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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

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