International investors are buying Brazilian, Indian and Indonesian bonds, driving the biggest monthly gain in emerging-market debt in at least three years, as the central banks cut interest rates to support their economies.
Merrill Lynch & Co’s LDM Plus Index of local-currency sovereign notes in 18 developing nations rallied 8.2 per cent in US dollar terms in December, the most since the index started in 2006. Indonesia’s domestic securities gained 29 per cent, India’s climbed 12.6 per cent and Brazil’s advanced 6.6 per cent, according to Merrill.
Investec Asset Management, Aberdeen Asset Management and Erste Sparinvest, which together manage more than $6 billion in the emerging market debt, are turning bullish as inflation cools and currencies rally. The index had dropped 6.5 per cent in the first 11 months as the worst global financial crisis since the Great Depression caused Pakistan, Ukraine and Hungary to seek loans from the International Monetary Fund (IMF).
“Investors expect rate cuts across many countries with no inflation problems going forward over the next couple of years,” said Anton Hauser, who manages $1.2 billion in the emerging-market debt in Vienna at Sparinvest, part of Austria’s biggest bank by market value. “This means quite good returns on the local-currency bonds in general.” Policy makers are shifting focus from fighting inflation as recession in the US, Europe and Japan erodes export demand, shrinks wages and reduces raw material costs. The World Bank predicted on December 9 that growth in developing economies will slow down to 4.5 per cent in 2009, from 6.3 per cent last year, as global expansion cools to 0.9 per cent.
Rate cuts
The Reserve Bank of India on Saturday slashed its repurchase rate for a fourth time in less than three months to 5.5 per cent as wholesale price increases slowed to 6.4 per cent last month, from a 16-year high of 12.9 per cent in August. India’s growth may slow to 7 per cent in the year ending March 31, from 9 per cent or more in the previous three years, the government said on December 23. Bank Indonesia lowered its benchmark for the first time in a year on December 4 to 9.25 per cent. Brazil, Thailand and Mexico will cut borrowing costs this month, according to the Bloomberg surveys of economists.
Developing-nation debt plunged for much of 2008 as credit losses mounted, prompting investors to hoard cash and pare investments in everything but the safest government securities. The outflows from emerging-market bond funds averaged $800 million in the 19 weeks ended December 17, according to EPFR Global, a Cambridge, Massachusetts-based research company.
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Currency swings
The LDM Plus Index rose 1.1 per cent in dollar terms in 2008, compared with a 12.9 per cent gain before adjusting for foreign-exchange swings. Returns for US currency investors were 13.9 per cent in 2007 and 12.7 per cent in 2006. US. Treasuries returned 14 per cent in 2008, a separate Merrill index shows.
“I would basically avoid all emerging markets for the first six months of 2009 with the possible exception of China and India,” said Arjuna Mahendran, Asia chief investment strategist in Singapore for HSBC Private Bank, which manages $494 billion in assets. “In a recession, it’s very difficult to raise taxes.” Pakistan is an “extreme case” of the risk as raising tax income is a condition of its $7.6 billion IMF loan, he said.
The Korean won weakened 26 per cent last year, the Brazilian real 23 per cent, the Indian rupee 19 per cent and the Indonesian rupiah 15 per cent amidst concerns that governments and companies would struggle to meet overseas obligations. The South Korean government said last month that it is considering providing aid to car makers and Russia approved a list of 295 companies to receive state support.
Financing plans
Developing nations may increase sales of dollar-denominated debt 68 per cent to $65 billion this year to plug budget deficits, according to ING Groep. Reliance on foreign markets led countries across Latin America to default in the 1980s, according to Ricardo Hausmann, director of the Center for International Development at Harvard University in Cambridge, Massachusetts.