Credit spreads on emerging market debt have tightened significantly since late last year. While slowing-down inflation in the US has supported the overall EM sentiment, one of the key internal drivers of the EM rally was China’s economy reopening. The removal of COVID-19 restrictions has released pent-up demand in the world’s second largest economy. Excluding real estate developers (green line), the remaining spread levels tightened all the way to 163 bps, just 20 bps wider than pre-COVID level in Dec 2019. Notably even the stressed real estate sector has seen a recovery thanks to government support policies.
The beta recovery in EM credit has been fast and strong. The big topic for investors from now on will be to identify opportunities that remained undervalued and separate them from credits that had already tightened too much.