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STAYING GLOBAL, GOING LOCAL
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Latin America

    The region is a mix of different ethnic groups and business cultures. What should catch the sight of an international fixed income investor is that it is an enclave and the ‘alma mater’ of emerging markets. Referred somewhat politically insulting to as “less developed countries” back in 1970s, the LatAm LDC debt actually started to gain popularity with investors in early 1990s, after the U.S. Treasury Secretary Nicholas Brady masterminded the conversion of the bank loans into marketable bonds. The Brady bonds relieved U.S. banks of the illiquid assets and offered very lucrative returns. This model has been relpicated and applied later to debt restructurings that took place far away from where it was born. Interestingly, the restructuring of the Russia’s Soviet-era debt was carved within the Brady template too, resulting in Paris and London clubs and the tradable Eurobonds, the first internationally traded debt of the new Russia. A few years later the baby high yield market weathered its first crucial test, the “Tequila crisis”, when the Mexican Peso plunged in value and gave birth to investment risks of a higher scale. It would be historically correct to name Latin America the “wild wild west” of the emerging markets, as they all began from there. As a direct result of realization of the Brady plan, the today’s genuine characteristic of Latin America is that it is the most financially open capital market among developing countries elsewhere in the world, where investors face very few restrictions for capital flows.

    Another noteworthy feature of the region is it is full of sophisticated long-term money, basically because of its historically very strong economic and political ties with the U.S. In 2014 alone, U.S. producers exported to Latin America three times more than to China, while the region’s countries, excluding Mexico, purchased 50% more U.S. goods than the Chinese. The recent Argentina’s sovereign debt dispute is the one good example of US political influence there. The U.S. court’s decision led the country to the default and undermined its ability to attract foreign investments.

    Nonetheless, Latin America actively develops economic relations with other parts of the world. While the North American money seeks for diversification elsewhere, China has been consistently increasing its presence in LatAm. In 2014 its banks boosted investments in the region by 71%, and the government plans to double its trade volume with the Central and South America over the next decade. Such dynamics results from the China’s far-reaching interest in all Latin America's abundant commodities like oil, minerals, metals, meat, soybeans, while some Latin America’s countries are truly desperate for cash, which China is happy to provide in exchange. Building partnerships with the Chinese will improve the region’s growth and independence from the U.S in the end.

    Strong reliance on commodities, which is a common basic feature of emerging economies, mirrors performance of the region that is strongly correlated with commodities prices dynamic. As a result, the regional economy demonstrates unstable results with periods of sharp growth and substantial corrections. The economic palette across the region is very uneven because it is also shaped by the cross-continental trade alliances: Mercosur and Pacific Alliance. Mercosur, which includes Argentina, Brazil, Paraguay, Uruguay and Venezuela, is focused on substantial government intervention in the economy, especially in international trade. It has implemented free trade among developing countries and a protectionist attitude toward major financial centers and traditional world powers. By contrast, Pacific Alliance that hosts Chile, Colombia, Mexico, and Peru, stimulates free trade both among its members and the world’s developed countries. As a result, Mercosur, despite the larger GDP, shows substantially less total trade volumes than its peer. This affects the stability of economic growth among the Mercosur countries.

    Despite the whole region is heavily exposed to oil and metal price fluctuations, their impact on individual countries and the growth expectations is very different, with Venezuela being the most vulnerable victim. The country’s economy almost completely depends on oil prices and GDP growth volatility mimics the respective changes in the oil market. After the oil price dropped under USD 60 per barrel, the national currency dropped precipitously and the country’s default probability lifted dramatically. On the brighter side, the Mexican economy benefits strongly from its trade partnerships with the USA and its high economic diversification. Over the last several years, the country’s government has implemented fiscal reforms that helped it reduce its dependence on oil exports. Mexico’s growth perspectives declined after the oil drop, but remain positive; its currency and credit ratings are stable. The fundamental difference between individual Latin American countries leaves plenty of opportunities to exploit economic zones with different risk profiles, which is a traditionally handy tool in diversifying investment portfolios aiming at extra returns.

    One of the most important drivers for Latin America’s capital market is the on-going fight against corruption. Traditionally, a high level of corruption is an eternal headache for both developing countries and their trade partners. This region is not an exception. Markets always keep a close eye on those processes, and it regularly happens that they over-react. Corruption allegations push bond yields of the affected companies to unreasonable levels that give the smart money plenty of opportunities to enjoy capital gains as the passions subside. After all, we have to admit that they all live in their natural habitat where corruption is, irrespective of its bad public impact and economic damage, an integral part of the emerging markets world.

