USD EM Corporate Bonds: Executive Summary

The asset class has grown rapidly. The amount of hard currency EM corporate debt outstanding is 7x larger than it was a decade ago. The asset class has grown more rapidly than virtually every other fixed income segment over this horizon, says Barclays. One of out of every five dollars of global corporate issuance now comes from an emerging market company.

Several developments have motivated EM corporates to issue hard currency bonds. The stability of EM sovereigns and the development of deep sovereign USD bond curves have laid the foundation for EM corporates to issue. Rapidly growing and increasingly international companies domiciled in emerging markets have outgrown their bank lines and sought to diversify using the bond market. This process has been accelerated by the slowdown in bank lending and supported by the persistent low rates environment.

Investors have been receptive of this supply. Some of the demand has come from EM dedicated investors who are increasing their allocations to corporates as sovereign supply declines. Meanwhile, global investors have been conservatively invested in EM corporates and are now seeking to increase their holdings of EM bonds, especially as developed market bond yields remain at extreme lows amidst accommodative central bank monetary policy.

As the financial landscape evolves, new challenges are emerging for EM corporates. Corporate bond liquidity has generally declined and, as a less-liquid segment of global credit, this has been an especially acute concern for emerging market corporates. The macroeconomic environment in which companies operate has also deteriorated - commodity prices have declined, EM FX has weakened versus the dollar, growth has slowed, and political/geopolitical risk has escalated. The decade-long trend of EM sovereigns being upgraded has stalled. EM corporates will soon face their first Fed rate hike as a mature asset class.

That said, this growth will continue, though perhaps at a more modest pace. From a supply standpoint, emerging markets comprise the majority of the Earth's surface and population, and 40% of its GDP, but still only account for 20% of the global financial market. Demand should also persist: in an environment of low developed market interest rates, EM corporate credit will continue to take on an increasingly important role in global bond portfolios, according to Barclays.