Wednesday28 August 2019 ★ FINANCIAL TIMES 19MARKETS & INVESTING
AMY KAZMIN— NEW DELHINarendra Modi’s government
delighted yield-hungrybond buyers in
July when it unveiled plans to raise
$10bn with its firstforeign currency-
denominated sovereign bond — an
issue intended to broaden the pool of
investors willing to buy Indian paper.Butthe prospects for theIndian issue
arein doubt after a flurry of high-profile
warnings that the move would expose
New Delhi to dangerous foreign cur-
rency risk — something it has always
avoided until now.
Those who have expressed concerns
about the plan range from Raghuram
Rajan, former governor of the Reserve
Bank of India,togovernment allies,
such as Swadeshi Jagran Manch, the
economic arm of the rightwing Rash-
triya Swayamsevak Sangh, the parent
organisation of Prime Minister Modi’s
ruling Bharatiya Janataparty.
New Delhi has not openly admitted to
having second thoughts but, weeks after
the plan was announced, the adminis-
trationabruptly removedSubhash
Chandra Garg, the top finance ministry
bureaucrat, who had publicly champi-
oned the international bond issue and
had promised to launch it in October.Many economistsstill believe the
chance for New Delhi to meet some of its
financing needsby exploiting low global
interest rates is something the govern-
ment cannotnot ignore, given its huge
fundingrequirements.
“Even the ropiest emerging markets
are borrowing at ridiculously low
yields,” said Saurabh Mukherjea,
founder of Marcellus Investment Man-
agers. “The money is so ridiculously
cheap that I can’t see a party like the BJP
— with its core base of traders — being
able to resist the temptation.”
But others believe New Delhi might behaving second thoughts. “My hunch is
that they are rethinking it,”said Vivek
Dehejia, an economics professor at Car-
leton University.
Sonal Varma, chief India economist at
Nomura,said theinternational bond
issuewasseen as a tool to help widen the
investor base for Indian paper, amid
growing concern that New Delhi’s
absorption of domestic borrowingswas
crowding out private investment.
New Delhi has shied away from bor-
rowing in overseas marketssince its
independence from colonial rule, opting
to encourage foreign investors to buy
rupee-denominated bonds in domestic
markets.
Many reckonthis cautiousapproach
has helped Indiaavoid a frequent cycle
of currency and overseas debt crisis,
such as those experienced by Latin
America. India’s ratio of external debt to
gross domestic product isbelow20 per
cent, one of the lowest among anyEM.
However, Mr Modi’s government has
considered tapping markets amid aglo-
bal bond rally that has seen high-grade
debt yields fall into negative territory.
Such plans have not been well-
received in some quarters.SomeIndi-
answarn that New Delhi could end up
hooked on cheap overseas debt whileFixed income
India’s $10bn foreign currency bond in doubt
ORTENCA ALIAJ— LONDON
COLBY SMITH— NEW YORKAutonomy Capital, a $6bn hedge fund
specialising in emerging markets, has
become one of the biggest losers from
the rout of Argentina’s financial mar-
kets after thesetbackto President
Mauricio Macri’s re-election prospects.The founder of the New York-based
fund, said, however, that the price
plunge was a buying opportunity.
The fund led byRobert Gibbins, also
chief investment officer,fell 16.3 per
cent in the first two weeks of August,
said a person familiar with the firm.
The decline, triggered by a primary
election result on August 11 that sug-
gested Alberto Fernández, the Peronist
candidate, is favourite to win October’s
presidential poll, more than wiped out
Autonomy’s gainsfrom earlier this year.
Mr Gibbins told investorsthat “Argen-
tina is in the beginning of a normalisa-
tion process” and that “Alberto Fernán-
dez will not be a puppet” ofCristina
Fernández de Kirchner, the populist
former president who is Mr Fernández’s
running mate.
Autonomy was up 17 per cent in 2018,making it one of the top-performing
hedge funds while most other managers
struggled with market volatility.
