The Emerging Markets Corporate Research team brings together their views on the EM High-Yield Commodity credits under coverage, in this report. We maintain a bullish stance on the commodity complex globally which is partially reflective of our positive stance on their respective underlying commodities, and partially as valuations still look fairly reasonable compared to the other more defensive sectors as well as their DM peers. With most of our top picks in the HY bucket within the sector, we restrict our discussion to that segment, in this report.

 Recovery in global commodity prices over the last one year has been rather remarkable and the market sentiment has turned from being very bearish to now being one of the more favored sectors within the credit universe at least.

Interestingly, while we saw downgrades, the sector didn’t see a large number of defaults over the last one year that would otherwise be feared during any economic downturn. We attribute this fundamental resilience to how several EM commodity credits had utilized the recovery post the 2015-16 commodity downturn, to repair their respective balance sheets and be better prepared for the next down-cycle from liquidity as well as solvency perspective.

 Reflation, inflation and commodity situation: This year has been all about reflation trade as the global economy recovers from the pandemic which bodes well for pro-cyclical sectors including commodities. Our house view on crude oil prices stays quite positive and even a multi-year structural story, while on base metals and steel/iron ore, the demand-supply situation seems “sufficiently” balanced, for us to maintain a positive view on some of the metals credits.

 EM HY commodity corporates have lagged the rally in US peers, presenting an attractive entry point in our view. CEMBI O&G HY STW at 515bp, is +213bp vs post crisis tight of 301bp, providing a pick-up of 80bp vs US HY Energy. Meanwhile, CEMBI M&M HY at 466bp, is +188bp vs post crisis tight, providing a pick-up of 72bp vs US HY M&M. Notably, there is quite a variety of rating, duration and valuation by region, and our analysts' picks focus on the wider credits with favorable fundamental potential.

 Broadly, we prefer single-B over BB-rated commodity credits, where we think there is more room for spread compression and better total returns for the rest of the year (Figures 1 to 4). That said, PEMEX and CSN curves in the BBspace seem like outliers against their respective similar-rated peers (Figures 1 and 3) and we see value across several bonds on their curves. Separately, our top picks in the single-B space are select bonds from Vedanta, Medco and Anton Oil from Asia; and Kosmos, Tullow, DTEK O&G and MetInvest from CEEMEA region.