Despite the huge inflows into emerging market debt, it is still an underinvested asset class which has achieved solid returns –up to 6 per cent in some countries, according to Lazard Asset Management portfolio manager, Arif Joshi.

During Investment Magazine’s Fixed Income and Credit Forum, Joshi said despite the volatility, he is positive on the asset class and pointed out that this year emerging market sovereign debt performed strongly.

“Most countries don’t have fully developed yield curves so they cannot issue in local markets and so run a lot of their bonds in US dollars. The performance of US dollar- denominated debt has been quite good, despite some defaults.”

For most of the year, he said, emerging market debt has benefited from the tailwind of falling rates. Joshi told delegates that country selection – and the rigorous fundamental analysis that supports it – will become increasingly important as the broad-based rally fades.

Amidst deglobalisation, emerging markets have their own economies, more fiscal stability and they don’t have the debt overhang that traditional developed markets have.

Joshi said emerging market counties are the least levered part of the world – the average emerging market has a debt ratio of around 48 per cent debt compared to the UK with 125 per cent and the US which has a ratio of 148 per cent.

“This is why the emerging markets have the lowest default rates in the world. They don’t have the vulnerability,” he said. He cited Turkey which, despite economic concerns, has no reason to default because it doesn’t have the debt overhang.

During the conference, Joshi pointed to opportunities in the  triple-B bond and double-B bond EM space saying that securities had already been marked down significantly and therefore look cheap.

August figures from the Institute of International Finance revealed that emerging market stocks and bonds suffered the worst outflows since November-2016. After a relative positive performance in July, IIF estimates that investors pulled out US$13.8 billion from emerging market securities as the due to a resurgence of the trade conflict, combined with increased fears of a global slowdown “Unlike previous outflow cycles, where the dynamics between debt and equity flows were clearly different, August saw both equity and debt securities experience large outflows,” the IIF said.

“We believe the outlook for flows to non-China EM remains difficult, given the large amount of hot money that has already gone to EM in recent years, which we see as having resulted in a positioning overhang, a structural drag on new inflows,” the Washington think-tank said.

 

 

Elizabeth Fry has been a financial journalist for more than 25 years and has written for a number of publications, including CFO, The Financial Times and The Australian Financial Review.
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