Markets have shown many times that the best time to buy is just when the bad news can’t get any worse. “Buy when there’s blood in the streets” as the old saying goes. It might sound a bit extreme to modern ears – more appropriate perhaps for the Napoleonic Wars, when it was supposed to have been uttered.

The parade of bad news about emerging markets (EM) has been suffocating. Russia and Ukraine; China real estate, gaming and tech; China and Taiwan; LatAm elections; Turkey; African coups. Food and energy price inflation has been tougher for emerging markets, which are tightening policy as a result (we’ve seen a total of 3770 basis points of rate hikes in nine months). Volatility in US interest rates and dollar strength are traditional headwinds. Is our long-running theme of EM resilience being tested? We think these problems are now priced in – EM hasn’t been this cheap relative to developed markets  for five years at least – and we may be close to the sort of buying opportunity that only comes around every few years.

We spend a lot of our time stepping back from the noise and relying on our own fundamental analysis of companies and countries across the globe. There’s a disconnect in our view between some of the bad macro noise and the fundamental health of the issuers we look at. Here’s some of the bottom-up views from our team of regional analysts.




Great opportunity

We have been arguing for many years that investors tend to misunderstand emerging markets: they underestimate its diversity, and they overestimate its vulnerability to interest rates and the dollar. The net leverage of EM credit is 25% lower than two years ago. Reliance on external borrowing has come down drastically – close to 90% of EM government debt is now in local currency, as opposed to 40% two decades ago. Throughout a pretty difficult period of Covid (which hit EM more than DM) and regional instability, the asset class has held up fine in absolute terms, but it’s lagged developed markets.


In our view, much of the bad news is in the price, and in fact there’s a good chance that the news flow improves, and EM debt markets are more sensitive to a positive surprise looking forward. Our base case is that regional tensions dissipate in Europe later this year. China is likely to continue to ease policy as we approach the party congress in the autumn. US interest rates have also moved a long way: markets are now pricing five rate hikes in the next twelve months alone. We think that as inflation pressures ease from Q2 onwards, and growth starts to slow down, pressure on central banks to tighten will reduce.

Another exciting opportunity in EM is ESG as EM catches up with DM standards. Corporates and sovereigns are much more willing to listen and work towards improvement which we as investors can greatly influence. The team has been working heavily on engagement with issuers.


Our team of dedicated credit analysts are still finding lots of issuers to like in EM on a fundamental basis, which is at odds with negative EM sentiment. If as we expect those political and policy macro headwinds ease later in the year, investor sentiment will turn quickly. Relative valuations make EM look very attractive. We see a great opportunity to add risk in EM – if you can pick the winners and avoid the losers.

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