In the past few quarters, as growth has remained tepid, we have seen some deterioration in credit fundamentals in emerging market corporates, particularly in Latin America – most notably among Mexican home builders and the oil and gas sector in Brazil.
In Brazil, one oil and gas company, with virtually no revenue, negative earnings, and significant capital expenditure commitments managed to issue $3.6bn (£2.3bn) in bonds for a two-year period on hopes of potentially striking oil.
The prospect that such an issuer would eventually struggle seems less than surprising. Yet many investors searching for yield were willing to make a bet based only on a highly speculative assessment of the company’s oil and gas resources.
Indeed, during the run-up in fixed income valuations in 2012, it became all too common for managers to set aside fundamentals in search of yield.
Structural improvements in emerging countries have markedly reduced the country risk premium of many sovereign issuers, in turn allowing smaller companies access to international capital markets.
All of these factors contribute to our confidence in the long-term prospects of the sector. Indeed, we believe recent setbacks have provided attractive entry points in some names.
That said, we believe any investment should be made with eyes wide open, based on real research and an understanding of the fundamentals.
Jennifer Gorgoll is co-manager of the Neuberger Berman Emerging Markets Corporate Debt fund