P&I Fixed Income & Credit Virtual Series – EMD: A place in the sun?

In a recent panel discussion, Victoria Harling, Head of Emerging Market Corporate Debt, spoke about the growth of the EM corporate debt universe and why the asset class is compelling.
Victoria Harling
In a recent panel discussion, Victoria Harling, Head of Emerging Market Corporate Debt, spoke about the growth of the EM corporate debt universe and why the asset class is compelling.
EM Debt has come of age

As investors consider emerging market debt, they may be surprised to learn about the extent that hard currency EM debt, both sovereigns and corporates, have matured and they offer a very diversified opportunity set. U.S. plan sponsors can consider dollar-denominated and local currency sovereigns, and they are also venturing into corporate debt that exhibits strong fundamentals and are increasingly supported by EM-domiciled buyers as well. The EM corporate debt market is now $2.5 trillion which is larger than the U.S. high-yield market, it has over 800 companies, and about 60% of the overall market is investment grade, noted the panelists. An asset owner said EM IG looks and performs like IG credits with some diversification, and high-yield EM offers similar benefits to the high-yield investor, and investors who see value in that perspective can in turn manage the liquidity issues that arise with headline risks.

Investors who are able to manage through the market volatility, particularly severe swings that occurred with the pandemic outbreak, can take comfort from the fact that underlying fundamentals are substantial for selective EM corporates. Investment managers need to have boots on the ground to do the onsite due diligence from a sovereign perspective, sector intelligence and company-specific visits – and they are being resourceful in using technology to get EM companies to be responsive and transparent today. When considered as a percentage of global GDP, EM allocations are under-represented in global portfolios and the growth trajectory in these economies strongly support their increased inclusion as a diversification tool.

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Specific risks
Default: There is a risk that the issuers of fixed income investments (e.g. bonds) may not be able to meet interest payments nor repay the money they have borrowed. The worse the credit quality of the issuer, the greater the risk of default and therefore investment loss. 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. Interest rate: The value of fixed income investments (e.g. bonds) tends to decrease when interest rates rise. Liquidity: There may be insufficient buyers or sellers of particular investments giving rise to delays in trading and being able to make settlements, and/or large fluctuations in value. This may lead to larger financial losses than might be anticipated.

All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results.

 

Authored by

Victoria Harling
Portfolio Manager

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