Following the worst phases of the COVID shock, the deterioration in fundamentals as measured through net leverage, the measure of a company's financial leverage, was less than experienced during the oil crisis in 2015, and in part due to strong company management. Net leverage is expected to improve through 2021 as company earnings recover.
From a valuation perspective, there is an attractive relative value case versus comparable fixed income credit alternatives, as EMC spreads have lagged the significant recovery seen in DM credit thus far, particularly when looking at US and European, High Yield and Investment Grade corporates. EMC investors can earn over twice the spread per turn of leverage than US High Yield offers. Whilst sovereign Emerging Markets Debt screens as cheaper relative to its historical trading range, the fundamental outlook for Emerging Markets companies appears more stable and less uncertain compared to many sovereign countries across the world. The EMC asset class has continued to offer a source of yield and income in what is ultimately still a low-yield world, and importantly spread valuations screen as attractive relative to Developed Markets credit opportunities.
We expect modest issuance as companies are acting conservatively, and in the face of improved cash flows they continue to limit shareholder-friendly activities such as capex, M&A or paying sizable dividends, that are typically financed through debt.
At a company level, we find non-cyclical companies including bottlers, telecoms and telecom towers, have emerged strongly through the COVID shock, due to implementing cost efficiencies and benefitting from product resiliency. Cyclical sectors including gaming and property, as well as transport were impacted more significantly, but have handled liquidity and refinancing proactively, and continue to do so whilst waiting for a return to normalcy in travel and consumer behaviour.
