For media distrib
bution. November 2013
Schro
oders
s
Multi-As
sset In
nsights
By Aymeric Forest
F
and
d Matthias
s Scheiber, Fund Managers, M
Multi-Asse
et
Eme
erging marrket debt: is there mo
ore pain to come?
The domestic en
nvironment fo
or most eme rging markett bonds rema
ains challengging due to slow
s
wth and rising
g inflation, po
osing a challlenge to central banks (figure1). Emeerging marke
ets
grow
suffe
ered a broad
d sell-off overr the summe
er on concern
ns that the Fe
ederal Reserrve (Fed) wo
ould
begiin to taper qu
uantitative ea
asing. Econo
omies with la
arge and grow
wing twin (fisscal and currrent
acco
ount) deficitss came under most presssure due to th
heir vulnerab
bility to a reduuction in liqu
uidity.
If the
ese economies are unab
ble to borrow as much mo
oney from foreigners, connsumption,
inve
estment or go
overnment sp
pending (or a
all three) must adjust dow
wnwards. Onnce that
adju
ustment beco
omes sufficie
ently large, it represents a risk to finan
ncial stabilityy.
While the decisio
on by the Fed to delay ta
apering bought emerging markets som
me breathing
g
mentals when
n tapering be
ecomes immiinent. Countrries
spacce, we expecct focus again on fundam
with twin deficitss should be using
u
this tim
me to repair th
heir economiies. Of the ‘frragile five’
a, South Afric
ca, Turkey a nd Brazil), all but Turkey have growinng twin deficits
(Indonesia, India
ating quarterr on quarter.
that are deteriora
d our rating ffor emerging market dolla
ar debt, whilee maintaining
g our
We have furtherr downgraded
e
ma
arket local de
ebt. Howeverr, we upgrad ed our outloo
ok
overrall negative outlook for emerging
for P
Polish local currency
c
bonds based on
n close links to
t the eurozo
one and fallinng inflation in
n the
regio
on.
Figu
ure 1: G-Track
kers for developed G9 verrsus emergin
ng debt marke
ets
Deve
eloped: US, UK, Eurozone, Japan, Canada, Au
ustralia, New Ze
ealand, Norway and Sweden (G
GDP weighted).
Sourcce: Schroders, Thomson
T
Datas
stream, 31 Octo
ober 2013.
1
For media distrib
bution. November 2013
Flig
ght to qualiity: is Euro
ope the nex
xt safe have
en?
Polittical posturin
ng in the US leading up to
o, and during
g, the govern
nment shutdoown saw ‘saffe
asse
et’ flows movve from US trreasuries to German bun
nds and UK gilts.
g
A key feeature of ‘saffe
asse
ets’ is liquiditty. We subtra
act the yield on governme
ent bonds fro
om governm ent-guarante
eed
agen
ncy bonds off the same maturity
m
to ca
alculate the liquidity prem
mium investorrs are willing to
pay to hold the sovereign
s
bo
ond (figure 2))1. The bonds
s have the sa
ame credit rissk but when
nd for safe ha
aven assets the governm
ment bond yie
eld falls and the liquidity
there is a deman
mium rises. The
T liquidity premium for bunds and gilts
g fell once
e an agreemeent over the debt
prem
ceiling was reached. The pre
emium for gillts fell more precipitously
p
y, possibly duue to better
wth prospects. Meanwhile
e credit risk iin the US rem
mains elevatted as the maarket recogn
nises
grow
that its fiscal diffficulties were
e not fully ressolved in Octtober (figure 3).
ure 2: Liquid
dity premium
m for treasu
uries,
Figu
trea
asuries, gilts
s
gilts
s and bunds
s
um for
Figure 3: Crredit premiu
and bunds
Sourcce: Schroders, Bloomberg, Barrclays Point, No
ovember 2013
We are in a low
w volatility
y regime – ffor now
We monitor the volatility
v
of various econo
omic and fina
ancial aggreg
gates to idenntify signs of
st a backdro
op of relatively low volatility, although the stress
stresss. Our indiccators sugges
rankkings of policcy-related uncertainty me
easures are slightly
s
elevated due to thhe lingering
impa
act from the US governm
ment shutdow
wn and lifting of the debt ceiling
c
at thee eleventh ho
our.
There are a num
mber of factorrs that could lead to a pic
ck up in volattility. Until theere is a more
e
overnment fu nding, the un
ncertainty fro
om October ccould return in
conccrete resolution to US go
the ffirst quarter of
o 2014 even
n if it would a
appear in neither party’s interest
i
in ann election yea
ar.
Mea
anwhile, the timing
t
and ex
xtent of Fed tapering rem
mains a conc
cern. Elsewheere, the
Euro
opean stresss test and As
sset Quality R
Review (AQR
R) could prov
ve significantt for the
euro
ozone in 2014. While the review is se
et to end in October
O
next year, news fflow before th
hen
coulld spur market volatility.
1 We
e construct bond
d curves for eac
ch issuer from liq
quid bonds in th
he same currenc
cy and comparee yields at a
consiistent maturity (five
(
years).
2
For media distrib
bution. November 2013
Amo
ong the funda
amental indic
cators we tra
ack, there is low stress from earningss revisions. In
n the
US tthe latest US
S earnings se
eason has be
een relatively
y benign, while in Europee and Japan
earn
nings release
es have been
n equally bal anced. In ag
ggregate the volatility of oour earning
mea
asures are att historical lows. The envvironment forr earnings should remain supportive iff the
econ
nomic recove
ery continues
s. The area w
where there has been a marginal pickk-up in stress is
in ecconomic surp
prises (such as purchasin
ng managers
s’ indices and the Philadeelphia Federral
Inde
ex) driven by an improvem
ment in the b
business env
vironment.
For further info
ormation ple
ease contactt the Schrod
ders PR team
m:
Este
elle Bibby, Se
enior PR Manager, Europ
pean Institutional
+44 (0)20 7658 3431/ estelle
e.bibby@sch
hroders.com
Cha
arlotte Banks, PR Manage
er, UK Interm
mediary
+44 (0)20 7658 2589/
2
charlo
otte.banks@sschroders.co
om
Geo
orgina Roberrtson, PR Ma
anager, Intern
national
+44 (0)20 7658 6168/ georgina.robertson
n@schroders
s.com
Kath
hryn Sutton, PR Executiv
ve, Internatio
onal
+44 (0)20 7658 5765/ kathry
yn.sutton@scchroders.com
m
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o
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3