EM Corporate Risk Remains Attractive Despite Volatility

Despite European headlines, slowing Chinese growth and rising global default rates, investors searching for yield in EM debt will remain a strong driver for the asset class, analysts and investors say. Moreover, EM corporate debt should weather the medium to long-term storm. “The medium to long-term outlook for the asset class is positive and continues to attract new investors,” says Paolo Valle, portfolio manager at Federated Investors. Crossover investors and new funds are turning to EM corporates, and with a small percentage of institutional investor’s portfolios exposed to EM, there is room for growth into the asset class, he says, with overall issuer quality and low cost of funding as the main drivers. In LatAm, he prefers quasi-sovereign and high-quality names, mostly from Brazil and Mexico, as well as PDVSA. “Short term drivers of performance are Europe and China, but the trends over 5-10 years will be continued growth in the asset class,” says Anne Milne, head of global EM corporate credit research at Bank of America Merrill Lynch. She adds that issuers at the moment have diversified funding options, especially in local markets, and that many are not in desperate need of funds. Milne highlights Mexican homebuilders and protein producers like Minerva as those in LatAm with upside potential. David Masse, corporate credit analyst at Prudential, notes that EM corporates are not immune to risk-on risk-off, and recommends dealing with swings by being dynamic, with participation through different types of debt instruments. So far, the short-term troubles have had limited affect on balance sheets. There has been $9bn in EM defaults since Q3 2011, notes David Spegel, global head of EM strategy for ING, though that is only 3% of the global rate. Valle, Milne, Masse and Spegel spoke on an EMTA panel in New York Tuesday.