There has been no shortage of economic challenges in 2022, with rising inflation and interest rates, Russia’s invasion of Ukraine, Covid-19 woes in China and a global economic slowdown. Despite the challenging macroeconomic environment, Manulife Investment Management believes high-yield emerging market credit provides a compelling opportunity.

The investment management firm sees high yield EM corporate debt priced for a calamity, as the J.P. Morgan Corporate Emerging Markets Bond Index (CEMBI) Broad Diversified High Yield Index is now 10.3%, among the best yield level in the past decade.

“There’s no guarantee that valuations have hit rock bottom, but today’s yield levels have historically offered compelling return potential, not to mention strong carry while investors wait on the eventual economic recovery,” said Paolo H. Valle, Senior Portfolio Manager for Emerging Markets Debt, Manulife IM.

Additionally, the asset manager believes the fundamentals of EMs are still quite strong despite the macro headwinds. EM corporates have lower leverage, high profitability, and resilient fundamentals with double-digit revenue growth. Manulife says EM credit looks attractive due to reason along with a relative value proposition for global investors.

Meanwhile, emerging market credit defaults are likely to be limited to certain segments, and the anticipated defaults are linked to either the embattled China property market or emerging Europe which is affected by the war in Ukraine.

“Despite these challenges, we see a number of encouraging signs, especially in EM high-yield corporates, that we believe make the segment worthy of considerations for investors with long enough time horizons to weather the current storm,” adds Valle.

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