are talking about double digits. We need to differentiate.


Thinking about the long-term development of EM, local savings have grown. Now we tend to talk about local pension funds, local insurance companies and sovereign wealth funds. The combination of local debt against dollar debt has started to change because there are deeper pools of local financing that sovereigns, quasi-sovereigns and corporates are tapping into.


When there are shocks in the dollar – we will see more defaults, especially in frontier mar- kets if they do not refinance soon – it will not be bad for all emerging markets. As long as local markets keep growing, they should be able to fund themselves.


The other point about the dollar is that when we build a portfolio we focus on companies that have a natural hedge against a strong dollar. This means exporters, utilities, tele- coms and banks.


In what other ways are emerging markets changing? Arevalo: We are in a different place than we were 10 years ago. Central banks in many emerging market countries started raising rates well before the Fed did. Brazil raised rates to 13% and has started to wind down its tightening cycle.


The expectation that central banks are there to protect the FX and fund the government is changing. There is now more inflation target- ing. Of course, there will be mistakes along the road, that is why we call them emerging, but we have seen some positive changes along the way.


With Covid, war in Ukraine, growth slowing in China and infla- tion, where should investors look in emerging markets for winners? Arevalo: We divide EM by three regions when allocating capital. The region worrying us most, and where we are underweight, is Asia. This is not only because of China, but inflation, too. Many central banks in Asia have been lagging in terms of increasing rates. They are going to have to tighten quickly, which will push many of these countries into recession. Then there is EMEA [Europe, Middle East, Africa] with the Middle East becoming a safe haven. It is about oil. Countries investors were worried would default four years ago, like Oman


10 September 2022 portfolio institutional roundtable: Emerging market debt


and Bahrain, now have a current account surplus, are undergo- ing reforms and are awash with liquidity.


The main defaults will be in Africa, which does not have deep local markets. They rely on commodities, which are under pressure. We also like Latin America, even with some geopolitical risks we have seen lately. We have seen a shift from left to right to left again, but the economies tend to be net exporters. We are in an environment where commodity prices could come down. Most of these countries have a combination of exporters and strong local economies coming out of Covid, so it has taken a long time for them to re-engage. We are starting to see a lot of consumption coming through and central banks have been ahead of the curve, so inflation expectations are falling. If you navigate Latin America carefully you could find interesting opportunities.


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