Emerging market corporate bonds have undergone a correction over past months, dropping even more sharply in the early days of 2022.
We see three main reasons for this decline:
– The announcement of a tightening of US monetary policy, with investors now expecting four key rate hikes in 2022, and the much more hawkish tone recently adopted in order to fight inflation.
– The Chinese economy’s programmed soft landing and the control regained over its real estate sector with the numerous bankruptcies that have hit several participants. Other sectors (internet, online games, and education) have also been affected by tougher regulations in China, leading to sharp stock market declines in these sectors.
– And, more recently, the resurgence of geopolitical tensions between Russia and NATO countries over Ukraine.
Since 1 January 2022, the Anaxis EM 2024 fund is down 0.51% (institutional unit in USD as of 21 January). By way of comparison, the emerging countries Investment Grade corporate bond index (EMIC) lost -1.72% and the High Yield index (HYEF) -2.50% (-2.10% for the double-B segment). Funds with comparable maturities are also showing a significantly higher loss.
The Anaxis EM 2024 fund has held up well during this period and offers an interesting entry point for investors seeking to diversify their sources of returns while maintaining controlled volatility risk:
– The yield offered by the 2024 portfolio is now close to 5.9% in USD (around 5% in EUR), for a duration of less than 2.9.
– The fund is entering its second phase of life, and should therefore see the price of the bonds in the portfolio converge towards their redemption price. Its volatility should therefore remain under control.
– The portfolio maintains its positions in less cyclical sectors (telecoms 19%, food 12%, healthcare 7%, media 4.5%) and is very well diversified in terms of issuers (124) and country risk (top holdings: Brazil 12.1%, China 8.9%, Mexico 8.3%).
– The issuers in the portfolio have a debt repayment schedule well spread over time and a good liquidity situation. Their fundamentals remain stronger than ever: JP Morgan calculates the average net debt for the emerging corporate universe at 1.4x EBITDA. In addition, the majority of issuers in the portfolio generate a large portion of their income in dollars or in dollar-linked currencies, which mitigates the risk in the event of a weakening of emerging currencies. Default rates should remain low, with global growth admittedly slower than in 2021, but still above the long-term trend.
– Lastly, the tightening of US monetary policy should not obscure the fact that real interest rates (nominal rate – inflation) will remain negative in most of the main economies in 2022, which traditionally benefits the highest yielding bond segments. At the same time, the Chinese central bank will continue the accommodative measures begun in recent weeks, in order to stimulate the economy.
