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Emerging market debt - signs of a frothy top?
06-20-2017, 06:42 AM
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#1
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Administrator
Join Date: Jan 2008
Location: Chicagoland
Posts: 40,518
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Emerging market debt - signs of a frothy top?
Argentina has defaulted on it's international debt twice in the past 30 years, in '89 and in '01. So, the news that it is now floating a 100 year bond was a surprise. That is, it's a surprise that there are buyers for a borrower with such a poor payment history. Such is the desire for higher yield.
What's the chance that in the near future, we look back at this moment and think "we should have seen it coming"? Or, is this time really different?
Quote:
Argentina sold 100-year bonds barely a year after settling a protracted legal dispute tied to a $95 billion default.
With the $2.75 billion sale, the government of South America’s second-largest economy joins Mexico, Ireland and the U.K. in issuing debt that matures over a century, which is often particularly attractive to insurers and pension funds seeking to lock in long-term returns. Argentina, for its part, is taking advantage of historically low borrowing costs to finance the budget and pay off debt that’s maturing in the next few years.
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From Bloomberg https://www.bloomberg.com/news/artic...soon-as-monday
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06-20-2017, 06:56 AM
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#2
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Recycles dryer sheets
Join Date: Aug 2013
Posts: 275
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Sold all my Emerging market ETF & Index funds last week. Been buying on the dips for the last 3 years. Did not sell because of any specific indicator. Just decided 30% profit was good enough and looking at historical data it is really hard to make money in emerging markets for a buy and hold strategy. May get back it if they get beat up again....
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06-20-2017, 09:22 AM
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#3
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Thinks s/he gets paid by the post
Join Date: Mar 2014
Location: Southern Cal
Posts: 4,032
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I'm also out of VWO. But I have VXUS. Less pain.
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06-20-2017, 02:06 PM
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#4
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Thinks s/he gets paid by the post
Join Date: Mar 2017
Location: New York City
Posts: 2,838
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Gee almost 8 % bond for 100 years, nice. But will they pay? If i knew they would pay , I would do it in a heartbeat.
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06-20-2017, 02:26 PM
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#5
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Thinks s/he gets paid by the post
Join Date: Sep 2012
Posts: 1,568
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I've got a couple EM debt CEFs. I was just looking at selling them last week as the discounts have narrowed significantly lately, now around 10%. I don't have much in this area, so was going to hold out for <5% discount and let it ride, but probably should sell some.
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You know that suit they burying you in? Thar ain’t no pockets in that suit, boy.
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06-20-2017, 09:57 PM
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#6
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2008
Location: Leeward Oahu
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I think I'd rather put together a basket of Junk bonds. YMMV
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06-20-2017, 11:00 PM
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#7
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Thinks s/he gets paid by the post
Join Date: Jun 2016
Posts: 4,655
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Quote:
Originally Posted by Koolau
I think I'd rather put together a basket of Junk bonds. YMMV
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+1
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06-21-2017, 07:06 AM
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#8
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2008
Posts: 35,712
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Is this Argentina bond representative of EM debts? A few years ago, Malkiel made a point that EM countries had lower debts than developed ones (as a percentage of GNP or economy size) among other attributes that made EM stocks a compelling buy. No expert here, so just retell what I read. Or perhaps my memory has been shot.
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06-21-2017, 07:22 AM
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#9
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Administrator
Join Date: Jan 2008
Location: Chicagoland
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Emerging markets are always a compelling story for growth and investment, and "this time is different" is common. As an asset class, though, it suffers from very high volatility. I lived and worked in that environment, and have a pretty high asset allocation to EM, but can't help but wonder if this news is a sign that things are getting stretched. Perhaps this shows a shift in expectations from real growth to imagined / fantasy improvements in governance and economic stability.
An EM crisis tends to be liquidity driven, when there is a sudden mismatch between liabilities and cash flow. This does not seem to be an issue right now.
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06-21-2017, 09:27 AM
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#10
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Thinks s/he gets paid by the post
Join Date: Sep 2012
Posts: 1,568
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https://www.gmo.com/docs/default-sou...).pdf?sfvrsn=2
While volatility is high in EM, it's the only asset class projected to have positive real returns over the next 7 years by GMO.
__________________
You know that suit they burying you in? Thar ain’t no pockets in that suit, boy.
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06-21-2017, 09:34 AM
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#11
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2005
Posts: 17,194
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I would be worried about the exchange rate making it much harder for them to pay the debt...
When oil prices dropped the Russian Ruble took a nose dive and people and companies there had problems paying back dollar or euro debt...
As others (who are also on the preferred stock thread) have said, I would much rather buy some junk here and not have to worry about exchange rates.... I could also diversify....
BTW, I read yesterday that you could get 9% on Chicago school debt as nobody wants to buy this junk...
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06-24-2017, 09:31 AM
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#12
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Thinks s/he gets paid by the post
Join Date: Jun 2014
Posts: 1,069
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Quote:
Originally Posted by MichaelB
Argentina has defaulted on it's international debt twice in the past 30 years, in '89 and in '01. So, the news that it is now floating a 100 year bond was a surprise. That is, it's a surprise that there are buyers for a borrower with such a poor payment history. Such is the desire for higher yield.
What's the chance that in the near future, we look back at this moment and think "we should have seen it coming"? Or, is this time really different?
From Bloomberg https://www.bloomberg.com/news/artic...soon-as-monday
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They have defaulted luke 8/9 times in the last 100, right?
The bonds are going to be worthless longterm, but there is money to be made trading them in the short term, and thats why they sold. Someone will be left holding the bag eventually when Argentina devalues them or defaults, likely in succession.
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