    With a few exceptions, compared to other developing regions Latin America is also the most democratic one. We expect that the economic, social and politic scenery will continue improving as people make a greater use of their right and ability to vote. That will lead to more reforms aimed at improving the competiveness of the economies and making the distribution of income inside them more efficient.

    Regional Highlights

    Latin America’s bond market amounts to USD 680.9 bln. The LatAm bond market is dominated by its two most populous countries, Brazil (33.5%) and Mexico (23.0%). Other players include Venezuela (10.2%), Chile (7.1%), Argentina (7.0%), Colombia (6.4%) and Peru (4.3%). At the same time, the regional HY bond market is worth USD 183.9 bln, over 27% of total Latin America’s market. Currently the oil and gas, mining and construction sectors are the most volatile in the region amid spiraling global commodities prices and the effect of the ongoing corruption investigation on Brazil’s local construction sector. In these industries, risk-seeking investors may find ideas with extremely high yields.

    What we like about…

    Brazil –

    The largest country in Latin America and its largest economy. It boasts a diversified export structure, significant natural resources, and a high level of development in several industrial sectors. Currently the country is facing substantial economic difficulties. Its economy is projected to contract almost 2% in 2015 as a result of the drop in iron ore and oil prices. Additionally, its growth prospects have eroded due to a growing corruption investigation that has already led five companies to default on their debt. However, it may be expected that market volatility will give HY investors opportunities for extra earnings.
    The Brazilian HY market amounted to USD 98.6 bln, over 53.7% of all Latin America’s HY issues. The country’s HY bond market is generally dominated by the energy and financial industries, which represent 49.3% and 22.1% of this segment of the bond market, respectively. Brazil’s highly competitive meat producers have a 12.1% share of the bond market.

    Mexico –

    The second largest economy in Latin America. The country benefits from sharing a border with the United States, its main trading partner. The country’s GDP increased 2.5% in 1Q2015 and its growth is expected to accelerate due to energy reforms, which are currently being implemented. Telecommunication industry reforms will increase competitiveness in this sector, having an additional positive effect on growth. Mexico’s HY bonds market made up USD 22.8 bln, or 12.4% of Latin America’s HY market. The country’s HY bond market is mainly represented by producers of different materials, mainly cement, accounting for over 45.2%. Its financial industry represented 20.2% of the bond segment and producers of industrial goods have a 14.0% share in Mexico’s HY bond market.

    Chile –

    The highest credit rating (Aa3/AA-A+) of any country in Latin America. It is a leader in terms of income per capita, economic competitiveness and its ability to tackle corruption and financial transparency. However, its economic performance is substantially correlated with copper price dynamics. Nevertheless, despite a dramatic commodity price drop, Chile’s economy increased 2.4% YoY in 1Q2015 as growth was supported by internal consumption.

    The country’s HY bond market is small and its share in regional market amounted to over 2.6%. Over 29% of the market was issued in the telecommunication industry. The country’s financial sector represents 25%.

    Colombia –

    A massive project is underway that will increase the depth of the Magdalena River, the principle river in Colombia. By increasing navigability, this project will reduce transportation costs for domestic producers of oil and coal by 50%. Despite a precipitous oil price decline, the country’s economy grew by 2.8% YoY in 1Q2015, supported by the national construction and financial sectors. Growth will accelerate when the infrastructure project is finished.


    The country’s bond market only accounts for 6.4% of the LatAm market, while the country’s share of HY issues represent over 6.1% of the total regional market. The financial sector has the highest share of the bonds market and amounts to over 47.8%. The country’s oil and gas sector is the second largest in the bond market with a 36.3% share. Communications has 11.5%..

EMEA Europe, Middle East and Africa

    Compared to other financially attractive parts of the globe, EMEA is the most contrasting mixture of racial and ethnic groups, hence their unique cultures, religions, politics, economies, living standards. Strictly, the landscape here is so different, that the only rationale to put its pieces together and refer to it as a single formation is its relatively concentrated geography and close time-zones. Those two factors also offer very convenient logistics from an investor’s perspective. Perhaps it is the only region, which remains completely self-sufficient for a full diversification of investments between rigidly conservative and gamblesome picks. The Olde World - the birthplace of the markets as we know them today - with its long- rooted concervatism and democracies, ambitious former Sovier Union countries with ever- inspiring and never truly predictable Russia, the uber-richy countries of the Gulf, and the natural resourse-rich Africans at the frontier – they all demand way different investment approaches, and offer value of different kinds. The region’s distinguishing feature is that EMEA hosts the world’s highest concentration of wealth; it is both the source of globally investable funds and the place of their application.

