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Public Fixed Income

A Compelling Value Proposition in EM IG Corporate Debt

December 2023 – 4 min read

Elevated yields, improving credit quality and lower interest rate risk are presenting a strong case for EM investment grade corporate debt—especially in a soft landing scenario.

The U.S. economic cycle will once again be a key driver of emerging markets (EM) debt in the year ahead, and will likely resolve into a soft landing or mild recession. While a soft landing remains the central consensus base case, we are cognizant that recession risk still looms large. The good news is, the combination of slower growth and declining inflation is not all bad for credit, and can in fact provide a quite supportive backdrop.

Resilient U.S. economic growth has surprised to the upside, perhaps because of the large increase in the federal budget deficit. While the U.S. Federal Reserve (Fed) has been tightening policy rapidly, the federal budget deficit has increased from around 4.5% of GDP in 2019 to close to 6% today.1 This is among the largest deficit increases in history, aside from those during Covid, World War II and the 2008 financial crisis.

This environment of a not so hard landing is largely positive for fixed income investors, as higher yields currently on offer provide attractive income and return potential, while also buffering potential price declines. Specifically, the price/capital appreciation potential is meaningful with the average EM investment grade (IG) corporate bond price at 91.5.2 The average duration of around five years is also likely to provide a tailwind should the dot plots following the Federal Reserve’s (Fed) rate decision in December prove to be accurate.3

EM corporate debt, in particular, may have a compelling role to play in an asset allocator’s playbook. As the lines blur further between EM and developed markets (DM), investors may benefit from the diversity in asset selection with EM IG corporates offering exposure to highly-rated jurisdictions such as Singapore, Malaysia, and Abu Dhabi, with long duration profiles and higher spread per leverage than DM peers.

1. Source: U.S. Treasury Fiscal Data. As of November 2023.
2. Source: JP Morgan. As of December 2023.
3. Source: JP Morgan. As of December 2023.

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Omotunde Lawal, CFA

Head of EMEA Corporate Credit and Emerging Markets Corporate Debt

The document is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This document is not, and must not be treated as, investment advice, investment recommendations, or investment research.

In making an investment decision, prospective investors must rely on their own examination of the merits and risks involved and before making any investment decision, it is recommended that prospective investors seek independent investment, legal, tax, accounting or other professional advice as appropriate.

Unless otherwise mentioned, the views contained in this document are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Parts of this document may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this document is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any forecasts in this document are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Any investment results, portfolio compositions and/or examples set forth in this document are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this document. No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments.

Investment involves risks. Past performance is not a guide to future performance. Investors should not only base on this document alone to make investment decision.

This document is issued by Baring Asset Management (Asia) Limited. It has not been reviewed by the Securities and Futures Commission of Hong Kong.

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