Noel Collins: There is still a picture across emerging markets of higher growth that’s more sustained. There are good valuations and a decent economic backdrop. The main risk is probably China. If it is slowing down there will be an impact on emerging market debt. On a three-to-five-year horizon, most investors can look forward to capturing a return, but there will be volatility. We will have periods like the second quarter of last year when things dropped for a few months because investors got nervous, particularly after reading idiosyncratic headlines. Diliana Deltcheva: We have to differentiate between hard currency and local currency. We expect flat EM FX returns at best. EM FX is driven by emerging and developed market growth pres- sure, which has been disappointing on a medium-term horizon and is unlikely to improve with trade tensions rising.
If trade war risks subside this year we might get a short-term spike, but longer term there is no consen- sus within the Democratic or Republican parties to deal with China and its position in the world. So we are concerned about trade tariffs and the decline in global trade for emerging market and emerg- ing market currencies particularly, but emerging market fundamentals generally are relatively strong. Argentina and Turkey have had their issues but are on the mend. We don’t foresee many defaults. Alfredo Mordezki: We also need to distinguish between the macro and micro levels in terms of funda- mentals and performance. In Latin America, it is the macro level that has been disappointing. In Brazil we have seen several down- ward revisions of GDP expectations. At the same time, from a fundamental level, companies have significantly strengthened their balance sheets by downsizing their capital expenditure as well as being more efficient on their operational costs. For example, Petrobras was struggling for four years but is currently in a strong position. What we are probably going to see in the coming years is a low growth environment on the macro side, but companies are a good credit investment because they will show a strong capacity to generate cash-flows.
PI: Argentina has been mentioned a few times. As the Latin America expert here, Alfredo, what is your assessment of it as a credit risk? Mordezki: We see companies in Argentina doing well but in a more uncertain environment. This is not only when considering the potential outcome of the political process but also the regulatory environment. We should consider not only who will win the presidential elections but what the new president will find when starting the presidential mandate. Through the years the idea of political risk has changed sig- nificantly. We changed our focus, from a concept around expropriation risk to a concept of governability. What hap- pens after the election? Will the elected congress be able to deliver reforms? We saw this in countries where the reform candidate won the election but was unable to pass any single significant law. We saw this in Peru and Brazil.
PI: What EM countries are investors gravitating towards? Deltcheva: Until a month or two ago we had significant positions in some African countries, especially those that are improving structurally. Angola is an example. It is in an IMF programme that seems to be on track, it is reducing the national debt and is trying to bring transparency to its relationship with China.
June–July 2019 portfolio institutional roundtable: Emerging market debt 7
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