Companies with less debt than their American and European counterparts
Fundamentals remain very strong in the emerging market corporate bond segment. This becomes clear when we consider the average debt of companies in the investment grade and high yield segments. Whichever category we look at, we see that emerging market companies remain less leveraged than their counterparts in the US and Europe (1.0x to 2.0x less in net leverage). This is important, especially when markets enter a volatile period like the one seen in 2020.
Another point to note is that, according to J.P. Morgan, companies in emerging countries should have returned to pre-pandemic debt levels as early as the FY 2021 results season. This bounce-back shows excellent resilience, but also a capacity for rapid recovery. This is what we have already begun to see in the company results published for the third quarter and in the first glimpses of those for the fourth quarter 2020. This underscores the solid fundamentals of the asset class.
Another crucial element of our proprietary analysis of credit risk at Anaxis is liquidity, which is particularly important for companies in emerging markets. These companies have a liquidity ratio – in other words, balance sheet liquidity versus total debt – that is about 10 percentage points higher than that of their US counterparts. This excess liquidity provides an additional cushion, even during periods of volatility. Emerging market companies are more accustomed than those in developed countries to facing economic and financial uncertainty. They are therefore more far-sighted at cruising speed, which has enabled them to weather the COVID-19 crisis in a much more resilient manner.
Lower default rates
We find a very concrete illustration of these better fundamentals when we look at default rates. According to J.P. Morgan, default rates in the emerging high yield segment are expected to remain lower than those of US issuers. For example, the expected default rate for 2021 is 2.8% for emerging high yield, compared with 3.5% in the US. It should be stressed that this is not a new phenomenon. Indeed, it would be the fifth consecutive year in which the default rate among emerging market issuers has been lower than among their US counterparts.
In addition to these strong fundamentals, the emerging market corporate bond category offers superior yields, which are a key component of its appeal. Regardless of the rating category considered, investors stand to benefit from a larger spread and therefore yield on emerging market companies compared with their US or European counterparts. It is interesting to note that this yield premium has remained relatively stable since the election of Joe Biden in early November and remains attractive relative to long-term historical averages.
