Emerging Markets Credit Rating

February 18, 2015 |Author: EGA Investment Strategy | Categories: Chart of the Week, Emerging Markets

Credit rating downgrades. Credit rating agencies assess the worthiness of all credit instruments. They have been busy downgrading the long-term foreign debt ratings of some emerging market (EM) and frontier market (FM) sovereigns. The ones that have felt the wrath have been predominantly heavy in oil and gas exposure as well as those facing an event-driven crisis. Bahrain, Greece, Kazakhstan, Oman, Nigeria, Russia and Ukraine have all been recently downgraded.

A few bright spots. Korea and Poland have a positive outlook assigned by Standard and Poors. This suggest that there is a possibility their credit rating may be raised. Also, sovereign debt in the Philippines was upgraded just over six months ago.

Safety is too expensive. Amidst the flight to safety, high quality bonds have been bid up and yields are now exceptionally low. At the short-end of the yield curve, some European sovereigns offer negative yields. From an asset allocation standpoint, it would make sense to pick up less expensive, quality, and high yielding equities that would also provide a decent clip of earnings growth.

 

Definitions

Credit default swap (CDS) is a financial contract whereby a buyer of corporate or sovereign debt in the form of bonds attempts to eliminate possible loss arising from default by the issuer of the bonds. 


S&P credit ratings assist investors by evaluating the credit worthiness of many bond issues. AAA to BBB ratings are typically issued to those securities considered investment grade. The rating is not a recommendation to buy or sell a particular bond. For information on the rating agency’s methodology go to: http://www.standardandpoors.com/home/en/us.

Sovereign debt is the amount of money that a country's government has borrowed, typically issued as bonds denominated in a reserve currency. 
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