Corporate Bonds’ Blunted Body Slam

Corporate bond promoters continued to slough off growth, earnings credit downgrade, and tight valuation worries with spreads well under 300 basis points over Treasuries into the first quarter before the covid-19 scare, citing Sharpe ratio return over a decade and Asian company resilience after the last SARS epidemic outbreak to support the asset class. JP Morgan’s annual conference participants favored Latin America with China’s economy retreating, despite a likely Pemex fallen angel rerating and Mexico and contentious sovereign restructuring over Argentina’s $100 billion pile owed more to the IMF than commercial holders. A core industry argument is hiring of dedicated analysts to perform bottom up evaluations, with reduced leverage in financial ratios and risks of massive currency depreciation remote. CEMBI risk adjusted returns were superior in particular the past five years, with liquidity also better than US high yield, according to historic calculations. Lower volatility has come with pension fund allocation, and cross over investors from pure advanced country instruments are now committed. Across major Chinese, Russian, Brazilian and Turkish issuers balance sheet and management fundamentals improved, although profit outlooks may suffer with the coronavirus spread. Ratings trends remain slightly negative, with Indian companies recently following post-sovereign rethinking on growth and competiveness reservations. Argentine names already followed this track, while Ukraine ones could benefit from opposite sovereign upgrade. China real estate was an iffy proposition before the disease pressure, and will fall further into the speculative category unlike steady rating patterns otherwise expected. Primary supply in January and February was strong for refinancing purposes chiefly with surprise pickup in Chile at 20% of the region for anti-unrest increased social spending ahead of a proposed constitutional redraft. Asia tapered as the COVID-19 epicenter, and Russian appetite was solid despite the threat of US and Europe election interference sanctions, while ESG green instruments also featured.

Banks have fallen out of favor in the Middle East and elsewhere, joining previously sidelined Chinese and Turkish ones. Non-bank problems are likewise in the spotlight in India and selectively in Latin America, and hydrocarbons and metals as one-fifth of the CEMBI are under demand squeeze with output and environment caps. Oil and gas suppliers can now be screened on a sophisticated range of operational and carbon footprint metrics gaining institutional investor acceptance. The leading providers have launched stand-alone indices that could be merged over the medium term with conventional gauges and cover both public and private markets, experts believe. On Argentina specialists argue that corporate negotiations on a case by case basis could be smoother than the latest sovereign saga. After the IMF declared the debt load unsustainable, recovery in the 50 cent range may not be assumed, and energy-related issuers will have to take on a new set of tariffs and regulation after the Macri government’s liberalization push.  Brazil should be a better bet with infrastructure and consumer goods’ rebound signs, but a key driver will be changing local capital markets behavior as retail customers switch from banking deposits and Treasuries to private securities preference. Mexico has enjoyed a peso bump with passage of another North America free trade pact, but near recession and President AMLO’s erratic decision making exacerbated jitters, despite top industry association investor relations marks for career professionals.