of emerging market corporates had to de-leverage to make their bal- ance sheet healthier, while US corporates did the opposite. It is simplistic to look at emerging market debt and think it is risky because it is emerging markets. To some extent it is risky to invest in UK equities.
The days when emerging market debt is going to be out of kilter with other markets in a sell-off are potentially no longer with us. Chetan Ghosh, Centrica Pension Schemes
PI: Chetan, are you tempted to move into corporate debt? Ghosh: Our governance model is to defer that decision to the man- ager. On a relative basis, they have a preference for corporate and hard currency debt. Having seen high yield and loans retrace significantly post the March lows, hard currency emerging market debt has not tracked it as much in terms of the rebound. So, we are starting to see a divergence in expected relative returns, which is something we may act upon in the next couple of months. Pickering: There is a growing recognition that for career-long members of defined contribution schemes we are going to have to find sensible ways of helping them access the growth oppor- tunities in emerging markets. The challenge is going to be how much discretion to give our sub-contracted managers in those markets, either to trade between asset classes and, where bonds are concerned, determine which territories around the world to invest in. There is a need for us to devote intellectual capital to find how best to allow defined contribution members to benefit from the asset classes which were traditionally the preserve of the defined benefit scheme.
compound interest over a longer period of time. Covid being first in Asia, first out of Asia was a good stress test and Asia credit held in place relatively well. It goes back to the pillars of macroeconom- ics that provides a stable foundation to go and extract additional yield premium in the corporate market. Lasocki: At the risk of sounding adventurous, the most important opportunities are always in the distressed and recovery space. There is always an interesting story there. There is an ongoing situation in Zambia, although it is difficult to be super optimistic about it. Then there is Ukraine, Argentina and Ecuador.
In the emerging market corporate space there are always a few strong names. In general, I like emerging market corporate because even in high yield, if you compare the US with emerging markets on average the expected recoveries are significantly higher in emerg- ing markets. Defaults are significantly lower because since 2015 a lot
PI: Taking a step back from Covid, what impact has China joining indices had? Muaddi: I would like to make a controversial comment: China is no longer an emerging market. When Covid hit China, Chinese government bond yields went down. When Covid hit Italy, Italian government bond yields went up. So, which one is the developed nation?
China still has plenty of progress to make, but from a macro-eco- nomic foundation they control their own monetary independence which affords many degrees of freedom in managing fiscal, pay- ment or global healthcare shocks. China’s current account surplus has gone down and will probably continue to go down given the trade tensions. Rather than leak out FX reserves they are looking to gradually bring capital into the country.
That in combination with the one belt one road initiative is part of a long-term plan to internationalise the renminbi and make it a reserve currency.
A reserve currency is the great privilege of nations. You can export paper and import everything else. It will be a well-managed transi- tion because they have their eyes on the long game. Ghosh: Our fund manager runs an unconstrained approach so
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