Mr Gibbins said investors had over-
reacted to the primary election and said
the starting point for Argentina now is
different to where it was almost two dec-
ades ago, when itdefaulted on almost
$100bn of debt.
He has long been bullish on Argen-
tina’s prospects despite concerns that its
bond and stock markets were at risk of
being overvalued. In a letter to investors
last October, he said a$57bn IMF bailout
and efforts by the Macri government
laid the foundations for “Argentina to
rise like a phoenix from the ashes”.
The primary result caused the peso to
losemore than a fifth of its value against
the US dollar. The Merval stock index
fell 48 per cent in dollar terms in a single
day.
Some of Autonomy’s peers and other
investment managers were also wrong-
footed by the change in sentiment.
Funds run byMichael Hasenstab,
Franklin Templeton’s high-profile bond
fund manager,lost $1.8bnin one day.
Additional reporting by Lindsay Fortado in
New YorkAsset management
Autonomy Capital sinks 16%
after Macri election blow
Raghuram Rajan has expressed
concerns about the bond proposalFastFT
Our global
team gives you
market-moving
news and views,
24 hours a day
ft.com/fastftROBIN WIGGLESWORTHFears over recession are once again
stalking markets, but many investors
and analysts are more worried about a
deeper, more structural shift — that the
world economy is succumbing to a
phenomenon dubbed “Japanification”.
Economists use the term todescribe
the country’s nearly 30-year battle
against deflation and anaemic growth,
characterised by extraordinary but
ineffective monetary stimulus propel-
lingbond yieldslower even as debt
burdens balloon.
Analysts have long been concerned
that Europe is succumbing to a similar
malaise but were hopeful thatthe US —
with its better demographics, more
dynamic economy and stronger post-
crisis recovery — would avoid that fate.
But with US inflation stubbornly low,
the tax-cut stimulus fading and the
Federal Reserve having cut interest
rates for the first time since the financial
crisis, even America is starting to look a
little Japanese.
Throw in the debilitating effect of
trade tension and some fear thatJapani-
ficationcould go global.
“You can get addicted to low or nega-
tive rates,” said Lisa Shalett, chief
investment officer at Morgan Stanley
Wealth Management in New York. “It’s
very scary. Japan still hasn’t gotten
away from it... The world is in a very
precarious spot.”
The primary symptom of spreadingJapanification is the rise of negative-
yielding debt, which has accelerated
over the summer. There aremore than
$16tn worth of bonds trading with sub-
zero yields, ormore than 30 per cent of
the global total.
Japan is the biggest contributor to that
pool, accounting for nearly half the
total, according to Deutsche Bank.
But the entire German and Dutch gov-
ernment bond markets havenegative
yields. Even Ireland, Portugal and Spain
have seen big parts of their bond mar-
kets submerged below zero.
As a result, the US bond market is no
longer the best house in a bad neigh-
bourhood: it is pretty much the only
house still standing.
US debt accounts for 95 per cent of the
world’s available investment grade
yield, according to Bank of America.
The US economy continues to expand
at a decent pace, with strong consump-
tion offsetting a weaker manufacturing
sector. Even inflation has ticked up a lit-
tle. But some economists fret that a
manufacturing contraction will inevita-bly affect spending, soforecasts have
been cut for this year and next. Some
even feara recession may be looming.
“Black hole monetary economics —
interest rates stuck at zero with no real
prospect of escape — is now the confi-
dent market expectation in Europe and
Japan, with essentially zero or negative
yields over a generation,”Larry Sum-
mers, the former Treasury secretary,
saidlast weekend. “The US is only one
recession away from joining them.”
He added: “Call it the black hole prob-
lem, secular stagnation, or Japanifica-
tion, this set of issues should be what
central banks are worrying about.”
The global economy’s darkening out-
look was certainly a major topic atlast
week’s annual central bankers’ jambo-
ree at Jackson Hole.
