Consolidating Debt – The Stars Now Aligned

08-office

Thanks to the rebound in commodities, the normalization of spreads and the increased stability of financial ratings, consolidating debt seems to be emerging as a new investment opportunity. This feeling is all the more significant as the easing of geopolitical tensions, whether in emerging countries (the Petrobras affair currently being dealt with by the courts) or developed countries (now known as Brexit), once again opens the way to investments in assets that are usually considered riskier.

 

Equity returns have collapsed in recent years.

Equity returns have collapsed in recent years.

The level of indebtedness of companies is declining. Investors are now paying attention to balance sheet management and income stabilization – a generally favorable environment for credit.

Most emerging countries – except those generating revenues in dollars – issue debt in local currency, avoiding the monetary imbalances causing so many problems observed in those years. Current conditions show that opportunities lie in both US dollar denominated debt, whether sovereign debt or corporate debt. Debt in local currency also offers attractive returns, but to be weighted naturally by the evolution of exchange rates, often unpredictable for emerging currencies.

The quasi-sovereign or the debts of major companies in Latin America are undeniably the best opportunities at the moment. Latam investment grade returns are almost twice as high as the good quality US debt, which is an interesting entry point. Even constant for high yield , also doubly higher on the Latam versus the United States.

 

Credit ratings

Credit ratings

Finally, have reached their lows and seem to rebound. This is a strong signal of improvement ahead. The fall in the price of oil had particularly affected dependent exporting countries such as Brazil. The barrel of oil is now likely to start up again, and regain 40-45 dollars within a year. Let us not forget that OPEC has carefully monitored the commodity market correction and could announce, by the end of the year, a major agreement to limit production, even if demand / supply rebalancing will probably be long. . The rebound of non-energy commodities is also observable. For example, iron has rebounded, supported by replenishments, resilient global steel consumption and massive investment, particularly in China where the government is trying to support access to credit and property. The same is true for agricultural commodities, where climatic phenomena such as El Niño or a prolonged drought in Brazil could continue to support prices, and ultimately favor exporting countries.