According to “Bond Vigilantes”, EM debt is not so safe – and we agree.
“Right now, the strengthening US Dollar is starting to cause a lot of problems, not so much because external debt is excessive in emerging markets (Eastern Europe is an exception), but more because one of the most crowded trades in the world is to be long EM FX (specifically Asia FX) and short the US Dollar. Another crowded (albeit slightly stickier) trade is to be long Brazilian Real against the Japanese Yen. Japanese investors have considerable exposure to emerging markets, and JP Morgan has estimated that in the last three years almost ¥6 trillion has flowed from yield-hungry Japanese investors into Brazilian bond or Brazilian Real currency overlay retail investment trusts alone, which equates to about 5% of Brazil GDP. No wonder the Brazilian authorities have struggled to contain BRL appreciation. An unwind of these long EM FX/short USD or JPY trades could cause violent moves.”