Emerging market corporate credit comes of age

This increased market sophistication is illustrated by the rise of the Emerging Market Corporate Bond index, which hit a capitalisation of $469 billion (£292 billion) at the end of September, surpassing its $463 billion sovereign debt equivalent for the first time.

On top of this, JP Morgan expects corporate debt issuance to reach $255 billion this year, dwarfing the $80 billion for sovereigns.

Marge Karner, senior emerging market debt (EMD) portfolio manager at HSBC Global Asset Management, expects corporate credit to take the EMD limelight within five years. She also emphasises the quality of the debt, pointing out the corporate universe is more than 70% investment grade, with 80% of new issues expected to be of this standard in 2012.

‘High credit quality is supported by the strong balance sheets of these emerging market companies,’ Karner says. ‘Since current global growth is mainly driven by emerging market countries, many EM corporates also enjoy strong organic growth, which further strengthens their balance sheets and keeps average leverage low despite increased issuance.

‘Additionally, EM corporates still enjoy favourable cost structures compared with developed markets (DM) and are further sustained by more attractive labour force demographics. The macroeconomic environments of many emerging market countries have transformed over the past decade and now offer a stable operating base to private companies.

‘In many ways, the comparison of emerging market corporates to developed market peers mirrors the comparison of emerging sovereigns to developed sovereigns.’

Aberdeen, which has built its reputation on EM equities, has identified the compelling opportunity in corporate credit. The firm believes the sector has come into its own as a standalone asset class and highlights several reasons why it has become a viable alternative for fixed income investors.

These include diversity, a wider investment base and low default rates, along with the significant increase in the size of the market and good liquidity supported by greater issuance.