4 min read 30 Mar 22
I recently attended an Emerging Markets debt conference, which provided some time away from the daily headlines on the terrible Russia/Ukraine situation to see how companies elsewhere are faring and how investors view the outlook for 2022. With the trauma of the war in Ukraine rightly in everyone’s minds, we must also be aware of events in the rest of the world which could prove to be key drivers of investment performance this year.
Before delving into the key conclusions, it’s worth taking stock of where we are. Russia’s invasion of Ukraine has caused asset prices to fall sharply and, despite a modest recovery over the past fortnight, valuations remain stretched. The chart below shows this, and also reveals that the spread between sovereign and corporate paper is close to all-time wides. This is partly due to index composition, in that the EMBI (sovereign index) has a higher duration component, which has been hit by rising rates, as well as a larger High Yield bucket. However, it also reflects strong corporate balance sheets – leverage is at its lowest point since 2011 – versus the efforts made by sovereigns to cushion their economies from the effects of the Covid pandemic through fiscal and/or monetary expansion.
Source: M&G, Bloomberg, 28 March 2022. EMBI = EM $ Bond Index; CEMBI = Corporate EM $ Bond Index.
With this backdrop in mind, here are some key conclusions from the conference:
We agree that corporate fundamentals generally remain strong and that the past month’s volatility has led to significant investment opportunities in areas less directly linked to Russia/Ukraine (Thai banks being one good example), though we feel that the same could be said of certain sovereign issuers (e.g. Mexico) which remain attractive due to the superior liquidity and value on offer. But to us the key risk/opportunity for 2022 lies in the flow of funds into LatAm. There is a clear sense that risks are not priced in here, whereas the risks in the rest of the world are more clearly understood and the market reaction to them is behind us. This leaves money in LatAm exposed to volatility later this year, at a time when asset prices elsewhere should hopefully be recovering. Perhaps the best time to seek opportunities outside LatAm is now.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.