The Long and Short

A fast start despite challenging fundamentals

| February 5, 2021

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Emerging markets debt looks likely to keep luring investors looking for yield, with spreads still wide of pre-pandemic levels. And EM issuers are responding. January marked the most active month for EM debt issuance on record, with some deals between 4x and 8x oversubscribed. Some new deals are immediately repricing in the secondary market one point to two points higher. Despite investor appetite, the earnings season is starting to show that some sectors face challenging fundamentals.

The EMBI Global Index’s most recent spread of 319 bp still stands wide of its pre-pandemic February 2020 tights of 288 bp. EMBI Global Index returns so far this year have come in at -1%.

In the EM debt primary market, January 2021 marked the most active bond issuance month on record with US$121 billion compared to US$112 billion in January 2020, according to Bond Radar. This is also almost five times the total bond issuance in December 2020 (US$25 billion). Within January’s issuance pie, Asia represents 50% and Latin America about 25%, with US$30 billion of new issuance and a year-end target for Latin America of US$75 billion. As things go this number will likely be surpassed during the first half of 2021.

Issuers are taking advantage of low US Treasury yields, despite the recent moves and curve steepening, and massive hunger for yield across the globe.  On the more technical side, Latam high yield corporate debt new issues are often 4.0x to 8.0x oversubscribed, with bonds breaking into the secondary market one point to two points higher above issue price. On the other hand, issuers and their syndicate banks are pushing spreads 50 bp to 100 bp tighter from original issuance price guidance, leaving less room from compression and some disappointment. Some of this very tight HY ‘B’ issuers look likely to be the first ones to sell-off during a correction.  Latam HY corporates that outperformed recently (+3-4pts) tend to be small issues (US$500 million) and include Crédito Real, Atento, Banco Industrial, Ammagi. Still, most of the new wave of issues—mostly issued to take out callable bonds—are trading above par.

Reporting season just started, which usually lasts two months in Latam. Earnings expectations for the fourth quarter of 2020 are a mixed bag, as most Latam countries experienced sharp recessions in 2020 with GDP down 5% to 10%. Many are still going through the pandemic with limited vaccination programs in place.  Sectors that should perform well during earnings include steel, mining, agribusiness, pulp and paper, all linked to exports and China. On the other hand, sectors with expected weaker results include industrials, transportation, oil and gas, consumer, financials and utilities, all linked to domestic GDP and a reflection of an uncertain recovery environment. It will be healthy to start seeing some credit differentiation based on fundamentals, as the current high tide in credit valuations hides some of the fundamental weaknesses in various companies.

Jose Kliksberg
jkliksberg@apsec.com
jkliksberg

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.

The Library

Search Articles