Russia’s Euroclear settlement eases access for foreign investors – Ashmore’s Dehn

Jan Dehn, head of Research at Ashmore, discusses a number of emerging market developments over the past week for investors.

Russia is preparing to introduce Euroclearable local currency corporate bonds in early 2014. Local currency corporate bonds are not recognised as an asset class, and do not even have an index. Yet, this asset class is among the fastest developing segments in Emerging Markets fixed income. China delivered more positive data and its currency appreciated to the strongest level for 20 years versus the US dollar. Malaysia’s budget was exactly what the doctor prescribed; business friendly and prudent. Meanwhile, US data continued to deteriorate and the Dollar and US treasury bonds continue to destabilise markets in the rest of the world.

Russia will formally launch Euroclear/Clearstream settlement
Russian Deputy Finance Minister Alexei Vladimirovich Moiseev announced last week that Russia will formally launch Euroclear/Clearstream settlement of local currency corporate bonds starting 1 January 2014. Over the last few years Russia has been highly successful in transitioning the settlement of local government bonds to Euroclear. Euroclear settlement significantly eases access for foreign investors, and in Russia’s case resulted in an increase in foreign ownership of OFZ bonds from less than 3% to a peak of almost 30%. We expect local currency corporate bond markets to become far more accessible over the next few years, ultimately exceeding in size the Dollar corporate bonds markets.

China’s gradual economic expansion
China’s flash PMI number for October was stronger than expected at 50.9 (versus 50.2 in September). The PMI number points to a continuation in China’s gradual economic expansion, which in Q3 produced 7.8% qoq real GDP growth. One of the main drivers of growth in the coming months is likely to be investment in railways infrastructure. China’s currency also set another 20 year high against the Dollar and the Chinese authorities allowed financial conditions to tighten marginally. Both these measures will dampen the pace of expansion, which is taking place against an inflation rate which recently picked up to 3.1% yoy.

Malaysia’s business friendly tax changes
Malaysia’s much anticipated 2014 government budget was published on Friday. The budget proposes to reduce the fiscal deficit to 3.5% of GDP in 2014 from 4.0% in 2013. The tax changes are very business friendly. The government will introduce an efficient generalised sales taxes (GST) regime from 1April 2015 at a rate of 6%, while corporate taxes will be reduced from 25% to 24% at the same time.

United States economy
In the past week, United States non-farm payrolls, existing home sales, house prices, mortgage applications, core durables orders, Markit’s PMI release, and initial claims for unemployment all surprised to the downside. The payroll data in particular impacted global sentiment. Since the data was collected before the government shutdown there is now a strong conviction in the market that the next payroll number will also be weak (reflecting the government shutdown). And in turn that means that Fed tapering will be pushed further into the future, with March has now becoming the consensus date for the Fed to re-try tapering. Meanwhile, cue a rally in US bonds and stocks. The Fed sits on the horns of a dilemma – taper and risk killing an over-indebted economy or print and fuel bubbles and eventual inflation. The weakness of the US economy and the erratic behaviour of both the Fed and Congress have inflicted tremendous volatility onto global markets, because of the Dollar’s special status as global reserve currency and Treasuries’ status as global bond benchmark. Intra-EM currency crosses are more stable than crosses involving the US dollar. Indeed, crosses between EUR and EM currencies have historically been more stable than crosses involving the Dollar. But because one way or another most investments benchmark against US markets the bulk of volatility in global currency and rates markets in the past 12 months can be traced back to US volatility. The world continues to pay a high price for the privilege of using the Greenback as its primary reserve currency.


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