Fitch Ratings' second annual Emerging Markets conference, held recently in London, started off positively enough. While presenting slide after slide of optimistic news for investors looking for potential opportunities in the sector, the rating agency noted that in 2007 most sovereign ratings of countries with active ABS markets were listed as "positive."
By the end of the conference, however, some market experts turned to warning participants of the pitfalls that menace such ventures. In the final and perhaps most relevant panel, titled "EM Securitizations: Is the Party Over or Is It Just Getting Started?" the three keynote speakers offered words of caution to attendees.
Armin Lindtner, of Europe, the Middle East and Africa (EMEA) Global Structured Finance & Investments at Merrill Lynch, said that a greater knowledge in the inner workings of some of the countries was necessary to learn for investors who are new to the market. However, in his experience, many are reluctant to educate themselves on these intricate legal aspects.
While there are many good deals to be had in Russia in particular, Lindtner continued, European asset-backed securities investors might be missing the boat by being overly cautious, an attitude they adopted during the recent credit crisis. Further, the conservative nature of the investors, mixed with an unwillingness to diversify, is making them unapproachable. Merrill Lynch has more than enough supply of securities, but lacks the demand.
Nicholas Winther at Standard Chartered Bank, added that it may be a few years before spread levels are back to similar forms seen in June 2007. A prolonged liquidity crisis in Europe may lead to problems in the future for emerging markets, he added. For now, however, solid investments exist.
Moderator Jaime Sanz of Fitch Ratings took a moment to remind audience members that education and speculations on the future needn't overly concern investors, adding that, "We have a fairly good grip on what this market looks like." Indeed, the ratings agency provided a phone-book sized file full of charts, graphs and reports to support Sanz's view.
Speaker Adrian Dommisse of UniCredit added that while emerging markets look as sound as any ABS investment, there are still some variables that can't be easily quantified. For instance, many residential mortgages in Russia are written in United States dollars, which is great for now considering the dollar's weakness in the foreign-exchange markets. But for the guy in Moscow, who gets paid in rubles, if the dollar climbs and his wage currency dips, he may face difficulties in repaying. But it is an unlikely scenario, the panel added, as incomes in Russia are, and have been, rising at a rate greater than house prices.
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