Mostremain optimistic that a US
recession can be averted, given that the
Fed has shown its willingness to cut
interest rates to support growth.
Instead, a scenario something akin to
Japan’s looks more likely, judging from
elevated stock prices and interest ratefutures. While this might appear more
benign than a full-blown downturn, the
implications are far from positive.
For one, it might mean that bond
yields are going to stay lower for much
longer. This might be good news for bor-
rowers but, as Japan showed, persist-
ently low rates do not necessarily invig-
orate economic growth.
And for long-term investors, such as
pension funds and insurers that depend
on a certain return from fixed-income
instruments, low rates can present a lot
of difficulties.
It is particularly problematic for
“defined benefit” pension schemes, for
example, which calculate the value of
their long-term liabilities using high-
grade average bond yields.
When yields fall, pension providers’
expected returns dim, their funding sta-
tus deteriorates and they have to set
aside more money.
The pension deficit of companies in
the S&P 1500 index rose by $14bn in July
to $322bn largely because of falling
bond yields, according to Mercer.
In the UK, it rose £2bn to £51bn for
FTSE 350 companies — that was even
before August’s tumbles in bond yields.
Nor is the prospect of Japanification
an appetising one for investments out-
side the bond market, said John Nor-
mand, a senior strategist at JPMorgan.
“The prospect of broader, sustainable
Japanisation when growth, inflation and
bond yields are already depressed
shouldn’t comfort anyone,” he said.
“When Japanisation is shorthand for
an anaemic business cycle, credit and
equity investors should question the
earnings outlook, recalling that Japa-
nese equities underperformed bonds
for most of the country’s ‘lost decade’.”Rise in negative-yielding debt
accelerates over the summer,
heightening deflation worries
‘You
can get
addictedto low or
negativerates. It’s
very scary’Distorted
economy:
Japan’s long
battle against
weak growth
trends is being
mirrored across
the globe
Toru Hanai/ReutersFixed income.Recession risk
Investors fear Japan’s stagnation
malaise is spreading globally
Japanification in action
-year government bond yields ( )UKGermanyJapanUSSource: Bloomberg- PHILIP GEORGIADIS AND
TOMMY STUBBINGTONInvestors are flocking to Greece as the
former financial market pariah emerges
from a decade of economic crisis,
sending stock prices soaring and
borrowing costs tumbling.
The finance ministry announced this
week that capital controls imposed fol-
lowing a 2015 bank run will be fully
lifted on September 1, meaning Greek
households and companieswill no
longer face restrictionson transferring
money abroad.
The development marks a milestone
in the country’s rehabilitation in the
eyes of investors, many of whom have
overcome memories of turmoil to
plough back in to Greek assets.
Ten-year government bond yields
dropped as much as 14 basis points yes-
terday to 1.826 per cent, their lowest
level on record, bringing total falls for
the year to 250bp.
The plunging cost of borrowing
reflects a stark turnround from the
darkest days of the eurozone sovereign
debt crisis when Athens was frozen out
of international capital markets.
“It’s a reflection of how far Greece has
come,” said Nick Wall, a portfolio man-
ager at Merian Global Investors, who
holds Greek government bonds. “Yields
do seem extraordinarily low. But every-thing else is extraordinarily low. People
will keep buying it for the positive yield
it brings.”
The sharp moves are part of a broader
rally in eurozone debt which has pushed
yields on a large part of the eurozone’s
sovereign debt marketbelow zero.
But Greece has been a particular ben-
eficiary. The spread between Greek 10-
year bond yields and their German
equivalent, a proxy for investors’ con-
cerns over Athens’ economic outlook, is
down to 2.5 percentage points, from a
high of nearly 40 points during the most
intense phase of the crisis in 2012.
Mr Wall said the growing confidence
among investors reflected Greece’s
healthy budget surplus and the co-oper-
ative attitude towards EU institutions of
the newcentre-right governmentled by
Kyriakos Mitsotakis.
