“EM corporates have actually been tendering a lot of bonds, so the real supply that is going to come on is unlikely to offset all of the coupons, redemptions and asset /liability management exercises that now need to take place.
“I think it is going to be around $220bn which is down about 35% from last year; part of that is down to Brazilian corporates not really being able to lend at the moment, Russia is still under sanctions and China is borrowing more domestically,” he said.
Indeed, he added, “If you look at the shape of the domestic yield curve and how flat it is, property companies are now predominately borrowing domestically and actually buying back their dollar bonds. So, what was the biggest sector in China won’t exist in three years’ time because all of the bonds will have been repaid.”
Long term
Over the long term, while Drew is not expecting the rapid growth seen in previous year, he believes it will probably return around 4 to 5% for the next four or five years, with probably around 2 to 3 % volatility.
“I do think defaults will pick up but it will be largely contained Latin America and it will help to have a more active manager.
“Everyone loves to be bearish on EM. I am not the biggest bull, but, if you slice it between investment grade and high yield, it is still cheap from an IG perspective compared to the US and has better overall credit metrics because the companies that issue in the EM universe are the companies that can. And, on the HY side, it yields about the same about 9% as US high yield, but it is three notches better in credit rating and two years shorter in duration, and with less volatility.”
