Emerging-market investors are not worried about the opinion of ratings companies these days as the hunt for yield outweighs what they consider rear-view assessments. Most of the developing nations that were downgraded in the past six months, including Brazil, Colombia and South Africa, saw their risk premium rise just briefly following the decision before quickly resuming their downward march amid a strong risk-on mood. According to reports from Bloomberg, investors have been chasing high payouts in an environment of stubbornly low interest rates and willing to take on more risk to juice returns, at least until this week’s market turmoil.
Meanwhile, growth is forecast to pick up in developing nations, with some of the biggest like Brazil and India engaging in market-friendly economic overhauls. But underpinning all of that is a simple fact: Markets are ahead of rating firms, which tend to take much longer-term views.
“Two words: backwards-looking,” Edwin Gutierrez, the Londonbased head of emerging-market sovereign debt at Aberdeen Standard Investments, said about rating actions. Given the strong economic tailwinds, Jennifer Gorgoll, an Atlanta-based money manager at Neuberger Berman Group who helps oversees $16.7 billion in emerging-market debt, says the impact of rating actions on developing countries’ assets is going to continue to be mild. “I’m not saying rating agencies don’t matter, but it’s a different environment now and negative rating changes can have less of an impact on spreads,” she said.
Measures of risk like credit default swaps and spreads on sovereign bonds fell in Colombia and South Africa after their latest downgrades and also in Brazil, which even managed to sell debt a week after being cut further into junk by S&P Global Ratings. In fact, investor demand for debt from Latin America’s largest economy was so strong that the government was able to close the deal at a lower yield than it initially sought. “In 90 per cent of the cases, market prices are more efficient than the ratings agencies,” said Sean Newman, a money manager in Atlanta at Invesco Advisers Inc., which oversees $5 billion in emerging-market debt.
Newman adds that in the case of lesser-known names or firsttime issuers, like Tajikistan or Suriname, rating actions can still trigger market moves because investors don’t have enough data to easily price them. Ratings firms have more importance for those countries, he said.
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