Additionally, the maturity profile of the debt is what really matters. Issuers that have debt maturing in the next year have essentially two options: roll over the debt with a new issuance or set aside cash to pay off bond-holders. If a management team is going to require a large pool of dollars, the company will often seek to currency-match the assets and liabilities on its balance sheet in order to avoid fluctuations that could result from changes in currency rates near maturity. Also, after the last several years of low global interest rates, many companies have fully extended the maturity profiles of their debt, further reducing roll-over risk.
Myth #3: Investors Aren’t Committed to EM Corporate Credit
Among the major concerns, we find this one the least compelling, in light of reported under-weight exposure to emerging markets via the latest investor surveys.9 The argument goes that in searching for income around the world, U.S. and European investors have recklessly invested in anything with higher yields. As a result, risky borrowers in emerging markets have had too much access to cheap funding, and investors are exposed to increasing defaults once these flows subside. While U.S. dollar borrowing costs have fallen in emerging as well as developed markets (as global bond yields fell), a sizable premium still exists among comparable businesses operating in each region.10 Additionally, just because bond yields rise, that does not immediately mean that a borrower is likely to default. In most instances, leverage remains manageable for these businesses. While a rise in rates may be painful for some hot-money investors, dedicated emerging market investors, along with regional players from emerging markets (such as pension funds or insurance companies), would likely step in when other investors lose their heads. As we have seen several times, private banks, sovereign wealth funds, and insurance companies in Asia and the Middle East appear willing to deploy capital in other emerging markets as the asset class continues to evolve.
Although inflows to emerging market dedicated strategies have slowed, we believe that current fundamentals from select issuers represent an attractive opportunity for nimble, active managers. As in any other credit market, we could see negative surprises that challenge our outlook. But for investors who stay focused on fundamentals, many issuers with strong core franchises and well-established business models may represent attractive entry points near current levels.
1Source: Barclays, 3/24/15.
2Source: Barclays, 3/24/15.
3Source: J.P. Morgan, 3/31/15.
4Source: IMF, as of 3/31/15.
5Source: Barclays, as of 3/24/15.
6Source: J.P. Morgan, 3/31/15.
7Source: J.P. Morgan, 4/30/15.
8Source: Corporate disclosures, Fitch, 12/31/14.
9Source: EPFR, 3/31/15.
10Source: J.P. Morgan CEMBI Broad Index versus J.P. Morgan JULI, as of 3/31/15.
Important Risks Related to this Article
Investments in emerging, offshore or frontier markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments.