Whether a recession is coming is no longer the question.

Only the extent of this is still being discussed.

This also applies to the bond markets, where inflation and the associated turnaround in interest rates have caused historic losses this year.

The Bloomberg index of government and corporate bonds (Bloomberg Global Aggregate Total Return) has fallen by more than a fifth since its peak in early 2021, the biggest decline since its inception in 1990.

Markus Fruehauf

Editor in Business.

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But more and more investors are now wondering whether the price losses and the associated increase in yields will soon come to an end.

Some investors are now seeing opportunities, particularly in emerging and developing market debt and corporate debt, given the low entry levels.

Attractive valuations

Anthony Simond, fund manager at the Scottish asset manager ABRDN, is concerned with emerging and developing countries, on the financial market there is then talk of emerging and frontier markets.

In an interview with the FAZ, he currently considers the valuations of government bonds from emerging countries to be attractive.

This applies above all to the titles issued in hard currencies, mainly in dollars.

According to him, these have an average risk premium (spread) of 5.0 percentage points compared to US government bonds.

At the beginning of the year it was 3.7 percentage points.

The spread has widened as a result of the sell-off.

The average yield on emerging market dollar bonds is now 8 percent.

For hard currency bonds from the frontier markets, it is even 12 to 13 percent.

"We see price opportunities above all in the frontier markets, i.e. the riskier emerging countries, even if there are greater risks of default here," he adds.

But this will not happen in all countries.

Currently, a large part of the possible negative events is already priced into the prices.

ABRDN currently prefers hard currency bonds over local currency bonds, according to Simond.

Opportunities in Latin America

However, he also sees interesting opportunities here, particularly in Latin America such as Brazil, Chile and Mexico.

"Some of these central banks started raising rates before the Fed," adds the emerging market specialist.

In Asia, even in China, inflation is not a big problem. This is different in Eastern Europe because these countries are dependent on Russian gas and the energy crisis is hitting hard here.

That leaves the issue of default, which has a current example in Sri Lanka and recently called the head of the International Monetary Fund (IMF), Kristalina Georgiewa, to appeal to the major creditors, especially China.

They must take responsibility and prevent the debt problem from exploding.

"We currently consider El Salvador to be at risk of a possible default," says Simond.

The country is trying to reduce the risk of default by buying back the bond that is due in January 2023.

Ghana has high foreign debt and is negotiating an aid program with the IMF.

This is also the case in Tunisia, which is currently politically unstable.

The countries in North Africa would be particularly burdened by the rising food prices.

That harbors the danger of social protests, warns Simond.

Positive returns likely

Bastian Gries, who is responsible for corporate bonds with good ratings (investment grade) in Oddo BHF's asset management, also sees opportunities.

The current price levels of corporate bonds are attractive for long-term oriented investors, he says in an interview with the FAZ "Over a twelve-month horizon, positive returns are likely at the current price levels."

The slowdown in growth is largely priced into corporate bonds.

Since the beginning of the year, the risk premium has increased by 1.00 percentage points in the investment-grade area and by more than 2.0 percentage points in the high-yield area, i.e. for companies with poor credit ratings.

"So the market has already partially anticipated the recession," says Gries.

However, he believes it is possible that risk premiums will increase further if the recession turns out to be more severe than expected.

Telecom and pharmaceutical company with potential

With yields averaging around 3.3 percent, he says, corporate bonds are currently 2.0 percentage points higher than government bonds, which he sees as a very high level in the long term.

With the recession, default rates in high yield would increase.

In the investment grade space, the focus is on how many companies have slipped into the high-yield space.

"But we don't expect a big wave here, because the companies have already pre-financed themselves to a large extent in recent years and are now under no refinancing pressure."

Oddo BHF considers companies in the telecommunications and healthcare sectors to be very stable in a recession.

The low level of business in Russia, the subordinate importance of energy and the low dependence on the economy speak in favor of the telecommunications industry.

For pharmaceuticals, above all the demographic development.

"We are critical of the real estate sector, where companies have come under pressure due to the rise in interest rates," says Gries.

From his point of view, the high dependence on gas is also causing problems for the chemical sector and some suppliers.