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“Going into 2H, we recommend staying underweight emerging markets (EM) rates, neutral EM sovereigns, and overweight EM corporates, but have moved neutral EM foreign exchange from underweight.” Luis Oganes, Head of Currencies, Commodities and Emerging Markets Research
EM Growth: Growth is set to improve in 2H, while EM risk premia have limited room to compress.
EM Credit: Credit spreads can tighten an additional 20-25bp by year-end and deliver positive returns, compared to EM local rates which will likely end the year still higher. In EM credit we maintain long commodity exposures in sovereigns and stay overweight in the J.P. Morgan Corporate Emerging Markets Bond Index (CEMBI) as corporate fundamentals look robust.
Government Bond Index Emerging Market yields have moved in lockstep with U.S. Treasury yields despite the wide variations of yield moves at the country level. We are selectively overweight high yielding rates, including Mexico, Indonesia and South Africa.
“Emerging Markets Corporate High Yield default rates should be benign this year at 2.5% with recovery rates remaining elevated at over 40%. Gross supply should reach a record $550 billion. Select High Yield commodity credits in Asia and CEEMEA remain attractive, as well as bank subordinated bonds across the regions.” Yang-Myung Hong, Emerging Markets Corporate Strategy Research