Emerging market investors cast wary
eyes on Argentina
It is undeniable that the Maltese love to make a profit. After all,
who doesnt? This week the Malta Financial Services Centre writes
in this paper, see page 8, about the dangers being faced by investors
in emerging markets. The danger to the already precarious position of
emerging markets bonds, of course, is clear and present through the
potential trickle-down effect from Argentinas current fiscal crisis.
If Argentina fails to pay out the interest to investors holding bonds
issued by the country, there could be severe implications on other Latin
American countries and on other countries with emerging markets. However,
so far there have not been too many ripples amongst Argentinas
fellow emerging market countries, except for its neighbour Brazil.
Political risk has always presented the greatest danger to investors
in emerging markets. However, prior to 11 September few would have even
ventured to guess that this type of investment risk, in the form of
terrorism, would leave its mark on even the worlds most developed
market that of the United States.
The resulting blow received by the emerging markets across the world
was a heavy one, especially since they were already struggling with
a third quarter downturn. In fact, data demonstrates that the last quarter
was one of the worst ever for the category, with global equity emerging
markets funds dropping an average of 22.3 per cent.
Despite the evident risks involved in investing in emerging markets,
the bond and fund sector has continually been one of the favourite tools
of the Maltese investing public, which, as is the case for investors
the world over, tends to succumb to the temptation of earning high coupon
However, the primary misconception in the realm of emerging markets
is that the high coupon interest offered is the direct result of the
high risk associated with these types of investments. The reasoning
behind it is that investors must be compensated for the volatility of
emerging markets, which is caused by a variety of factors - such as
their susceptibility to economic downturns or international sentiment
turning its back on the country or region the fund or bond in question
is issued by. It accordingly follows that the higher the risk, the higher
But with coupon interest payments of between nine and 11 per cent, investors
are easily seduced into dumping their savings lock, stock and
sometimes barrel - into such vehicles. Lending further security
to the investment, emerging markets bonds are also denominated in a
trusted currency other than that of the issuing country
and the fact that they are issued or guaranteed by a sovereign government.
To completely cease investing in such funds is by no means being advocated.
Instead, good advice would point investors to evenly distributing their
portfolios between the high risk, high yield and the lower risk, lower
Investors should also look closely at the rating of the emerging market
bond they are interested in, as the MFSC bluntly states that a cursory
look at the ratings given to such bonds clearly indicates that they
are considered to be speculative and below investment grade. All international
bonds are rated by rating agencies and are based on an analysis of the
issuing countrys financial status, its economic and debt characteristics
and the revenue sources that are to secure the bond. The weight of such
ratings are far too often misunderstood or underestimated.