“What markets didn’t want to see was
the new government going against the
wishes of European partners,” he said.
“The capital controls move was
expected but the fact that it was done
[while] making sure that the EU author-
ities were consulted was a good sign.”
Greek stocks are also surging. The
Athex composite index has risen 35 per
cent this year, leaving it on track for its
best year since 1999 and outgunning the
10 per cent gain of Europe’s benchmark.
Ricardo Garcia, chief eurozone econo-
mist at UBS Global Wealth Manage-
ment,said the market had given “some
advance credit” to the government’s
economic reform programme.Fixed income
Greek yields
hit record low
after capital
controls move
‘What markets didn’t
want to see was the new
government going againstEuropean partners’ wishes’
taking unnecessary currency risk itself.
Others fear it coulddamp interna-
tional appetite for the rupee-denomi-
nated sovereign bonds India issues
domestically.
“What we believe is that it is an
imprudent decision and it’s a dangerous
one,”said Ashwani Mahajan, national
co-convener of the Swadeshi Jagran
Manch. “Nowhere in the world have
countries been able to gain after bor-
rowing from abroad in external cur-
rency. Not Latin American countries.
Not Turkey.”
He added: “The very claim that this is
a cheaper mode of borrowing is not cor-
rect. You are borrowing at a lower inter-
est rate now but there is definitely a
depreciation of our currency.”
Amid the arguments, market expec-
tations of an imminent issuehave
dimmed.Economists said the Indian
government was instead looking at
alternative options to meet its financing
needs. But,with India’s growth stalling,
few expectan imminent decision.
“It looks like it’s on the backburner
n o w,”said Ms Varma. “There has been a
lot of internal debate on the risk-reward
around this sovereign bond issue and it
seems like the government may have
gone back to the drawing board.”
RELEASED
Chandra Garg, the top finance ministryRELEASED
Chandra Garg, the top finance ministry
bureaucrat, who had publicly champi-RELEASED
bureaucrat, who had publicly champi-
oned the international bond issue andRELEASED
oned the international bond issue andBYtration
BYtration
Chandra Garg, the top finance ministryChandra Garg, the top finance ministryBY"What'shaving second thoughts but, weeks after"What'shaving second thoughts but, weeks after
the plan was announced, the adminis-
"What'sthe plan was announced, the adminis-
trationtration"What's "What's abruptly removedabruptly removedNews"ruling Bharatiya JanataNews"ruling Bharatiya Janata
New Delhi has not openly admitted to
News"New Delhi has not openly admitted to
having second thoughts but, weeks afterhaving second thoughts but, weeks afterNews"vk.com/wsnwshaving second thoughts but, weeks aftervk.com/wsnwshaving second thoughts but, weeks after
the plan was announced, the adminis-vk.com/wsnwsthe plan was announced, the adminis-
abruptly removedvk.com/wsnwsabruptly removed
Chandra Garg, the top finance ministryvk.com/wsnwsChandra Garg, the top finance ministry
bureaucrat, who had publicly champi-
vk.com/wsnwsbureaucrat, who had publicly champi-
oned the international bond issue andoned the international bond issue andvk.com/wsnwsTELEGRAM:bureaucrat, who had publicly champi-TELEGRAM:bureaucrat, who had publicly champi-
oned the international bond issue andTELEGRAM:oned the international bond issue and
had promised to launch it in October.TELEGRAM:had promised to launch it in October.t.me/whatsnwsNew Delhi has not openly admitted tot.me/whatsnwsNew Delhi has not openly admitted to
having second thoughts but, weeks aftert.me/whatsnwshaving second thoughts but, weeks after
the plan was announced, the adminis-t.me/whatsnwsthe plan was announced, the adminis-
abruptly removedt.me/whatsnwsabruptly removed
Chandra Garg, the top finance ministry
t.me/whatsnwsChandra Garg, the top finance ministry
bureaucrat, who had publicly champi-bureaucrat, who had publicly champi-t.me/whatsnws