Emerging Markets Monitor - April 29
EM Bonds Moment, AGOA to Expand and Continue, Qatar LNG Rising, CNOOC Record Profits, Mexico Manufacturing, Copper Rises Above $10K on BHP Megabid
The Top Stories Shaping Emerging Markets - April 29
Emerging Market Bonds Are Catching Wall Street’s Eye
Barron’s
“Emerging market bonds have sold off over the past two weeks, ever since Federal Reserve Chairman Jerome Powell signaled a hawkish shift on U.S. interest rates.”
“But the average spread for emerging market hard currency sovereign paper over U.S. Treasuries remains near its postpandemic low, around 3.4 percentage points, says Sergey Goncharov, head of Americas fixed income at Vontobel Asset Management. That’s down from 460 basis points five months ago—a powerful rally in fixed-income terms. (A basis point is 1/100th of a percentage point.)”
“There are two ways to look at this steady performance: Emerging market bonds remain fully priced and vulnerable to further global shocks, or emerging market economies are stable by historical standards, and that 340 extra basis points of yield is worth the risk. ‘The market is divided between spread sellers and yield buyers,’ says Edward Al-Hussainy, senior currency analyst at Columbia Threadneedle Investments.”
“Pros in the space are splitting the difference by shifting toward solid credits from the likes of Mexico, Indonesia, and Saudi Arabia, away from higher-yielding names. ‘We are not chasing risk in our portfolios,’ says Samy Muaddi, portfolio manager for emerging market bonds at T. Rowe Price.”
“Expectations that the Fed will stay higher for longer have undercut one driver for emerging market bonds: anticipation of interest-rate cuts in countries that tightened faster and more aggressively than the U.S. in 2022-23. These bets focused on Brazil, Mexico, and other Latin American sovereigns.”
“‘We have parted ways with the LatAm rate cutters after a massive run in the bonds,’ says Michael Kelly, head of PineBridge Investments’ multi-asset strategy.”
“Another driver was policy reform in countries that were either in or threatened with credit default, from Argentina and Nigeria to Egypt and Turkey. This year’s unlikely fixed-income stars are Argentina and Ecuador, where new presidents promising fiscal stringency have returned up to 80% for bondholders, Goncharov says.”
“Emerging markets, with their enormous diversity, remain fertile ground for bond pickers. Another 2024 macro story—rising commodity prices—is creating value in the debt of oil exporters like Colombia and Nigeria, says Eric Fine, head of emerging markets active debt at VanEck. Nigerian dollar bonds maturing in 2028 are yielding around 9% annually. Three-year paper from Mexican state oil producer Pemex pays 9.5%.”
“PineBridge’s Kelly sees bargains in Asian high-yield corporate debt. The travails of Chinese property developers are obscuring value elsewhere, he argues. For instance, Indian utilities, which are borrowing heavily to power the new great growth economy.” Craig Mellow reports.
AGOA To Expand to All of Africa and Extend to 2041, US Says
The East African
“The US Congress has put forward proposals that would see the African Growth and Opportunity Act (Agoa) extended to 2041.”
“Senators Chris Coons of Delaware and James Risch of Idaho last week introduced the bipartisan Agoa Renewal and Improvement Act of 2024, which would see Agoa cover 54 African countries.”
“The extension is expected to integrate Agoa with the African Continental Free Trade Agreement (AfCFTA) to support the development of intra-African supply chains Enacted in 2000, Agoa is due to expire next year.”
“Speaking in Nairobi during the fourth edition of the regional American Chamber of Commerce Kenya (AmCham) business summit, US Secretary of Commerce Gina Raimondo said the plans to extend Agoa were on course.”
“‘President Biden and our administration have made it a priority to renew Agoa. It is the decision of the US Congress, so we have to work with some of the members,’ Ms Raimondo said.” The East African reports.
New Projects to Increase Qatar LNG Production by 85%
The Peninsula
“Qatar’s LNG production capacity expansions are being driven by a stronger global LNG demand growth outlook, stated Fitch Solutions in its latest report. Recently, QatarEnergy announced the addition of the greenfield North Field West (NFW) LNG project, which is estimated to have a 16 mtpa LNG production capacity, which comes as an addition to the North Field East (NFE) and North Field South (NFS) projects that are currently underway.”
“The three greenfield projects, with a combined LNG production capacity, are expected to augment Qatar’s LNG production capacity by 85 percent from 77 million tonnes per annum to 142 mtpa by 2030.”
“The report said: ‘Qatar’s announcement of the NFW project came after the Biden administration’s decision to pause approvals for pending and future applications to export LNG from new projects in the US, as well as the US’s opposition to the startup of Russia’s Arctic LNG Phase 2 project.’”
