Low Volatility Is $1.4 Trillion Emerging-Markets Risk, BIS Says
2014-09-14 10:00:00.5 GMT
By Anchalee Worrachate
Sept. 14 (Bloomberg) -- Some of the very factors that have
becalmed developed nations are increasing risks for emerging
markets, affecting $1.4 trillion in funds focused on those
assets, the Bank for International Settlements said.
Unprecedented stimulus by central banks and historically
low volatility levels across asset classes have made it more
likely that emerging markets destabilize, the Basel,
Switzerland-based institution said today it its quarterly
report. Governments and companies from Latin America to Asia
have boosted borrowing in local and foreign currencies, leaving
them more vulnerable when interest rates climb or their exchange
rate falls.
The stability that has developed since the worst days of
the global financial crisis has encouraged investors to funnel
money into higher-yielding assets in emerging markets, swelling
them by about 55 percent to $1.4 trillion in May compared with
October 2007, the BIS said, citing data from Emerging Portfolio
Fund Research Global. That means decisions by money managers to
buy or sell have increased impact on these economies, where
assets are smaller and less liquid.
The trend is “a potentially important source of concern,”
researchers including Ken Miyajima and Ilhyock Shim wrote in the
report. “Any decision by asset managers with large assets under
management to change portfolio allocation can have a major
impact on emerging-market assets that are relatively small.”
Gauges of price swings have fallen toward, or set, record
lows this year amid the protracted sluggishness of the global
economy. The “exceptionally accommodative policy” of central
banks and more transparent communication, including so-called
forward guidance on interest rates, played a key role in driving
volatility down to these levels, the report’s authors wrote.
Risky Behavior
“An environment of low yields on high-quality benchmark
bonds -- coupled with investor confidence in the continuation of
favorable market conditions -- is set to foster risk-taking
behavior,” the researchers wrote. “As market participants
further revise down their perceptions of market risk, they may
be inclined to take larger positions in risky assets, boosting
prices and pushing volatility even lower.”
There are signs that may be starting to turn around.
Volatility among global currencies rose the most since May
2012 last week, JPMorgan Chase & Co. indexes show. Bank of
America Merrill Lynch’s MOVE Index, which measures price swings
in Treasuries based on options, was at 66 basis points on Sept.
12. That’s up from this year’s low of 52 basis points though
short of its 10-year average of 91 basis points and
The Chicago Board Options Exchange Volatility Index, or
VIX, also climbed since touching the lowest level since 2007 in
July.
Common Benchmarks
Another challenge facing emerging-market nations is the
asset-management industry’s use of common benchmarks and
relative-performance measurement, which may lead to herd
behavior, according to the BIS, the organization that acts as a
central bank for the world’s monetary authorities.
“In particular, there is a higher degree of concentration
in the use of benchmarks by asset managers investing in
emerging-market assets” than those investing in developed
markets, the analysts wrote. That is a factor that raises the
potential for “one-sided markets.” In the past two years,
“investor flows to asset managers and emerging-market asset
prices reinforced each other’s movements.”
In the foreign-exchange market, suppressed price swings
increased the attractiveness of carry trades that target
emerging-market currencies, the report said.
Carry Trades
Carry trades exploit differences in global interest rates
and reduced volatility makes profits more reliable. Investors
using the euro to fund purchases of the Brazilian real, for
example, would have made a 15.3 percent return this year through
6:30 p.m. London time Sept. 12, data compiled by Bloomberg show.
The Standard & Poor’s 500 Index gained about 9 percent during
the same period.
The low volatility and interest rates also raised risks
among corporate borrowers, the bank said.
Companies in major emerging-market countries have increased
their borrowing in foreign currencies as they took advantage of
low financing costs. Private-sector borrowers excluding banks in
major developing economies sold almost $375 billion worth of
international debt in 2009 to 2012, according to the BIS. That’s
more than double the amount in the four years before the crisis,
it said.
“The share of debt denominated in foreign currency is very
high, and there is reason to believe that many emerging-market
corporates are unhedged against this exposure,” the report
said. “Together, with their increase in leverage, this raised
the vulnerability of emerging-market corporates to the combined
effects of a domestic slowdown, currency depreciation and a
global rise in interest rates.”
For Related News and Information:
Foreign-Exchange Information Portal: FXIP <GO>
Stories on Central Banks: NI CEN <GO>
For research on currencies: NI ANAFX BN <GO>
Foreign-exchange forecasts: FXFC <GO>
To contact the reporter on this story:
Anchalee Worrachate in London at +44-20-7073-3403 or
aworrachate@bloomberg.net
To contact the editors responsible for this story:
Paul Dobson at +44-20-7673-2041 or
pdobson2@bloomberg.net
Todd White
2014-09-14 10:00:00.5 GMT
By Anchalee Worrachate
Sept. 14 (Bloomberg) -- Some of the very factors that have
becalmed developed nations are increasing risks for emerging
markets, affecting $1.4 trillion in funds focused on those
assets, the Bank for International Settlements said.
