Since late 2013, international bond markets have been offering an unusual and rare arbitrage opportunity between developed and emerging market (EM) corporate bonds.
Currently, as EM issuers, as rated by Standard & Poor’s, display a more stable rating compared to their European and US peers, by switching from BB rated eurozone bonds to BBB rated EM bonds, investors can not only reduce their credit risk significantly but also take advantage of a 98 bp spread (as of early May 2014).
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Furthermore, EM corporate bonds have performed well in the year so far, shaking off various adversities including the on-going dispute between Russia and Ukraine, domestic political turmoil in Venezuela and somewhat jittery stock markets. Both investment-grade and high-yield rated bonds are in positive territory and the pick-up in primary market activity attests to sustained market momentum. Corporate bond spreads in EMs continue to trade at historically high levels compared to those in developed markets with similar ratings and maturities, which will probably attract further inflows into the asset class.
EM corporate bonds enable investors to get exposure to the superior EM growth story with a similar credit risk to that of developed market corporate bonds, all the while providing efficient diversification within a developed bond portfolio. In addition, they offer higher yields and better compensation for risk than similar developed market corporate bonds in the current low interest-rate environment.
UBP currently offers different EM corporate bond strategies: a traditional global one, one focused on investment grade, and a short-duration and high-yield one. The latter two strategies apply a traditional bottom-up bond-picking approach with the aim of offering the highest yield for a given level of risk.
UBP’s EM investment-grade corporate bond strategy has consistently outperformed its benchmark (JPMorgan CEMBI Diversified) since its launch on 1 December 2011, offering an annualised return of 7.67% compared to 7.14% for the index. In the second half of 2013, just as EMs suffered from higher volatility and the sharp US Treasury curve-steepening, the strategy offered investors a positive performance.
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By GlobalDataManaging around USD 2.9 bn in assets as at the end of March 2014 (up 48% from end-2012), UBP’s EM Fixed Income team comprises eight investment specialists and has resources dedicated to credit research, risk management and trading. They are active managers and oversee the entire spectrum of global EM fixed income (sovereign, corporate, local currency).
