LAC Monthly Watch - July 2024
The credit market extended its strong performance in July due to US Treasury rally which brought the rates down from mid-4% to 4% with employment data continue to show weakness. The outperformance was fueled by both successful liability management exercises (LME) and continuation of high yield credit spread compression towards investment grade level. While the credit market is enjoying the general rally, we should be cautious on the change in risk appetite due to potential rate cut by Fed in September, as it might signal a potential economic downturn in one of the largest economies of the world.
Asia Credit Markets: Rally continues followed by the Subtext of Change in Risk Appetite
Asia high yields continued to show solid performance in July. Apart from the returns that were attributed from the beta rally, the Indonesia real estate sector once again was the outperformer in July where developers are able to pay or tender their maturing bonds at par or sub-par level before the maturity wall arrived by using cheaper onshore funding. On the other hand, some corporates from the Indian commodity sector and the Hong Kong property sector have also experienced a fierce spread compression due to attractive valuations.
Looking forward, alpha generated by the LME theme will be a focus in the area, while more RV opportunities will emerge due to the change in risk appetite. We do believe fundamentals play a more important role to determine the fair valuation when the risk-off tone arrives.
Global Credit Markets: Potential Alpha within the Sovereigns and Corporates in Africa and CEEMEA
US employment data in July continued to be sluggish which sustain the positive sentiment in the global credit markets as a rate cut can happen as early as September. Credit markets especially those with supportive fundamentals and potential upgrade stories in Turkey and Brazil are some of our key areas to search for quality corporate credits that are capped by their sovereign ratings.
On the other hand, we continue to follow the restructuring stories of some frontier markets in Africa where we believe the exit yield should be matching its peers in the area with potential upside from their existing trading level.
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