EM Corporate Bond Newsletter

Overall, the press conference left an unusually uncertain impression.

Ultimately, US Treasury Secretary Scott Bessent is also feeling the consequences: higher yields at the long end are making the refinancing of US government debt more expensive. The other US economic indicators, however, remained robust in July (see chart 2). 

Chart 2: Economic growth in the US remains robust

The price of oil and – to an even greater extent – the prices of oil products such as diesel, petrol and kerosene rose again over the course of the month, thereby exerting additional upward pressure on yields. Among other factors, this was triggered by renewed mutual attacks between the US and Iran, as well as a significant reduction in traffic through the Strait of Hormuz. Furthermore, attacks by the Houthis in the Red Sea and Ukrainian attacks on Russian refineries fuelled concerns about potential supply bottlenecks for oil products.

Emerging Markets Overview

In the run-up to Xi Jinping’s visit to the US, scheduled for 24 September, tensions between China and the US rose slightly. At the same time, the Chinese purchasing managers’ indices were rather weak, pointing to persistently subdued domestic demand. Sectors such as the automotive and technology industries remain key drivers of the export economy. 

However, new orders performed weaker than expected: at 48.5, the relevant index was below the neutral mark of 50 points. According to Bloomberg, Germany is preparing for an economic-diplomatic confrontation with China and is analysing, in particular, the vulnerability of the Chinese economy from a German perspective.

In Indonesia, doubts about the central bank’s independence have continued to grow. President Prabowo Subianto had previously appointed his nephew as deputy governor of the central bank. Now, central bank governor Perry Warjiyo has resigned two years before the scheduled end of his term of office. Warjiyo is regarded as one of the most influential economists and central bankers in the region. The Indonesian rupiah remained relatively stable following this development, having already depreciated by around 13 per cent against the US dollar so far this year. Buoyed by a strong fiscal stimulus, the Indonesian economy is currently growing at a rate of nearly 6 per cent, which is above its potential growth rate.

Brazil plans to increase the proportion of its government debt issued in foreign currency from the current level of around 3.8% to approximately 5–7% in order to relieve pressure on the local capital market. Yields on the Brazilian domestic market remain at a very high level; real yields are also hovering around 8%. Reasons for this include limited domestic savings and expansionary fiscal policy. The high local financing costs are leading to the crowding out of private investment, increasing pressure on companies – a prominent example being Raízen – and contributing to a rise in non-performing loans, as shown, amongst other things, by the latest figures from Banco do Brasil and Santander Brasil. 

The announced increased use of international capital markets has led to a widening of the risk premiums on Brazilian euro- and US dollar-denominated government bonds, as higher issuance volumes are expected in the future.

IMF Managing Director Kristalina Georgieva visited Argentina and spoke positively about the country’s economic development. She also suggested that, in the long term, Argentina could once again manage without emergency funding from the IMF and meet its financing needs via the capital market or alternative sources such as development banks. However, as previously reported, economic development remains sharply divided:  
 
Whilst investment and activity surrounding the expansion of oil and gas production in Vaca Muerta are booming, other industrial sectors are stagnating or are under pressure. The labour market also remains under strain. A key factor is the relatively strong peso, which helps to stabilise inflation but at the same time undermines the competitiveness of other sectors of the economy.

In Kazakhstan, drone attacks on loading facilities belonging to the Caspian Pipeline Consortium (CPC) weighed on market sentiment. The CPC handles 80 per cent of the country’s oil exports, and the attacks led to a widening of risk premiums on government bonds. We remain overweight in the Development Bank’s bonds but are monitoring further developments closely.

Overview of EM Companies

Emerging market companies reported stable or good results overall in July. This trend underpins the recent positive rating changes in this segment (see chart 3).

Chart 3: Changes in corporate ratings in EM continue to show a stronger trend

Results were less dynamic or slightly weaker in the banking sector – including, as already mentioned, Banco do Brasil, Santander Brasil and Turkish banks – as well as in the retail sector, for example at El Puerto de Liverpool (Mexican department store chain).

In the mining sector, by contrast, companies such as Fresnillo, Volcan, Buenaventura and Minsur reported encouraging business performance thanks to persistently high metal prices. Oil and chemicals companies also, as expected, posted improved results.

Outlook & Performance

The performance of the funds and client portfolios during the reporting month was largely in line with that of the market. A renewed attempt to reopen the Strait of Hormuz to shipping could, if successful, increase market participants’ appetite for risk and create a more constructive market environment in the run-up to the US elections in the autumn. 

Note: Investments in securities entail risks in addition to the opportunities described.