    What we like about…

    Western Europe –

    Home of the global financial center, it nests a diversity of the best service providers and top quality products. Well-established, solid market infrastructure – regulated and well-organized markets, various types of investment vehicles and a high level of investor protection – keeps trillions of dollar-worth of bonds and processes daily significant turnovers in them, supporting their high liquidity. The other side of it is low yields. The historically lowest interest rates in major currencies in Western Europe translated into periods of even negative yields to maturity of Swiss and German benchmark bonds. Still, in this high-grade territory pockets of extra returns of are always available as an outcome of continuous M&A activity, ECB or local regulatory rulings, sporadic and at times epic shifts in credit quality of specific corporate and government issuers.

    Eastern Europe (former COMECON) –

    A number of bond markets there are still a nice hunting ground for high yield seekers as speculative credit rating of some countries in the region pose a formal cap on the select domestic companies despite their sound credit metrics.

    Former Soviet Union rebublics (FSU) –

    Some of the FSU states that have not joined the EU maintain traditionally very close ties with Russia. Russia itself has been exerting great efforts to strengthen its internatiopnal influence and act as a global political and economic power. It is likely to continue going that way in the future. The country’s profile is shaped with both its emerging market nature (because it still lacks a great deal of efficiency and a market-friendly regulation, which is commonplace for the EM world), and its own strong self-determination when it comes to its uneasy relations with the West. Which is why the FSU will keep offering to an international investor a generous premium over the peers in the same rating category…and seasonal roller-coster rides as a bonus.

    Middle East –

    Thanks to their oil, nowadays those states are rather the net investors than the borrowers. Significant cash from the region is being sourced and invested through their giant sovereign wealth funds, direct investments, private banking. The local issues are exceedingly A- plus and above rated names, while high yield bonds are available mainly from the local developers.

    Africa –

    The frontier of the markets, where the fundamentally strongest countries are highly dependent on commodity prices and their well-being is mostly based on production of oil (Nigeria, Gabon), diamonds or precious metals (Ghana, South Africa). The region’s opulation suffers from poverty and the on-going local conflicts exhaust their fragile economies. No wonder that the region and country-specific risks justify extra premium on the African Eurobonds. However it worth to note that due to the low base, African countries’ economies in a favorable global conditions outperform other regions as the GDP in the countries rose circa 10% annually. The financially healthiest countries are the investment grade South Africa (Baa2/BBB- /BBB) and Nigeria (Ba3/B+/BB-). 80% of the bonds in the region are made up of sovereign and quasi-sovereign issuers (65%), banks (9.6%) and mining companies focusing on precious metals and diamonds (6.4%)

Asia-Pacific

    When we refer to the region in broad economic terms, we would inevitably think of China first. It does matter to the world, and it certainly dominates in Asia. The almighty, highly concealed from the international money, and still largely mysterious to the West, which for a number of conditions still classifies it as an emerging market. That, by large formal, definition should not mislead about the actual place of the country in the world’s finance, given the deep level of its involvement there, and its huge size. Two decades past their intensive integration into the global economy the Chinese accumulated both the financial power and won the political role that all others need to respect. This Chinese color paints the whole modern background of the region.

    The region distinguishes itself as the place where business finds most of the support from state. Needless to mention that no support comes without the control. High level of involvement of governments with commercial enterprises in all business areas is controversial, by a classic capitalist judgment. However when the issuer credibility is concerned, this model is more competitive than the rest, of course to the extent of the credibility of the government that takes it all in the end.

    Asians have been meticulously master-piecing their centuries-long heritage of commerce well before the Europeans came there to trade, and those rich ancient traditions have to be taken into account now, before we come to seek for opportunities there too. For its colonial past, Asia blends contrasting habits, traditions and the mindsets. It is an extremely dynamic economic place, where an international investor finds a great diversity of HY investment cases on its USD 191 billion-worth Eurobond market.

    Asia as a permanent source of our investing inspiration for the following basic reasons.

