viernes, 15 de agosto de 2014

viernes, agosto 15, 2014

Markets Insight

August 12, 2014 7:21 am

Watch for risks from indebted corporate Asia

Asian debt back to levels last seen in crisis of 1997


August can be a perilous month for investors. It is a month when there is little volume or liquidity in financial markets and this August appears to be an especially treacherous one.

Among the most vulnerableperhaps surprisingly – are emerging Asian markets, where aggregate private sector debt has been building up. That is because the combination of high leverage and lack of liquidity is not a happy one when investors are feeling nervous.

This summer, the markets have been hit by a bout of fear produced by the combination of the prospect of a world with less easy money and more dangerous gunmen. Since their July peaks, both emerging market debt and currencies have weakened.

Today, as investors shift away from their quest for yield, and outflows from US junk bond funds last week reached a record $11.4bn, it seems timely to ask how badly the emerging markets of Asia will be affected and how much they should be affected.

While leverage levels have dropped in developed markets since the financial crisis, they have gone the other way across the Pacific. The total stock of debt has more than doubled to $21tn in emerging Asia in the past five years, JPMorgan notes. Asian debt levels are back to levels last seen during the Asian financial crisis of 1997, according to data from Gavekal Dragonomics, a research boutique.


Heavy burden


Debt levels matter because they have an influence on future growth and the more expensive the debt, the heavier the burden on borrowers.

Since 2009, the region has been among the most fortunate in the world as its high growth rate attracted disproportionate capital flows from outside. Most of that debt came from domestic borrowing, though, with just $2.5tn of the total in foreign borrowing.

In addition, much of Asia still generates current account surpluses, which have led in turn to large foreign exchange reserves. These considerations have led many analysts to conclude that Asia is far less exposed today than it was 17 years ago.

But the optimistic analysis focuses on the sovereign. The chances of a systemic crisis are more remote than in 1997, but that is not to say corporate Asia is immune. Many Asian companies have been huge beneficiaries of the inflows set in train by the Federal Reserve’s zero interest rate policies.

Now, though, a benign period for Asia seems to be drawing to an end. Exports have been growing at a slower rate for many countries in the region. US companies are spending less not only on plant and equipment but also on technology, which hurts a region that has thrived by providing both corporations and consumers with their technology tools.

Emerging Asia’s foreign liabilities are now higher as a share of exports than any time in the last 10 years,” notes Jahangir Aziz, a Washington-based economist for JPMorgan, adding that as a result there is “increased potential for currency mismatch in the private sector. Corporates are directly exposed to FX shocks.”


Corporate dependence


Moreover, while as a percentage of total borrowing, foreign borrowing is smaller than in the past, the absolute amounts – and the dependence of some companies on the US bond market – is growing. Almost half the borrowers are Chinese, mostly property and industrial firms. Another 10 per cent are Indonesian.

JPMorgan’s Asian credit index, which includes both high grade and high yield debt, stands at $500bn, three times higher than in 2005.

For the first half of this year issuance was $96bn, while for the whole of last year, $120bn was raised. And while less than 20 per cent of that is high yield, it is worth remembering that critical inflection points often reflect incremental changes. If the US high yield market suffers, the Asian US dollar high yield market is likely to register the impact.

Of the 51 defaults in the market since 2000, 17 were Chinese borrowers and 23 were Indonesian. Today Chinese and Indonesian companies may be especially vulnerable in the face of skittish investors.

All these potential clouds over credit markets come at a time when the Chinese stock markets have rallied. Chinese equities have been the single best performing asset class in the past month, (up 4.4 per cent) with inflows at their highest level since December 2012. Meanwhile, the S&P 500 index dropped 4 per cent from its highs over the past two weeks.

It was especially easy to make the bull case for China on both macro and micro levels last week. Exports hit record levels while growth is back at its desired 7.5 per cent level. Many analysts think state-owned enterprise reform is real.

Hopefully the debt market will not spook the stock market any time soon.


Copyright The Financial Times Limited 2014.

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