KUALA LUMPUR, Sept 8 (Bernama) -- Bursa Malaysia closed almost flat on Tuesday as buying interest rotated away from index heavyweights towards smaller-cap construction stocks, with sentiment affected by geopolitical uncertainty, said an analyst. At 5 pm, the FTSE Bursa Malaysia KLCI (FBM KLCI) eased 0.39 of a point to 1,714.40 from Monday’s close of 1,714.79. The benchmark index opened 1.65 points lower at 1,713.14 and moved between 1,710.44 and 1,714.50 throughout the trading session. The broader market was almost evenly balanced, with decliners leading gainers 548 to 546, while 598 counters were unchanged, 1,107 were untraded and 25 were suspended. Turnover expanded to 4.13 billion units valued at RM3.14 billion from 3.60 billion units valued at RM2.45 billion on Monday.
In a significant shift, investment bank JPMorgan has lowered its forecast for corporate defaults in emerging markets (EM), projecting the lowest default levels since the onset of the Covid-19 pandemic in 2020. This optimistic revision comes in the wake of the most substantial improvement in distressed-level market pricing since 2016, providing a brighter outlook for investors.
Revised Default Forecasts
JPMorgan has adjusted its global high yield (junk-rated) EM corporate default forecast to 3.6%, down from the previous 4.0%. For companies within the closely-followed CEMBI Broad Diversified index, the forecast has been reduced from 2.9% to 2.1%. This change reflects a more positive view of the market's resilience and the overall economic stability of emerging markets.
Underlying Factors for the Revision
Several key factors have driven this more favorable outlook:
Materialized and Avoided Defaults: The decrease in forecasted defaults is partly due to several anticipated defaults having already occurred or failing to materialize. This has reduced the overall risk landscape for EM corporate debt.
Limited New Risks: The number of new companies at risk of default has remained limited, indicating a stabilization in the market.
Regional Breakdown
JPMorgan's report provides a detailed regional analysis, highlighting specific areas of improvement:
Asia: The default forecast remains steady at 4.5% overall and 2.5% for the CEMBI index, reflecting stable conditions in the region.
Latin America: The forecast has been cut by 1% to 4.6% overall and to 2.8% for the CEMBI index, suggesting improved economic stability.
Emerging Europe: The forecast has been lowered to 2.0% from 3.0% overall and to 2.3% for the CEMBI BD HY index, indicating reduced risks in this region.
Middle East & Africa: The forecast has seen a slight increase to 0.6% from 0.5% overall, with the CEMBI index at 0.5%, pointing to minor regional challenges.
Sectoral Concerns
Despite the overall positive outlook, JPMorgan notes ongoing issues in specific sectors:
China’s Property Sector: Problems are expected to persist, although the overall market is seen as more stable.
Repeat Defaulters in Latin America: Certain companies in this region continue to pose risks, though these are seen as manageable within the broader positive trend.
No Ukrainian Defaults
Remarkably, there have been no defaults from Ukrainian firms this year, despite the ongoing conflict, highlighting the resilience of some emerging market economies even under severe stress.
Market Optimism
Investor sentiment has improved significantly, with the proportion of EM firms in a distressed state—defined by a 1,000 basis point risk premium on their bonds—plunging by 7% this year. This represents the largest calendar-year improvement since 2016. Analysts at JPMorgan believe that the default rate of 4.6%, assuming 50% of distressed bonds default within 12 months, is unlikely due to an overestimation of default risk, particularly in China.
Conclusion
For investors, JPMorgan’s revised forecasts signal a more stable and optimistic outlook for emerging markets. With fewer defaults expected and improved market conditions, the opportunities for investment in EM corporate debt appear more attractive. While sector-specific and regional challenges remain, the overall risk has decreased, paving the way for potentially rewarding investments in these markets.
This updated perspective from JPMorgan provides a welcome boost of confidence for investors, suggesting that the worst of the default risks may be behind us, and highlighting the resilience and potential of emerging markets in the current economic landscape.
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