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While emerging market debt has always been a diverse asset class, it continues to expand its boundaries.
Alongside solid investment grade companies, which can be benchmarked against the best developed market peers, there are also less established – but equally as impressive – smaller companies. Some of these are from newer geographies or making their bond market debut. Together, these varied credit profiles provide emerging market debt investors with a uniquely dynamic risk/reward opportunity for their portfolios.
Togo, Ecuador and Moldova are just some of the countries from which issuers have recently joined the benchmark universe for corporate debt. The asset class continues to grow both in depth and breadth, offering investors new ways to access higher returns in a yield-starved bond universe, where globally around USD 13 trillion of debt are trading at yields below zero. Commenting, Senior Portfolio Manager Theo Holland said: “Companies based in these so-called ‘frontier’ countries often pay coupons in the high single digits or even in double-digit territory, providing a welcome yield boost to a well-diversified portfolio.”
In comparison to more mainstream asset classes, emerging market corporate debt is relatively young. That said, it has grown substantially over the past 20 years from less than USD 100 billion in 1999 to almost USD 1,500 billion in 2019, according to Bank of America Merrill Lynch data. As such, the value of outstanding debt has surpassed both the US high yield and emerging market sovereign debt segments.
On a bottom-up basis, companies based in emerging markets continue to outstrip their developed market peers – not least when it comes to net debt to EBITDA ratios. Theo Holland adds: “This is a highly relevant factor for investors when it comes to determining a company’s risk and resilience. Looking at the past year, the relative difference between the net leverage in US companies and emerging companies widened, in favour of the latter. At the same time, you are paid more to be invested in a given emerging market credit vs. a given developed market credit for the same unit of risk. For example, US companies rated BBB pay a spread of 47 basis points per turn of leverage, versus 106 basis points in emerging markets.”
Investors can achieve substantially higher returns, with correspondingly higher risk, via companies based in more ‘frontier’ markets. The commonalities of such issuers tend to be that they are from less developed economies and financial markets; there are no or very few existing corporate issuers in hard currency from that geography; issuance sizes are generally smaller; and ratings are lower.
Theo Holland adds: “These bonds present meaningful return opportunities for active, nimble investors that have access to local knowledge, as well as deep credit analysis capabilities. Examples of such issues in 2019 include a mining company in Mongolia, a telecom company in Georgia and a pan-African bank headquartered in Togo. Taken together, the inclusion of these bonds aids diversification as their performance drivers are often less correlated to global newsflow.”
To take advantage of these opportunities across the spectrum, from more established emerging markets and proven companies to frontier geographies with younger credits, investors should consider investing on a global, unconstrained basis. With best-in-class credit research, alongside an effective risk control framework, the Fisch Bond EM Corporates Opportunistic strategy seeks to fully exploit this opportunity set.