Emerging market investments, particularly fixed income, are underrepresented in institutional portfolios but they offer a range of advantages over more common investments, including US credit, experts told the Investment Magazine Fixed Income and Credit Forum.
Investing in emerging-market [EM] equities has been well appreciated for decades, said Michael Conelius, portfolio manager, fixed income, with T. Rowe Price, speaking in late July at RACV Healesville Country Club in Healesville, Victoria. This is despite it being the bottom end of a capital structure of a company and carrying a currency risk.
Emerging market debt, on the other hand, is still seen as “the brown paper bag asset class”, he said. It doesn’t sell itself well, owing to factors like related countries appearing on the front page of newspapers, and the presence of “touristy” investors who sometimes aren’t rigorous enough in their investments.
T. Rowe Price is a publicly owned American global asset management firm with more than US$1 trillion ($1.4 trillion) in assets under management.
Conelius believes emerging market credit is something credit analysts can master.
“If you are deep into the analysis of a country’s fundamentals, you can see inflection points where quality is deteriorating or improving and you can allocate accordingly,” he said.
But attempting to time the market is largely futile, he warned, and time in the market, long term, is much more valuable than attempting to sell and buy at peaks and troughs.
Paul Lukaszewski, head of Asian corporate debt and emerging market credit research with Aberdeen Standard Investments, said he spends much of his time explaining the advantages of EM corporate debt to investors who don’t know the basics.
Aberdeen Standard is a global asset manager with more than US$775 billion ($1 trillion) in assets under management, making it the largest active manager in the UK.
EM corporate bonds are a US$2.2 trillion ($3 trillion) asset class – substantially larger than US high-yield bonds – Lukaszewski said. EM corporate bonds are well diversified geographically and across sectors. And while EM sovereign debt has a limited number of countries issuing in US dollars, the EM corporate universe has more than 600 issuers in 50 countries, so investors can avoid taking a currency risk.
“If you’re thinking about adding exposure to emerging markets, EM corporate bonds are the safest, most resilient, most defensive way to do it,” Lukaszewski says. “So it’s sort of the first baby step you can take.”
EM corporates are less levered than US credit investments across all ratings categories, he said. They also bring higher returns for lower degrees of leverage.
“So if we talk about whether you should think about EM corporates as a strategic or tactical allocation, the question I would ask is why wouldn’t it be strategic if you consistently get paid more?”
In aggregate, across regions, more than 50 per cent of EM [corporate bonds] are held in the country where they are based. Dedicated global EM corporate investors account for only about 10 per cent of the market, he said.
“So the opportunity, and I think the mis-pricing, continue to be there and that’s something for folks to look at, going forward.”