Emerging market corporate debt is a largely misunderstood asset class as general perceptions have not kept up with reality. Our Emerging Markets Fixed Income team looks at how the asset class has evolved over recent years and dispels some of the key myths surrounding it.
Key takeaways:
- EM corporate debt has matured into a large, higher quality asset class, growing five fold since 2008 to around USD 2.5 trillion, with close to 60% now rated investment grade.
- Fundamentals are strong and improving: leverage has fallen back to historically low levels, margins and interest coverage ratios compare favourably with US peers, and default expectations have normalised.
- Valuations remain attractive despite better fundamentals, with EM corporates offering a spread premium over developed market credit across both investment grade and high yield segments.
- Liquidity and risk adjusted returns have improved materially, supported by a broader investor base, negative net issuance, and strong long term Sharpe ratios – making active, selective exposure particularly compelling.
When it comes to investing in emerging markets (EM), there are long held assumptions and biases that often go unchallenged. And with defaults likely to rise in high-yield corporate credit markets over the next 12-18 months, investors will need to be clear-headed and sighted.
EM corporate debt, which has grown out of the shadows of the EM hard-currency sovereign bond market, has expanded significantly since the global financial crisis. From a starting base of approximately USD 500 billion in 2008, the asset class has grown five-fold to USD 2.5 trillion and is between euro investment grade and US agency debt in terms of market size.
Strong fundamentals, attractive valuation and improving secondary market trading volumes have all led to a broadening of the investor base.
A deep bench of seasoned portfolio managers and research analysts is vital to developing a nuanced view of the emerging markets corporate opportunity set.
