Fixed Income Quarterly. October 2021 - Facing a Stagflation Narrative

We expect pressure on EM bonds to abate as commodity prices lose some steam. However, 4Q21 is set to be challenging, as key central banks face mounting pressure to start tapering in light of stubbornly persistent inflation. We still advise placing greater emphasis on credit exposure than duration risk in our hard-currency fixed income space, though we think Russian bonds should be more resilient than EM peers. We also think OFZs should be able to outperform comparable markets. > Azerbaijan: Economy recovering from pandemic, supported by high oil and gas prices. We expect GDP to grow 2.8% this year and 3.8% next year. Elevated oil prices have been supporting both the budget and the current account and both should move into surplus this year. Azerbaijan's sovereign spread over the Russian curve of 45-50 bps is reasonable, in our view. We recommend to market-weight the credit in portfolios and focus on quasi-sovereign names, such as SGC.> Ukraine: Macro fundamentals should keep improving. The country will likely continue making progress in addressing its vulnerabilities, with fundamentals moving toward B+ rating category levels. However, gas transit issues retain uncertainty, which could delay positive repricing. > Russian banks: On a decent recovery path. Russian banks are enjoying stable financial profiles thanks to limited asset quality pressure, stable capital ratios and a healthy earnings recovery. As we had expected, private lenders have recently increased activity in the primary dollar market to prefund next year's redemptions or support balance sheet growth, which will broaden the investable space. We think some bonds in the space represent a good bet on a high-quality recovery.> Borets: Credit metrics to improve as ESP market continues to recover. Borets is one of the largest ESP producers globally and has strong relationships with oil majors. It is focused on expanding its international presence in the largest markets for ESP systems. The Borets 26 is trading with the highest yield among Russian BB-rated issues. The ESP market has begun to recover this year, so we expect the paper's spread to narrow as the company's financials gradually improve. > Interpipe: Running solid, lighter balance sheet. Following complete repayment of its post-restructuring facilities, Interpipe returned with a new Eurobond placement in May. We argue that the new capital structure would be sustainable even during EBITDA shocks similar to the one seen in 2015-16. However, the now-ample cash buffer might deteriorate as some elevated dividend payments might be seen again. Check out a short video in which our analysts discuss a few key ideas from the report.