The times in which investing in bonds of Latin American issuers was something done only by managers of the most daring funds and/or those specialised in that region are behind us. In fact, these days practically everybody holds some LatAm fixed income investments in their portfolios.
There are several key factors typically pinpointed to justify international investors’ rising demand for bonds of Latin American issuers: the expansionary policies of the main central banks and the consequent search for returns under a global scenario of low/negative interest rates. However, we should also bear in mind other factors as well: the improvement of the region’s economies, adjustments to their trade and current account balances, a decline in inflationary pressures, company earnings growth, greater political stability, structural reforms, the rise in the number of issuers as well as the number of issuances in international markets, etc. These factors also underpin the rising presence of this region's debt in a greater number of portfolios.
According to the Bank for International Settlements (BIS), in June 2016 the value of international debt outstanding by non-financial Latin American and Caribbean companies amounted to $406 Billion or triple the June 2010 figure. According to Dealogic's data, in the first half of 2017 new international issues of LatAm bonds had already reached $93 Billion. With regards to LatAm’s presence in international debt markets, we would mention the stellar reappearance of Argentina in April of last year – after suffering a 15-year shutout from international debt markets – with its $16.5 Billion issue which was then followed by a $2.75 Billion centenary bond in June 2017 (initial yield of 7.9% and it was 3.5x oversubscribed). We would also highlight the fact that numerous corporate issues have been carried out in international primary markets, often (40% in 2016) accompanied by buybacks of outstanding issues: thus leading to healthier financial positions thanks to refinancing at lower rates and with longer-term maturities.
Clearly, this wave of primary issues has greatly improved the liquidity, diversity and size of the LatAm debt market. But, as some voices are saying, is this also a symptom of excessive leverage and a potential bubble? Well, based on June 2016 data compiled by Bank of America Merrill Lynch, LatAm issuers with investment grade ratings are 30% less leveraged than North American companies. As for liquidity levels, LatAm corporations are quite comparable to their North American peers.
Obviously, neither all Latin American countries nor all of their companies face similar situations and/or have identical outlooks. Opportunities arising in the region’s debt markets are certain to be diverse and changing, but can investors aiming to build solid medium-term portfolios opt to completely ignore LatAm debt? Investing in this region no longer seems to be a temporary fad. Its greater resilience may help prevent price upheavals such as we suffered in 2013 on the back of the taper tantrum caused by Bernanke. Moreover, this asset class is increasingly becoming a key element for well diversified portfolio construction.
Column by Crèdit Andorrà Financial Group Research, written by Meritxell Pons, Asset Management Director at Beta Capital Wealth Management.