Investing in Emerging Markets Corporate Bonds

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  • 03 mins 49 secs
Chris Perryman, Corporate Portfolio Manager and Head of Trading, PineBridge Investments outlines why EM corporate bonds are an attractive proposition for investors as well as what he sees as the key drivers for the asset class.

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PineBridge Investments

 PineBridge

PineBridge Investments is a private, global asset manager focused on active, high-conviction investing. The firm draws on the collective power of our experts in each discipline, market, and region of the world through an open culture of collaboration designed to identify the best ideas. Our mission is to exceed clients’ expectations on every level, every day.

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Chris: Emerging market corporate debt market has grown exponentially over the last few years, were now a $2.4 trillion market. When I started, it was 400 billion, it was very small, and I think the perception of that has carried over still into what is a growing market. And, you know, it was risk on or risk off when I started and you couldn't really, you weren't really able to diversify your risk well. What we've got now in the 2.4 trillion market is a broader spectrum with 52 countries, 600 plus issuers where we can we can pick pockets of interest regardless of where we are in a cycle. So, we can pick that Brazilian consumer credit that you know, produces beef and exports it to the world. You know, historically, you might have liked that and had a great view on Brazil, but not been able to express that without the broader market selling off and taking it with you, now, actually, what we find is idiosyncratic risk as it blows up is kept specific. So, you know Argentina, China headlines shouldn't really affect Brazil in the same way they did historically, and you know it’s the same with the investor base. Actually, what we've seen is a broadening of that base in domestic terms. So China, historically when I started was 20% of the market was the domestic and the rest of it was international. Now what you're seeing is 70 to 80% of that market is China investors, and those investor base, they're not really worried about other headlines. They want to know about China and they'll manage their China risk, and they have a great understanding of that, and for us, that's the opportunity set now it's a diverse market with domestic players that have created a good, stable base for an investment opportunity that is broad.
First, the premiums, actually, if you look at the quality of emerging market corporate versus the U.S. Investment grade market, for instance, or other developed markets, what you'll find is there's a better quality of credit within the emerging market space and you get paid a premium for that. Some of that premium, you could argue, is justified because of emerging market headlines in history. What you see is typically the top best in class credits come, they are, from a turn of leverage point of view from where, however, you want to measure quality, high quality assets that pay a premium over their developed market peers. So, yes, there are some emerging market risks that are factored into that premium, which is understandable, politics, other things that can come up. But, actually in reality, what you're buying is a very good credit at a premium that we think is a valuable proposition. For emerging market corporates, we have a fairly positive outlook on fundamentals. We think emerging market in general is in a positive growth cycle, having been past the lows which we saw last year. And we've seen a slower growth than, perhaps expectations in EM itself. But actually, what we're now seeing is those shoots turn into something. So, fundamentals in corporates are positive what the other factor that can sometimes drive returns is macro. Last year, we saw Treasuries have a big contribution to returns. I think this year our interest rate outlook is more benign, so we're not expecting a strong return growth from the macro story outside of EM, but actually within EM we are expecting positive returns of between 4 and 6% which I think from us, security selection is really going to be key to driving that, and for us that plays to our strength. We have 12 analysts globally and four portfolio managers, we can utilize those to generate our returns.