EM Corporate Debt Themes in an Evolving World

Industry Investment Rating - Emerging market (EM) corporate debt offers compelling opportunities due to its diversity and potential for return dispersion [2][6] Core Themes Impacting EM Corporate Debt - Negative net supply, U S policies, crude oil, interest rate trajectory, and improved default rates are key themes for 2025 [6] EM Corporate Debt Performance - In 2024, EM corporate credit performance was strong with index returns surpassing 7 6%, outperforming both EM and developed market (DM) credit in most rating categories except CCCs [5] Negative Net Supply - EM corporate debt market cap grew from $300 billion to $1 4 trillion ($2 2 trillion including quasi-corporates) from 2010 to its peak, driven by Asia, particularly China [7] - Net financing turned negative in 2022 and 2023 due to a 50% drop in gross issuance from its peak, though issuance stabilized in 2024 and is expected to remain stable in 2025 [8][14] U S Policies - The Trump 2 0 administration's potential trade policies, particularly tariffs on China, and a softer outlook for EM currencies are key risks for EM corporates [15] - Greater China issuers account for 15% of the J P Morgan CEMBI Broad Diversified index, with 74% being investment-grade (IG) rated [16][17] Crude Oil - Global oil demand growth for 2025 is forecast at 1 million barrels per day, below historical averages, with China and the U S being the primary demand drivers [35][36] - OPEC's output constraints and geopolitical factors, such as conflicts in the Middle East and Ukraine, add volatility to oil markets [38][39] Interest Rates and Financing Costs - Higher interest rates have increased average coupons by over 40 basis points (bps) since 2021, with lower-rated issuers more affected by rising financing costs [46][52] - The index maturity profile is stable, with 5% maturing in 2025 and 10-15% per year over the next five years, in line with historical averages [53] Default Rates - The long-term default rate for the HY component of the EM corporate universe is 3 6%, with defaults peaking during COVID-related stress and Chinese real estate sector challenges [60][62] - Default rates are expected to remain contained in 2025, supported by issuers' ability to address near-term maturities and expanded financing options [63][64]