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Emerging market corporate credit comes of age
by Dylan Lobo on Dec 28, 2012 at 07:00
‘The asset class was previously only viewed in piecemeal fashion by regional investors or as a specialist source of returns for investors seeking "risky" alpha,’ Aberdeen EMD portfolio manager Esther Chan says.
‘Now, dedicated financial infrastructure such as investable market indices, dedicated research and rapid growth in market capitalisation from increasing issuance has brought this burgeoning asset class into
She adds: ‘On top of this, the fundamental case for emerging market companies is compelling. Emerging economies are healthier and less leveraged than developed countries, as are the companies within them.
‘Companies and banks that have emerged as survivors of the recent financial crisis are entities that now have experience in managing operations and understand the vagaries of capital markets and management – lessons that will hold them in good stead in the years ahead. Additionally, default rates have dropped significantly since 2010.’
The potential for corporates to offer more diversity than sovereigns is outlined by Kazaryan. ‘While the emerging market hard currency sovereign debt asset class is more mature than its emerging market corporate debt counterpart, it is also limited in terms of its size and growth potential. There is clearly a ceiling on the number of countries in the emerging market universe, yet the potential number of quality corporates coming to the market is vast,’ she says.
‘We believe that the potential diversity and the size of the corporate debt asset class are significantly larger than that of sovereign debt.’
Suited to weak macro outlook
EMD pioneer Investec also believes now is the time for corporate credit to flourish, especially as it is becoming increasingly easy to do business across the region.
Investec portfolio manager Victoria Harling sees the asset class as perfectly placed to perform well in the difficult macro environment. ‘In the current environment of weaker growth and cautious corporate strategy, corporate bonds are positioned to perform well – a significant part of the value in emerging market corporate bonds lies in their priority claim on cashflows and assets,’ she says. ‘In an environment of weak growth, companies are focusing on strong cashflows and deleveraging, which favours bondholders.’
However, some are concerned about the quick rise in the asset class. PSigma Investment Management’s chief investment officer Tom Becket is among those who believe sovereign debt remains a safer bet. ‘We have recently seeded the AXA Short Duration Emerging Market Bond fund, which predominantly focuses on government bonds,’ Becket says.
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