EM Corporate Bond Newsletter

Emerging Markets Overview

Chinese industrial production performed unexpectedly weakly in July, growing by 4.6% year-on-year, and fell short of both expectations and the previous month’s figure. Consumer spending rose by just 0.6% year-on-year, whilst investment in fixed assets actually fell by 12.6% over the same period.

Note: Past performance is not a reliable indicator for future performance.

The Politburo announced further measures to stabilise the property sector which has been under pressure for years. In future, property developers will only receive their sales proceeds once the respective projects are nearing completion. This means that companies will have to rely more heavily on additional financing to bridge their cash flow gaps. This shifts the completion risk more heavily from buyers to project developers. At the same time, the measure is likely to help limit a further oversupply in the property market and thus, in the long term, also support house prices. However, shares and bonds of the remaining property developers reacted negatively.

US Treasury Secretary Scott Bessent also sought, in a communiqué following the G20 meetings, to highlight the Chinese trade surplus, which the US views as problematic and burdensome. As expected, China refused to endorse the communiqué.

In Peru, economic activity has recently slowed by a surprisingly large margin. The El Niño phenomenon which has been particularly pronounced this year, is weighing on both the fishing industry and agricultural production.

At the same time, Gerdau, the Brazilian-American steel group, warned the Peruvian government against allowing a Chinese company to significantly expand its production capacity. Should this happen, Gerdau is considering putting a planned investment of USD 45 million in Peru on hold. By promoting Chinese investment, Peru is increasingly coming under the scrutiny of the US, given that the country already has a large industrial port owned and operated by a Chinese company. At the same time, the government aims to mobilise investments of around USD 40 billion in the mining sector and, to this end, intends to address social conflicts – which have frequently blocked projects in the past – more proactively and decisively.

Note: The companies mentioned in this article are selected for illustrative purposes only and do not constitute an investment recommendation.

The pronounced El Niño weather phenomenon is also being felt significantly in Panama. Due to low rainfall and low water levels, the Canal Authority is limiting the number of ships that can pass through the Panama Canal. To stabilise revenue, transit rights are being auctioned off: higher bids allow for earlier passage.

In Brazil, the elections on 4 October are drawing nearer, with Bolsonaro catching up to Lula and they are  now both at the same level around 41% of election chances in the first round.  The economy continues to suffer from high local nominal and real yields. These are weighing on economic activity, increasing financing costs and making it more difficult for both households and businesses to service their debt.

As much government spending is enshrined in the constitution, the scope for short-term and clearly visible fiscal adjustments remains limited. The currency and risk premiums have so far remained stable. However, corporate bonds in the lower high-yield segment have recently performed comparatively poorly. The effects of high financing costs are becoming increasingly apparent both in this segment and on bank balance sheets.

The Dominican Republic which is assigned a BB rating, continues to grow robustly. Economic growth of around 5% is expected for 2026. Despite high oil prices, government spending remains under control thanks to consistent prioritisation of expenditures. Tourism, too, remains stable despite high airfares and is supporting economic performance. We have been, and remain for the time being, overweight in government bonds maturing in 2031 and in the bond issued by the airport operator.

Note: Prognoses are not a reliable indicator for future development.

Moody’s has affirmed the rating on Nigerian government debt and raised the outlook to positive. This is due, amongst other things, to the significant increase in foreign exchange reserves which have now reached just under USD 55 billion thanks to higher oil prices and are strengthening the country’s external position. Remittances from Nigerians living abroad have also risen significantly, totalling just under USD 1 billion in July alone. Angola is also benefiting from high oil prices; its gross domestic product recently grew by more than 8%.

Senegal’s rating was further downgraded to a level just above ‘D’ after the country announced its intention to restructure its debt. This debt had risen to more than 130% of GDP as a result of misclassifications and mismanagement. It remains to be seen to what extent, in addition to international bonds, local liabilities, bilateral loans from other countries and financing from development banks might be included in a potential restructuring. Bonds issued by BOAD, AFRFIN and AFREXIM – development banks with, in some cases, senior loan positions – also performed slightly weaker in the face of this uncertainty.

Venezuela and the US have agreed on a framework for the future development of Venezuelan oil production, involving both private and state-owned US entities. The country’s bonds reacted positively to this news.

Overview of EM Companies

CSN from Brazil reported slightly better figures than expected. However, given the continued significantly negative free cash flow, this is not sufficient to substantially alter our assessment. The company is also in the process of divesting its cement division. The remaining business segments – particularly mining (iron ore) and steel – remain under pressure due to lower selling prices and higher costs (e.g. transport). The new CEO, the former chairman of the board of the iron ore group Vale, may have to manage the capital structure more rigorously in future. We remain underweight in CSN.

By contrast, Lenovo, the Chinese computer manufacturer, and Thai Oil from Thailand reported strong results. S&P confirmed the rating of PTTGC, the Thai chemicals group, and raised the outlook to positive. We are slightly overweight in the company’s callable, perpetual bonds.

Turkish companies continue to suffer from weak demand, a strong currency and rising input costs. Ulker and Sisecam both reported weak figures; we hold no positions in these issuers. Furthermore, Garanti Bank, the Turkish subsidiary of BBVA, plans to remove loans to small and medium-sized enterprises with a nominal value of around USD 2 billion from its balance sheet as part of a swap transaction. This is a further indication of the rapid deterioration in credit quality on Turkish banks’ balance sheets.

We remain significantly underweight in Turkish banks and continue to favour Turkcell, in which we hold a much larger position.

US meat producers are suffering from high procurement costs due to a significant decline in cattle herds. At the same time, capacity closures and an easing of import restrictions could benefit producers such as Marfrig and Minerva from Brazil. Minerva plans to significantly reduce its working capital over the next six months in order to lower its debt by reducing inventory levels. We have therefore become cautiously more optimistic in this regard and have reduced our underweight positions or built up slight long positions – with yields of between around 7.0% and 8.5%.

Outlook & Performance

US yields are increasingly coming to the fore this year as a key driver of performance. Higher-yielding bonds in the lower-rated segment, as well as less liquid securities, have so far benefited from falling risk and liquidity premiums, thereby providing an effective buffer against the rise in US yields. This effect can be observed particularly clearly in the subordinated bond issued by the Saudi Arabian Al Rajhi Bank, which we are overweighted in (see Chart 2).

Chart 2: Al Rajhi Bank’s risk premiums have so far only moved in one direction...

The bond’s spread have narrowed significantly, although the price and absolute yield have remained largely unchanged. Many investors base their buying decisions more on the absolute yield than on the risk premium. As US yields have risen over the same period, this has led to an ‘apparent’ narrowing of the risk premium.

However, this development is not attributable to a significant improvement in the issuer’s fundamentals, as these have hardly changed. Rather, the narrowing of risk premiums reflects sustained strong demand as well as pronounced technical support at certain yield levels.

Our fund’s performance was slightly below that of the benchmark index due to its higher effective sensitivity to US yields.

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