For professional investors and qualified investors only

Dispelling the myths aroundemerging market debt
At a glance
emerging markets bear little resemblance to those> Today’sthat were rocked by financial crises in the 1980s andLaura Reardon
Client Portfolio
Manager, Emerging
Market Debt

1990s, with the asset class diversified across geography,
investment grade, high yield, sovereigns and corporates

the JP Morgan EMBI Global Diversified Index yielding> With8%, and central banks set to ease policy rates, we believe
there are good opportunities

Threadneedle Investments has a dedicated> Columbia
team of 22 emerging market investment professionals
seeking to unearth the best investment ideas via an active
management research-driven approach

Issued July 2024

1

Dispelling the myths around emerging market debt

Things in emerging markets are not always what they seem. InDecember 2023, Argentina elected as president Javier Milei, arabble-rousing populist fond of brandishing a chainsaw on thecampaign trail. Milei had a radical agenda, including dollarising
the economy and abolishing the central bank – just the kind ofpolicies that alarm investors.
In the event, his actions have been surprisingly market friendly.
Since coming to power he has devalued the Argentinean peso
and cut transport and energy subsidies. He has even earned
the praise of the International Monetary Fund (IMF).
Milei may yet prove to be the market’s bogeyman. But recklesspolicymaking in the main emerging market economies is

now the exception rather than the rule. The perception thatemerging markets have not moved on much since the 1980s
and 1990s, when financial crises rocked Latin American andAsian countries leaving some unable to service their debts, isan outmoded one. In the past 30 years many emerging market(EM) governments have adopted institutional frameworks
that guarantee prudent macroeconomic policy and contain
imbalances. Sovereign defaults do occur, but in a small minorityof a large and diverse investment universe.
Indeed, at a time when emerging markets fixed income is
an attractive asset class with attractive yields, outdated
perceptions are in danger of holding investors back. We think
three myths in particular need dispelling.

The three myths
Myth1: Emerging markets are generally economic “basket cases”

Most major EM economies now boast stable rates of growthunderpinned by orthodox policy frameworks. Many haveembraced central bank independence, inflation-targeting
monetary policy and fiscal rules.

year Turkey’s central bank has raised rates nine times, by a totalof more than 400 basis points. Interest rates are now 50% andinflation is at 75%1. Everything is relative, but Turkish policy
appears to be moving in the right direction.

Of the rest, several have shown that even persistent offenders
can sometimes seek redemption. Take Turkey, which hasendured years of very high inflation. President Erdogan
opposed raising policy rates to tackle price pressure, claimingthat higher rates were themselves inflationary. Yet in the past

As Argentina and Turkey show, there is no single EM “story”. The
EM hard currency fixed income universe comprises more than
70 countries, all with their own idiosyncratic circumstances. We
believe there is the opportunity, via active management, to build adiversified portfolio while minimising potential tail risk eventsMyth2: Emerging market bonds are mainly junk

Nothing could be further from the truth. The hard currency EM
index carries an investment grade average rating of BBB-,
thanks in part to the inclusion in 2019 of Middle Easternstates such as Qatar, Saudi Arabia and the UAE.2 In fact,

Myth

3

: There is significant contagion risk

Correlated imbalances were once a hallmark of emerging markets.
But two decades of structural reform and policy improvement has
greatly diminished the danger of a crisis in one country spilling over.
The diversified exposures and idiosyncratic nature of the asset
class provides much greater insulation against exogenous shocks.
123

nearly 60% of the JP Morgan EMBI Global Diversified Index is
rated as investment grade.3 The wealth of active management
opportunities in the asset class reflects the broad range ofcredit qualities.

Consider China’s recent economic slowdown, the war in Ukraine
and the crisis in the Middle East. All events that might once havespelled a systemic crisis for EM debt have in fact demonstrated
its resilience and diversity and provided opportunities for activeinvestors.

