Introduction
Analysts at JPMorgan estimate that over a third of emerging market companies may face significant impacts from U.S. policies, particularly Chinese and Mexican firms.
Context
The analysts project that 36% of the more than 750 companies in the bank's closely monitored CEMBI EM corporate debt index will be affected, with around 16% likely to experience a "significant" impact. While this figure is considered "not negligible," the analysts also noted that more than half of the firms in the index might only be "minimally" affected.
- 6.3% of the CEMBI index is composed of Chinese companies.
- 4.3% of the CEMBI index is composed of Mexican companies.
Developments
JPMorgan's report found that the average interest rate premium investors demand for holding EM corporate debt does not currently reflect concerns about severe tariffs that could trigger a U.S. recession. The spread has increased to 226 basis points from 190 in recent weeks, yet remains over 100 basis points lower than its post-2010 average of 320.
Should recession fears intensify, the spread could widen toward 300 basis points, similar to the pattern observed in 2018 during the onset of trade tensions initiated by then-President Donald Trump. In that period, the CEMBI spread widened by 132 basis points, or 60%, in about nine months, surpassing both EM hard currency sovereign debt spreads and U.S. corporate credit spreads.
Currently, Asia has a smaller exposure level at 21%, as the higher proportion of industrial firms is balanced by a much lower contribution from commodities sectors. The region accounts for just over 40% of the CEMBI index and includes a significant number of tech exporters who could be affected by semiconductor tariffs.
In Latin America, Mexican companies are particularly vulnerable since nearly 80% of Mexico's exports are directed toward the U.S., while major economies like Brazil are expected to be less impacted.
Conclusion
JPMorgan's report emphasizes that there will naturally be differences within countries regarding which sectors are more or less affected, and those with mitigating factors such as U.S. operations.