EM corporate debt long overdue attention

Like emerging market sovereign debt, emerging market corporate debt has shown impressive growth in the past decade and can rightly be considered an asset class in its own right.

Indeed, as the economies of emerging markets continue to develop and mature, the local corporate bond market should continue to expand to help finance and fund this growth.

Importantly, this asset class has the potential to offer attractive risk-adjusted returns in the medium and long term, and can help to improve the risk profile of a diversified investment portfolio.

Article continues after advert

It is important to recognise emerging corporate debt is lowly correlated with developed global bond markets. It has demonstrated largely robust qualities since the onset of the global credit crisis.

Emerging market corporate debt remains underinvested, but more investors are likely to recognise its robust fundamentals and income-generating potential, particularly as developed market bond yields continue to hover around record lows.

While emerging market corporate debt is largely denominated in US dollars, more corporates are expected to issue in local currency terms. Until then, the yield potential can be further enhanced through the addition of a passive currency overlay on core US dollar-denominated bonds.

At the regional level, debt issued by corporates in eastern Europe and the Middle East remains attractive, particularly in Russia. Sectors such as telecoms are well insulated from the vagaries of the global economy, with companies such as VimpelCom and MTS enjoying strong exposure to a thriving Russian consumer.

The improving debt profile of Dubai and its strong economic position is encouraging. This area has performed well in recent months, and there is further potential for strong returns.

Elsewhere, pockets of value are being detected in Asian high-yield corporate credit following the recent market sell-off.

In Latin America, Brazil has underperformed other areas of the emerging corporate universe this year, but the market should perform better from here, with yields converging towards levels in other emerging regions.

The recent weeks have seen heightened volatility in global markets as investors have responded nervously to the news that the US Federal Reserve will likely start tapering its quantitative easing programme towards the end of the year.

Emerging market corporate debt did not escape the sell-off. The JPM Corporate Emerging Markets Bond Broad Diversified index declined by 4.4 per cent in US dollar terms in the second quarter of 2013. Broader emerging market bonds, currencies and equities were also negatively impacted, as well as developed government bonds and investment-grade and high-yield credit. In fact, there have been few places to hide bar cash.

The recent sell-off has created an attractive opportunity for investors to increase or initiate exposure to this growing asset class.

Faisal Al is investment manager at Baring Asset Management