World Economy

Prolonged EMs Vulnerability Worries Europeans

Prolonged EMs Vulnerability Worries EuropeansProlonged EMs Vulnerability Worries Europeans

European credit investors have grown more bearish on emerging markets and see them as the biggest risk to European credit markets, according to Fitch Ratings’ latest senior investor survey.

But most investors see selective EM risk as acceptable in more stable countries and sectors. Fifty-nine percent of respondents to the survey, which closed on November 4, said the risk posed over the next 12 months by adverse developments in one or more emerging markets was high, up from 45% in the  previous survey in July, Reuters reported.

Investors again singled out EMs as most likely to experience deteriorating fundamental credit conditions in the coming year. Three-quarters of respondents think EM sovereign fundamentals will deteriorate, compared with two-thirds in July.

For EM corporates, the proportion increased nearly 20% to 80%. Just 6% predict an improvement for either category. A more pessimistic view among investors is consistent with the volatility in EM assets since mid-year. This has been driven by concerns about US monetary tightening, global growth, and commodity prices, as well as country-specific factors.

 Risk Factors

Survey responses reflect this range of related challenges, with no single risk factor notably outweighing others. Twenty-nine percent of respondents see low commodity prices as the main risk to EMs, followed by slower global growth (26%), a Fed rate rise (24%), and high debt levels (21%).

The view that EM corporates face the greatest refinancing challenge has hardened, with 63% of respondents selecting this category, up from 46% in our previous survey.

Nevertheless, more than half of respondents described their view on EM debt as selective, looking to pick more stable countries and sectors to avoid high risk exposures. 14% think now is a good time to buy in an oversold market.

Concerns about EMs are not new, and Fitch’s European senior investor surveys have shown increasingly negative sentiment in recent years.

US investors also saw EM contagion as the top risk to their market in the agency’s recent US survey. “Our global growth forecast of 2.3% for 2015 factors in the impact of recessions in Brazil and Russia and a structural slowdown in China and other EMs. Fed tightening can exacerbate credit pressures via its impact on EM rates, capital flows and currencies, but this will vary across regions and asset classes,” Fitch said.

Many sovereigns have large FX reserves and low public debt, while EM corporate debt has risen sharply in the last decade. Highly indebted corporates with large dollar exposure and unhedged FX risk profiles will face greater refinancing risk than those with good funding diversification.

US rate rises may put pressure on some EM banking systems’ asset quality and increase refinancing challenges.