Debt issues by emerging market corporations might seem risky and volatile at the moment, but it was set to develop strongly as an asset class, according to HSBC’s Marge Karner.
A senior portfolio manager with HSBC Global Asset Management, Karner told I&T News that despite its growing prominence, “emerging-market corporate debt still remains an under-owned and overlooked asset class within investors’ portfolios.”
“However, given the pace of growth of the EMD corporate universe and recent turbulence in a number of developed markets, we believe that we are approaching a turning point,” said Karner.
“Many investors are starting to take note of the positive trends in emerging-market corporate credit and we believe it is poised to potentially exceed sovereign debt in allocations in the next five years.”
Karner thinks that emerging-market corporate issuance is likely to reach over 70 per cent of EMD issuance this year, with JP Morgan forecasting it will reach US$255 billion.
While it was often perceived as risky and investors were unfamiliar with it as an asset class, Karner says the overall quality of the debt is “currently higher than many investors perceive it to be.”
“Many emerging market corporates currently have more attractive valuations versus their global peers,” said Karner.
“On average, for similar credit quality, emerging market corporates offer higher yields and wider spread levels over their US peers, while having lower leverage and sounder balance sheets.”
Karner urged portfolio managers to look at EMD corporate issues on their “own merits”, rather than a marginal allocation within portfolios.
Lachlan Colquhoun is head of market analysis at East & Partners.