Emerging market debt – Roundtable


tion that says we will continue to support you because you are an avenue for migrants to reach our shores, but we will be doing that more carefully as to how you respect human rights and the rule of law. These are important elements for inves- tors and that rule-based policy will help us a great deal.


The way we approach allocating to the asset class is, because the markets change quickly as we have seen, you want to be in the asset class already but being able to flexibly allocate to different components. For example, we have seen interest in our Select product, which invests hard currency sovereign, hard currency corpo- rate and local currency sovereign. We tell our clients that we will do that asset allocation for you because we under- stand that some of these changes will be more tactical, some will be more struc- tured, but if you wait for that change to materialise to allocate you will effectively miss the bus. Being able to provide that flexibility in this ever-changing world for us has been a winning position. Wesbroom: It is a fascinating point that this is just another complexity for trustees to struggle with. Regime change is another way of saying: is the past a reliable guide to the future? Is this a manager who looks at historic trends and builds on those? Or is he somebody who says the past may not be a good guide? Deficits have dragged the dollar down historically, perhaps this defi- cit is a different one.


It is another example of why you need active management – that brave thinking. It is going to be difficult for our side to trust the credibility of the people they are listening to. Sen: One way of doing that is to give your managers flexibility across EM debt when allocating. However, if you want to use a specialist approach you can design that mandate to try and control risk. For exam- ple, in local currency, we have worked with managers to create a mandate that lowers volatility by allowing them to move into developed market assets if they feel like


emerging markets as a whole is vulnera- ble or unattractive.


PI: If we are moving into a new commodi- ties super-cycle what will that mean for EM debt strategies? Deltcheva: Emerging market credit is a diverse universe. We are focussed on trading well the US interest rate cycles and the compression of high yield verses investment grade risk premiums in the hard currency space. To be fair we are finding it difficult to play the copper com- modity super-cycle. Copper is going to be one of the most desirable metals during the recovery. It goes into buildings, renew- ables and tech – that is, it is both an old and new economy input. It is expected that copper specifically experiences


a spark of global


demand. Chile, Peru and Zambia are large producers of it, but it is difficult to play in the sovereign space. You have to look for equity expo- sure. Even in EM corporate space, valua- tions are not as attractive as they could be. In terms of Oil, we are still observing a supply demand imbalance and most investment banks have upgraded their average price forecasts for the end of 2021. Yet, the current oil rally almost feels like the last hurrah for the hydrocarbon sector. In the long term, we are going to deal with issues of investors being pressured to dis- invest from traditional energy sources and into cleaner ones. European regulators are looking for enhance disclosure on sustain- ability of investments and there are cer- tain sectors that are not going to benefit. We find ourselves in the expansion stage of a global growth cycle that typically ben- efits demand for commodities. I would not call this a commodity super-cycle or a regime shift.


EM debt, on average, despite differentia- tion being required within the asset class, still offers risky asset class-type returns. For hard and local currency, we expect around a 5% return on a one-year horizon. We are exposed to each of those segments.


Of course, the risks around local currency are always higher because on the one hand, currencies are quite cheap from a long-term perspective but on the other, the strong dollar trend around inflation in the US, or outperformance of the US in the first half of the year, is also a strong head- wind to EM currency performance. So, hard currency in the end is the pre- ferred asset class. Of course, you need an active


manager because asset class


dynamics may shift during the year and active managers are more likely to be able to exploit these. For example, currencies and corporates may offer interesting opportunities later in the year. Ross: In the old days, emerging markets


Roger Mattingly Trustee director Ross Trustees


were divided into oil consumers and oil producers. Now, no matter how many var- iables are influencing emerging markets, such as domestic politics and geopolitics, or if a super-cycle comes or not, it is no longer easy to allocate between those two segments as markets will behave differ- ently from how they have done historically. So, do you use historical performance to map out your expected returns? It has made it even more difficult. Add that to currency weightings, should you allocate to a domestic sovereign because in theory they can print money, or hard currency because if rates go up and the currency goes against them, they default. There are an increasing number of varia- bles which reiterates the consensus here that active management is giving the man- ager as much discretion as you can. Leave it to the experts.


PI: How are pension schemes integrating ESG into their emerging market debt decisions? Wesbroom: ESG is becoming all pervasive


Issue 103 | May 2021 | portfolio institutional | 25


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