Although optimism is still not the order of the day, macroeconomic data released in April did bring some quite cheering news. Expectations as reported in findings from surveys of purchasing managers, pointing to the first green shoots of a recovery, improved quite noticeably for the first time since the crisis flared up. This sudden upturn in expectations does, however, need to be put into perspective: the rise in these indicators is still not enough to talk about an improvement in the economy. Overall, readings remain in territory indicating that the recession will still be there tomorrow.
Investors’ interest in corporate bonds as an asset class is still lively, as evidenced by the record volumes of bonds issued since the start of 2009. The primary market is gradually expanding, with borrowers with lower credit ratings or whose businesses are more cyclical issuing bonds. Less expected a few months ago, enthusiasm for high-yield bonds has remained buoyant, which is reflected in this segment’s impressive returns.
Returns on emerging-market debt were again positive in April. Local-currency emerging bonds continued to outperformed their dollar denominated counterparts. The main reasons behind this rally by emerging debt, beyond the mere revival in investors’ appetite for risk, can be pinpointed as the policy initiatives being implemented by various countries and the IMF to keep emerging countries’ financial systems afloat. In any event, performances in the coming weeks will remain heavily influenced by what is happening on the global stage.
OUTLOOK
The credit-risk market should, on the whole, benefit from demand from investors attracted by the interesting credit spreads, but corporates are unlikely to outperform stunningly unless there is a tangible upswing in economic circumstances. The reporting season that has just got under way should shed some welcome light on the matter.
The short-term outlook for emerging local currency bonds hinges largely on the macroeconomic risk backdrop. The recent improvement in risk sentiment has significantly benefited emerging-market assets. Nonetheless, uncertainty continues to prevail and, for this reason, any recovery will be tentative without further macroeconomic data indicating that a bottom has been reached. For the time being, the market remains vulnerable to a further move downwards in macroeconomic variables. In the medium term, the basic consensus view remains that emerging markets will continue on their convergence path.
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