EM Daily:EM Corporate Credits -Turning Neutral

EM Corporate Credits - Turning Neutral

    We entered the year with a constructive view on EM corporate credit. Then inour last chartpack in March we argued that investors often get too bogged downwith fund flows for EM, and in the process miss out on some of other importantfactors that drive it - underlying growth, commodities, USD, China, rates, etc.

    While almost all these factors are still supportive, the performance so far this yearhas been solid with 30bp tightening and +4.5% total returns as we write. We takethis opportunity to turn more neutral on EM corporate credit, expecting the nextquarter to be largely range bound for spreads and carry being the name of thegame. We think risk/reward looks largely balanced with fundamentals (low defaultrates) and technicals strong, but valuations challenging and event risks on therise. Other key risks in our view are an oil price collapse, geopolitics, continuationin the recent trend of softer macro data, Fed balance sheet unwind, etc.

    On Asia credit, we generally remain negative oil and have Sells there in the IGspace, and are also negative on the property sector in India & Indonesia. Weprefer defensive credits in India HY. We find value in some of the high stepupcorporate perps among China HY names. In sovereigns, we are cautious overallwith Mongolia 2021s representing our only outright Buy recommendation. Weexpect CEEMEA corporate spread performance in 3Q17 to remain range bound,but remain constructive on Turkish banks. As for developments in GCC involvingQatar and Saudi led alliance, we are optimistic about a diplomatic resolution;but apart from this, the recent weakening in oil prices is expected to weighon GCC issuers and CIS oil and gas names in the near term. The risk of USsanction extensions will weigh on Russian credits. Select real estate, Quasi utilityand Russia and South Africa based TMT issuers continue to be our preferredplay within corporate space. We are turning more cautious on LatAm corporates(and on LatAm energy companies in light of lower oil prices) and advocate amore defensive allocation into intermediate-duration (ideally 4 to 9 years), higherrated(ideally ‘BB’ to ‘BBB’), lower-beta and not-too-tight credits (ideally above200bp) within the region, of which our favorite risk-reward stance is found in theBrazilian BB-rated and BBB-rated credits in the pulp & paper and petrochemicalsproducers, as well as large manufacturing and food companies with a significantinternational presence but no mention to ongoing corruption investigations. Thekey exception to our filter described above is our still constructive view on single-B-rated YPF ‘25s and the Argentine provinces of Salta (SALTA ‘24s) and Cordoba(PDCAR ‘24s). See Corporate Credit - EM Chartbook for details.