Emerging Markets: a market in progressive recovery

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Damien Buchet, head of Emerging Markets Fixed Income at AXA IM, shares its views on risks in emerging markets and the opportunities that could arise.

Oil has rebounded from its lows, as the acceleration of future production cuts combined with an unprecedented “contango” situation in the market:

Brent future prices markedly higher than spot prices have lifted sentiment and attracted trading buyers from the end of January.

We expect Brent oil to slowly trend back towards the second half of 2015 to an average of 70-75$ per barrel. We should remain in a 55-65$ range in the coming three months but this will not be enough to revive any inflation fears across emerging markets.

In our opinion, this prospect is a good balance between the expected growth benefits to importers in Asia, Central Europe or Turkey, while removing the threat of extreme pressure on oil exporters, most of which have already seen a sizeable adjustment in their currency value.

Special situations like Petrobras, which affects about $55bn of debt, also need to be considered.

The recent downgrade of the company to high yield, as much as a similar move on several key Russian corporates, should maintain a short term technical cap on these assets as the reaction of “buy and hold” investment grade investors to these rating moves need to be watched in coming weeks.

The Petrobras story will remain paced by the various deadlines surrounding the publication of their audited full year 2014 results; the next key date being 30 April.

We should also recognise that, in line with other ‘fallen angel’ cases, the worst spread performance tends to be mostly recorded before the downgrade to high yield occurs. Petrobras is so far no exception, having bounced strongly after the news.

We believe the noise on audited account and mild credit profile deterioration do not justify depressed valuations. Any write-offs should not exceed $20bn and will not be as damaging for bondholders as it will largely be a non-cash item.

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