Emerging-market credit delivered some of its best returns in eight years last week, driven by a combination of market-wide and regional-specific factors (see figure 1). The increase in the European Central Bank’s Pandemic Emergency Purchase Programme, better-than-expected employment numbers in the US and a rising oil price – in response to the largest price-hike by Saudi Arabia in 20 years – all supported the asset class.
Figure 1. Moving on up: emerging-market credit returns
Source: Bond Indices, as at June 2020.
The deluge of fallen angels this year has increased the size of the energy sector, which means that the recovery in the oil price is particularly important for the global high-yield universe. An oil-price rally also supports Latin America, and the region has contributed the most to emerging-market outperformance.
As in the US, emerging-market economic data are proving rosier than expected. Both regions are now outperforming Europe, where flows and primary-market activity are lagging. The recent recovery in emerging-market currencies, coupled with diminishing inflation expectations, will also make it easier for central banks to keep policies loose. Credit is increasingly seen as the asset class of choice for the market recovery – a sentiment which is spreading to emerging-market bonds.
This can be seen by the fact that emerging-market credit returns are roughly flat year-to-date, even though regions like Latin America are still struggling to combat the coronavirus pandemic. As central banks in the developed world continue to take bonds off the hands of investors, markets that are not directly impacted by this surge in policy support will seem increasingly attractive.