The ebb and flow of asset values this year has been larger than on previous occasions, but it is very unlikely that we are at a long-term inflection point for emerging markets.
Against a background of sentiment-motored noise, one can pick up the steadily louder hum of increasing EM leverage, the bulk of it in the corporate sector. Yet EM corporate credit has held up better than US high yield. The fact that energy figures more prominently in EM corporate benchmarks makes this outperformance more intriguing.
Some argue that the relative resilience is explained simply by the fact that most EM corporate credit is investment grade. However, ratings are not the assuring anchor they once were; our credit RiskMetrics suggest that EM ratings have only begun a process of being cut several notches.
The real reason EM corporates have been able to avoid serious stress is that about 35 per cent of outstanding paper is issued by partially or wholly government-owned companies. In energy, a sector still under pressure despite the modest rebound in oil prices, the government ownership ratio is close to 70 per cent. “The sovereign will not let the quasi-sovereign default” is a much too common refrain in EM investment circles and it is very likely correct. But even as governments can delay the pain for some companies, their involvement also engineers a transmission of pain from credit to other assets.
In the US default rates in the energy sector are expected to rise to 11 per cent in 2016, a grim reflection of over-investment. But, no matter how acute this pain is, it does not seriously affect sectors such as healthcare, consumer staples and technology. Default rates ex-energy and materials are below long-term averages. Given the strong negative correlations between high yield spreads and government bond yields, one may argue that as energy companies confront stress, the cost of equity for a typical non-energy company falls.
Not so in EM. Weak public-sector corporations risk infecting sovereign balance sheets when many are already under fiscal pressure due to sustained weakness in growth. As EM governments suppress corporate trouble, their own credit risk will probably rise, nudging their yields higher. The cost of equity then rises for every company, even those that are fundamentally sound, in sectors unrelated to the one in trouble.
The accepted wisdom is that low public debt ratios compared with developed markets will enable EM governments to retain a very generous fiscal stance for a good while yet. However, EM’s weaker institutions, shallower markets and under-developed debt resolution mechanisms invalidate a like-for-like comparison with developed-economy public debt. Historically EM countries have slipped into crises at much lower levels of government and private leverage than have developed markets.
A link that reinforces the loop of trouble between EM corporates and sovereigns is the financial sector, which also happens to be the largest issuer of hard-currency debt in EM. The non-performing loan cycle in EM has yet to manifest itself fully, even though debt service ratios for the private sector are higher than in developed markets. That is because investors, both external and local, have been happy to roll over maturing debt until recently. But rising leverage and a more elevated opportunity cost of global capital are whittling down investors’ appetite at a time when EM refinancing needs are rising.
There are warning signs aplenty over in EM equities, which are less interested in a company’s capacity to touch its parent for a quick penny and more focused on its ability to generate profits. State-owned enterprises, particularly financials, have underperformed broader indices for several years. It is a damning statement on EM corporate management that the return on equity has fallen even though leverage has gone up. State-owned enterprises have been centre stage in this act. So far EM equity investors have had to deal with weak earnings and a low return on equity. As corporate debt infects sovereign debt, they may also have to worry about a rising cost of equity.
The pain in EM corporate credit will begin with a lag, but it is very likely to demand more than its pound of flesh. And the collateral damage will be broader and may last longer than in developed markets.
Bhanu Baweja is head of EM strategy at UBS Investment Bank
本文作者是瑞银投资银行(UBS Investment Bank)新兴市场策略主管