(March 27, 2013) -- Quantitative easing (QE) has become a bit of a catchall scapegoat among institutional investors.
In these pages alone it has been blamed for ballooning corporate pension deficits, market shortages of inflation-linked bonds, and mounting risk appetites. Guggenheim CIO Scott Minerd called QE a "Faustian bargain," and a Société Générale analyst warned that it could lead to French Revolution-style civil unrest.
But according to a commentary from Investec Asset Management, loose monetary policy is too easy an explanation for at least one financial trend: falling real yields in emerging markets.
Author Thanos Papasavvas, a strategist with the firm's fixed income and currency team, argued that there are more factors at play than investors may realize. Real yields in emerging and developed markets began to converge long before central banks opened liquidity floodgates following the financial crisis, he wrote. Investec's analysis showed average real yields in emerging markets have fallen fairly consistently since 2003, while in developed nations they only began dropping in 2008. From 2007 to the close of 2012, the former fell from 3.5% to 1.0%, while the average real yield for G7 nations sunk from 2.0% to -0.3%.
Abundant global liquidity is certainly a factor in this convergence of yields, Papasavvas acknowledged, but he and his fellow Investec analysts also cited four other factors at work in emerging markets:
1.) Higher domestic savings rates. Emerging economies, particularly in Asia, have generally experienced high rates of saving, according to the commentary. This has allowed the markets to maintain low yields and fast growth without the negative effects of inflation.
2.) Lower credit risk. Investors no longer require the same level of compensation for credit risk from emerging market sovereign debt as they did ten or so years ago, as credit ratings have improved.
3.) A reduced inflation premium. At least a dozen major emerging economies have implemented some form of inflation targeting since the early 1990s, according to the note, leaving less of a risk premium for investors.
4.) Weak economic growth post-2008. Developing nations felt a drag on growth from the financial crisis, and many have not returned to their pre-crisis expansion rates. Central banks, in turn, have cut policy rates to encourage investment.
What do these factors mean for emerging market debt? Investec analysts projected that they won't be a match for the US Federal Reserve's continued stimulus. A real yield spread between emerging and developed markets will persist in the short term, the note said. "We expect emerging market debt to generate positive returns for the year; however, for those worried about rising yields, we favor local currency over hard currency emerging market debt in terms of outperformance."