At a time of such palpable turbulence in world affairs, it’s easy to assume that the risk appetite of both borrowers and investors would be greatly diminished. Uncertainty ought to breed high levels of caution and to argue otherwise would seem counter-intuitive.
For that reason it’s interesting to hear from two people, very well placed to judge current attitudes to risk, who take a very different view of the current global environment.
Meet two of the senior executives from JP Morgan’s Central and Eastern Europe, Middle East and Africa (CEEMEA) debt capital markets (DCM) practice with years of experience working in some of the world’s most dynamic, but often volatile, emerging markets.
Both Stefan Weiler, head of the bank’s CEEMEA DCM practice, and Laurel Hurst, MD and head of transaction management in the practice, take the view that the last 15 months have been a time of extraordinary stability in global markets in general and emerging markets in particular where the investor hunt for yield, in a continuing low interest rate environment, has grown increasingly intense.
“If you look at the VIX Index – the fear gauge of Wall Street – we are at nearly an all-time low and markets have been extremely stable and actually very predictable,” says Stefan.
“In the last 15 months or so we’ve enjoyed a bull market, and, with the exception of the month immediately following the U.S. presidential election, the picture has remained that way.”
Laurel agrees. “There has been a steadiness to the last year, year and a half. Events of course take place but get amalgamated into the market view fairly swiftly. On balance, I would say we’ve been working from a steadier, solid base.”
Few people can be in a better position to make that judgement. As a bank, JP Morgan has been one of the few institutions to maintain a firm focus on emerging markets, while many of its peers have, since the financial crisis, scaled back their operations to concentrate on their core markets.
“While other banks have downsized, closed offices, lowered headcount and off-boarded clients, we have invested more into our platform and have doubled down on our focus and interest in these markets,” says Stefan.
“It’s a long-term strategy. Emerging markets are growing faster than developed markets over time. Of course, there often is a certain degree of volatility and unpredictability, usually stemming from unexpected political events, but recently this is also increasingly true for developed markets. There are some ups and downs, but longer term these are markets with much greater promise and ever since the asset class was established by JP Morgan in the mid-1990s it’s been core to our DNA.”
And the bank’s success in the last year and a half underlines the picture of stability that Stefan and Laurel describe.
2016 saw a surge in Russian activity with JP Morgan playing a bigger role than any other bank in issuances by those corporates and banks able to avoid the impact of sanctions. The bank was highly active in other CIS markets too, including Georgia, Azerbaijan and Kazakhstan.
In the Middle East, it not only worked on Saudi Arabia’s record-breaking USD17.5bn sovereign transaction but was represented on almost all the sovereign deals in the region including transactions in Bahrain, Qatar, Jordan, Oman and Abu Dhabi. And there were unique one-off transactions, including local currency Eurobond issuances for the Bank of Georgia, Russian Railways and Turkey’s Garanti Bank.
In the first half of this year that strike rate has continued, notes Stefan. “There have been 167 deals so far this year in the CEEMEA region and we have done 77 of them, almost half of the deals. So we are definitely in the know.”
DEALS IN 2016 IN THE CEEMEA REGION
OF WHICH COMPLETED BY JP MORGAN
So what patterns of risk and risk appetite are they seeing across their region?
“Emerging markets are not uniform,” Stefan explains. With some 60 countries falling within the CEEMEA region, some are necessarily more stable and predictable than others. Some core markets go through periods of turbulence as we’ve seen in Russia with the imposition of sanctions following the Ukraine crisis, in Turkey and South Africa with domestic political turmoil and, more recently, with Qatar’s increasingly fractious stand-off with its Gulf neighbours.
“What’s clear though is the growing ability of issuers and yield-hungry investors to assess and deal with such risks,” says Stefan.
“Risk and uncertainty are much better understood by the market now and the emerging markets market is a very broad one these days.” When the Turkish market closed for a while, a host of Russian issuers came forward and investors allocated their liquidity there instead, he says. The Polish market was effectively closed for a year after a new government came to power, then opened again, with investors ready to move in again on opportunities.
“When I started in this business there was a lot of contagion,” he says. “If there was trouble in one market then it tended to spread across the whole emerging markets space. Now investors understand these markets and risks much better, and are able to differentiate the risks in individual markets.”
