Outlook on emerging-market corporate debt

 

 

Union Bancaire Privée’s Koon Chow, Macroeconomics and Rates Strategist, and Denis Girault, Head of UBP’s emerging-market bond team, give an overview of the investment areas and bond segments to be favoured over the coming months.

 

 

The fall in the price of crude oil and relatively low global inflation – which itself is affected by China’s manufacturing overcapacity – is changing the deal for emerging markets, which are having to meet the challenge of new growth models. Logically, the drop in the oil price is having a disparate impact on these economies: the main oil-producing countries, such as Venezuela, Russia, Nigeria and Iraq are suffering, as, when the price of a barrel of oil slides by USD 10, their current accounts are negatively impacted to the tune of between 2% and 4%. In contrast to this, there is a positive effect on the current accounts of consumer countries, such as Chile, China and India, as well as those in South-East Asia.

These conditions justify a more selective approach to emerging markets than before. According to UBP’s team, the outlook is very favourable for countries that can implement far-reaching structural reforms. We are very positive on India and Indonesia, where growth forecasts are solid thanks to these countries’ fiscal reforms and new investment laws.

Despite the negative impact of the oil price, Colombia is also benefiting from economic reforms. The public investment in infrastructure development is designed to provide sustained support for Colombia’s economic growth.

In terms of issuer profiles, Denis Girault believes that investment-grade corporate debt denominated in strong currencies is currently the most attractive segment in the emerging-market bond universe. The continued rise in the US dollar, buoyed by the US Federal Reserve’s round of monetary normalization, favours debt issued in strong – rather than local – currencies.

Corporate bonds should be preferred over government debt, as their risk-adjusted yield prospects are better: the average quality of corporate debt is higher (BBB vs. BBB-), there is greater diversification amongst issuers and the rate risk is considerably lower. Institutional investors – who traditionally tend to approach bond markets via sovereign debt – are increasingly coming out in favour of corporate debt because of these qualities.     

UBP’s team prefers investment-grade over high-yield issuers. In the long term, inflows from institutional investors will continue to help expand the investment-grade segment, which is less volatile than the high-yield segment. In comparison with developed markets, investment-grade, credit spreads are more attractive as they offer a higher valuation potential.

The less favourable borrowing conditions in certain emerging countries (given rising interest rates coupled with weaker local currencies) will penalize lower-quality lenders, leading to increased caution on the high-yield segment, but it is still an attractive means of diversification for the euro investor.

 

 

 

 

About Denis Girault

Denis Girault is Head of Emerging Markets Fixed Income at Union Bancaire Privée. He joined UBP in 2007 from Barclays Capital, where he was a director in the debt origination group in Hong Kong. He also worked for Merrill Lynch.

He started his career at Moody's Investors Service in New York where he managed various high yield portfolios, and has now 21 years of experience in the financial industry.

Denis holds a Master’s degree in business administration from the University de Louvain, Belgium and an undergraduate degree in economics from the University de Strasbourg, France. 

 

 

About Koon Chow

Koon Chow is responsible for analyzing the macroeconomic developments in EM fixed income markets at Union Bancaire Privée. He is also in charge of formulating investment allocation recommendations on this analysis. Before UBP, Koon worked as Managing director, head of EM local markets strategy and EMENA economics at Barclays Capital.

 

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