It’s been an interesting time to watch emerging market assets.
As we and plenty of others have written on extensively, there were all kinds of reasons to doubt whether the rally in all things EM was sustainable considering a backdrop characterized by the following list of potential headwinds:
- the prospect that DM central banks are on the verge of a coordinated normalization push
- swings in commodity prices and rampant uncertainty about crude
- idiosyncratic risk (think Turkey, Brazil, and South Korea)
- worries about whether China’s efforts to rein in speculation will choke off growth and/or stymie the flow of credit to the real economy
But through it all, flows remained resilient – no, robust – in 2017 right up until last week when, for the first time in 22 weeks, EM funds suffered an outflow:
Of course the relentless inflows – catalyzed by the DM central bank-inspired global hunt for yield – have meant falling yields and tighter spreads and on Wednesday, Bloomberg’s Natasha Doff observed something highly amusing.
Namely that yields on Mongolian dollar bonds maturing in 2021 have now dropped below 6%:
Circumstances have conspired to drive yields on that debt down 3.5% this year alone (Google it).
But before you go getting too excited and plowing your life savings into Mongolia, do note that Goldman thinks we might have gotten ahead of ourselves with the IMF premium.
Here’s a fun excerpt with some pros and cons on the case for Mongolia from a note out earlier this month:
Armenia (B), Sri Lanka (B), Serbia (BB), Mongolia (B) and Georgia (B) look overvalued by 150bp on average. A common denominator among these sovereigns is that they have been in IMF programmes, which may explain why they are trading at a premium to our estimate of ‘fair value’, despite any significant projected improvement in macro risk.
Mongolia is the main exception, where macro risk is projected to improve by 40bp, on the back of an improving growth outlook, although this is not enough to explain the 186bp misalignment between the actual and our model-implied valuation signal.
Trade accordingly.
