Emerging Markets: Safer than Banks

I'm at the Fitch Latin America Sovereign Hotspots conference at the technologically-challenged Warwick Hotel this morning, where the irrepressibly quotable David Rolley, of Loomis Sayles, just appeared on a panel. Rolley's always interesting, partly because he doesn't confine himself to emerging markets: he sees them in the context of credit opportunities across the globe.

Recently, one of Rolley's top picks was about as far away from emerging markets as it's possible to get: the new 10-year bonds recently issued by Bear Stears (BSC). In a sign of how much the world has changed over the past year those bonds had a higher interest rate than the EMBI Global yield - the standard benchmark for emerging-market sovereign bonds. If you want to be safe these days, don't take your money to the bank: take it to Mexico or Russia, instead.

Indeed, says Rolley, the main emerging-market credits at risk these days are those countries reliant on bank debt to finance their current-account deficits: Latvia, for instance. In general, if a country is big enough to issue bonds rather than borrowing from banks, it's likely to be in pretty good shape. Emerging markets are now something of a safe haven, and in countries like Mexico domestic local-currency interest rates go down when the economy slows, rather than going up, as international investors require a higher risk premium on their bonds. "That's counter-cyclical," says Rolley. "That's what an OECD country does, and Mexico is an OECD country."

I used to write a great deal about Latin America in a previous life, and some things never change, primarily the perennial discussion about whether and when Brazil might ever get itself an investment-grade credit rating. Rolley, tongue only slightly in cheek, has an elegant solution to that problem which kills two birds with one stone:

If we could get Vale (RIO) to build the new locks on the canal instead of buying Xstrata, we could upgrade Panama and Brazil simultaneously.

The problem with Panama getting itself an investment-grade rating, you see, is the fact that it has just embarked upon a $5 billion plan to upgrade the Canal. And as Rolley, who comes from Boston, well knows, $5 billion construction projects have a nasty habit of becoming $15 billion construction projects. Unless they're run by a super-efficient private corporation like Brazil's Vale, of course. Clearly Rolley, a bond investor, would much prefer Vale to stick to its extremely-profitable strengths rather than embark upon risky $76 billion hostile takeover bids.