«Emerging market debt (EMD) can offer investors a compelling investment case»

On Tuesday, 27.02.2024, Aviva Investors hosted a high-profile lunch entitled «Meet the PM» at the «Hotel Storchen» in Zurich. Afterwards, I had the opportunity to talk to Aaron Grehan and Tanya Vinnikova about the emerging market debt (EMD) asset class. It is always very valuable to meet portfolio managers from such a large organisation. I learnt a lot of interesting facts. Thomas J. Caduff, CEO, Fundplat LLC

• Caduff: Mrs. Vinnikova, Mr. Grehan, why are investments in emerging market debt (EMD) so interesting?

Vinnikova: EMD can offer investors a compelling investment case based on:

Strong fundamentals: Compared to developed markets, many emerging market eco­nomies have higher growth rates, lower debt-to-GDP ratios and improving standards of gover­nance. Emerging eco­nomies have become more resilient to external shocks given increased sovereign balance sheet strength and benefit from posi­tive demo­graphic trends, creating a wealth of investment opportu­nities.

Portfolio diversification: As a global asset class, EMD offers portfolio diversi­fi­cation across regions, countries, sovereign and corpo­rate issuers in both hard and local currencies. Each of these segments has unique risk profiles and return drivers, meaning EMD has the potential to provide stable diver­sified returns for your portfolio.

Growing asset: Class EMD as an asset class has evolved consi­derably in recent years. The universe of countries has widened and credit quality has improved. The asset class is worth approxi­mately 33 trillion US dollars and continues to see growth in issuance, creating a more diverse and liquid asset class spanning over 72 countries.

Alpha opportunities: Despite their signi­ficant size, we believe emerging debt markets are less efficient than their deve­loped equiva­lents. Alpha opportu­nities are created by the breadth and diver­sity of an under­researched and under­reported universe, creating oppor­tunities across countries, issuers, yield curves and currencies.

• Caduff: What share do emerging markets have in global GDP and how large is the share of EMD measured against global fixed-income assets?

Emerging markets represent nearly 60 per cent of global GDP. Aaron Grehan

Grehan: Too big to ignore: Emerging markets represent nearly 60 per cent of global GDP, yet EMD makes up 26 per cent of global fixed-income assets. Despite consistently deli­vering strong risk-adjusted returns, many investors remain structu­rally under­invested in the asset class.

• Caduff: Are large investors already sufficiently invested in this asset class?

Grehan: Emerging markets can exhibit high levels of idio­syn­cratic risk and can be characte­rised by periods of high vola­tility. As a result, many investors remain structu­rally under­invested in the asset class and only chose to allocate to EMD on a tactical basis. Our strategies are designed to gene­rate alpha in both spread widening and tightening cycles aiming to deliver consistent outperfor­mance thereby allowing for that structural allo­cation to the asset class.