Alan Siow, Co-Head of Emerging Market Corporate Debt at Ninety One, emphasizes the need to reassess outdated views on emerging market credit as of August 21, 2024. Major economies like the US are grappling with persistent inflation and fiscal deficits post-pandemic, which has led to a reevaluation of investment strategies. The traditional label of 'emerging markets' is becoming less relevant due to improved fundamentals and resilient sovereign debt performance. Recent elections in countries such as India, South Africa, and Mexico have demonstrated peaceful democratic processes, further stabilizing these markets. [acc8ede2]
Investment grade and high yield credit spreads in the US and Europe are trading at historically tight levels, while emerging market corporate credit spreads remain within their long-term averages. Siddharth Dahiya, head of emerging market corporate debt at abrdn, believes that EM credit still has significant potential. He is optimistic about the fundamentals for EM credit, as companies have improved their balance sheets over the past five years. The high yield portion of the EM market offers a higher spread differential, particularly in Latin America, where companies have significantly strengthened their financial positions. However, Dahiya notes that the credit rating of Latin American companies is often constrained by the sovereign rating of their country. [a0814427]
Dahiya also highlights that the strength of the US dollar and high interest rates have hindered local currencies from appreciating. Nevertheless, he believes that as global inflation cools, EM central banks will have the opportunity to start cutting interest rates, which should positively impact local EM currencies. [08687d14]
The uncertainty surrounding the near-term economic outlook has inflated corporate credit risk for domestically focused firms as spreads tighten. Adam Whiteley, portfolio manager of the BNY Mellon Global Credit fund, stated that the credit risk of more economically sensitive firms, particularly in the US, has been amplified due to ongoing regional issues. He also mentioned that absolute yields on US corporate bonds remain attractive as the health of the US economy appears to be advancing well. [08687d14]