Why Asean bond buyers can dismiss oil's plunge
Published on: Saturday, December 27, 2014
THE lack of oil has turned into a mark of a winner in the developing world's bond markets. And that's proven to be a boon for borrowers in Asia.Dollar-denominated notes from the region, a net energy importer, had the biggest returns in emerging markets this year with a 7.49 per cent advance. The world's fastest-growing continent also held up better in December, when the selloff in crude oil upended issuers from commodity-producing companies in Russia and Brazil.Rising Asean debt demand helped push dollar issuance to a record $197 billion this year, more than Latin America, Eastern Europe, the Middle East and Africa combined, as borrowing costs close to record lows spurred investment from textiles to Internet services.
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That spurred growth in Asia, which expanded 6.3 per cent last quarter, at least twice the pace in the rest of emerging markets."The best region by a long shot is Asia," said Jonathan Lemco, a fixed-income money manager at Valley Forge, Pennsylvania-based Vanguard Group, which oversees about $3 trillion. "The biggest divergence is whether you sell oil or commodities or not" and countries in Asia are "more fiscally prudent than other parts of the world. Growth, certainly in China, Indonesia and the Philippines, is better."Brent crude tumbled to its lowest level since May 2009 last week as the Organization of Petroleum Exporting Countries lowered its estimate for demand in 2015. Its 46 per cent plummet since June has sliced energy costs for India, China and other countries in Asia. They're also benefiting from a supply glut that's pushed metal and coal prices deeper into a bear market.
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In 2014, Asia corporate dollar bond returns have been led by companies including Indonesian electricity distributor PT Perusahaan Listrik Negara, whose notes due 2042 are up 25.9 per cent, and developer China Overseas Land & Investment Ltd., whose 2042 bonds gained 10.2 per cent this half alone.That exceeded advances of 7.2 per cent in the Middle East, 4.6 per cent in Latin America and 1.9 per cent in Africa, data compiled by JPMorgan Chase & Co. show. Emerging Europe lost 8.8 per cent.
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This month, Asia has fallen less than 1 per cent. Europe had the biggest losses with a 7.19 decline as Russia was rocked increased sanctions and a swoon in the ruble. Bonds due 2020 from Moscow's OAO TMK, the world's biggest oil and gas pipemaker, have lost 28.4 per cent this month.In Latin America, Petroleo Brasileiro SA, the state-controlled oil producer, paced declines as a widening bribery investigation compounded the slump in crude. The company's 2023 dollar debentures are down 7.9 per cent this half."Markets are telling us there's a significant divergence" among these countries, said London-based Yerlan Syzdykov, an emerging markets money manager at Pioneer Investment Management Ltd., which oversaw $248 billion as of Nov. 30.Even with People's Bank of China Chief Economist Ma Jun forecasting growth of 7.1 per cent next year, the slowest since 1990, that's still faster than most emerging countries. Brazil will expand 0.85 per cent next year, while Russia will contract, according to economists.In India, investment and growth have both increased since Prime Minister Narendra Modi came to power in May and the finance ministry said Dec. 12 the economy may expand as much as 6.5 per cent next fiscal year. Moody's Investors Service said in October Modi should enhance the credit profile of India, which it rates Baa3, the lowest investment grade. Mumbai-based Reliance Industries Ltd.'s perpetual dollar bonds returned 23.1 per cent this year."India at the moment looks like a star," Vanguard's Lemco said. Russia, on the other hand, "has been spending a fortune to prop up its currency." Offshore bonds from Russian companies have lost 13.7 per cent this year, with only Ukrainian bonds logging a worse performance.In Venezuela, the cost to insure against a default by state oil company Petroleos de Venezuela SA for five years soared to a record high this month. Based on credit-default swaps, traders are pricing in a 92 per cent likelihood that the Caracas-based group will renege on its obligations before 2020.Asia's record supply of debt could become a cause for concern as the U.S. Federal Reserve prepares to raise rates, according to Rosemary Fu, a senior credit analyst in Singapore at the emerging corporate team of Pictet Asset Management, a unit of Banque Pictet & Cie SA, which had 404 billion Swiss francs ($409 billion) under management or custody on June 30. Chinese banks also have large amounts of soured loans and policy makers are seeking to reduce leverage."We've absorbed a gigantic amount of supply," Fu said.Diverging benchmark borrowing costs in the developing world's biggest nations may help keep Asian bonds in demand.While Chinese and Indian authorities ease monetary policy, economists in a central bank survey expect rates in Brazil to rise 0.75 per centage point to 12.5 per cent by the end of next year. Russia raised its key rate to 17 per cent from 10.5 per cent on Dec. 16, the largest jump since 1998, when the government defaulted on its obligations.The extra yield on corporate dollar debt from Asia over Treasuries has decreased 0.27 per centage point this year. The spread slipped 0.18 in Latin America and increased 2.11 in Eastern Europe, Middle East and Africa since Dec. 31, Bank of America Merrill Lynch indexes show.Stay up-to-date by following Daily Express’s Telegram channel.
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