Video transcript

Luis Olguin: While the COVID pandemic is still playing out, we think it’s important to analyze its effect on the asset class and its issuers separately. As an asset class the incorporates have shown quite a bit of resilience. Having dipped to negative 7.5% at the depths of the pandemic, the asset class has been positive since late May, and is currently up 3.5%. All major countries except Chile and Turkey are in positive territory. On a sector basis, the transportation sector is still showing negative returns dragged down by the stress in airlines. EM dedicated fund flows have shown a similar pattern dipping during the depths of the pandemic and now showing inflows of 3.3 billion so far this year. While issuance slowed down during the dark days of the pandemic it has come roaring back, particularly in IG with over 300 billion issued so far through July. Gross issuance expectations of 440 billion will make this year one of the largest years on record.

Going through second quarter earnings season we see stress in cash flows as stop lines have been hurt. But even the margins, although weaker, have mostly held their ground. We’ve also noted that grossed up levels have increased with companies drawing down on their credit facilities as well as some even issuing longer term debt as a liquidity cushion. Although, in general that cash is still on the balance sheet and net debt levels haven’t risen as much. This dynamic is reflected in the relatively low year-to-date default rate of 2.5%. While default rates are likely to pick up from here, they’re not expected to be anywhere near the financial crisis levels or the original knee jerk expectations of many on the sales side. In general, companies in our universe have been appropriately managed in their maturity profiles for a while now and this has been evident during the COVID pandemic.

Financial sectors in the majority of our countries have performed well as they went into this period with solid capitalization ratios. And regulators have been quick to offer relief measures in order not to stress banking systems. Longer term, we think the COVID crisis will likely accelerate trends that were already underway. The transition to a greener economy is evident as many countries have set limits to their non-renewable resources as part of their electric generation matrix and companies incorporate these plans.

The COVID pandemic has proved that capital markets can shut down, even if temporarily, and having established relationships with different funding sources as well as available credit facilities can help issuers ride these uncertain times much better. We are yet to see whether increasing tensions between China and the U.S. will lead to further regionalization of the world and what effect that may have on supply chains. So far, global trade seems to be rebounding. All in, while the COVID pandemic has certainly tested the EM corporate asset class, issuers in our universe have performed well, and the asset class has shown maturity and resilience.