“It further noted that ‘Regardless of US policies to curb LNG exports, the rosy outlook for global LNG demand growth is a key driver behind Qatar’s LNG production capacity expansions and its ambition to expand its footprint in the global LNG market.’”
“On the other hand, the analysts also remarked that Europe’s struggle to reduce dependence on Russian gas offers vital opportunities for Qatar to expand its LNG production capacities.”
“Europe is emerging as a new frontier in the LNG industry as a rising number of countries aim towards LNG as a replacement for Russian gas. Numerous new LNG import terminals are being planned or built to accommodate the growth in LNG demand.”
“Qatar is seeking to expand its footprint in Europe’s LNG market, although the continent is currently dominated by the US. Even though the US joined the global LNG market as recently as 2014, it has overtaken Qatar and Australia to become the largest LNG exporter in 2023, with total exports rising to a record high of 90 mtpa in 2023.”
“Although the US leads in terms of LNG exports to Europe, Qatar has secured a number of long-term supply agreements with European customers in recent years.” Joel Johnson reports.
Cnooc Posts Record 1Q Net Profit
Wall Street Journal
“Cnooc reported a record high net profit for the first quarter, supported by increased efforts in oil and gas exploration, and steady growth in net oil and gas production. The Chinese oil major on Thursday posted a net profit of 39.72 billion yuan (US$5.48 billion) for the quarter, up 24% from a year earlier. Its revenue rose 14% to CNY111.47 billion.”
“Cnooc also reported a 21% rise in oil-and-gas sales, the company’s main source of revenue. It attributed this strength to higher realized prices of these products, as well as higher oil and gas sales volumes.”
“Total net production of oil and gas rose 9.9% to 180.1 million barrels of oil equivalent. Brent crude, the global benchmark, rose about 14% during the first three months of 2024, driven by geopolitical uncertainty amid the continuing Israel-Hamas and Russia-Ukraine conflicts.” WSJ reports.
Mexico Manufacturing Rising - The US Is Buying In, and So Is China
CNN
“As US supply chains decouple from China, Mexico’s manufacturing sector is emerging as a winner. Manufacturing in Mexico is attractive for companies that experienced pandemic-era supply chain snarls or want to decrease reliance on trade between the US and China amid geopolitical uncertainty.”
“That’s called nearshoring, which is when companies bring production facilities closer to home markets. As nearshoring continues and global supply chains are reorganized, Mexico’s manufacturing sector has an opportunity for long-term success, according to Alberto Ramos, head of Latin American economics research at Goldman Sachs, who spoke with CNN.”
“Ramos said Mexico and China have been competing for the US manufacturing market for years, but amid a shifting US-China relationship, Mexico looks poised to pull ahead. Mexico surpassed China as the top exporter to the US in 2023. Those exports were driven by manufacturing, which comprises 40% of Mexico’s economy, according to Morgan Stanley.”
“US imports from Mexico continued to increase in February, according to April 4 trade data released by the Commerce Department. Meanwhile, Chinese exports to the US were down 20% in 2023, compared to 2022.”
“US Trade Representative Katherine Tai told CNN’s Julia Chatterley that supply chains have made the US economy over-reliant on the Chinese economy in the past.”
“Amid shifting geopolitics and competition, US and Chinese companies both see potential in Mexican manufacturing: Low labor costs, geographic proximity to American markets and the US-Mexico-Canada (USMCA) agreement — a free trade accord established in 2020 that makes trade in North America more cost-effective and efficient — are all factors contributing to a potential boom.”
Copper Surges Above $10,000/Ton After BHP Megabid
Bloomberg
“Copper’s surge to $10,000 a ton just days after the bombshell news that BHP Group is trying to buy Anglo American Plc is highlighting a core disconnect at the heart of the industry: miners just aren’t building enough mines.”
“The biggest producers all want to increase copper output to take advantage of rising demand in electric vehicles, grid infrastructure and data centers. BHP has made its $39 billion proposal to buy Anglo American in large part because the world’s biggest miner wants to grow in copper.”
“Yet, that bullishness still isn’t translating into the huge investments involved in developing new pits and shafts and associated infrastructure. A successful takeover would make BHP the biggest copper producer with about 10% of the market, but it won’t make any difference toward meeting the world’s supply needs.”
“Production from existing mines is set to fall sharply in the coming years, and miners would need to spend more than $150 billion between 2025 and 2032 in order to fulfill the industry’s supply needs, according to CRU Group.”
“‘Copper looks like the last remaining supply risk for the EV industry,’ said Bernard Dahdah, senior commodities analyst at Natixis SA. ‘In a net-zero scenario, we’re going to need a vast amount of copper, and we’re going to need a different strategy to boost supply.’ Bloomberg reports.
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