Emerging markets continue to have lower levels of debt than developed markets as a percentage of GDP. But as the chart below shows, from 2009 emerging markets have increased their levels of indebtedness to reach 183% of GDP according to latest available figures. What has driven this increase?
1990-2018
Source: Pictet Asset Management, BIS, CEIC, Datastream, Q3 2017
Source: Pictet Asset Management, BIS, CEIC, Datastream
Q2 2009-Q3 2017
Source: Pictet Asset Management, BIS, CEIC, Datastream
In the Chinese corporate market, we feel our investment opportunities are mainly in the external (US dollar denominated) space. That's not to say we don't occasionally look at renminbi debt, but we do not currently have any RMB corporate bond exposure in our portfolios.
As shown below, China is expected to remain a significant contributor to gross issuance in external debt in 2018.
2018 supply forecast by region
Source: JP Morgan 09.05.2018
China now accounts for 42% of short-dated EM credit issuance compared to 18% five years ago. Most of this is focused on two sectors: real estate and financial services.
In our view, short-dated credits issued in the former are not attractive. This is because China real estate developers have been willing to pay up to get their debt issued, given their refinancing needs and time limits on regulatory approval, which in turn has put pressure on the secondary market. In relative terms, we therefore prefer select short-dated Chinese credits in financial services when the bottom-up fundamentals stack up.
31.05.2018
Source: Datastream, Bloomberg, data as at 31.05.2018 and in USD. Equity indices are quoted on a net dividend reinvested basis; bond and commodity indices are quoted on a total return basis. The currency rates evolution is treated as a performance calculation based on FX rates.
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