According to Fitch Ratings’ new Latin American Sovereign Credit Overview, “Slightly more than half of our Latin American sovereign ratings are on Negative Outlook due to the impact of coronavirus, up from 37% six months ago”. The agency said it forecasts a pick-up in growth next year, however, expects it will be both “uneven” and risks remain “tilted to the downside.” Fitch highlighted that “the pandemic's lasting effect on public finances along with uncertain consolidation prospects to continue to challenge sovereign credit profiles in the region.” Since its last review in April, the rating agency says there have been no positive outlooks across the region, where Fitch expects GDP will contract 8.1% this year. The rating agency also raised its concerns over the rising debt-to-GDP ratio which it forecasts will rise by 13.5% this year, with a further 4.6% increase in 2021.
In terms of the investment grade rated countries within which we have exposure, across our Global Bond Strategies, Fitch has Chile’s A rating on negative watch, and Mexico’s BBB- rating as stable. We hold positions in Chilean state owned copper mining company Codelco, which a couple weeks ago, Fitch affirmed its A-, stable rating. The bonds are also rated A3 by Moody's and A by S&P. Codelco 6.15% 2036, which is currently trading at a couple points off the all-time highs, remains attractive with risk-adjusted returns plus yield at 13.55%, the bond also offers around 2.5 notches of credit cushion and is thus a favoured position. Quasi-sovereign Banco Del Estado - Chile 2.704% 2025’s is a good shorter duration position. Rated A1/A+ the bond trades over 2 notches cheap, and although it only yields 1.35% it has been a resilient position and is currently trading at all-time highs. In Mexico we have exposure to state-owned petroleum company Pemex, rated Ba2 (Moody’s)/BBB (S&P)/BB- (Fitch). The 6.625% 2035 bonds, for example, have struggled to pick-up from their April lows, when they were downgraded to sub-investment grade by Moody’s and Fitch. However, they continue to offer close to 5 notches of downside protection according to our proprietary Relative Value Model, and offer an exceptional risk-adjusted return of 43.4% and yield of 8.3%.
Within the region’s investment grade nations there is very little value elsewhere at present. If we take Peru, rated A3/BBB+, the 5.625% government bonds maturing in 2050, for example, trade expensively at over -2 notches. Uruguay's bonds also trade expensively, the 4.975% 2055 issue, for example, is currently priced at -2.1 notches expensive. Both these nations fall within our investable “wealthy” Net Foreign Asset investment universe at 3 and 4 stars respectively, however, as we are value investors, we seek to hold bonds which we believe are mis-priced by the market, this offers us not only sufficient credit notch cushion but risk-adjusted capital upside potential as well.