The emerging market corporate bond (EMCD) market looks to start the New Year in better shape than many asset classes. We believe the asset class could achieve total returns of close to 7% in 2021; some 4.5% of which should come from income or carry alone.
While the pandemic affected the emerging market bond (EMD) universe as much as it did every global asset class – a shock far greater than the 2008 crisis – lower debt levels in many emerging markets ahead of the crisis helped mitigate the impact.
China is a key component of the recovery in EMD and EMCD with the economy of greater significance and influence on emerging markets today than the US. Some 65% of the increase in Chinese imports since May 2020 have come from emerging markets highlighting the shift in dependencies in the region.
Net leverage across emerging markets is lower than developed markets for both high yield and investment grade-rated companies. The lower debt levels of companies, the refinancing activity last year among emerging market corporates when conditions were favourable and the supportive measures being taken by governments around the world are all positives for the asset class for the year ahead.
We also believe defaults in the EMCD universe will be far less than in other crises. We expect defaults in EMCD to stay below 4% for 2020 – almost half the level expected in the US high yield market.
Rodica Glavan, head of emerging market corporate fixed income, and Colm McDonagh, head of emerging market fixed income, Insight Investment.
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