Roundtable – Emerging market debt
EMERGING MARKET DEBT: QUESTIONS AND ANSWERS
Emerging market debt is a big topic for investors in a low-yield world. In 2019, debt issued in the emerging world accounted for more than a fifth of the world’s total, while emerging markets were projected to drive more than half of the globe’s economic growth. However, last year the pandemic took hold, uncertainty kicked in and investors dumped bonds issued in the emerging world. But what happened next? We as- sembled a panel of experts to find out.
portfolio institutional: How are institutional investors approaching emerging market debt?
Gordon Ross: We have eight partner funds and they have allocations to emerging markets to diversify their fixed income holdings.
The managers we have chosen and the mandate we have chosen allows them to go anywhere within emerging markets, which will be between hard currency and local currency credit.
They have different investment profiles, different risk profiles and they will be measured against the hard currency benchmark, which historically has been the one that has performed better. There- fore, any outperformance will add to that asset allocation benefit at issuer and man- date levels.
PI: How have emerging markets been impacted by the pandemic? Roger Mattingly: Last year was incredibly volatile for a huge number of emerging markets, but there were opportunities. Going into 2021, appetite for increased diversification and the desire for yield has never been greater as we come out of the pandemic.
Also, the need for active management in this market is greater than any other asset class because the countries that come out
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of this pandemic in one piece will be key in terms of where the investment opportu- nities lie.
Alejandro Arevalo: Last year the opportuni- ties were wide open. You could say that emerging markets were hit by a perfect storm in the first half where you had the pandemic, oil price pressure and outflows. It was a situation where it did not matter if you had the best emerging market bonds, everything was being marked down. In some cases by 40 to 50 points. Investors simply wanted to get out and ask ques- tions later. For active managers and dedicated emerg- ing market managers, it was a fantastic opportunity. When you look at the funda- mentals of sovereigns and corporates and see investment-grade names paying high- yield returns…it was a free for all. We focus on Latin America. When you look at what is happening in developed markets, such as the US, the supply chain means countries like Mexico could benefit. Giulia Pellegrini: The pandemic has reminded managers of the lessons of the great financial crisis. In March and April last year, we were reminded of how corre- lated emerging market debt has become to global risks, global politics and global health issues.
We had to find ways to protect our portfo- lio through hedging, looking primarily at US treasuries to cushion that blow to our portfolios.
Investors may also pick up some opportu- nities by allowing themselves room to manoeuvre, if they do their risk budgeting properly. Kevin Wesbroom: I like the idea of return- ing to the fundamentals. When pension scheme trustees are thinking about this, they need to ask basic questions: what are we looking for? Will this asset category generate a stable income? Are you looking for a diversifier in a growth portfolio or a kicker in your matching portfolio? Being clear on your basic expectations from the asset category is important and even more so given what we have seen in the past few years. Diliana Deltcheva: We had to sharpen our pencils to make sure that our due dili- gence on specific countries is top notch to take advantage of the multiple opportuni- ties that opened-up last year. To us, it was almost a pleasant surprise that we could utilise more of our detailed ESG data from our sustainability frame- work to extract investment opportunities. We created a health dashboard, which held basic available data for most countries on immunisation rates, health capacity, child mortality and age group distribution to see which emerging world countries could be more exposed. Based on that data, we shied away from Latin America in Q2 and added back in late Q3, in line with the pan- demic’s first wave. Despite that age group distribution was reasonably okay for most Latin American countries, the concentra- tion of population in large cities was not particularly helpful for like Brazil and Mexico.
larger countries
The EM hard currency asset class under- went a material correction in March 2020. In 2008, high yield recovered in line with investment grade within six months after the October 2008 correction because only one country – Ecuador – defaulted. Last year, six countries out of a 74-universe did.
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