Emerging Market Investors to Focus on Energy Importing Nations in 2015

Investors are turning more cautious about dollar bonds from “frontier” markets – a fast growing but less developed and higher risk sub-set of emerging economies – due to sliding oil prices, low trading volumes and expectations of smaller returns.

Within the diverse group of economies, which ranges from Belarus and Belize to Egypt and Pakistan, interest is likely to shift in 2015 towards energy importing nations that will benefit from cheaper crude, and away from oil exporters.

Debt issuance by frontier countries is a small proportion of the total for emerging markets, which are dominated by bigger names such as Brazil or Russia. But their governments have made the most of investors’ hunt for better returns while interest rates in developed economies remain ultra low.

 
According to Thomson Reuters data, frontier countries sold $19.7 billion in hard currency debt last year – an almost 50 percent rise from 2013 and nearly three times the 2012 level.

Yet many, especially oil exporters such as Nigeria and Ecuador, are likely to be hit hard this year by the dramatic drop in crude prices, said Kevin Daly, portfolio manager at Aberdeen Asset Management’s emerging debt team.

“The outlook is tenuous for some countries, given the sensitivity for oil,” said Daly. “Investors will be a little bit more circumspect and demand a higher risk premium when it comes to these kind of commodities-sensitive countries in the current backdrop.”

With emerging market sovereigns overall issuing just over $100 billion in hard currency bonds last year, frontier markets remain a niche investment but they have been a rewarding one.

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza