DoubleLine held its emerging markets teleconference on Tuesday; notes on the call follow below. Thanks to Nathan Dutzmann for the analyst coverage.
Biggest problem is Greece
- The market is pricing in a high probability of default.
- It is becoming evident that December fiscal targets will be missed; government and citizens lack the will to meet austerity requirements.
- Greek government says it can make October payments, but markets are increasingly concerned about liquidity.
- Protests likely to resume.
- Nearly impossible to avoid default at some point.
Europe
- Declining GDP growth.
- European Financial Stability Facility (EFSF) may not be big enough.
- Markets question the banking stress test results, and now so does IMF head Christine Lagarde.
- Demonstrations occurring in Italy and Spain.
- Debt sustainability problems will continue to plague the EU for years.
- Failure to address peripheral country debt is spilling over into market concerns about core EU countries.
United States
- Treasuries have benefitted from a flight to safety given European issues.
- GDP growth is slowing, possibly even risking recession.
- Monetary or fiscal stimulus may be able to slow the stall but are not expected to lead to self-sustaining growth.
Japan
- Declining GDP growth.
- Political deadlock, government turnover.
- Aging population.
- Strengthening yen hurts competitiveness.
Emerging markets tailwinds
- Developed market growth rate projections are low to begin with and have been revised down.
- EM growth projections revised down as well, but much higher.
- Twice as many EM sovereigns have been upgraded as have been downgraded year-to-date.
- Eleven EM countries have lower CDS spreads than does AAA France; i.e., positive outlook is already priced in for sovereign debt.
- EM corporates, on the other hand, offer value relative to sovereign corporates (corporate bonds with considerable government ownership of the corporation), despite having much lower leverage ratios than their U.S. counterparts.
- EM corporate EBITDA is growing strongly.
- EM corporates are no longer good companies in bad countries. (That distinction now belongs to EU corporates.) EM corporates have better balance sheets and better liquidity, and the EM regulatory environment is generally improving.
- EM equities have done poorly, but EM debt is up slightly year-to-date.
- EM banking sector is preparing well in advance for the new Basel III requirements; thus far they have avoided Eurozone issues.
- Some of the largest EM banks are owned by European banks (specifically Spanish banks); it's unclear what contagion could result, but measures have been taken to prevent EU parent banks from raiding EM banks.
- Local currency interest rates from EM countries have fallen substantially year-to-date, but there is a risk of volatility/retracement given the global growth slowdown.
