Roundtable – Emerging market debt
fundamentals. It is sticky money. That is complemented by lower ESG risks. So, borrowing costs are inherently tied to sound fundamentals and lower ESG risk.
Have you ever decided against investing in a bond because of its ESG profile, Matt? Murphy: All our ESG assessments are part of the mosaic. I do not want to overstretch here and say that everything we do is a function of ESG, but governance is the most important thing in emerging mar- kets. I am seeing a deterioration in gov- ernance. That could be the way a country is thinking about its fiscal policy, the way a country is thinking about a trade policy or the way a country treats its people. That will give us pause to ask if what we are getting paid is going to compensate us for those risks.
There are plenty of countries that we have not owned in the past. We did not own Argentina when it defaulted, did not own Ecuador when it defaulted. A lot of that was a function of what we saw as a deteri- oration in governance. We are known for being chronic bears in South Africa. If we do not have to own it, we won’t because there has been a continued deterioration in the rule of law there and a continuing deterioration in property rights. That is what we focus on. If economic freedom is improving, the country risk premium goes down. You are going to get paid back on those bonds and you might get some price appreciation as the coun- try premium declines. We are going to be hard pressed to invest in the country where that premium is increasing because you need to get much more compensation for that risk, particu- larly if the trend is not your friend. Anthis: We have been quite active on ESG. Over the past couple of years, we have tried to be even more ESG aware across all asset classes. For emerging market debt that has been challenging. The nature of the asset class means that trying to assign credible scores to it can be quite a challenge given the quality of the data
44 | portfolio institutional | June 2021 | issue 104
available, while aggressive regime chang- es can cause volatility. We try to take a more practical approach by using the UN sanction list as a filter and then enforce strategies to be PRI sig- natories. It has not been as straightfor- ward as with developed markets. Another thing we try to do is provide liquidity to distressed countries through investing in high yield. We tend to walk in line with the IMF in providing access to capital for those countries.
In essence, we are trying help distressed countries to overcome their financial diffi- culties by providing liquidity in collabora- tion with the IMF.
I have read that emerging markets are entering a commodity super-cycle. If that is true, how is it affecting your strategies? Murphy: Commodities impact a country’s ability to pay. Angola has been mentioned. The fact is that we are not commodity managers. We do not have a view on them. They are fairly efficient and diffi- cult markets to call. We are thinking about if high energy prices are sustained what is that going to do for countries that are importers. And what is it going to do for countries that are exporters because usually when oil prices are high you get fiscal slippage. What we try to do at the individual security level, if we are given that flexibility by our clients, is to hedge some of the ability to pay risk. Back in 2011/12, we owned Vene- zuela dollar debt with a put option on Brent on the other side. In 2014, those bond prices were cut in half and that option kicked in for us. The key there is that it is a risk inherent in the security we do not have a view on and if we have permission to do so we will try to take that risk out. At the overall portfolio level, we will stress test to see how our portfolio moves with changes in energy and commodities ver- sus the benchmark to make sure we are not taking any unintended bets. Maybe the super-cycle is here, maybe it is
Having feet on the ground and access to companies gives you more relevant
and up to date data. Anders Lundgren, Nest
not. It is too hard for us to call so we are going to think about the impacts at the country level and in our portfolios to make sure we are not making a bet on commodities in one direction or the other.
Lundgren: We have a commodity fund, but in general the portfolio is skewed towards commodity exporting countries because our manager believes there is a commod- ity expansion.
Developed markets used a lot of helicopter money to solve the problems the pandemic has brought to their economies. What do emerging economies have in their toolkit? de Kock: It comes back to how much debt countries can take on. They cannot take on as much as developed markets. The UK having 120% debt-to-GDP is not seen as a problem whereas 80% is a big issue in many emerging markets. Some of that is about perceived credit risk and some of it is about liquidity.
Those willing to take austerity measures and work with the IMF may have access to significant facilities. Ecuador is an example. The new regime could get access to $1bn [£706bn] from the IMF after com- mitting to austerity measures. That is sig- nificant help, but only some of that fiscal stimulus can come externally. A lot of it is
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