Emerging Market corporate debt as an asset class is the most attractive it has been in 20 years as higher yields are back and the interest rate cycle is about to turn
Given the constructive and supportive global economic backdrop since the pandemic, risk assets like equities have performed well. However, they have been susceptible to bouts of increased volatility. We are in the midst of such a bout as investors worry about the potential of a sharper than expected US economic slowdown, uncertainty around the US elections in November, and the US Federal Reserve’s imminent interest rate decisions and how it will be taken by markets.
The resilient return profile of Emerging Market (EM) corporate debt has fared strongly against many other asset classes, offering a compelling case for investment in the asset class today. More specifically, as we highlight in this Investment Insight, we believe that there are several important factors that mean the asset class is well-positioned to weather potential volatility risks and continue to deliver strong performance, providing attractive risk-adjusted returns and diversification benefits at a time of uncertainty. These factors include:
- Improved fundamentals, including stronger balance sheets, improved operations and cash generation;
- Proactive refinancing of debt, creating a yield buffer for investors;
- Increased diversification from both a sector and geographic perspective; and
- Supportive technicals with favourable market supply and demand dynamics.
As of 31st August, our J. Stern & Co. Emerging Market Debt Stars portfolio has returned +8.3% year to date in US dollar terms, outperforming both the comparator index* and other developed market fixed-income asset classes.
A track record of resilience
EM corporate bonds have performed well in previous periods of high market volatility. We looked at seven different periods of elevated volatility levels in the markets, as characterised by the VIX index, which measures the market expectations of future volatility, reaching at least 36 or more.