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In 2023, the cloud of headline risks swirling around emerging market (EM) corporates (COVID, Russia/Ukraine and China’s property crisis) began lifting as rating upgrades outpaced downgrades. Year to date 2024, the positive trend has persisted, bolstered by an uptick in sovereign-related upgrades.
In our view, EM corporations’ responses to the challenges they faced during the past few years have made them stronger. Looking forward, we believe that resilient EM corporate fundamentals, experienced company management and a more supportive macro backdrop should continue to support an improving ratings trajectory.
As shown in the chart, the aggregate EM corporate opportunity set has moved higher in quality over the past few years. Several factors supported this development: increased issuance of corporates in the higher-quality regions of the Middle East and Asia, the recent uptick in upgrades and pockets of select defaults.
2024 YTD sovereign rating action
Despite persistently higher interest rates and heightened geopolitical risks, positive sovereign rating actions have outpaced negative sovereign actions year to date. The general economic recovery post COVID, normalization in energy prices following the shock from the Russian sanctions and country-specific reforms supported the upgrades. Positive sovereign rating adjustments have the potential to provide an uplift for corporate ratings in the country.
Corporate deep dive
As noted previously, a key driver of upgrades in the corporate opportunity set has been related sovereign upgrades year to date. Upgrades of Turkey and Qatar provided tailwinds for their respective corporate opportunity sets, which together account for 7.6% of a closely followed corporate index.[1]
Following a few years of negative rating actions driven by the fallout associated with the Russia/Ukraine war, the net ratings trend in EM Europe has been strongly positive year to date, as several corporates in the region were lifted by the Turkey sovereign upgrades. However, even excluding corporate ratings associated with sovereign actions from the total ratings tally, corporate upgrades continued to outpace downgrades.
Asia—excluding China—has also stood out for positive rating actions, led by improving fundamentals for corporates in Indonesia and South Korea. Looking across sectors, resilient infrastructure issuers across countries led upgrades. Several idiosyncratic consumer stories in Latin America and EM Europe also supported upgrade trends.
While the negative ratings trend for China real estate has moderated over the past year, Chinese corporates still dominate downgrades year to date.
We believe the positive trend for corporate credit quality is likely to persist
The emerging market corporate universe has increased in size by 83% in the past 10 years.[2] As the opportunity set continues to expand and evolve, we believe it is important for investors to make note of the shift to higher quality and factor this development into asset allocation and valuation analysis. Due in part to strong fundamentals and conservative balance sheet management, many EM corporates demonstrated resilience during the macro shocks over the past few years. As companies continue the recovery from exogenous shocks, we believe many of the positive trends seen in the first half of 2024 should persist into the second half of this year.
[1] J.P. Morgan CEMBI Index, as of 28 June 2024.
[2] J.P. Morgan, as of 7 July 2024.
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This blog post is provided for informational purposes only and should not be construed as investment advice. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of Loomis, Sayles & Company, L.P. Information, including that obtained from outside sources, is believed to be correct, but Loomis Sayles cannot guarantee its accuracy. This material cannot be copied, reproduced or redistributed without authorization. This information is subject to change at any time without notice. Market conditions are extremely fluid and change frequently.
