es. So, it is important to hedge the currency or at least manage it actively through currency markets. Pickering: If this asset class is to find a home in the defined contri- bution space then a trustee’s starting point will be to hedge the currency. It is difficult to expect DC members to take too many var- iables and getting the right asset class return is hard enough with- out trying to second guess the effect of currencies.


PI: How are emerging market economies recovering from the pandemic? Muaddi: When you look at the 200-year history of emerging sover- eign nations issuing debt internationally, there are four ways a country can go through a period of stress: fiscal risk, external risk, institutional degradation and contingent liabilities or the off-bal- ance sheet factors that will be socialised in a crisis. Covid permeates through all four those, but the one that is most acute in 2020 is the fiscal side. We are going to see a large, one-off increase in debt-to-GDP. It is going to take three to four years at best for countries to regain where they were from a debt sustaina- bility perspective. The silver-lining is getting the bad news out front and then learn how to deal with it. The good news is that multilateral aid pro- grammes have been announced as bridges to liquidity. Ultimately, after this necessary fiscal push in 2020 there will be a period of consolidation of finances for emerging market countries. By and large, the mainstream emerging market countries, particu- larly in Asia, entered with enough balance sheet space to absorb this fiscal shock. We expect defaults in frontier markets. There have been five in the past 18 months and three of those were not Covid related. We could potentially see another three to five in the next 24 months. That is small enough to stock pick around and should not contam- inate the broader outlook for the asset class. Ghosh: On the point about debt sustainability getting back to pre- crisis levels, we are hearing from our manager that emerging countries may come out of this better in terms of the hits to their GDP than developed markets. We might see positive growth in some countries.


On a relative basis, is there a strengthening versus developed mar- kets? That will be an interesting dynamic to track over the next three to four years as debt sustainability also applies to developed market countries, probably more acutely than their emerging mar- ket peers but they do not get punished as much. Most of these countries are close to fully open in a way that most developed markets are not. You would be surprised at how open Brazil is despite the number of cases reported as being sky high. No one knows how this will pan out. It will be three to four years before we see who the winners and losers within emerging mar- kets are and if emerging markets weathered this better or worse than developed markets.


10 November 2020 portfolio institutional roundtable: Emerging market debt


There are opportunities which will emerge from the recovery and investors will be expecting a lot from China and Brazil in the coming months. Krzysztof Lasocki, Royal Mail Pension Plan


Pickering: It is not sensible to regard all emerging markets as being homogeneous and all investment opportunities within each of those markets as identical. We need to use managers who are adept at cherry picking within market segments, within sub-sets of industries and sovereigns within those market segments. It is hard to know how particular industries or territories are going to emerge from the epidemic.


PI: Is the worst yet to come, Krzysztof? Lasocki: I am not brave enough to set a date for a full recovery. There are countries that will emerge stronger and even the timing will be different. China’s recovery is on a different trajectory than Peru’s, for example.


The underlying characteristic of emerging market debt, which is fascinating, is that there is such a wide spectrum of countries and


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