02 Feb 2018
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After a couple of down years in terms of CEEMEA primary market issuance in January, despite the unfavourable geo-political back drop (i.e US Pres Trump's inauguration) January 2017 saw a rebound with USD 15.032bn worth of supply courtesy of 17 deals. This bettered the average of the previous 5yrs (2012-2016) of USD 12.149bn and was over 4 times the January 2016 total of USD 3.527bn.
Could the same rebound in issuance volumes be replicated in February? Thus far the month is off to a slow start, with only one CEEMEA deal having priced (Rusal's USD 800m Jul-2023 line) and one deal courtesy of Dubai Islamic Bank being marketed today. However, January didn't get its first deal until the 11th, so there is still plenty of time and the pipeline is building rapidly. The Feb 5yr average CEEMEA issuance volume (2012-2016) is USD 11.254bn whilst 2016 saw a measly USD 4.787bn of primary issuance.
So by using January issuance as an indicator of what to expect in February (which is fair given a correlation of 0.78 between the 2 above data sets), supply should again rebound. There are many other supportive factors for issuance as well though. Firstly, 10yr UST yields are now back towards the 2.40% mark having been as high as 2.60% in Dec - thus making USD issuance less expensive. Furthermore, although there has been some talk of March as a "live" Fed meet, the market continues to only price in a 24% chance of a rate hike, according to the Fed Funds rate. Are investors taking the " 3 hikes in 2017" dot-plot seriously yet? We aren't so sure.
Away from US factors, CEEMEA specific CDS indicies, which provide a strong gauge of investor sentiment, are either at or near record narrows. The iTraxx Sovx CEEMEA index is seen today at 75.61, its tightest level since 2010, whilst the iTraxx Corp CEEMEA index keeps narrowing towards the psychological 200 mark as shown below .
iTraxx Sovx CEEMEA (via Bloomberg)
iTraxx Corp CEEMEA (via Bloomberg)
Furthermore, funds flow data from EPFR Global also illustrates that investors have not been put off the EM investment case just yet, thanks largely to US Pres Trump staying away from any fiscal stimulus plans and instead doing his best to talk down the USD. For more on that see here: Viewpoint - EM risk still favoured as reflation trade slows, but for how much longer?
So with CEEMEA sentiment looking positive as underlined by key proxies such as CDX indices and investor flows, and a strong start to the year for CEEMEA issuance in January having traditionally carried on into February, there are plenty of reasons to be optimistic with regards to the region's near-term primary prospects. Indeed, this is also supported by a bulging pipeline with there are no less than 5 potential issuers either continuing or wrapping up roadshows this week.
Watch this space...
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By Marcus Dewsnap 09 Apr 2018
Welcome to our newsletter, The Context, from IFI Research, containing thought leadership articles spanning a host of asset classes.
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