Latin Finance - November/December 2012 - 2

front Notes

A delicate balance
f there was ever any lingering doubt about the enduring appeal of Latin capital markets, the second half of this year may well have snuffed it out. Markets are on fire. Records are being smashed. And an unprecedented surge in liquidity looks set to drive yet more deal-flow in the region. Bankers now expect debt capital market volumes for Latin America to top $100 billion this year. The boom in issuance is taking place amid a broader swell in capital flows to emerging market assets, following the announcement by the US Federal Reserve in September of a third round of quantitative easing and renewed hopes that the eurozone’s darkest days are finally behind it. Total issuance across the emerging market asset class had already hit $370 billion by the end of October, up 20% on the previous year. And globally, more than 75% of that sum is expected to come from corporates, as yields on sovereign paper drop to historical lows. Yet the explosion in issuance has also raised concerns that investors are increasingly prepared turn a blind eye to risks in their hunt for yield. Pimco, manager of the world’s largest bond fund, for example, is gearing up to cut its holdings of EM corporate debt next year, as fears rise over the surge in new sales. New buyers are shunning local currency and piling into dollar assets – and few asset classes have benefited more from this year’s market turmoil than emerging market hard currency debt. But as any veteran emerging markets investor knows, rapid inflows can be followed by sharp reversals – given the right trigger. Nothing about today’s environment suggests that basic rule has changed. And today’s investor enthusiasm for emerging markets shows little sign of discernment. On one hand, there is concern that it’s becoming harder for the market to digest the extraordinary volumes. Meanwhile, smaller and less established credits that have taken advantage of unprecedented demand may find it harder than expected to repay debts if the environment changes suddenly. The strength and soundness of issuing companies and governments is increasingly at issue. And investors buying assets without doing the proper homework could end up burned. Another question in today’s low-yield environment is whether prices accurately reflect the chances of a further downturn in Asia or Europe. Investors, meanwhile, are getting ever more jittery about the so-called fiscal cliff – the combination of tax increases and sharp federal budget cuts scheduled to kick in on January 1 unless US lawmakers agree to an alternative plan for reducing the deficit. Even without a major fiscal contraction in the US, the economic outlook is far from encouraging. For emerging regions – and for Latin America in particular – the risk is that politicians may now take for granted that capital inflows and a booming terms-of-trade position are permanent features of a brave new world. But a sharper-than-expected slowdown in China would quickly put paid to such beliefs. As more and more people pile into EM hard currency assets, yields will inevitably fall further. While emerging market debt may not prove immune from another financial crisis or broad-based global economic slowdown, for now, they still look attractive compared to anything else on offer. Moreover, as long as developed world interest rates stay extraordinarily low, emerging market bonds are likely to remain supported by the hunt for yield. But the asset class is still vulnerable to idiosyncratic risks. As recent crises have shown, assets many thought were liquid turned out to be less so. And the fact is that capital markets across emerging regions remain relatively illiquid. Some risks – as October’s Hurricane Sandy brought home – are hard to predict. But others, including a weak and deteriorating global growth picture, should be built into any global risk assessment. Too much talk of the emerging markets asset class as a safe haven could prove its undoing. LF

Editor Taimur Ahmad NEWS Editor Ben Miller rEportErS Mariana Santibáñez, Karen Schwartz coNtributorS Ivan Castano, Thierry Ogier, John Rumsey, Vinod Sreeharsha, Elliot Wilson Art dirEctor Rosa Matamoros-Sense coVEr iLLuStrAtioN Gary Neill cArtooN iLLuStrAtioN Christopher Weyant portrAit iLLuStrAtioN Rob Murray dEputY pubLiSHEr Teresa Aguilar, T +1 212 224 3051 rEGioNAL dirEctor J. Albert Negrón, T +1 305 428 6275 SENior MANAGEr Arielle Schrader, T +1 305 428 6274 VENEzuELA rEprESENtAtiVE Matthew Perks, T +1 718 260 8970 dirEctor of coNfErENcES Michael Brosgart SENior EVENtS MANAGEr Omar Suarez SENior EVENtS proGrAMMEr Teddy Ward EVENtS proGrAMMEr Aarti Bhatnagar MArKEtiNG ANd 1-1 MEEtiNG coordiNAtor Lily Costa MArKEtiNG MANAGEr Archana Kapur circuLAtioN MArKEtiNG MANAGEr Patricia Arcic officE MANAGEr Teresa Romero ASSiStANt to tHE cEo Vicky Maqueira LAtiNfiNANcE boArd of dirEctorS prESidENt Christopher Garnett dirEctorS Stuart Allen, Colin Jones, Giuliana Moreyra cHiEf EXEcutiVE officEr Stuart Allen cHiEf opErAtiNG officEr Giuliana Moreyra

telephone: +1 305 416-5261 fax: +1 305 416-5286 E-mail: editorial@latinfinance.com www.latinfinance.com Subscriptions hotline: u.S. +1 212 224-3427 u.K. +44 207 779 8999 E-mail address: hotline@latinfinance.com Subscriptions customer Service: +1 212 224 3455
Subscriptions: one year magazine only $495. Premium subscriptions $2,499 Send subscription orders to: LatinFinance, 1101 Brickell Avenue, Suite N1200, Miami, FL 33131 USA T 305-416-5261, F 305-416-5286. Copyright© 2012 Latin American Financial Publications, Inc. is owned by Ell Holdings, Inc. All rights reserved. Reproduction in whole or in part of any text, photograph, or illustration without written permission from the publisher is strictly prohibited. Title is protected through a trademark registration with the US Patent Office. Indexed in Information Access Company.

Have your say. Contact us: editorial@latinfinance.com
2 LatinFinance
November/December 2012

http://www.latinfinance.com

Latin Finance - November/December 2012

Table of Contents for the Digital Edition of Latin Finance - November/December 2012