 A most frequently used word this year was “unprecedented” and rightly so, as the world has seemingly changed in a fundamental way with the COVID-19 pandemic. Yet, as we assess our outlook for 2021, we cannot help but feel a sense of deja-vu when looking at the credit market and expectations for the coming year as they are similar to the original forecasts we had for 2020. We also highlighted the improved risk adjusted return of EM corporates, and CEMBI managed to deliver a more resilient performance amidst the uncertain environment compared to other EM fixed income as well as global credit.

 We expect the global environment to remain supportive for credit in 2021, and the stronger fundamental footing of EM corporates should enable CEMBI to deliver 50bp tightening to 250bp. This assumes CEMBI will continue to follow the narrative in global credit, which is set to keep benefiting from the low rate environment and further recovery prospects from vaccines. The 250bp spread target for CEMBI Broad implies +5% return for 2021, with higher contributions from HY (+8%) than IG (+3%).

 Earnings for EM corporates started to turn the corner in 3Q and we expect the improvement in credit metrics to continue over the next 12 months with the macro recovery remaining in place. As such, we foresee leverage ratios returning to 2019 levels by the end of 2021, driven by a combination of rebound in EBITDA growth as well as further reduction in net debt.

 We forecast 2021 EM corporate HY default rate of 2.8%, below 2020YTD and the long term average (3.5%). Despite numerous uncertainties that still cloud the macro outlook next year, we believe EM corporate defaults in external bonds will remain limited, driven by a general lack of aggressive issuance in recent years, moderate volumes of at risk maturities, andcontained deterioration in EM corporate fundamentals.

 We believe fundamental and macro backdrop are supportive for continued inflows and focus toward EM corporates, and expect the $522bn gross supply and +$73bn net supply in 2021 to be manageable. Most of the issuance will remain focused on refinancing than aggressive expansion or capex.