17 to 23 October: Super Tankers Passing in the Night

The success of this week’s USD 17bn Saudi Arabian bond market debut reiterated the global hunt for yield. Indeed, it was the 3rd time this year the record was broken for the size of an emerging market issue (previous best was USD 7bn by Qatar in 2009).

Just like super tankers, fund flows and, in turn, economies have considerable momentum and therefore change direction slowly and with difficulty. We think the early warning signs for the bond market ship are flashing – in particular a greater tolerance for inflation and potential changes in policy towards fiscal stimulus and steeper yield curves. Indeed, despite the success of the Saudi deal, the last few months has been characterised by a rebound in bond yields and last week saw the first large redemption from emerging market bond funds since January. On the other side, positive flows towards emerging market equities have started this year but allocations and valuations have only recovered to (approximately) historical averages. Given also the expensiveness of developed market alternatives and the sanguine reaction to the recent USD rally, we think this boat has considerable distance to sail.

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