Hard currency EM corporate bonds have displayed stellar performance in the past and continue to offer attractive investment opportunities worthy of consideration as part of a portfolio’s strategic asset allocation (SAA). EM corporate bonds offer a broader and more diversified investment universe than sovereign bonds in terms of sectors and issuers while also featuring a significantly lower duration. In addition, willingness to pay tends to be greater in the case of EM corporates compared with sovereign bonds.
High returns coupled with low risk
A comparison of EM corporate bonds with their US counterparts reveals that here, too, the former are characterized by interesting performance in terms of fundamentals and valuations that should no longer be overlooked. EM corporate bonds exhibit lower net leverage, for example. At the same time, investors are compensated with higher risk premiums. A J.P. Morgan comparison of the high-yield segment (CEMBI HY) with its US peer shows that historical and expected payment default rates are lower and recovery values are similar. If we now compare their sound fundamentals with valuation levels, EM corporate bonds continue to score points thanks to the higher risk premiums mentioned earlier. The risks involved when investing in emerging markets do need to be taken into account; nevertheless, investors continue to be compensated very well, in our view.