  • It offers the most rapidly growing markets and a strong business support by the state
  • Its local emending emerging markets are the least natural resource-dependent among the peers in of both Latin America and EEMEA. The economic power nests mostly on a combination of high productivity and a relative cheapness of labor.
  • It has a unique risk-reward profile with the risks close to EMEA and yields often in excess of those in LatAm.
  • Regional Highlights

    Strong Demographics. The Asia-Pacific region accounts for around 60% of the world’s total population; this figure is still growing at 1% per annum, just a notch lower than the world’s average of 1.2%.

    Rising Urbanization. The urban population represents only 46% of the total, considerably lower than the world average of 53%, which presents huge upside potential. The Asia’s urban population currently grows at 2.4% per annum.

    Improving Education. The Asia’s adult literacy rate is 83%, which is roughly on par with the world, and it continues to grow.

    High-Growth economy. Partly due to the aforementioned factors and its low base level GDP per capita of only around USD 5,700 annually, Asia’s GDP is growing at the highest pace in the world: around 4.3% per annum. Overall Asia generates 29% of the world’s nominal GDP or more than USD 22 trillion annually.

    What we like about…

    China –

    This cradle of civilization has come a long way from the country once completely closed for foreigners and practicing Soviet-style planned economy to the emerging super-power that now represents roughly half of Asian economy. Its GDP was USD 11 trillion and USD 18 trillion in 2014 in terms of its nominal GDP and PPP, according to the IMF. China remains the fastest-growing economy due to raising urbanization and economic reforms, with an expected growth rate of around 7%.

    Its HY Eurobonds market is around USD 55 billion, which represents around 29% of bond issues in Asia. International investor should be aware that the market is notorious for cases of fraud and highly leveraged property developers take dominant share of the market. Generally high debt loads and economic slowdown there also give good reasons for our concern. For those reason issuers there often have to pay hefty premiums and the markets generally follow the “sell first” mentality.

    Indonesia –

    This archipelago comprising thousands of islands is the world’s 4th largest country with the population of 240 million, about 50% of which are under age 30. Demographics create a strong base for economic growth, which was at around 5% in the past and is expected to stay at this level going forward. In 2014 GDP was USD 0.9 trillion and USD 2.7 trillion in terms of its nominal GDP and PPP, according to the IMF. Its HY Eurobonds market is around USD 65 billion, which represents around 34% of the total in Asia. The government is very much dependent on foreign capital, as the result sovereign issues take up 60% of the total. The other repercussion and the caveat is that currency risks are the major factor, as country is very vulnerable to capital flights.

    In the corporate segment the most attractive sectors are those most benefitting from demographics. This focus provides a safer place to withstand both external and internal storms, e.g. consumer staples and export oriented textile industry (“cheap labor” factor).

    The market research coverage remains rather limited for Indonesia, which leaves plenty of room to investors willing to dig deep and hunt in the Indonesian jungles.

    Australia –

    Famous not just for its endemic flora and fauna, but also for being probably the only country in the world that has been experiencing an uninterrupted economic growth for more than the last 20 years! Land Down Under is characterized by one of the world’s highest nominal GDP per capita of around USD 61,000, stable macroeconomics, low public debt and sound financial system. GDP was USD 1.4 trillion and USD 1.1 trillion in 2014 in terms of its nominal GDP and PPP, according to the IMF.

    Australian HY Eurobonds market is around USD 11 billion, which represents around 6% of the total in Asia. The country is blessed with ample low-cost natural resources, but right now it is more of a problem because commodities are at the end of this super cycle, and economy slowdown being the result. On the bright side, this leads to great findings in shied-away commodity-related names for the investors with long-term perspectives.

Originating from the Netherlands, Schildershoven looks far beyond its European homeland to discover trading ideas worldwide: in Asia, Africa and the Americas. The firm’s analysts are on the lookout for truly productive medium- and short-term international investment opportunities with no bias towards any particular industry or region.

In our surveys we avoid meaningless content and trite expressions, which are commonplace in financial publications on the street. Oft-repeated phrases and long-winded texts are time-consuming to read and difficult to work with. There is no value in idle speculations about events, which may or may not have any material or assessable influence on the markets at all.

This is why we would not generate facile investment ideas to "buy assets because they are cheap" without being able to justify this transparently. Instead, our opinions are based on the logic that may prove reasonable to our clients the way they would reason the opinions of their own. This confidence helps make timely and responsible decisions when you trade. It is what we call the INTELLIGENCE™.