Emerging-Market Corporates’ Most Underappreciated Quality? Resilience

11 November 2024

1 min read

Emerging-Market Corporates Have Been Resilient Across Market Cycles

Bars showing EM corporates (with spread and Treasury components) posting competitive returns over past 10 years

Historical analysis does not guarantee future results.
EM: emerging-market; IG: investment-grade
EM corporates are represented by the JPM CEMBI Broad Diversified Index; US high yield is represented by the Bloomberg US Corporate High Yield Index; US IG corporates are represented by the Bloomberg US Corporate Investment Grade Index; Global Aggregate is the Bloomberg Global
Aggregate Index.
Through December 31, 2023
Source: Bloomberg, J.P. Morgan and AllianceBernstein (AB)

Emerging-market (EM) corporates have a track record of resilience across market cycles. Over the past decade, EM corporate bonds have allowed for participation in rising markets, while exposing investors to less downside during market downdrafts (Display, left). This is due to an especially pronounced inherent barbell structure that balances interest-rate risk with credit risk, providing independent sources of return that are negatively correlated to each other (Display, right).

This dynamic comes naturally to EM corporates. EM corporate debt priced in US dollars is sensitive to US interest rates. This helps provide a defensive buffer against volatile markets. Meanwhile, the sector’s lower-rated credits boost upside participation in risk-on environments. (While the EM corporate market is rated investment-grade in aggregate, it reflects the entire credit spectrum, from high-grade through high-yield debt.)

This natural barbell feature also partly explains why the EM corporate market’s Sharpe ratio, or risk-adjusted return, for the past 10 years has been meaningfully higher than that of both US investment-grade corporates and the Bloomberg Global Aggregate Index.

That’s why we believe EM corporate bonds’ balance of interest rates and credit can help prepare investors for whatever conditions lie ahead.

The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AB portfolio-management teams, and are subject to change over time.