One paradox of investing in emerging market debt is as follows: very often, those outside the asset class, when criticising it, fail to differentiate between sovereign and corporate borrowers. At the same time, those within the asset class probably don’t think sufficiently about the two investment themes together. Let me explain what I mean.
Firstly, when those who criticise emerging market debt aren’t sure which sort of borrower they’re talking about. In this instance, it’s fair to say that this is not a mistake that these otherwise well-informed people would make when talking about developed market fixed income! To these critics, all emerging market debt is the same. This is, at quite fundamental levels, not the case. Consider the following few facts: emerging market private sector debt as a percentage of GDP is over twice the level of emerging market general government debt as a percentage of GDP. Simultaneously, emerging market private sector debt is overwhelmingly made up of bank lending to corporates and households, as opposed to debt raised in the bond markets. And in both cases, emerging market government and private sector debt is overwhelmingly domestic.
All this puts a few holes in some of the usual shibboleths about emerging market debt. For example, that emerging market sovereign and corporate debt profiles are one and the same. Or, that emerging market corporates have made the entirety of their liabilities (dollar) bonds, owned by foreigners.
What about those inside the asset class? As the emerging market fixed income universe has grown greatly in scale in recent years, investors in the space have become increasingly isolated, as either specialists in one investment theme or the other. However, if you want to buy an Argentine corporate, for instance; you should be sure to have a firm view of what’s going on with the Argentine sovereign. Surprisingly often among emerging markets investors, this isn’t the case.
At Kames, we invest across emerging markets sovereigns and corporates, and aim to marry a clear-eyed view of the top down, with a firm understanding of the bottom-up. This holistic approach also involves tackling some of the widespread misunderstandings about emerging market fixed income as a whole.