RPT-EU INVESTORS FEAR QE TAPERING EFFECT ON EMERGING MARKETS

European investors are concerned about how the end of the Fed’s quantitative easing will affect liquidity for emerging markets, according to the latest Fitch Ratings quarterly investor survey. We believe these concerns are likely to be focussed on the most vulnerable sovereign and corporate credits and that widespread credit distress in emerging markets is unlikely.

Two-thirds of those polled expect concerns over the timing of QE reduction to drive volatility in the amount of cash flowing into and out of emerging market bond funds for the remainder of the year. A further 21% said the flows into emerging market funds will decrease due to greater concerns over political risk.

Worries about liquidity are underpinned by nearly two-thirds believing fundamental credit conditions for emerging market corporates will deteriorate, more than double the proportion in the last survey (30%). The views on emerging market sovereign credit were equally bearish.

Fitch believes that an improvement in credit fundamentals over the last decade should make emerging markets more resilient to a liquidity shock than in the past, making a widespread wave of crises unlikely. However some emerging markets are more vulnerable to volatile capital flows and higher interest rates due to factors including large external financing requirements, low foreign reserve buffers and high leverage.

As part of a recent report we looked at 11 key indicators for sovereign credits. We found that Hungary, Jamaica, Lebanon, Mongolia, Turkey and Ukraine all had at least three red-flags indicating risky or stretched levels.

On the emerging market corporate front, 29% of investors believe this asset class faces the greatest refinancing risk; a sharp rise from the 8% who said so in our April survey. But again, Fitch believes most emerging market issuers are well placed as they have steadily improved their liquidity profiles and have not used cheap money for the kind of debt-fuelled expansion that has caused problems in the past.

Commodity and infrastructure companies will be among the biggest emerging market debt issuers over the next year, due to capex investment needs. If liquidity were to deteriorate we could see a widening performance gap between companies that have already tapped cheap funding and those that still need to, or which might have to scrap investment plans.

Fitch conducted the Q313 survey between 1 and 31 July. It represents the views of managers of an estimated EUR5.6trn of fixed-income assets. We will publish the full survey results in mid-August.

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