Man Group Plc is warning that a surge in distressed emerging-market sovereign debt may be contagious, posing a threat to companies from mature economies — especially in Europe.
(Bloomberg) — Man Group Plc is warning that a surge in distressed emerging-market sovereign debt may be contagious, posing a threat to companies from mature economies — especially in Europe.
“We may be on the cusp of a distressed debt supercycle,” Santiago Pardo and Patrick Kenney, credit portfolio managers at Man GLG, wrote in a note on Thursday. “But unlike in 2008, the crisis is likely to originate from EM, not DM.”
While European nations are likely safe from defaults, corporate-debt issuers are at greater risk of a drop-off in cashflow as the region faces an “unpalatable cocktail” of energy shortages, rising prices and low growth, they wrote. That’s an opportunity for investors who can discern sound businesses across emerging markets and in Europe, according to Pardo and Kenney.
A JPMorgan Chase & Co. gauge of debt from emerging governments has lost nearly 19% so far this year, on track for its worst year since 1994 amid turbulence in the US Treasury market tied to soaring inflation and central bank tightening. This year, almost $20 billion has been pulled out of developing-market debt funds, according to the Man GLG money managers — the most on record for the asset class.
For Pardo and Kenney, there is opportunity in European companies that are at risk of trading at distressed prices because of rising energy prices and higher borrowing costs. They like residential real estate businesses in Germany and Sweden, as well as some that have critical infrastructure surrounding energy transportation, like a Slovakian gas transmission company. In other regions, they pointed to value in Argentina’s majority state-owned energy company, which has solid credit metrics despite a junk-rating because of its domicile.
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