beyondbrics

By Timothy Ash of Standard Bank

New issues are finally coming out of the woodwork and pricing very, very aggressively. It’s set to be a feeding frenzy across EM, and any EM issuer worth its salt, or its rating, is likely to want to get some cash (as much as possible) in the bank.

I am tempted to say that almost any issuer, whatever the name and fundamentals, with a bit of carry could tap this overbaked and pretty ridiculous market.

It reminds me of a year or so back when I came very close on April 1 to adding a new country, Vulgaristan, to my regular sovereign weekly. It would no doubt have been AAAA-rated. In the end I chickened out, mindful that the FSA might have taken a somewhat dim view of an analyst (then) in a state-owned bank actually having a sense of humour.

That said, I am sure a new Vulgaristan issue would do exceptionally well in this market, as would the Vulgaristan Absolutely Best Ever Credit Bank Honestly, and many others.

Joking aside, what kind of worries me at the moment is that it seems credit risk is not being priced in at all. Dubai 10-year sukuk at 3.875 per cent is surely not really pricing the real or likely risk of default (willingness and ability to pay, with willingness being an underpriced asset these days) but is simply a reflection of bonds trading as commodities now.

Maybe I am old fashioned but I kind of think that when investors are investing, particularly in bonds, they should think at the time that the issuer has some reasonable chance of paying back. That probably should be the basis of ethical banking – my word is my bond and all that stuff – in which both sides look each other in the eye and commit to honouring the contract.

I just don’t think this is the case at the moment, as post Argentina, Russia, Greece, et al, both sides think that restructuring is easy and markets will be forgiving. I think at the moment investors are buying bonds which they don’t like much, where they see a disconnect between yield and fundamentals, but which they are just being forced to buy by peer pressure. In their hearts and minds they know that Issuer X in EM space is very unlikely to repay but they hope that when the proverbial hits the fan they will be clever enough to get to the exits, or duck, sooner than the other guy. Right.

Timothy Ash is head of EM research at Standard Bank; he formerly held the same job at the Royal Bank of Scotland. He sent a version of this post to clients on Friday.

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