when China hits the bond indices there is not going to be an over- night step change for us. It will have a material impact on manag- ers who are more closely aligned to benchmarks. Pickering: In the long term, China is part of the solution rather than the cause of the problem. The challenge is to manage the transition in a way that does not do any collateral damage to China or world markets.
PI: Has transparency in emerging markets improved? Muaddi: On the sovereign side, in the past 20 years there has been broad institutional improvement. Indonesia’s central bank today is seen as independent and credible. That would be a wild thought in the 1990s. However, there is reduced transparency in some frontier markets, especially those borrowing from Chinese development banks or Middle East sovereigns. I would put Turkey into that bucket as well. On the corporate side, the improvement in transparency has been unequivocally positive. As the capital structures for emerging mar- ket corporates have globalised, they have gone from being banked within their country to being banked abroad and that puts a higher standard on transparency. There is still room for more progress but in the 15 years I have been doing this, corporate transparency has never been better. Lasocki: This is great for emerging market debt investment in gen- eral. The more transparent they become the more likely we are to invest in them and that makes them likely to become even more transparent.
There are exceptions and challenges. They are emerging markets for a reason and you have to tread carefully. It is not just transparency, but the overall engagement issue. In terms of governance this is important. From what I am hearing from our investment managers, engagement is difficult, but it is more direct. Larger managers having access to the governor of the central bank, finance minister and CEOs of large corporates is possible in emerging markets. Pickering: We are moving from a world of advertising department rhetoric to an investment manager engine room when it comes to transparency.
It is a two-way road to salvation in that the better governed coun- tries and corporates are the more accessible they are to institutional investors. If we as institutional investors can provide them with capital at appropriate times it should be a win-win. I am, therefore, a multi-national internationalist in trying to make sure that we seek to continually improve governance, transparen- cy and inter-dependence. Ghosh: This story that emerging market transparency is a whole lot worse than developed markets does not wash with me. I am not sure as to whose advantage it is to keep propagating that story, but we do not have a massive differential anymore. We have accounting incompetencies and frauds in developed mar-
14 November 2020 portfolio institutional roundtable: Emerging market debt
It is not sensible to regard all emerging markets as being homogeneous and all investment opportunities within each of those markets as identical. Alan Pickering, BESTrustees
kets and the same happens in emerging markets. There is not that much difference in the frequency of these events. It is an issue of 20 to 30 years ago. Over the past 10 years it has been at the margins. Muaddi: Before I was a portfolio manager, I was an analyst cover- ing emerging market banks. I was asked to look at European banks during the financial crisis because that was more of an emerging market skillset. The most trouble I have ever had as an analyst looking at accounting was with Irish banks.
PI: It has been a year we will not forget, but what is your outlook for emerging market debt in 2021? Muaddi: The asset class has earned optimism with more than 9% returns in sterling for a quarter of a century. You will not get the same kicker from government bond yields declining going forward.
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