this time emerging markets are a core allocation for an increasing number of investors,” Mr Finkelstein said.

Emerging markets have not been a one-way bet, however. While Russia made a successful return to the capital markets, borrowing $5.5bn with its first bond issue since it defaulted in 1998, Dubai’s restructuring of its debt-laden companies has unnerved other investors.

But corporate borrowing, led by Chinese companies, now makes up about three-quarters of emerging market bond issuance, up from just over half before the financial crisis.

As in the developed world, banks’ reluctance to lend is forcing companies to turn to the markets. Unlike their western peers, however, emerging markets companies tend to be less heavily indebted, making their bonds more attractive and suggesting potential for the market to grow.

“There are lots of countries that haven’t even started. The potential is huge,” Mr Booth said.

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