EM corporate debt to take over from sovereigns, says HSBC
Corporate debt will likely become the dominant emerging market hard currency asset class in terms of appetite and portfolio allocations within the next five years, says HSBC Global Asset Management.
Guillermo Ossés (pictured), head of emerging markets debt (EMD) portfolio management at HSBC Global Asset Management, said that although the emerging market external debt space has traditionally been associated with sovereign debt, “many investors would be surprised to learn of the current growing prominence of corporate debt in terms of assets, issuance and credit quality.”
He noted that in August this year, the market capitalisation of the emerging market corporate debt index surpassed that of sovereign debt for the first time. Corporate debt issuance is likely to represent over 70% of total emerging market external debt issuance this year, with a forecast to reach US$255bn issuance in 2012, versus US$80bn for emerging market sovereigns.
Ossés expects the growth in emerging market corporate debt to continue – driven by high levels of issuance – and that this market segment could exceed the size of the US high yield market in the near future.
Corporate debt remains an under-owned asset class within investors’ portfolios. But Ossés expects the asset class to come of age, and most likely will exceed sovereign debt within investors’ portfolios within five years.
Marge Karner, senior portfolio manager, EMD at HSBC Global Asset Management, said the corporate debt asset class features currently higher quality issues than widely recognised. For example, the emerging market corporate universe is comprised of more than 70% investment grade issues.
The index (JPM CEMBI Diversified) for this high quality asset class has a higher average rating than the emerging market sovereign index (JPM EMBIG) (3). Currently, the high quality will be further reinforced as more than 80% of new issuance is rated investment grade in 2012 thus far.
“High credit quality is supported by the strong balance sheets of these emerging market companies. Since current global growth is mainly driven by emerging market countries, many emerging market corporates also enjoy strong organic growth which further strengthens their balance sheets and keeps average leverage low despite increased issuance,” Karner said.