2016 looks like it’s shaping up to be a pretty tough year for Latin American markets. How long do you think we’ll continue to see a lull in the region’s primary bond markets?
I don’t think 2016 has been as challenging as last year. You could argue that so far, it has been a better year for Latin America, particularly if you look at what was achieved with Argentina, the deal pipeline we have in place, and the sizable pockets of liquidity available to the region’s borrowers and issuers.
The reality is that each market in the region has its own unique dynamic. If you look at commodities, and particularly oil prices, they are having a deep impact. In some markets such as Mexico and Colombia more than others. Countries like Chile and Peru are much more exposed to other commodities such as copper and demand from China, for instance. You also have Brazil, which is working through its own political issues, though it is important to point out that even in that market we are seeing more movement than we saw last year.
We’re seeing a few demand drivers emerge. Investors are getting more comfortable with the broader emerging market asset class and some of the main factors at play there: increasing understanding of the outlook for China’s economy and the resulting impact on commodity prices; oil prices are stabilising to a certain degree, and don’t seem likely to hit the lows that many were forecasting towards the end of 2015.
Another factor in play here is interest rates, and what the US Federal Reserve is (and isn’t) doing. The perception last year was that the Fed was going to increase rates, which limited the amount of demand for fixed income products, as opposed to what we have been seeing more recently. Now the sense in the market is that the Fed isn’t going to move on interest rates as aggressively as previously believed, which has helped with liquidity.
Has FX volatility impacted the appetite of some of the region’s corporate local-currency debt by global investors? And how aligned are funding windows of opportunity with the perceived next moves of the US Federal Reserve?
I don’t believe the Fed poses too much uncertainty, and investors don’t seem overly concerned by the possibility of a steep US interest rate hike. The strong levels of liquidity for deals we are seeing in the region’s debt is a testament to this.
In times of heightened volatility, which we have obviously seen in some of the region’s markets, there is less demand for local currency issuances, and global investors tend to migrate towards dollar tranches – or what is perceived as safer markets.
Local markets also have their own sets of variables that aren’t only linked to the US Fed’s movements. Some Latin American currencies – like the Colombian peso or the Mexican peso – have recently been influenced more strongly by oil market volatility than US monetary policy.
The positive sentiment around Argentina seems tremendous, especially after the Government’s recent landmark issuance – which HSBC worked on. Can you shed some light on that deal? What were some of the main challenges involved with driving that through to completion?
As one of the join global coordinators we were one of the key banks ensuring Argentina makes a smooth re-entry into the market. The country’s economic team is extremely capable, and everyone – from the President through to the Secretary of Finance – worked diligently from the day they took office to the moment they issued the bond to build credibility for the Republic.
It is clear that the market has expressed a huge vote of confidence in the new administration, as this deal saw one of the largest orderbooks ever recorded at close to US$69bn. The participation of high quality accounts and the sheer number of investors that participated with the deal speak loudly to what investors think about Argentina and its trajectory: uptake on the three-, five- and ten-year tranches was high, and impressively, appetite for its 30-year paper was quite substantial as well. Of course, it made sense not to print more 30-year notes because the country’s curve is tightening, and Argentina didn’t want to lock in what could be perceived to be higher rates.
It’s important to point out that by the time Argentina went to market, it had already done enough to establish itself and win credibility within the investor community, which played an important role in the deal’s success.
What is the outlook on Argentine corporate issuances in the medium to long term? How quickly do you think they’ll follow the sovereign, and what are the major factors in play here?
The Provinces of Buenes Aires, Neuquén, Mendoza and Chubut have all looked to tap international markets following the sovereign deal in April. So it’s clear that the quasi-sovereigns have decided to follow the sovereign. The ones coming to the market have likely had plans in place for some time but were prevented from doing so given the pre-holdout deal climate.
There will be a trickle-down effect and we will see corporate issuances, but corporates will largely hit the market in a second phase that will be more protracted and less concentrated in terms of timing. Corporates have to generate their own funding strategies and CAPEX plans, which depend on a wide range of dynamics and factors at play within their respective sectors, but I believe we will see more corporates tap both debt and equity markets in order to meet their needs. On the equity front, that’s likely to pick up sometime next year when we see more mergers & acquisitions; on the debt side, we could see some corporates tap the market in the second half of this year, though that depends on their yield curve and spread compression. Unlike the case with the provinces, however, we haven’t seen any corporates that were previously prevented from tapping the market now going ahead and issuing new debt.
On the other end of the spectrum, we’ve seen a significant erosion of fundamentals in Brazil. I got the sense that six months ago large international banks like HSBC were taking a ‘wait and see’ approach. Has this evolved at all? And, with local – particularly state-controlled banks – struggling, are you looking at this as a potential opportunity?
Brazil is definitely an opportunity in the long run. Today we are seeing more positive news coming out of the country, but the market is waiting to see how some of the recent political changes will play out.
The market seems to be interpreting the initial impeachment proceedings as a positive thing: we’ve seen a rally in the bond space, improvement in its currency, and a number of deals are expected to be finalised before the summer. But it’s also clear that Brazil isn’t where we want it to be, or where it used to be in terms of deal activity and volumes. We are working with our established relationships and will continue to support our clients in the country.
What dominant themes do you think are likely to emerge in Latin America’s bond markets over the next 6 months?
Argentina is definitely the theme of the year, and there is more to come from that market. I would not write off Brazil – we continue to see slow but steady improvements in the country’s political situation, and more activity on the horizon in the bond market (as well as very selectively on the equity side).
The big question this year is: What’s going to happen with Mexico? Are we going to see an increase in issuance volumes there, or are we going to continue seeing subdued deal volumes?
These are some of the things likely to “move the needle”, so to speak. Overall, we see activity in the capital market for Latin America in a better light this year than in 2015.