Marcelo Assalin, CFA, Partner
Head of Emerging Markets Debt Team
Emerging markets debt has underperformed over the past few years as interest rates increased as a reflection of central banks tightening monetary conditions to fight inflation. It's a very interesting moment to get involved with the asset class.
1. The End of Central Bank Tightening Could Generate Demand for Emerging Markets Debt
Now, with the global disinflationary trend we are seeing, we believe that central banks are either at the end or close to the end of the global monetary tightening cycle, and this could in turn generate stronger demand for fixed income. And we believe that this will result in stronger inflows into emerging markets over the next few months.
2. Declining Rates Could Drive Growth in Emerging Markets
Emerging markets growth has surprised, and it does look quite resilient. But very importantly, inflation in emerging markets countries has decelerated more rapidly and significantly than it has in developed economies. This should allow central banks within the emerging markets world to start reducing the level of interest rates in the next few months, and that should in turn translate into additional support to economic growth in these countries.
3. High Yields Could Lead to Strong Returns
Indeed, emerging markets debt high-yield credit spreads have been very attractively valued against high-yield spreads in other asset classes, such as U.S. credit or European credit. That, in turn, translates into higher-yield levels for emerging markets debt. And we know that over the long term, higher yields tend to lead to stronger returns because of the higher carry.
4. Alpha Generation Opportunities Abound
Emerging markets debt is a very, very diversified asset class, which provides ample scope for fundamental differentiation. So, we do see value in different regions, different countries, and very importantly, how to position and take advantage of these differences. Yield levels are very high. Credit spreads are very wide. We see particularly value within the higher-yielding frontier markets debt space, where we believe investors are mispricing the risk premium. Investors are overestimating default rates and underestimating recovery events. And with our very strong, bottom-up focus, we are very well suited for uncovering value for our clients in the emerging markets debt space.
The views and opinions expressed are those of the speakers as of the date of publication, are subject to change without notice as economic and market conditions dictate, and may not reflect the views and opinions of other investment teams within William Blair. Factual information has been obtained from sources we believe to be reliable, but its accuracy, completeness, or interpretation cannot be guaranteed. This material may include estimates, outlooks, projections, and other forward-looking statements. Due to a variety of factors, actual events may differ significantly from those presented. This video has been provided for informational purposes only and not intended as investment advice or a recommendation of any particular strategy or investment product, or as an offer to buy or sell any securities or related financial instruments in any jurisdiction. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions.
Investing involves risks, including the possible loss of principal. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks. These risks may be enhanced in emerging markets. Investing in the bond market is subject to certain risks including market, interest rate, issuer, credit, and inflation risk. High-yield, lower-rated, securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Diversification does not ensure against loss. Past performance is not indicative of future results. This material is a marketing communication and is not intended for distribution, publication or use in any jurisdiction where such distribution or publication would be unlawful.