Roundtable – Emerging market debt
have not delivered during Covid is going to feature negatively in our analysis. The issue is that different governments have different perspectives on specific top- ics. We are not talking about stable affairs; we are talking about a dynamic evolution. A lot of countries have elections in the coming year and we will track what pro- spective governments are propos- ing in terms of policies. What the pandemic has estab- lished is that you have to analyse multiple dimensions and intro- duce different data into your anal- ysis, such as political dynamics, govern- ment bias and ability.
The pandemic has brought challenges to policymakers globally. The lesson learnt is that they have to build out their health capacity.
There is something else that we have to be aware of. Rating agencies are not giv- ing sovereigns, emerging and developed, the benefit of the doubt. They still consid- er 50% to 60% of debt-to-GDP as sus- tainable. Just because the US and some emerging countries have moved above 130% does not mean that the threshold is going to move up. This means that in the near term we are going to see down- grades in the developed and emerging worlds. Mattingly: The vaccine rollout is pivotal. If economies which are dependent on lei- sure and tourism have marginal vaccine coverage over the next 12 to 18 months they are going to struggle to recover.
PI: Is how managers are approaching risk in emerging markets changing? Sen: In a sense. There are elements, such as ESG, which become more and more prominent as the nature of crises changes. It is no longer just long-term debt sustain- ability, it could also be about the volatility of foreign flows in and out, for example. We are now checking that the risk frame- work is more robust, more three dimen- sional. Are managers considering ESG risks? Political risk and governance have
24 | portfolio institutional | May 2021 | issue 103
always been considered, but let’s think about E and S data, such as health and cli- mate vulnerability, and how this can im- pact their fundamental position. It is also about revisiting the lessons learnt to ensure that they were learnt in 2008 and 2013 and that the risk framework is there to encapsulate that, plus under-
Diliana Deltcheva Head of emerging markets debt Candriam
standing the new risks that could come at you. This, and incorporating ESG, re- quires a little bit of three-dimensional thinking.
PI: What impact will the new US govern- ment have on emerging markets? Arevalo: We now have someone more ex- perienced, more predictable and less will- ing to make unilateral decisions on for- eign policy.
What could change is having to forge alli- ances with like-minded countries to tackle what they see as a main risk, such as Rus- sia or China. This would be a good step. What markets do not like is volatility and uncertainty. We are still on a wait-and-see mode on how Biden will tackle China, for example. He will not be focused on trade. You are going to have corporate rights and Hong Kong. Different scenarios will be need- ed to come to an agreement with other countries on how they should approach it. That is good, because you are going to have better thoughts and it gives us time to adjust our views and, in some cases, our portfolios to reflect what is coming down the line. Wesbroom: A discussion about the US brings to my mind the third factor that you have to think of when investing in emerging market debt. We have spoken about yield, we have spoken about defaults and then we have currency. Do you go for hard currency or local market currency? It
seems to come down to an argument about where the dollar is going. Is it going to get dragged down by deficits or go up with rising interest rates? You have to balance those three factors in coming up with your proposition for where you invest. From a trustee looking to invest, trying to find a manager who can juggle all of those, put those arguments in front of you and come to conclusions is challenging. A manager has to have strength in depth to do that detailed analy- sis, but they need that bigger enough pic- ture to say, “don’t invest”. You never call the Japanese equity desk, and the person there says, “don’t buy Japa- nese equities”. That is one of the challenges. You want a manager who is prepared to drill down to the level of detail needed to find serious opportunities. It is quite a daunting prospect in some ways from a trustee’s perspective. Pellegrini: A change in perspective at the White House is welcome, not so much in terms of political colours rather for the predictability of foreign and economic pol- icy, which, as an emerging market inves- tor, we welcome.
It is clear when you consider the situation in the Middle East, where Biden has made dealing with Iran his key objective. He has spoken openly against attempts to inter-
Giulia Pellegrini
Senior portfolio manager for emerging markets debt AllianzGI
fere with US elections. It is the same for Turkey, which has in the past four years seen a budding relationship between Trump and Erdogan but then receives a lot of political pressure from the US. So, the erratic policymaking will change and a sense of being able to have some thought as to the direction of travel will be important. The same goes for Central America. Biden is talking to Honduras, where you have a person who could be implicated in drug trafficking scandals and a US administra-
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