From October 2022 to June 2024, as per Bloomberg data.
Marmore Mena, GCC’s inclusion in J.P. Morgan’s EM Bond Index: The “Hurray” Moment, 15 October 2018
JP Morgan EMBI Global Diversified Index, as at May 2024

Issued July 20242

Dispelling the myths around emerging market debt

A diversified asset class
When it comes to constructing investment portfolios, thenumber of countries pursuing distinct economic policies
fosters a diversification that mitigates many remaining tailrisks. What is more, investing across EM fixed income’s threesub-asset classes can deliver further diversification. Firstly,
there is the hard currency sovereign debt universe. More than

70 countries issue their debt in dollars or euros. Secondly, thereis the fast-growing corporate debt sector. And, thirdly, there
are the 18 countries that issue debt in their own currencies.
Only those with the most credible economic policies can do so:consequently, the number of borrowers is smaller and the credit
rating higher at BBB+ (Figure 1).

Figure 1: an attractive income proposition across a diversified asset class

Hard EMDCorporate EMD

Local EMD

JPM EMBI Global

CEMBI Broad Diversified

GBI-EM Global Diversified

Market size ($bn)

1,230

521

1,536

Number of countries

705818Inv. grade/High yield %

IG

HYIG

HYIG

HYAverage credit rating

BBB-BBB-/Baa2

BBB+

Duration

6.8

4.3

5

Yield to maturity

7.2

7

6.6

2023 index return10.50%

9.10%

12.70%

 ollowing the most widely used definition, EMD currently consists of 70 countries and 929 bonds, a significant increase from the 14Fcountries and 51 bonds available in 1993
Investing in EM debt gives access to government and company debt, in both investment grade and high yield, around the world
EMD is an underinvested asset class
Source: JP Morgan, as at 31 March 2024

The resulting asset class is diversified across geography,
investment grade, high yield, sovereigns and corporates.
At Columbia Threadneedle Investments, we have 22
investment professionals in the emerging markets fixedincome team, located across three continents, dedicated4

to unearthing investment ideas including the best relativevalue opportunities. With just under $4 billion undermanagement we are big enough to access all the major
market counterparties, yet small enough to be nimble attimes of market stress.4

All figures as at March 2024

Issued July 2024

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Dispelling the myths around emerging market debt

An opportune time
We are encouraged by current opportunities in emerging
markets fixed income. The JP Morgan EMBI Global Diversified
Index is yielding about 8% – an attractive rate – although atight yield spread over US Treasury bonds indicates the asset
class is fairly valued (Figure 2).

Figurespreads
tighter but yield still attractive
Liontrust2:Russia
A Acc GBP
Index valuation vs 10-year average

EMBIG diversified spread and yield

800

750

700

650
550

600

450500

350
250

400

150

300

50200

-50100

2014

02014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

J.P. Morgan EMBI Global Diversified Sovereign Spread
J.P. Morgan EMBI Global Diversified Blended Yield

2024

Source: Macrobond and Columbia Threadneedle Investments, as at 30 April 2024. Past performance is not a guarantee of future returns.

At the same time, the headwinds faced in recent years from highinterest rates are dissipating. Easier US monetary policy shouldloosen funding conditions for issuers and support emerging
markets fixed income. In the meantime, Latin American central

banks such as Brazil have already begun cutting (Figure 3), taking
advantage of disinflation. This should stimulate economic growthin emerging markets, which the IMF has forecast will be 4.2% in2024 against 1.7% for developed markets.5

Figure 3: rate cutting cycles have commenced in emerging markets
Average EM policy rate (14 major local markets)

Latin America interest rates

12141310121181096874652402019

2020

2021

2022

2023

Average EM Policy Rate

2024

MayJulSep

Nov

JanMar2022
Chili

PeruMayJul

Sep

Nov

Jan

2023
Colombia

BrazilMarMar

2024
MexicoSource: Macrobond and Columbia Threadneedle Investments, as at 30 April 2024

Meanwhile, the IMF is helping reduce the risk of debt distressamong EM issuers by making loans conditional on theimplementation of reforms aimed at strengthening economicresilience. For instance, it agreed to increase its loan facility toEgypt from $3 billion to $8 billion, but insists it raise interest
rates and float its pound to prevent imbalances.
5

There is a new reality in emerging markets, far from themyths of yesterday. We believe improving policy making isstrengthening the investment case for an asset class whereyields are highly attractive and falling policy rates should
provide a fair wind.

World Economic Outlook, April 2024: Steady but Slow.

Issued July 2024

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Dispelling the myths around emerging market debt

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