Emerging market debt in focus

Rising inflation and tighter monetary policies have put the Covid rebound on the back foot, and market analysts now see the global economy slowing in 2022 and 2023. However, the outlook varies for every region, with emerging market debt looking attractive as the US and Europe head towards a recession, says Aviva Investors.

The investment management firm says that emerging markets are forecasted to grow at 4% next year compared to a 0.6% growth in developed markets. “In contrast to many developed markets, rate hikes have helped build a real rate cushion in many EM countries,” says Aviva.

Over the last two decades, emerging market debt has seen considerable growth, with local currency bonds now in focus compared to hard-currency issuances in the past. In comparison to developed markets, corporate bond issuance has grown at a much faster pace in emerging markets.

“EM companies have also strengthened their balance sheets in recent years. Leverage among emerging market companies is at its lowest level for ten years – far below the average among US firms,” says Aviva.

However, Aviva notes the variance found in emerging markets, where some exporters are benefitting from high commodity prices while others are seeing deficits rise due to soaring food and energy costs. Citing an analysis by Goldman Sachs, Aviva says that 80% of EM countries have seen food terms of trade worsen, which could be a significant concern going forward.

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