Emerging Market Debt Roundtable 2020
[i3] Emerging Market Debt Roundtable

Emerging Market Debt Roundtable 2020

5 August 2020
Online Anywhere

Historically, emerging market debt has been somewhat mis-understood and sometimes frowned upon, given its patchy boom and busts over the decades.

Developed vs Emerging Market Debt

However, with yields remaining low in most developed markets, emerging market debt has been an area of interest for many institutional investors as a source for better returns. The recent quantitative easing measures, implemented by global central banks as a response to the coronavirus-induced crisis, have pushed sovereign yields to almost negligible levels.

Likewise, developed market credit spreads have suffered the same fate.

In that context, investing in emerging market debt looks attractive. Future economic growth in emerging markets is also expected to outpace the developed markets.

However the volatility of this asset class remains a major impediment to investors’ portfolio construction.

As part of [i3] Pivot, we’re pleased to convene an investor roundtable on Emerging Market Debt (EMD), in partnership with Pinebridge Investments.

Risk and Portfolio Construction

What is the role of EMD in the portfolio? Can it be considered a separate asset class with unique factors, notwithstanding constant debates on the geographical definition of emerging markets?

In the roundtable, we will address EMD and credit portfolio construction:

  • Determining the objectives of including EMD: Diversifier or return seeking? Opportunistic vs strategic? Defensive vs growth?
  • Managing the volatility
  • Determining the exposures: Hard or local currency? Sovereign vs Credit? Or blended approach?
  • Benchmarking and performance attribution

Fallen Angels: How severe is this risk?

The impact of the COVID-19 pandemic on governments and corporates has put the spotlight on ratings. From past experience, rating agencies have tended to be relatively quick to downgrade emerging market issuers – increasing the rate of “fallen angels” among emerging markets corporate issuers.

There are obvious implications of sovereign or corporate downgrades on the portfolio – How can the investor manage this risk? How about risk of defaults?

China Bonds

After years of anticipation, the inclusion of China onshore bonds in the major global indices will certainly draw many investors to that third largest bond market in the world.

  • How will this inclusion change the composition of fixed income portfolios?
  • Will Hong Kong’s BondConnect continue to be relevant?
  • Will the lack of market liquidity, including derivatives for hedging interest rate risk, be a key concern?

In a related manner, the increasing trade tension between US and China, further accelerated during the pandemic, will inevitably interfere with economics and investments. Will this geopolitical uncertainty hinder China’s ascension?

Focus on ESG

Sustainability and governance are mainstream priorities that concern investors. While the institutional and governmental frameworks in some markets are becoming more mature, ESG risks remain high.

Developing a pragmatic risk and liquidity framework remains a challenge.