From Argentina to Egypt: A Guide to EM’s Quirkier Risk Gauges

(Bloomberg) -- How adventurous are emerging-market investors feeling?

There are risk-appetite gauges for developing nations as a whole, but the asset class is vast, and its most powerful players typically overshadow the rest.

So here’s a look at four risk indicators that may often go under the radar:

Egypt Rate Decision

Egypt has been the world’s best carry trade this year. Holders of local bonds have made a total return of 37% in dollar terms, according to Bloomberg Barclays indexes, thanks to a strengthening Egyptian pound and average yields of almost 15%.

That’s made it something of an emerging-market favorite, a status helped by an International Monetary Fund program underpinning some much-needed economic reforms.

The reaction to the central bank’s rate decisions, then, have become a useful gauge of risk. In August, policy makers surprised economists with a deeper-than-estimated cut of 150 basis points, while in February of this year and in March 2018 they reduced costs by 100 basis points, defying forecasts for no change.

And each time, investors kept chasing Egyptian bonds, a sign of continued risk appetite in emerging markets.

The monetary authority committee’s next meeting is on Thursday. The consensus is for a 100 basis-point reduction, pared down from 125 basis points at the start of the week. The question now is: Will investor demand for returns outweigh concern over last weekend’s anti-government protests? If the answer is yes, than the hunt for yield is alive and well.

Nigerian Reserves

Nigeria is another country that benefited from the thirst for higher returns in the first half of the year. Many investors bought naira debt, attracted by rates about as high as Egypt’s.

As a result, Nigeria’s reserves rose by almost $3 billion to $45.2 billion between February and June. They’ve since lost most of those gains as investors fret about a weakened economy, double-digit inflation and rising protectionism.

The further reserves fall, the stronger the signal that investors are shying away from the riskiest emerging markets.

Central bank Governor Godwin Emefiele has a tricky balancing act. While he’d like to lower interest rates to boost economic growth, he said in an interview with Bloomberg TV on Tuesday that doing so could trigger more outflows.

Argentine Swaps

Holders of Argentine bonds have turned to so-called “blue-chip swaps” after the nation imposed capital controls this month.

These involve buying assets in the local currency and then selling them abroad. The controls, meant to quell money outflows, left some investors wondering whether they would be able to cash their checks as usual.

The blue-chip swap rate has widened against the official peso rate as the country’s financial markets sink further into turmoil. Any narrowing of the gap would suggest that sentiment toward Argentina is improving enough for some traders to exploit the arbitrage.

Pemex Fortunes

Mexico, Latin America’s second-largest economy, is showing signs of stress and President Andres Manuel Lopez Obrador is struggling to boost growth while simultaneously balancing the budget.

At the heart of Mexico’s fiscal struggles is state oil company Pemex, which accounts for almost a fifth of the government’s revenue and is trying to reverse more than a decade of declines in oil production. One telling metric is the spread of its bonds over the sovereign’s, which climbed to 3.6 percentage points after Fitch Ratings downgraded Pemex to junk in June.

It’s since settled near 2.8 percentage points. But if more investors expect a second Pemex downgrade it could widen again.

To contact the reporters on this story: Paul Wallace in Dubai at pwallace25@bloomberg.net;Andres Guerra Luz in Houston at aluz8@bloomberg.net;Justin Villamil in Mexico City at jvillamil18@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Justin Carrigan

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