The Zhitong Finance App notes that investors are becoming more and more picky in choosing corporate bonds in emerging markets. They are betting that only a few corporate bonds can continue to provide strong returns in the second half of the expected turbulent second half of the year and be protected from monetary policy turbulence.

Includes Aegon Asset Management, Lazard Asset Management, and T. Fund managers, including Rowe Price, are strongly advocating high-yield dollar-denominated bonds issued by emerging market companies. They said that shorter terms and credit quality that usually exceeds that of the country where they are located can help make transactions more attractive, although uncertainty about the timing of the Fed's interest rate cut and the US presidential election have curbed the general rise in risky assets.

Jeff Grills, head of emerging markets debt at Aegon, said, “Our focus has moved from lower rated companies to more stable or higher-rated companies,” said Jeff Grills, who increased his corporate debt holdings. “As the second half of the year begins, we are nervous and it depends on the Federal Reserve's action.”

Markets generally expect Federal Reserve officials to keep borrowing costs unchanged in July. According to futures pricing, weak data from the US makes the market bet that the Federal Reserve will cut interest rates at least twice before the end of 2024, starting in September.

This year has been an excellent year for emerging market corporate bonds. The Bloomberg Emerging Markets US Dollar Composite Enterprise Index has risen in seven of the past eight months. The rate so far this year has been 4.8%, while the sovereign index has risen 3.4%. Local currency debt fell less than 0.1% during the same period.

Samy Muaddi, head of fixed income at Puxin Emerging Markets, said, “Emerging market companies are better able to withstand the effects of a tightening financial environment than sovereign bonds.” He pointed out that compared to sovereign bonds, emerging market corporate bonds have a shorter term and “lower leverage ratio” on their balance sheets. Muaddi is optimistic about BBB and BB-level businesses in Brazil, Mexico, Colombia, the Philippines, India, and Eastern Europe.

Decrease in default rates

The quality of credit for companies in developing countries is also improving. The yield difference between emerging market corporate bonds and Bloomberg's US Total Return Index has fallen 60 basis points this year, reaching its lowest level since April 2018, indicating the strength of this asset class. Omotunde Lawal, head of corporate credit for emerging markets at Bahrain Investment Services, said that even if there is a rebound, absolute returns are still attractive compared to many other fixed income asset classes.

Moody's Ratings predicts that the default rate in emerging markets will also decline this year, and that the default rate for speculative non-financial issuers will drop to 3.9% by the end of the year. This is below the historical average of 5.3% and is close to the expected default rate in advanced economies.

“Bonds from high-yield companies in emerging markets have picked up relatively,” said Anthony Kettle, senior portfolio manager at RBC Bluebay, who is optimistic about Mexico's B-grade bonds and Argentina's C-class bonds. “As the default rate falls, investors can reasonably be optimistic about this asset class.”

Featured Bonds

Lazard's Arif Joshi is looking for companies that are likely to be upgraded to investment grade. He said that in the long run, the compression of corporate spreads that went from 2B to 3B was “much greater than any other credit upgrade in terms of return on capital.”

He added that utilities and channels with long-term contracts are particularly attractive because they offer “inflated spreads” while being less affected by macroeconomic uncertainty.

Emerging market investors look for high-yield corporate bonds to reap returns

The primary market has also been providing opportunities.

“The new bond market, particularly the corporate bond market, has always been very favored by managers like us,” Aegon's Grills said. “Especially when you buy double B bonds and single B bonds, they still have very attractive value in the new bond market because these bonds often require a premium.”

Grylls used the new 0.5 billion dollar bond issued by the Dominican Republic airport operator Aeropuertos Dominicanos as an example. According to Trace data, the bond's coupon interest rate is 7%, the maturity date is 2034, and the transaction price is slightly higher than the face price, which is 102 cents of face value.