1. Buy Tajikistan 7.125% 2027
We have a Buy recommendation on the TAJIKI '27s. Economic fundamentals have remained solid as spillovers from Russia and the war in Ukraine have been minimal, confounding initial expectations.
We think its strong reserves coverage, and gold endowment, can mitigate payment risks to bondholders in the near term. Debt service (interest only) is just US$36mn a year over 2022-24, ahead of the bond's amortisation commencing in 2025.
Report: Fixed Income Strategy – Top picks for 2023
2. Buy Nigeria 7.875% 2032
We reiterate our Buy recommendation on the NGERIA 7 ⅞ 02/16/2032s at US$75.7 (12.42%% YTM, 911bps z-spread) on a mid-basis at cob on 31 January on Bloomberg.
With the general election scheduled for 25 February, we continue to hold out hope for a positive policy shift at the margins. We think there is upside for Nigeria's eurobonds if elections go smoothly, with greater upside if Peter Obi wins and more limited upside under Bola Ahmed Tinubu (status quo), with the latest sell-off – the bonds have sold off sharply from US$84 on 18 January – potentially providing an opportunity to buy the dip.
Report: Nigeria – Symbolic rate hike does little amid mounting controversy
3. Chile is the most liquidly traded country play on copper
Chile, where copper export revenues should benefit from China re-opening and Peru protests in the short term and the renewable energy transition in the long term, is our top equity market pick in LatAm.
Chile's political risks are material but the persistence of broadly orthodox economic policy, despite a leftist government, and its status as the most liquidly-traded country play in EM on copper (and, by implication, the renewable energy transition) are sufficient to underpin the investment case when valuation is cheap relative to the historical average.
Report: LatAm EM equity strategy – 2023 outlook
4. Vietnam remains our top pick in Small EM and FM
Prior to Covid, Vietnam was a consensus favourite of foreign investors, perhaps the only frontier market of interest to mainstream EM funds. The intolerance to 'off-benchmark' positions during the period of pressure on assets under management in the past couple of years prompted sustained foreign institutional selling. This was compounded in 2022 by the painful unwinding of excessive margin lending schemes for domestic investors.
The result is an investment case with all the same strengths (and risks) of a couple of years ago but with much cheaper valuation: manufacturing export growth driven by political stability and free trade agreements with the US and EU, domestic consumption growth driven by job creation and urbanisation, and the adoption of leap-frogging technology.
Report: Vietnam: Anti-corruption ensnares president, highlighting succession risk
5. The five countries at most risk of default in 2023
After Ghana’s default at the end of last year, we identify five countries as being at most risk of default in 2023: El Salvador, Ethiopia, the Maldives, Pakistan and Tunisia. These are largely idiosyncratic risks and a broader EM rally may do little to help ease default concerns in these countries.
For each, bond prices could come under pressure if default crystalises, although to varying degrees depending on what is already being discounted and recovery prospects, while those that manage to avoid default could see price gains.
For those countries that do default, we can draw lessons from recent and ongoing restructurings, which are likely to set some major precedents.