There is a phrase being bandied about to describe the risk currently involved in emerging market debt: “Like running down a motorway to pick up coins.”
At present, many investors would have you believe that the only way that EMD could be construed as even slightly appealing is from a purely yield-based viewpoint, and then there is still the risk debate to be had.
However, while China seems to be at the heart of the world’s problems, for Veneau, Axa Investment Management’s head of Asia fixed income, the corporate credit space is presenting not just attractive opportunities, but also relatively safe ones.
“While we are negative on renminbi exposure due to the increased volatility and expected depreciation, we are constructive on Chinese credit,” he said. “There are pockets of fundamental strength, and in pricing terms it offers relative value over other sectors.”
One driving factor of the Chinese corporate debt market is the recent depreciation of the renminbi versus the dollar, which, having been at 6.209 on 10 August, closed at 6.35 on 2 October.
This movement, says Veneau, is allowing Chinese companies to better facilitate their debt balances and also keeping spreads on an even keel.
“Fundamentally, the investment grade market is stable,” he expanded. “We have seen a slight uptick in leverage, as measured in debt to capital and debt to EBITDA.
“One positive technical factor developing in the market is the cheap cost of onshore debt funding in China. Chinese corporates are redeeming and refinancing onshore – this means there is less offshore dollar issuance, which generally supports credit spreads for those issuers.”
This has impacted on Veneau’s portfolio as he seeks out the pockets of relative value.
