Fate of nations: Why country calls will be key for hard currency debt investors this year

The quick view

• A more stable global growth backdrop makes it unlikely that falling rates can be counted on to push up total returns in hard currency debt portfolios this year.
• In seeking to deliver solid outcomes for investors, active managers will need to make their country selection work even harder.
• This means trying to avoid blow-ups, identifying positive reform stories and selectively finding value in a carefully risk-considered way.

Look behind the double-digit total returns and it becomes clear that 2019 was not a straightforward year for many active managers of hard currency debt.

Crises in the likes of Argentina and Lebanon saw many managers wrong-footed in their country picks. But the tide of falling interest rates – against a stubbornly fragile global economic backdrop – drove up total returns, and it did so indiscriminately. In short, duration-derived returns helped to obscure many an active mis-step last year.

However, with tentative signs of steadier economic conditions ahead, it seems unlikely that widespread rate falls can be counted on to gloss over less-successful manager decisions. We expect country selection to return as the dominant driving force of both active (i.e. benchmark-relative) and total returns in 2020.

In a short paper, we share a few case studies from the high-yield part of the investment universe to highlight the opportunities and potential pitfalls active managers will need to navigate to keep their investors happy this year.

Emerging market: These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.

The value of investments, and any income generated from them, can fall as well as rise.