Emerging market debt – Feature
(£1bn) eurobond amid a deepening economic crisis. But Pat- naik insists that viewing the asset class solely through the lens of its failures distorts its image.
“When people think of emerging markets they automatically tend to think of the headlines on Argentina or Lebanon, the lat- est on Turkey and Erdogan but what they don’t realise is that it also encompasses countries like Peru, Mexico, Qatar and South Korea,” he adds. Patnaik notes that the emerging market debt universe is a long and varied one and goes from AA countries like Abu Dhabi and Chile all the way down to selective defaults, such as by Vene- zuela, and everything else in between. “Part of it is that a lot of pension funds haven’t looked at the risk-adjusted cost of capital,” Patnaik adds. “Look at the yield differential you get for emerging market investment grade ver- sus developed market investment grade and the extra amount of capital and the return you’re getting. They just haven’t run the numbers. “We at LGIM, we have run those numbers and have sent that information to our clients saying that for the similar ratings, similar duration, well-diversified portfolio, we can give you a 50 to 75 basis point enhancement and that’s how we got a lot of interest,” he adds.
All change
Lebanon is no longer alone in suffering from a sharp down- turn as Coronovirus engulfs the globe, blasting all economies in its path. Emerging market sovereign debt and corporate
Spreads on corporate and sovereign EM debt
600 500 400 300 200 100 0
29.02.2016
500 450 400 350 300 250 200
29.02.2016 28.02.2017 28.02.2018 28.02.2017 28.02.2018 CEMBI Diversified Spreads
bonds were buffeted by the storm. Spreads on the JPMorgan Emerging Markets Bond Index Global Diversified, which tracks sovereign emerging market debt, broadened by almost 70 basis points between February 18 and 28, while the JPMor- gan Corporate Emerging Markets Bond Index Diversified, which tracks its corporate counterparts, widened by more than 60 basis points. But that is not to say that emerging nation debt will be com- pletely scarred by the crisis. Indeed, Daniel Wood and Luis Olguin, portfolio managers at investment bank William Blair, are optimistic about the asset class’ prospects. They believe changes in spreads make for a buying opportunity and stress attractive valuations, positive flows into emerging market debt and believe that global liquid- ity conditions will continue to drive asset prices. It is a bullish attitude which is shared by Patnaik who believes that emerging market paper will grow in popularity with pen- sion schemes.
28.02.2019 28.02.2020 EMBI GD Spreads 28.02.2019 28.02.2020 Source: JPMorgan
Positive signs Patnaik is positive about interest in the asset class from British pension schemes. “We are working on several mandates but assuming this next few get done, we could easily see in the UK 20 mandates with pension funds,” he adds. The tremendous sell-off in assets as the virus left China and started sweeping across the globe has drawn institutional in- vestors to the asset class. “It is important to remember that they have a long time-frame so if you can now access the same investment-grade credits at 150 to 200 basis points wider it is incredibly attractive,” Patnaik says. Perhaps it is because market reactions to previous pandemics has been time-limited, fund managers retain an upbeat view of emerging market debt’s fortunes. Patnaik agrees there is a problem with developing nation debt yields but believes the en- try point is enticing. He points out that notwithstanding the Coronavirus crisis, the yield-parched developed market conditions which made debt from issuers in the developing world an attractive proposition for pension schemes remain in place and are unlikely to change any time soon. “You have investment-grade European bonds and investment- grade US bonds, but the problem is with the developed market bonds, we are virtually at zero. If you go onto the 10-year part of the curve it’s negative or close enough to zero,” Patnaik says. “Could you imagine Germany with rates at 5% like the good old days? No. There’s too much debt. It is hard to imagine meaning- ful, sustained higher yields in the developed world,” he adds. There can be no way of knowing how long or how badly the Coronavirus crisis will last but the pension scheme and emerg- ing market debt story clearly has some way yet to run.
Issue 92 | April 2020 | portfolio institutional | 35
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44
