Source: Bloomberg

The difference between emerging market (EM) and US corporate BBB Option-Adjusted Spread is at an all-time low. The difference between EM volatility and VIX is around the average. This chart begs the question: Is there a trade in shorting credit and buying equity?

The comparison isn’t a precisely equivalent due to different index composition. The bonds are more heavily Latin American and the spreads are helped by the revival in commodity prices. Still, there are Asian shorts to be found. There are five to seven Asian bond issues every week. They are all oversubscribed and some dogs are getting priced at very low yields. They are widely held among the Blackrocks, Pimcos and other funds. Once you have a benchmark-sized bond the funds have to buy it.

Several EMs are at very low multiples. Korea presents an opportunity as the political and strategic situation has put a tremendous risk premium on the market. India is rich. A rotation trade may be in order rather than an aggregate short. Modi’s win in Uttar Pradesh was epochal, and the media doesn’t know how to evaluate it. He is 100% assured of the upper house and the focus is pet projects: Infrastructure, micro-finance initiatives, and so forth. The Index is weighted heavily towards tech companies and exporters, which are overvalued. Focus on beaten-up sectors, such as steel and cement and power. The Constituents of the Index will change over two years.

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