Emergent AM claims investors should think twice about turning to high yield debt after Gm, ford downgrades
A leading UK debt fund has cast doubt over whether emerging markets are as safe a haven for ex-GM, ex-Ford high yield seekers as some might think.
Susan Payne, chief executive officer at Emergent Asset Management, says the company is not convinced emerging market high yield debt will prove the haven for those who may decide to flee to quality from a downgraded GM and Ford.
She notes Treasuries would be a more likely beneficiary of such investors - with high yield funds generally not restricted to just high yield debt - as moving to emerging markets assets before a potential second downgrade may be "a hard idea to sell to your boss, especially when the ratings agencies were late in the their downgrading of Enron and Worldcom. They are unlikely to make that mistake again."
"A manager does not want to come out of one market where they have been hit and go into another - like Brazil, Ecuador or Turkey - where they could get hit again in a spread widening environment.
"The downgrading of almost $500bn of auto debt is so radical, the market has not yet digested the size of it," she said.
Payne notes Russian debt may be a safer bet in a falling equities environment than Brazilian or Turkish paper. Brazil 2040 debt fell in March from 119.5 to around 107.5 over five days, and then reverted to 115 a month later, producing what Payne says is a "nervous market".
"There is a reasonable portion of GM and Ford's debt that is essentially going to hit the market in some form or another if there is a second downgrade by a second agency, and if that happens there will be a good chance there could be serious repercussions in high yield debt markets," she adds.
Emergent has been short Ford in its global macro hedge fund, Cosmopolitan, well before Standard & Poor's downgrade, and covered its short position when the downgrade came.
Using other examples such as Maytag and Whirpool, Payne says the Ford and GM story is a classic example of a good spread trade, long Treasuries and short weak, especially consumer, corporates.
Another negative is a rising rate environment. Payne believes rates are likely to rise for at least the Fed's next two meetings, and says if equities start to correct to the downside, "emerging markets may go with them".
Emergent is presently long emerging markets short-term paper and short certain emerging currencies. Emergent feels there will be some shock to the markets this year - sentiment, Payne notes, suggests the market may be "set up for a shock" - which has not already come with the first Ford/GM downgrade.
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