Research & Insight

Emerging markets local currency debt had a strong start to the second quarter, rising nearly 5% in USD terms in April with all countries in our benchmark except for Peru posting positive returns. However, these gains could not be sustained with investors increasingly worried about the outlook for developed markets and what impact a negative credit event in the US or Europe would have on commodity prices, demand for emerging market exports and the availability of investment capital. JP Morgan’s GBI EM Global Diversified index finished the quarter up 4% after a volatile, but directionless May and June.

MSCI Asia ex Japan was flat at 0.01% during the quarter, but this belies a volatile period within where market directions were driven variously by moderating oil and commodity prices, continued concerns about potential China hard landing, European debt crises and increasing evidence of faltering recovery in the US economy while QE2 drew to an end.

After a bright start in April, sentiment deteriorated through May and into June as investors grappled with credit downgrades for Portugal and Greece and weaker economic data from the West. Yet again events from outside the emerging world took centre stage. The fact that the MSCI EM Index fell a mere -1.04% over the second quarter, hides the picture of yet another volatile quarter. Greece dominated the headlines and market attention with a “will-they-won’t they” confidence vote for the prime minister followed by a crucial vote to ratify a $40bn austerity package. The passage of the latter helped global equity markets rally into the last week of the quarter. Also helping markets at the end of June was the surprise release of oil inventory (supposedly to make up for lost production from Libya) by the International Energy Agency. The resulting dip in the oil price is seen as some relief to the weak growth in developed economies.

Mongolia has a population of 2.7m people. About 30% of the population still live a nomadic life style, rearing 40m animals. 50% of the people live in the capital Ulaanbaatar (UB). The country has vast natural resources including rich deposit of coal, copper, gold, iron, uranium and other base metals. After the fall of the Soviet Union which provided 90% of the country’s financial support, Mongolia went through a period of economic hardship as the Soviet financial aids stopped. Neglected by the world for almost 20 years after the fall of the Iron Curtain, Mongolia is now back in the world spot light thanks to its rich natural resources that have attracted significant attention and foreign direct investment. South Gobi Resources (based in Ovoot Tolgoi, some 50km from the Chinese border) and Mongolia Mining Corporation (in Tavern Tolgoi, 250 km north of the Chinese border – a prolific coal resources area, where Mongolia Mining only has a small piece of the vast reserves) are already producing coals. Both companies are listed on the Hong Kong Stock Exchange.

The chart above shows one year Credit Default Swap (CDS) prices for both Brazil and the US. This is essentially the insurance premium the market asks against a default on the sovereign debt of a nation – the lower the number, the cheaper the premium and hence, the lower the implicit probability that a sovereign nation will default on its debt.