Emerging Market debt is in a difficult position right now as investors continue to try to play the tapering of quantitative easing, Europe’s debt problems and the many other moving parts involved in international debt markets. A new report from Societe Generale analysts Eamon Aghdasi takes a look at the Latin American debt market and breaks some misconceptions.
The most surprising result of the analysis is the conclusion that in most Latin American countries investors actually increased their holdings in debt. According to Aghdasi, Brazil, Colombia, and Peru have seen net inflows from foreign investors, while Mexico saw only small outflows from foreign investors.
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Emerging market debt gets tricky
The point of this report, which is titled Setting the record straight on local debt positioning, is to break illusions about emerging market debt in the current climate. There are, according to Aghdasi, specific factors in each country which are determining the level of inflows from foreign investors. Brazil recently removed a tax on foreign debt investment, making it more attractive. At the same time foreign investment in Colombian debt started from a very low base.
“In total, we believe these data point to the fact that the recent slide in valuations is not a foreign investor-driven phenomenon, and, barring a much more serious change in the global financial landscape, it’s unlikely that we’ll see aggressive selling by this segment of the market simply as a result of the Fed’s policy shift.”
Aghdasi doesn’t think a change in Federal Reserve Policy will have a big effect on emerging market debt in most of South America, but following his own advice he states that the picture doesn’t hold true for every country in Latin America. The situation in Mexico is more complex, and that country could be a riskier bet for investors.
According to Aghdasi, foreign investors have reduced their holdings of Mexican debt by more than 2% since April. The report is bullish on financial and energy reforms in Mexico, and believes that their impact has not been fully priced in by the market yet. Foreign exchange pressures from the situation in Syria and fiscal negotiations in the United States could trigger risk aversion making the bet risky in the short term.
Aghdasi’s overall point is that though the narrative suggests that foreign investors are bringing their capital home wholesale, each country should be studied on its own merits. Latin America, according to this report, is full of opportunities that investors are taking advantage of.