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Emerging Markets Debt: Beyond the Benchmarks

15 May 2023   |  

The macroeconomic backdrop in emerging markets has been uncertain for some time now—indeed, if anything, uncertainty seems to be increasing. War continues in Ukraine, inflation globally remains sticky (particularly core inflation) and, consequently, global monetary policy is, overall tilted toward tightening (relatedly, the Reserve Bank of Australia announced a surprise hike in early May). And at least partially thanks to tighter monetary policy (which is ongoing, with both the Fed and ECB raising rates again at their recent May meetings), some things have broken—e.g., we’ve seen a cryptocurrency winter, trouble with UK pension funds, concern about global real estate and, most recently, bank failures in the US and Europe.

Which isn’t to say there aren’t opportunities to invest. On the contrary, we think there are interesting investments out there. Importantly, we don’t think they’re all represented well by the standard EM debt benchmarks—which exclude significant investable swathes of the markets. To take just one example, consider the hard currency space (wherein, incidentally, we think the benchmark does a slightly better job of representing the asset class): the benchmark excludes countries’ euro-denominated paper issuances, which means countries like Albania, North Macedonia, Montenegro and Benin are underrepresented for (in our opinion) no great reason. As a result, the EM investable universe is actually much broader than represented by the most common benchmark. Additionally, the benchmark has a considerable number of low -spread securities, while also including some from countries that have defaulted.

In our view, this combination—ongoing macroeconomic uncertainty plus less-than-representative benchmarks—presents a compelling opportunity to capable investors. Those willing to do the deep-fundamental research required to see beyond the uncertainty and the benchmarks’ constraints are likelier to find investing candidates that could prove highly beneficial to long-term investors—topics about which we will have more to say soon, so to our regular readers, stay tuned … more to come.

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