Fixed income strategy – Our top picks for H2
Strategy Note / Global

Fixed income strategy – Our top picks for H2

  • We present our Top-5 picks for the second-half of the year and survey recent market developments

  • Our picks are: Sri Lanka (BUY ‘24s); Senegal (BUY ‘48s); Iraq (BUY 23s); Mozambique (BUY 31s); Egyptian T-bills (BUY) 

  • We discuss these in more detail and also present our latest ratings vs spreads chart

Stuart Culverhouse
Stuart Culverhouse

Chief Economist & Head of Fixed Income Research

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Contributors
Luke Richardson
Kiti Pantskhava
Patrick Curran
Tellimer Research
23 July 2020
Published byTellimer Research

In this Strategy note, we present our Top-5 picks for the second-half of the year and survey recent market developments.

A lot has happened since we published our last Top 5 picks in December. EM hard currency sovereign bonds have seen a strong recovery since the depths of the coronavirus pandemic in March/April when the world looked a rather bleak place. In fact, the return on the EMBIGD is now flat for the year, after having been -20% at one point. The spread on the EMBGID is 447bps (cob 21 July), compared to its peak of 721bps on 23 March, but it still remains 156bps above the level at the start of the year.

The EM debt rally has been fuelled by three main factors: (1) an easing up in the spread of the pandemic and national lockdowns; (2) the massive global policy response; and (3) support for oil prices, which will help ease external liquidity and fiscal pressure in exporters.

As a result, capital inflows to EM have returned, and the decline in yields and stabilisation of market sentiment has allowed sovereign borrowers to return to the international bond market (including non-IG issuers). According to the IIF, debt inflows into EM amounted to US$48bn in Q2, more than making up for the outflow of US$33.5bn seen in March. We estimate that EM hard currency sovereign bond issuance reached US$83bn in Q2 (see here).

But global risks remain, which could constrain the recovery in EM debt. Notably these include: (1) The continuing threat from the coronavirus pandemic; (2) the full economic impact of the coronavirus pandemic has not yet been realised and may only be seen with a lag; (3) the extent of the impact while economic scarring (hysteresis effects) may mean that the cyclical recovery is hindered by structural damage to the economy; (4) specifically for EM, the fiscal impact and impact on debt sustainability has still to be revealed, while economic prospects for some countries that are particularly dependent on sectors that have been most affected by coronavirus (eg travel and tourism) is not yet clear; (5) continued deterioration in the West’s relationship with China; (6) US presidential election in October; (7) debt relief for EM; and (8) the oil price outlook and the ability of OPEC+ to manage effectively the supply/demand imbalance.

Our Top-5 picks for the second half of 2020 are:

1.       Sri Lanka (BUY ‘24s)

2.       Senegal (BUY ‘48s)

3.       Iraq (BUY 23s)

4.       Mozambique (BUY 31s)

5.       Egyptian T-bills (BUY) 

Our picks are all sovereigns (no corporates), and Buy recommendations, and comprise a well-diversified mix of special sits/distress (Sri Lanka), long duration (Senegal 48s), short duration (Iraq 23s), high-yield (Mozambique 31s) and local currency (EGP).

We also present our latest ratings vs spreads chart.