An Update on Emerging Market Bonds
AM with a PM
Mila Skulkina, CFA
Title: An Update on Emerging Market Bonds
Hi, my name is Mila Skulkina and I’m the lead portfolio manager for Lord Abbett's emerging markets bond funds.
INTERSTITIAL: Emerging Market Bonds: The Current Environment
We have a positive outlook on emerging markets fixed income. The prospect of synchronized global recovery as the vaccinations pick up pace and help address the health situations in some of the hard-hit countries, coupled with rising commodity prices and really the amount of liquidity in the global financial system, we believe is supportive for risk assets and emerging markets debt in particular.
Valuations look quite compelling with the investment grade portion of the emerging markets universe providing 50 to 70 basis points of yield pickup versus the developed markets; in emerging markets high yield, giving well over 150 basis points of yield pickup versus U.S. high yield.
EM corporates entered the crisis last year on a strong footing, having been on a leveraging trend for the last several years. And in fact, historical default rates in emerging markets follow the global credit cycle and last year were lower than those of U.S. high yield. And as earnings continue to recover, we expect that bondholder-friendly behavior to continue with capex and M&A remaining limited.
INTERSTITIAL: Potential Opportunities
Our preferred sectors include consumer cyclicals and commodity producers, where we expect pent-up demand to continue to benefit margins and credit metrics. On the sovereign side we favor idiosyncratic stories where the presence of multilateral institutions such as the International Monetary Fund or the World Bank can provide liquidity relief and technical assistance necessary as the sovereigns bridge the gap from the effects of multiple lockdowns and economic recovery on the other side.
There are currently very interesting opportunities in sub-Saharan Africa and Southeast Asia.
INTERSTITIAL: Final Thoughts
To conclude, current yields of over 4½% in emerging markets are attractive, given our overall macro outlook and fundamental views. Emerging markets can play a key role in an investor's portfolio that may be domestically tilted and provide geographical diversification and a compelling yield pickup.
Thank you for listening and thank you for your continued interest in Lord Abbett.________________________________________
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