Q What broad trends do you see for the asset class in 2020?
We expect to see a continued rise in investors’ appreciation of emerging market corporate debt as a strategic addition to their portfolios.
In 2019 we saw an increasing number of investors wake up to the asset class, which comprises well-run emerging market companies with prudent leverage metrics, and saw default rates hit record lows. Combined with relatively high yields, these characteristics make for a compelling long-term risk/reward profile. We expect the low rates environment to continue to draw investors to the asset class in 2020.
Q How will the macro backdrop affect your positioning?
Various clouds remain on the horizon as we head in to 2020, not least US/China trade tensions; US political uncertainty; and Brexit-related unknowns – all against a backdrop of fragile global economic growth. Any of this could cause investors’ nerves to become frayed, resulting in credit spreads widening enough to offset any positives that lower rates bring to bond prices. That’s keeping us defensively positioned.
We currently prefer longer duration, higher credit quality corporate bonds as we think they’re relatively well placed to benefit from easing financial conditions and weather storms. We particularly like Asian investment grade corporate credit. Asia is home to some well-run and resilient companies that have a firm footing on the global stage.
Q Are there any markets you’ll look to avoid?
The short answer is no. While in investment-grade markets our positioning heading into 2020 is conservative, in high-yield markets we will continue to seek out investments that much of the broader market is overlooking, and that can take us far and wide.
Across all emerging market jurisdictions our research can uncover some really well managed companies with compelling debt metrics. These firms often have global client bases and sell their products and services in US dollars, removing emerging market currency volatility from the equation.
Yet many of these companies’ debt is overlooked or under-priced by the investment community simply because of the sovereign credit rating of their country of domicile. We often refer to this phenomenon, which typically sees emerging market company bonds offering larger spreads than their similarly rated developed market peers, as the ‘postcode premium’.
Country crises can amplify the postcode premium, pushing down corporate bond prices and presenting opportunities for investors who have the conviction to ride through short-term volatility in pursuit of long-term investment gains.
One recent example – and an area where we see potential for significant opportunities moving into 2020 – is Argentina. Home to some very solid businesses, often with earnings in US dollars, Argentina’s corporate bond market was dealt a blow by negative headlines over politics and sovereign debt this year. Yet the default risk attached to many of these companies remains low. We see some compelling risk-adjusted return potential here for long-term investors.
Q How will emerging market companies stack up against their developed market peers?
While many developed market companies have continued to increase their indebtedness, leaving them vulnerable to a downturn in fortunes, emerging market companies have done exactly the opposite over recent years. This is a trend we expect to continue.
It is common to find companies in emerging markets that have lived through tough times and learned the value of prudence – typically saving for a rainy day and reducing their leverage to put them on a relatively stronger footing than many of their developed market peers.
This relative strength could become increasingly apparent in 2020 and make more investors question whether their perception of emerging versus developed market corporate debt needs an upgrade.
Emerging Markets: 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.
All investments carry the risk of capital loss.