JPMorgan Flags Corporate Default Risk

Despite strong performance in March, JPMorgan is staying underweight EM corporate debt versus sovereigns heading into Q2. “Corporate fundamentals continue to deteriorate with rating downgrades accelerating at a much quicker pace,” says the shop, adding that LatAm defaults look set to rise to 10%, versus a previous 7% forecast. So far this year there has been $2.8bn in defaults in LatAm including Arantes, Independencia, TGN, Vitro, and Iusacell. JPMorgan’s default forecast for EM corporates generally was raised to 13.4% of the high yield debt stock, and 4.5% of the total debt stock, a significant jump from the current EM high yield corporate bond default rate of 3.7% on a 12-month trailing basis. The EMBIG sovereign index has already tightened to JPMorgan’s year-end target of 600bp, while its corporate equivalent, the CEMBI, has returned nearly 9% year-to-date, outperforming all other asset classes, across developed and EM fixed income and equity. “We remain constructive on EM sovereigns but feel that the EM corporate rally is at odds with deteriorating fundamentals,” says JPMorgan.