Emerging market debt issuers are often assumed to be inherently less creditworthy than their developed market counterparts but in our experience the reality tells a different story.
For one thing, in recent years emerging market (EM) default rates have not been materially greater than those in developed market (DM) and the formers’ bond covenant quality has also tended to be higher on average.
Within the high yield (HY) area of EM debt, fundamentals are also improving and default rates are expected to decline this year.
Comparing default rates for EM corporate HY issuers with those of their US equivalents since 2000, two observations are worth highlighting. First is the close similarity in trend between the two series which suggests global cyclical factors, rather than regional idiosyncrasies, explain a large part of the default experience for both EM and US corporate issuers. Second, the magnitude of default rate has been broadly similar across cycles, with 2002 the only meaningful exception in the period surveyed.
Similarly, when we consider EM Sovereign defaults we can see how credit events have become more of a rarity. Using JPMorgan’s Emerging Market Bond Index (EMBI) Global benchmark to represent the investable hard currency EM sovereign issuers accessible to international investors, only seven EM sovereigns in the index have defaulted since 2000. The adoption of flexible exchange rates, strengthened external balances, reserve accumulation and a move from external to local currency debt issuance go some way toward explaining this shift.
Rodica Glavan – Insight Investment, a BNY Mellon company
This content is provided by Market Eye, BNY Mellon’s blog. You can register to receive Market Eye updates by using the subscribe function below
Past performance is not a guide to future performance.
Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA or the BNY Mellon funds.
For Professional Clients and, in Switzerland, for Qualified Investors only.
Any views and opinions are those of the author, unless otherwise noted and is not investment advice.
BNY Mellon take no responsibility, nor endorse any comments from third-parties which contain links to external websites outside of those of BNY Mellon.
Furthermore, this material does not constitute an offer or invitation to anyone in any jurisdiction to invest in any BNY Mellon product or use any BNY Mellon services where such offer or invitation is not lawful, or in which the person making such offer or invitation is not qualified to do so, nor has it been prepared in connection with any such offer or invitation.
BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the corporation as a whole or its various subsidiaries.
This information has been prepared and approved by BNY Mellon Investment Management EMEA Limited. Issued in UK and Europe (excluding Switzerland) by BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorised and regulated by the Financial Conduct Authority. Issued in Switzerland by BNY Mellon Investments Switzerland GmbH, Talacker 29, CH-8001 Zürich, Switzerland. Authorised and regulated by the FINMA.
All information contained in this material is current at the time of issue and, to the best of our knowledge, accurate.
© 2017. BNY Mellon Investment Management EMEA Limited. All rights reserved.
This article was provided by BNY Mellon Investment Management and does not necessarily reflect the views of Citywire