Amid election surprises, EM investors are bullish on local debt

EM investors pivot towards local bonds: In the wake of election disruptions that have upended the “long-standing” positions of major developing economies’ bond markets, emerging market investors such as Ashmore and Ninety One are shifting towards buying local bonds and relative value currency securities, Bloomberg reports. France’s decision to hold snap elections, for example, sent the EUR to its weakest in a month.

Investors are liking the risk: “We’ve been increasing the frontier risk, through both local bonds and FX derivatives. We like the story in Egypt, we like some of the stories in smaller Latin American names. We’re trying to diversify and not load up,” Christine Reed, a portfolio manager at Ninety One told Bloomberg.

Election “surprises” have triggered the search for alternative return avenues, with the MXN — once favored for carry trades — currently losing investor favor after a bout of volatility following the elections, with concerns that potential economic reforms will increase the government’s influence in the economy. Meanwhile, the Polish PLN is gaining traction for its perceived insulation from political volatility.

Appetite for Turkey’s debt is also on the rise: In Turkey, the post-election economic overhaul, including the central bank’s aggressive rate hikes and investor-friendly policies, have sparked a surge in demand for local-currency assets, with foreign holdings of TRY-denominated bonds jumping tenfold in a year, reflecting investors’ confidence.

What are EMs’ selling points? “We see cleaner positioning as a positive technical factor, but more importantly for us is a country’s monetary and fiscal policy stance, and inflation and growth profiles. Otherwise, we are running the risk of picking up pennies in front of a steamroller,” says Valentina Chen, co-head of emerging-market debt at Mackay Shields.

MARKETS THIS MORNING-

Asia-Pacific markets are mixed on their return from a public holiday, with Japan’s Nikkei up 0.49%, while the Hang Seng is down 1.4% — seemingly unaffected by the rally over on Wall Street, which saw the Nasdaq and S&P 500 hit fresh highs yesterday.

THE CLOSING BELL-

The DFM fell 0.2% yesterday on turnover of AED 346.5 mn. The index is down 2.1% YTD.

In the green: National International Holding Company (+9.6%), Drake & Scull International (+6.4%) and Dubai Islamic Ins. and Reins. (+3.3%).

In the red: Commercial Bank of Dubai (-5.8%), Emirates Reem Investments Company (-2.6%) and Amanat Holdings (-1.9%).

Over on the ADX, the index rose 0.4% on turnover of AED 979.3 mn. Meanwhile Nasdaq Dubai closed up 0.9%.

CORPORATE ACTIONS-

Drake & Scull wraps up restructuring: Dubai-based contractor Drake & Scull has completed its restructuring after raising AED 450 mn in a capital increase and resuming trading on the Dubai Financial Market (DFM), it said in a DFM disclosure (pdf) yesterday. With the implementation of the restructuring plan, all lawsuits filed against Drake & Scull have been suspended.

The restructuring saw the contractor write off over AED 4.18 bn in accumulated debt, representing 90% of its total debt. For the remaining 10%, Drake & Scull will issue mandatory convertible sukuk to the larger creditors to be converted into shares five years from the issuance date, alongside a cash settlement totaling AED 13.6 mn to be distributed to small creditors owed less than AED 1mn.

ICYMI- Dubai–based Drake & Scull re-listed its shares on the DFM on 29 May, following a five-year hiatus. The construction firm’s shares were suspended from trading on the back of excessive financial losses and reporting violations.

SCA gave Drake & Scull the all-clear: “After obtaining approval from the Securities and Commodities Authority (SCA) the company has now reached a stage where it can resume its activities, participate in new bids, and secure new projects,” the contractor said in the statement. “This is a major achievement which opens new opportunities for the company to expand its operations within and outside the country by entering new bids, thus enhancing profitability, assets, and shareholders’ equity.”

Spinneys has tapped BHM capital as a liquidity provider for its shares on the DFM for one year, according to a DFM disclosure (pdf).

Takaful Emarat proposed to increase its share capital by an additional AED 60 mn, a DFM filing (pdf) reads. The capital increase would follow an earlier AED 185 capital increase approved in February, and would bring its total share capital to AED 210 mn. The proposal is still pending regulatory approvals and agreement from shareholders at the upcoming general assembly, set to take place on Friday, 14 June. The ins. company posted a net loss of AED 132 mn in 2023.