Emerging Market Debt - A Sustainable Opportunity for Yield or Haven for Tourist investors?

10 August 2016

As an asset class, Emerging Market Debt has seen marked volatility over the last 24 months. From a hiring perspective, while some firms have viewed it as an out of favour auxiliary business, others have embraced the counter cyclical opportunity to bolster key talent. As the pendulum of demand has recently swung in favour of the sector, we look at some of the key factors driving demand and likely implications in terms of talent. Heading in to the start of 2016, sectoral demand had seen three straight years of declining valuations and downward growth projections. This was largely driven by a limited EM reaction to a perceived Fed rate hike, slowing growth in major markets and a strong US dollar impacting on EM currency levels.

So what has driven the recent upturn in fortunes?

i. Potential of EM Sovereign and Corporate defaults has not materialised
Whilst not without significant challenges, both EM sovereigns and corporates have held firm and not experienced the '98 style crisis some had predicted. Last year's commodities crash and emerging market rout forced EM companies to hunker down, cut costs, slash capex and sell off underperforming assets. As such, average leverage is now lower than in developed markets, meaning emerging market junk-rated companies are ready to ride the good times, or heaven forbid, well prepared to weather another crisis.

ii. Alternatives beyond China
As with many growth prospects for Developed Markets, much importance has been placed on the unfettered growth prospects of China driving EM demand. With slowing expectations, demand stability from other nations such as Russia and Brazil has been encouraging.

iii. Brexit and the broader search for yield
2016 has been characterised as a globally low interest rate environment. With central banks slashing rates further, gilt yields have fallen to incredibly low levels. Consequently asset classes offering some form of yield have been in high demand and with returns of c.7% + EMD has looked attractive. Further an early symptom of the Brexit vote has seen investors look at geographical diversification away from the UK with EM one of the beneficiaries.

iv. Rebound in commodities
Both Sovereign and Corporates have benefited from an increase in demand for one of their largest exports - commodities. Not even a recent failed Turkish coup has affected demand and asset class stability, with some arguing that this has actually led to increased inflows for other EM nations.

Implications for talent:

A handful of key trends appear to have developed within EMD franchises in the UK and Europe.

i. The first is a significant demand for investment capabilities at a mid to senior level with specific local currency experience. Ongoing FX fluctuations have created perceived opportunity with many firms looking to bolster headcount.

ii. An increasing interest in EM specific Macro Strategists has been noted as geo political factors have gained far greater importance alongside bottom up security specific research capabilities.

iii. Senior Corporate Credit analysts continue to be in demand with EM specific experience top of many peoples agenda hiring agenda. iv. Increasing access and availability of sell side talent. This has broadened potential candidate pools making filtering and first stage assessment of technical competence and buy side culture fit even more important.

Despite ongoing global challenges across both developed and emerging market economies, the search for yield continues unabated. With interest rates likely to remain depressed for some time, our clients suggest that many of the so called 'tourists' may be tempted by a longer stay in the asset class.

Written by

Navin Raina

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