PI Partnership – Legal & General Investment Management
HOW HAS EMERGING-MARKET CREDIT FARED DURING THE RUSSIA/UKRAINE CRISIS?
Uday Patnaik is head of emerging market debt
Raza Agha is head of emerging markets credit strategy
Emerging-market (EM) credit has been hit hard by the Russia/ Ukraine situation. Both EM sovereigns and corporates have widened by approximately 100 basis points (bps) since the con- flict began. Barring the initial impact of the pandemic, current spreads are the widest since the global financial crisis. Looking at the dynamics of the widening, at an overall level, it has been led by high-yield credits. In sovereigns, these are 170bps wider since the start of the invasion. Investment-grade credits have also widened, but by a relatively smaller 65bps. Regionally, credits in close geographic proximity to the crisis have weakened the most (countries like Azerbaijan, Kazakh- stan and Uzbekistan), despite relatively decent economic fun- damentals. Similarly, countries like Egypt and Pakistan – which are heavily dependent on food and/or energy imports – have seen sharp falls in bond prices. Underperformers include countries where the reform story and fundamentals are weak, either due to large financing needs (reflecting big budget and current account deficits) or high debt levels. That includes the countries of El Salvador, Ghana, Sri Lanka, and Pakistan. The relative outperformers include commodity producers like the Gulf Cooperation Council countries (including Qatar, Sau- di Arabia and UAE), South Africa, and Brazil where exports should benefit from higher commodity prices. What all this widening of spreads has meant is that the yield on our emerging-market sovereign benchmark is now more than 7%, which means nearly 60bps of monthly carry alone. Much of the long end in the high-yield space is above 10%, which – in that tenor at least – means market access is compromised. In- deed, issuance has more or less come to a standstill since the conflict began.
Diversity amid contagion
While contagion from the crisis has been widespread, we have several diverse themes running in our portfolios. We like bonds from countries and corporates which benefit from higher commodity prices (Angola, Gabon, Oman and Bah- rain, for example). We also have a positive view of countries which have reform
26 April 2022 portfolio institutional roundtable: Fixed Income
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