Unprecedented stimulus by central banks and historically
low volatility levels across asset classes have made it more
likely that emerging markets destabilize, the Basel,
Switzerland-based institution said today it its quarterly
report. Governments and companies from Latin America to Asia
have boosted borrowing in local and foreign currencies, leaving
them more vulnerable when interest rates climb or their exchange
rate falls.
The stability that has developed since the worst days of
the global financial crisis has encouraged investors to funnel
money into higher-yielding assets in emerging markets, swelling
them by about 55 percent to $1.4 trillion in May compared with
October 2007, the BIS said, citing data from Emerging Portfolio
Fund Research Global. That means decisions by money managers to
buy or sell have increased impact on these economies, where
assets are smaller and less liquid.
The trend is “a potentially important source of concern,”
researchers including Ken Miyajima and Ilhyock Shim wrote in the
report. “Any decision by asset managers with large assets under
management to change portfolio allocation can have a major
impact on emerging-market assets that are relatively small.”
Gauges of price swings have fallen toward, or set, record
lows this year amid the protracted sluggishness of the global
economy. The “exceptionally accommodative policy” of central
banks and more transparent communication, including so-called
forward guidance on interest rates, played a key role in driving
volatility down to these levels, the report’s authors wrote.
Risky Behavior
“An environment of low yields on high-quality benchmark
bonds -- coupled with investor confidence in the continuation of
favorable market conditions -- is set to foster risk-taking
behavior,” the researchers wrote. “As market participants
further revise down their perceptions of market risk, they may
be inclined to take larger positions in risky assets, boosting
prices and pushing volatility even lower.”
There are signs that may be starting to turn around.
Volatility among global currencies rose the most since May
2012 last week, JPMorgan Chase & Co. indexes show. Bank of
America Merrill Lynch’s MOVE Index, which measures price swings
in Treasuries based on options, was at 66 basis points on Sept.
12. That’s up from this year’s low of 52 basis points though
short of its 10-year average of 91 basis points and
The Chicago Board Options Exchange Volatility Index, or
VIX, also climbed since touching the lowest level since 2007 in
July.
Common Benchmarks
Another challenge facing emerging-market nations is the
asset-management industry’s use of common benchmarks and
relative-performance measurement, which may lead to herd
behavior, according to the BIS, the organization that acts as a
central bank for the world’s monetary authorities.
“In particular, there is a higher degree of concentration
in the use of benchmarks by asset managers investing in
emerging-market assets” than those investing in developed
markets, the analysts wrote. That is a factor that raises the
potential for “one-sided markets.” In the past two years,
“investor flows to asset managers and emerging-market asset
prices reinforced each other’s movements.”
In the foreign-exchange market, suppressed price swings
increased the attractiveness of carry trades that target
emerging-market currencies, the report said.
Carry Trades
Carry trades exploit differences in global interest rates
and reduced volatility makes profits more reliable. Investors
using the euro to fund purchases of the Brazilian real, for
example, would have made a 15.3 percent return this year through
6:30 p.m. London time Sept. 12, data compiled by Bloomberg show.
The Standard & Poor’s 500 Index gained about 9 percent during
the same period.
The low volatility and interest rates also raised risks
among corporate borrowers, the bank said.
Companies in major emerging-market countries have increased
their borrowing in foreign currencies as they took advantage of
low financing costs. Private-sector borrowers excluding banks in
major developing economies sold almost $375 billion worth of
international debt in 2009 to 2012, according to the BIS. That’s
more than double the amount in the four years before the crisis,
it said.
“The share of debt denominated in foreign currency is very
high, and there is reason to believe that many emerging-market
corporates are unhedged against this exposure,” the report
said. “Together, with their increase in leverage, this raised
the vulnerability of emerging-market corporates to the combined
effects of a domestic slowdown, currency depreciation and a
global rise in interest rates.”
For Related News and Information:
Foreign-Exchange Information Portal: FXIP <GO>
Stories on Central Banks: NI CEN <GO>
For research on currencies: NI ANAFX BN <GO>
Foreign-exchange forecasts: FXFC <GO>
To contact the reporter on this story:
Anchalee Worrachate in London at +44-20-7073-3403 or
aworrachate@bloomberg.net
To contact the editors responsible for this story:
Paul Dobson at +44-20-7673-2041 or
pdobson2@bloomberg.net
Todd White