Emerging markets corporate debt: coming of age | Financial Adviser - Aberdeen Asset Management
Contact Us
March 6, 2017

Emerging markets corporate debt: coming of age

Here’s an asset class that continues to defy the odds. Despite concerns of high debt levels, growing geopolitical risks and sluggish global growth, emerging markets (EM) corporate debt has once again delivered another year of impressive results.

This year sees a continuation of many of the same challenges, not least the uncertainty over what Donald Trump’s US presidency will look like. Anyone hoping that Trump’s campaign promises were just talk won’t have been overly encouraged by his opening spell in the White House. While it’s still too early to gauge which of his policies he’s genuinely serious about, his message of ‘America first’ has been made loud and clear. The Republican Party does not have a history of being trade protectionists though, so it’s likely that this rhetoric will be dialled back over the coming months.

But it’s not all about Trump. And among the uncertainty also lies great opportunity. EM corporate debt has grown significantly since the global financial crisis of 2008-2009. It’s developed in a number of ways, not just in size. Prospects vary across and within the differing EM regions, but EM nations are home to some of the fastest growing companies globally and there are a number of reasons for investors to consider it.

Here’s why:

1. Debt levels

EM chart 1
Since the end of the global financial crisis, EM companies had been gearing up in anticipation of continued success and high levels of growth. However, headwinds facing the global economy saw profitability decline with a number of companies left highly leveraged, especially in the mining and energy sectors. These concerns subsequently led to a rethink in business strategy. The end result is that EM companies’ balance sheets are now much improved, especially when compared to their US counterparts. Attention has shifted away from a focus on cheap debt to efficiency and cost optimisation programmes. Business models, which were largely shaped around expansion, are now focusing on return generation and sustainability. This in turn will translate into stronger cash flow and a quicker deleveraging process.

In short, the boom years are over and these companies know that.

2. A Growing Opportunity

Em chart 2
Relative to other asset classes, the size of the EM corporates universe is greater than other segments of the global credit markets, including the US high yield market and EM external sovereigns. Growth over the last decade has been staggering. The establishment of the JP Morgan Corporate Emerging Markets Bond Index (CEMBI) in 2007 has ensured EM corporate debt has become an asset class in its own right, rather than simply a sub sector of EM debt.

EM countries continue to offer fertile ground for corporates to succeed. Attractive demographics, a growing middle class, and large labour forces will remain drivers of domestic demand.

EM chart 3

3. Profitability remains strong

EM companies continue to offer a more attractive return on the risk/ reward spectrum relative to their US peers, a trend that’s been accelerating over the last few years. A common misconception among investors is that it’s of non-investment grade quality. But it’s a well-diversified asset class, with 60%[1] of ratings investment grade. So EM corporate debt is not only higher quality than in the US, but it’s also less exposed to default risk. This is backed up by a recent JP Morgan report which forecasts the EM default rate will decline to just 0.8% in 2017.

Em chart 4

4. Low yields in developed markets

In 2016, EM bonds experienced vast inflows as the ‘great migration’ from developed markets (DM) to EM took place. Even the big institutional investors were making their move. Ultra-low yields in DM were a primary reason. More than two thirds of European bonds still yield less than 1%, while the average yield of the JP EMU index is just 0.49%. The European Central Bank is likely to remain accommodative for the foreseeable future, extending the current quantitative easing programme at its latest meeting by nine months to December 2017. In the US, the Federal Reserve raised interest rates by 25 basis points in December. The market expects another two rate hikes in 2017, but even if this were to happen, rates would still be at historically low levels.

EM corporate bonds still offer an attractive solution as investors continue to broaden their hunt for yield in an income starved world.

EM chart 5

5. Consistent long-term performance

Over the past 10 years, the JP Morgan Corporate Emerging Market Bond Index has delivered a cumulative return of 108.25% and an annualised return of 6.40%. This compares favourably when compared to other global bond indices. Couple this with the robust credit fundamentals of EM companies, still growing underlying economies and manufacturing indices that are ticking higher, there’s no reason why EM corporates can’t continue on their positive path to greater success.

[1] Market Cap

Register to our regular newsletter

Important Information

Investors should be aware that past performance is not a guide to future results. The value of investments, and the income from them, can go down as well as up and your clients may get back less than the amount invested.

The details contained here are for information purposes only and should not be considered as an offer, investment recommendation, or solicitation, to deal in any of the investments mentioned herein and does not constitute investment research as defined under EU Directive 2003/125/EC. Aberdeen Asset Management does not warrant the accuracy, adequacy or completeness of the information contained herein and expressly disclaims liability for errors or omissions in such information and materials.

Any research or analysis used in the preparation of the information has been procured by Aberdeen for its own use and may have been acted on for its own purpose. Some of the information may contain projections or other forward looking statements regarding future events or future financial performance of countries, markets or companies. These statements are only predictions, opinions or estimates made on a general basis and actual events or results may differ materially.

No information contained herein constitutes investment, tax, legal or any other advice, or an invitation to apply for securities in any jurisdiction where such an offer or invitation is unlawful, or in which the person making such an offer is not qualified to do so.

Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom.


Risk warning:

Risk warning

The value of investments and the income from them can go down as well as up and your clients may get back less than the amount invested.

Back to the top