ties and risks associated with emerging markets in general and emerging market debt in particular.


Looking at the next decade, emerging markets could offer more growth than developed


markets. Paul Rhodes, Reach Pension Plan


I have a long timeframe in DC and not such a long timeframe in DB, but I would not want the ups and downs of the next six to 12 months to frighten me off looking at this asset class. Lasocki: There will be a lot of opportunities. There is always the risk of trying to catch a falling knife. The fact that it has been the worst six months on record for emerging market debt in terms of performance and outflows does not mean that it can- not get even worse.


In the next six to 12 months, we may see some bad news, but longer term there is a lot to be optimistic about. Now that we are hopefully done with Covid there will be other issues. Polit- ical risk is always something to have in mind. South America is a great place to look at and could be an area where things either go very bad or very good. Overall, this time I am not cautiously optimistic. Performance- wise global EM debt investors paid out $10bn (£8bn) in March and while you should normally not divest simply because per- formance is suffering, until now those who did saved a further 10% of negative performance. Perhaps the worst might be yet to come, but I hope some EM sovereigns will come out of this situation with stronger finances.


targets, which you review every six months and measure against that information. Pickering: Entity-specific targets are a better yardstick than applying UN or other people’s standards. You can measure the extent to which the targets have been met. You can then say to your members that this company was doing X tonnes of bad stuff last year but it is now doing -X tonnes of bad stuff because of our engagement. Arevalo: There are also sustainability-linked bonds, which set targets in the prospectus. If they reach those targets their cost of funding will fall.


What are you expecting to happen in emerging markets in the next 12 months? Rhodes: It is hard to tell. There are too many variables. It is very much up in the air at the moment. Pickering: I cannot say what is going to happen, but whatever happens end-users like me should not discard the opportuni-


There may be trouble when dollar issuers need to refinance. There is a lot to worry about, but also a lot of value opportunities. Arevalo: There is a lot of uncertainty. Will the US enter reces- sion? What will China do with the real estate sector? What will happen in Ukraine and Russia? What impact will the war have on food inflation? How will countries manage that? We are going line by line in our portfolio and thinking about the worse-case scenario of hyper-inflation, real estate in China, food inflation and trying to see who will be the survivors dur- ing this cycle. That is what we do. It is difficult to see six months from now, let alone 10 years, so we have a short timeframe to look at a company’s financing, operations, management, political risk, how they will be impacted by China and then factor in the probability of default. You can never rule that out. We are trying to have a solid portfolio of companies and miti- gate some of the risks. We cannot hide under a rock because volatility is here to stay. You have to believe in your process, you have to believe in the fundamentals.


If you have a strong process, this volatility will give you an opportunity to lock in companies and sovereigns which have a discrepancy between valuation and fundamentals. We are high in cash because we want to pick those cheap valu- ations, while conscious that outflows could continue. We are building a defensive portfolio with dry powder so when the time comes we can take advantage of that.


September 2022 portfolio institutional roundtable: Emerging market debt 19


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