That makes it all the more important to identify risks as soon as possible and for issuers to be open about how they are addressing uncertainty.
“We bring an experienced ability to spot issues early,” says Laurel. “Where there is uncertainty, issuers want a trusted bank that will take their transaction through seamlessly from start to finish and spot the issues a mile off. They are putting their name and reputation on the line and don’t want to go out into the market before they’ve crossed every ‘t’ and dotted every ‘i’.”
And she identifies a growing and more sophisticated level of transparency among issuers.
“I have seen a quickness and a receptiveness to deal with anything that comes up in a very open and transparent fashion, whether it’s how we deal with sanctions and how we ring-fence use of proceeds, or, if there’s a cyber security issue, how we demonstrate to investors that the issuer has robust technologies in place. There is a real willingness on the part of the issuers to ensure investors have the transparency to address tough issues.”
For all issuers – whether a sovereign, a corporate or a financial institution – market agility is increasingly key.
“Across all our issuers there is a real understanding of what’s required of them to get their deals done efficiently from start to announce, in terms of disclosure, sanction compliance, due diligence and dealing with issues that will allow them to execute faster,” says Laurel.
“What we want to do is get them ready as quickly as we can so they have as many market windows as possible, making sure they have the flexibility to choose the right one.”
Stefan suggests there is a widespread view that market conditions have rarely been more favourable and that there is a need to take advantage of them while they last. Increased transaction speed is not down to a fear that uncertain events will interrupt and scupper a planned deal. “Rather, the mindset is more: ‘Oh wow – this is a great opportunity and I don’t want to miss it!’”
Potentially momentous political risk can of course have an impact, but often in surprising ways.
Brexit, they suggest, had a beneficial effect in the sense that the economic uncertainty it caused seems to have had the effect of delaying increases in interest rates, temporarily at least.
The election of Donald Trump did raise worries that some of his expansionary and protectionist campaign pledges would translate into higher inflation and therefore much faster increases in interest rates.
But with his administration having difficulty turning pledges into policy, the market grew pretty sanguine, pretty quickly. “Since the beginning of the year the market has taken the view that rates will not rise much and will do so in a gradual and predictable way, which is helpful to investors and encourages risk appetite,” says Stefan.
That could all change. Central banks are increasingly discussing tightening monetary policy, reining in quantitative easing and hiking rates. Emerging market investors are watching this very carefully. They have a keen eye on oil prices too, with the fear that if they were to become volatile again and dip below the USD40 mark, the impact on emerging markets would be negative.
“If the market was to become more uncertain, all of these issues would become more tricky to navigate and the advice would need to focus on manoeuvring around risk events, accelerating timetables to mitigate risk and choosing different products for the transaction,” he says. “Ultimately, if uncertainty grew significantly investors would eventually turn away from smaller, lower rated borrowers and gravitate to bellwether and blue chip names that are well known.”
For now, though, that is certainly not the case and Stefan points to two recent deals that clearly demonstrate the current market mood.
The first was an international bond issuance done in local currency for the Bank of Georgia. “That was a phenomenal feat. Georgia is a small market with very few international investors who had any exposure to the local currency. Investors are generally very cautious about mixing currency and credit risk, so this was a perfect example of investors willing to step into unknown territory to capture a good yield.”
He also highlights the corporate bond issue by the Ukrainian poultry giant MHP, in April, only the second issuance in Ukraine since the Russian crisis erupted three years ago. The transaction priced 100 basis points inside the sovereign, eventually repricing the entire sovereign curve.
“That’s very rare. I can think of only four times that has happened in my career in the region and it highlighted to me that investors are very hungry for corporate credit and very hungry for riskier jurisdictions.”
In the end, it’s a sign of how radically the world and attitudes to risk have changed. Of course, core emerging markets will continue to have moments of crisis and increased volatility. But, as Laurel and Stefan point out, developed markets are just as open to risk – look at Greece and Portugal.
“These events are not unique to emerging markets any more,” says Stefan.
“Politics have become much harder to predict and market risk much harder to anticipate, more generally. It’s a global issue now.”
“I would say we are probably in the most unpredictable time since the end of the financial crisis and it is now a very different set of issues that is driving events. You don’t just have macro-economic and political uncertainty; it’s the impossibility of predicting what’s going to happen next that is so difficult to contend with.”