A Value Perspective on Global Credit Markets

Emerging Markets countries have seen a growth slowdown in the last quarter. But in these countries – unlike Europe or the US ...

... – the governments have the finances available to stimulate economic growth. Emerging Markets’ central banks have already begun easing monetary policy by lowering interest rates and further cuts are expected in Q3.

‘The ‘good’ thing about the stress in financial markets is that it keeps businesses unusually focused on balance-sheet quality. This is good for credit investors because it means that focus is centered on paying off bondholders rather than paying large dividends to share¬holders. European banks are making a tremendous effort to get themselves in better shape – something that – over the medium term – should imply lower default risk for bondholders in financial businesses. Because companies are reducing debt, they are not issu¬ing new bonds so supply is low and this is a support to corporate bond prices. Investors are nervous and are putting their money into fixed income securities. European and Emerging Markets high yield bonds pay high yields currently and are less volatile than equities.

Some markets are more attractive than others. European and Emerging Markets high yield bonds yield substan¬tially more than US high yield bonds because of the crisis in the Eurozone and perceived weakness in Emerging Markets in terms of growth. Instead of investing heavily into the Eurozone area we have invested in Norway, UK and Sweden. Here you also get high premiums compared to US high yield, but these countries have their own central banks behind them to support – something that unfortunately can’t be said for the Eurozone countries.

The attached ‘Letter to Shareholders’ gives a perspective on the events of Q2 from Sparinvest’s Value Bonds team, value hunters in the corporate bonds market.

If you have further questions, please do not hesitate to get in touch.

Best regards
Nichola Marshall
Manager, Marketing & Communications
Sparinvest S.A.

+352 26 27 47 32