Differentiation has moved from buzzword to reality in emerging markets investment.
According to Robert Whichello, global head of syndicate at BNP Paribas, two years ago investors would buy any EM deal that came out. Now there are sovereigns, corporates and financial institutions that are looked at more closely and generating books for new deals isn’t a given. Whichello told conference delegates at a LatinFinance conference in São Paulo that differentiation was clearly now a market reality for EM investors, if not yet for developed markets.
"It’s healthy – a little more cynicism has entered the market for EM, which hasn’t happened globally," he said.
Brazil’s Banco Daycoval illustrates this well. During the roadshow for its recent $500 million international bond the bank’s CFO, Morris Dayan, met with investors from the US, Europe and Asia, and he says that none had a positive view about Brazil.
"All the investors were very pessimistic about Brazil and none had anything positive to say about the country," says Dayan. "They were worried about the politics, they were very worried about the big banks – and the small banks. It was very challenging – our answer was the same: we are also very pessimistic about Brazil but very optimistic about our business. Investors then look to the credits of the specific transaction."
The bank upsized the deal on strong demand. One banker tells Euromoney of his surprise when on a recent deal roadshow with a Chilean financial institution a lot of time was spent differentiating Chile from the rest of Latin America. "Frankly, in recent years the macro story hasn’t been discussed in much detail, but now the bank was making a painstaking presentation about why Chile is different from the rest of the region and why it has been investment grade for the best part of 10 years," he says.
Even for those with a nice line in black comedy, the punchline is differentiation. "Brazil is the new Argentina; Argentina is the new Venezuela and Venezuela is the new Cuba," quipped one banker. But this is all based on a serious point: investments will now likely vary far more widely in performance, by country, sector and credit.
"Portfolio returns will also become more differentiated and those managers that underperform will face tough questions and unhappy investors. Differentiation, meaning credit-specific analysis, will be crucial to determining whether an EM portfolio takes a gentle hit or a proper beating. Or as BNP’s Brazil economist Marcelo Carvalho neatly puts it: "Investing in EM is no longer black and white. It’s 50 shades of grey."