Euro Denomination’s Singular Corporate Signposts
The euro-specific corporate universe now stands over $150 billion or one-tenth the total, and the investor base from investment-grade to high-yield buyers despite the absence of a currency-specific benchmark, according to new JP Morgan research. Fund managers often switch or add exposure along the curve in names like Pemex and Petrobras, even as all-in yields are lower, and the ECB’s recent targeted purchases up to EUR 10 billion/month have strengthened the trend. Russian and Brazilian rating downgrades increased representation in Global speculative euro indices to 10 percent, with sell side dealer sponsorship. Local, dedicated and crossover developed country investors are all active, with the domestic base most pronounced for Central Europe and Asia issues. The current spread over dollar counterparts is 30 basis points, the low this year reflecting risk-on sentiment and widespread flight from minimal-return advanced economy instruments. Latin America’s differential is almost double that number with defaults in Brazil and Mexico, and by regional size the Middle East-Africa lags at $20 billion. Two-thirds of the total outstanding is top-rated, and Europe retains a dominant weighting despite Russia’s recent disappearance under sanctions and repayment without rollover. Asia moved into the gap with $10 billion placed this year for one-third of activity, as borrowers recalculate currency hedging along with underlying costs.
Sovereign wealth funds have entered, but the latest Peterson Institute survey shows limited accountability and transparency among the 60 vehicles tracked across the governance and asset allocation spectrum. Only half are members of the international association promoted by the IMF and other bodies to strengthen disclosure and best practices, in response to fears that Asian and Gulf pools built on massive foreign exchange reserves, which dominate the $6 trillion field, could be secretive arms for geopolitical manipulation. Ten have over $100 billion on hand, led by China, the UAE, Kuwait, Russia, Korea and Singapore, although foreign ownership is typically a small portion. China’s CIC has one-quarter abroad, with assets up 5 percent to $200 billion in the past three years, according to its annual report. The four biggest each control at least $500 billion, and pension funds are growing as a subset of the universe topped by Japan’s over $1 trillion government scheme. The 2015 scorecard dropped previous representation from Kazakhstan and Venezuela as they were drawn down to combat internal crisis, and on a scale of 100 Azerbaijan, Chile, Trinidad and Tobago, and Nigeria got above 75. At the bottom were oil-flush Algeria, Libya, and Equatorial Guinea, while in the separate pension fund ranking Thailand (85) beat China (60). The median for all listings was 80, and emerging market members were just below that level. It rose 15 points from the original exercise a decade ago, especially since 2012 after the Santiago principles and permanent forum were launched. The organization has separate committees on oversight, investment management, and the global economy, and funds pledge to conduct and publish self-assessments. Non-members have also made progress, but the paper urges more detailed information on specific investments and currency composition, balance sheet audits and corporate responsibility policies. It concludes that the lack of provisions can invite “controversy” such as Malaysia’s 1MDB alleged misappropriations, in a sovereign struggle with an Emirates’ poor-scoring fund.
