Investment bank JPMorgan cut on Monday its forecast of the number of emerging market companies expected to default on their debt, following the biggest improvement in distressed-level market pricing since 2016.
With some defaults out the way and others not having materialised, 2024 is also expected to be the first year since the start of the COVID-19 pandemic in 2020 that EM corporate default levels fall below the historical average.
The bank lowered its high yield or 'junk'-rated EM corporate default forecast to 3.6% from 4.0% globally and to 2.1% from 2.9% for firms in the closely-followed CEMBI Broad Diversified index, which is run by a separate JPMorgan unit. "We see lower risks for the rest of the year as some of the default candidates rolled off and others already materialized, while new additions were limited," the bank's analysts said in a research note.
Problems are expected to stay concentrated in China's property sector and among "repeat defaulters" in the likes of Latin America, although the bank also pointed out that there had not been a Ukrainian default yet this year, despite its war. Regionally, Asia's default forecast was left at 4.5% overall and 2.5% for the CEMBI group. Latin America's was cut by 1% to 4.6% and to 2.8% for the CEMBI.
EM Europe was lowered to 2.0% from 3.0% and to 2.3% for CEMBI BD HY, while Middle East & Africa was nudged up to 0.6% from 0.5%, with the CEMBI at 0.5%. Today we're going to revisit the outlook for clean energy stocks and my guest is Sam Adams,
The note highlighted how much more optimistic international investors now seemed to be. The share of EM firms viewed as being in a "distressed" state and at serious risk of default had plunged 7% this year - distress being defined as having a 1,000 basis point risk premium or 'spread' on their bonds. That is the largest improvement in any calendar year since 2016, JPMorgan's analysts added.
"Assuming 50% of bonds trading at distressed levels may default 12 months forward suggests a 4.6% default rate, but we believe this outcome is unlikely," they said.
This was because more than half the distressed volume is from China, where bond prices are depressed in excess of the actual default risk, they added.
