Emerging Market Credit Spreads
It’s not just the USA and Europe, EM corporate credit spreads are pushing lower as a warm blanket of complacency is wrapped around markets.
The upside is that it likely does reflect an element of improved fundamentals given relative calm in macro and markets and improving data out of China. Furthermore, again — this can become self-reinforcing in that it reflects easier financial conditions, supporting growth and risk-taking, which in turn imparts a cyclical improvement in fundamentals.
But the problem is it represents a very low risk premium for investors should things deteriorate. On my analysis I’d prefer EM sovereign bonds (ex-China), and EM equities where the risk premium is much larger and the upside potential asymmetric (but in the right direction… whereas corporate bond returns are also potentially asymmetric, but in the wrong direction: i.e. limited upside, but large potential downside e.g. in the event of a credit default cycle or rates shock).
Overall though it’s a key development and one that’s probably slipped under the radar for most people...
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