Research & Insight

Emerging markets local debt trended higher in April in spite of struggling commodity prices and a poor outlook for developed markets. Concerns about Chinese demand for key inputs like copper and iron ore have added to the general malaise about global growth prospects but for the month, emerging markets tended to perform in line with domestic issues.

The modest fall of 1.2% in April was the second consecutive down month and the momentum of the first quarter rally has clearly stalled. Nevertheless, the falls were not sharp or widespread. China started the month depressed by continued worries about the sustainability of growth, but enjoyed a late rally when news was published suggesting a quite sharp expansion in lending. The Chinese market ended up over 3%, second only to Colombia’s 8% gain. At the other end of the league table languished Brazil and India. Brazil suffered from declines in two important sectors – banks, on worries about margin pressures following a poor trading update from Itau and energy companies on some disappointing output figures from Petrobras.

MSCI Asia ex-Japan fell 1.6% in GBP terms (though was flat in US dollar terms). Investor’s attentions returned to Europe and its commitment to the austerity ‘medicine’ as elections in France look likely to deliver a change in government while the Dutch government collapsed as the coalition members pulled out of budget cut talks. Across the pond, the US also delivered weaker than expected 1Q GDP.

“I am a head of state, not a hoodlum” Cristina Fernandez de Kirchner, President of Argentina, April 16th 2012.

Spanish oil company Repsol no doubt think “hoodlum” following the announcement that Argentina was nationalising Repsol YPF, Argentina’s largest oil and gas company, by expropriating 51% of the company from Repsol of Spain whilst at first glance leaving local investors untouched.

Local currency emerging market debt has had a strong start to the year returning over 8% in dollar terms. This strong performance has been in line with a general pick up in risk appetite this year as the liquidity benefits of “operation twist” in the United States and the long-term refinancing operations (LTRO) in Europe feed through into higher global asset prices.