Our views on emerging markets
Emerging markets’ high yield corporate default rate (source: Bank of America) is stabilising at slightly above 3% (3.4% in August from 3.6% in July). The region with the worst default rate is Latin America (7%), particularly Argentina and Mexico. The distress ratio in Latin America is close to 10.6%, but excluding Argentina is it only 2%. EMEA, on the other side, is the safest region (with a default rate of 0.56%).
The emerging high yield corporate default rate is stabilising, at slightly above 3%
In terms of forecasts, our internal calculations see GEM HY corporate default rates decreasing further on a six-month horizon in the range 1.8%-2.3%. Country risk perception (CDS) has stabilised, but spreads are not showing any further improvement, and this is visible in the distress ratio, which has moved up again to 17.6% in August from 15.5% in July. GEM earnings growth expectations are going to move down on a 12-month horizon from the current 18% to 16%, due to the slowing down recovery, which leaves less room for further pickup. On the positive side, leverage is improving for GEM, in both net (4.5) and gross (6.3) terms. Global financial conditions remains quite supportive and volatility is low.
Internal calculations see GEM HY corporate default rates decreasing further on a six-month horizon in the range of 1.8%-2.3%
At the regional level, as we have seen, the Latin America default rate is still high, mainly in Argentina. We see some improvements in the next six months (default at 1.5%-2%) thanks to not excessive funding requests and a further recovery in earnings growth (Latin America is still a laggard).
In EMEA and EM Asia, default forecasts remain contained and not very far from current levels.
EMEA is the region where both current default rates (0.56%) and six-month forecast rates (1.2%) are lower, thanks to very contained leverage (net debt/EBITDA ratio at 2.7 and gross at 4) and distress ratios (1.6%).
Risk perception remains higher in China, in particular in the property sector. We expect, however, Beijing will carefully prevent systemic financial risk
On the other side, emerging Asia remains the region with the highest forecasted default rates on a six-month horizon, at slightly above 2%. In this region, the spread-to-worst increased further last month, and the distress ratio is mounting again (to 34.6% from 29%). Risk perception remains high mainly in China, in particular in the property sector, where spreads have widened. The case of Evergrande illustrates that Beijing will continue with financial de-risking and reducing housing sector leverage, but will carefully prevent systemic financial risk. In light of weakening growth momentum and with inflation risks at bay, we expect China’s overall policy stance to turn more decisively to the dovish side.