Location
Please select your investor type by clicking on a box:
We are unable to market if your country is not listed.
You may only access the public pages of our website.
The powerful combination of high yields and very low defaults
In Emerging Market Debt investing, volatility can offer opportunities to generate compelling returns. Anthony Kettle looks at the macro environment and discusses where the opportunities lay.
Key points
- The macro-outlook remains uncertain.
- EM credit fundamentals remain strong.
- In Emerging Markets, a disinflation trend is coming through.
As 2024 progresses, the choppy macroeconomic backdrop continues to create uncertainty in global markets. However, we see a strong fundamental case for emerging market (EM) credit to deliver solid total returns over the medium term. The composition of those returns, be it carry or duration, is up for debate, but the attractive carry, with yields at 8-9%, and improving fundamental outlook in the sovereign and corporate sectors put us in a much better place than we were a few years ago.
Typically, with carry at such elevated levels, concern over default risk abounds. Consequently, investors demand higher yields to compensate for higher potential risk. However, EM sovereigns are, in fact, likely to have a 0% default rate this year and we believe corporate default rates to decline materially, closer to historical averages by the end of the year. Indeed, it is global inflationary pressures that have driven much of the push for higher yields. Yet, emerging market central banks have been ahead of the curve in terms of monetary policy and we currently see the indications of the disinflation trend coming through.
In terms of geopolitics, the Russia-Ukraine situation is ongoing, as is the conflict in the Middle East. Plus, the future of China’s relationship with its neighbours and the US remains a concern for investors. Moreover, with over half of the world’s population going to the polls this year, the impact on the outlook of EM economies creates another source of uncertainty, with the outcome of the US election being of particular interest.
Given there are over 80 countries in the EM universe, the volatility created by these elections can create opportunities to take advantage of market over reaction in certain areas, resulting in mispricing of assets.
We believe that some economies, such as India and the GCC are generally more insulated from the US election, while some countries in such Mexico and China will likely be more impacted.
In terms of specific investment opportunities, we follow the reform stories very closely across the EM universe. As an example, Argentina has a new president, Javier Milei, who is intent on making bold changes. There are concerns, of course, because the population may push back against these reforms and Argentina has a history of repeated defaults. However, in the recent election the people voted for this path and President Milei’s popularity appears to be holding up, which is crucial for his ability to enact his reform plan. Therefore, our preferred approach has been to buy long-dated bonds, which should benefit investors significantly if the reform story plays out, and implement hedges, by buying short-dated credit default swaps (CDS), should the reform agenda become derailed.
Download this content as a PDF
Sign up for insights by email
Subscribe now to receive the latest investment and economic insights from our experts, sent straight to your inbox.
This document is a marketing communication and it may be produced and issued by the following entities: in the European Economic Area (EEA), by BlueBay Funds Management Company S.A. (BBFM S.A.), which is regulated by the Commission de Surveillance du Secteur Financier (CSSF). In Germany, Italy, Spain and Netherlands the BBFM S.A is operating under a branch passport pursuant to the Undertakings for Collective Investment in Transferable Securities Directive (2009/65/EC) and the Alternative Investment Fund Managers Directive (2011/61/EU). In the United Kingdom (UK) by RBC Global Asset Management (UK) Limited (RBC GAM UK), which is authorised and regulated by the UK Financial Conduct Authority (FCA), registered with the US Securities and Exchange Commission (SEC) and a member of the National Futures Association (NFA) as authorised by the US Commodity Futures Trading Commission (CFTC). In Switzerland, by BlueBay Asset Management AG where the Representative and Paying Agent is BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich, Switzerland. The place of performance is at the registered office of the Representative. The courts at the registered office of the Swiss representative or at the registered office or place of residence of the investor shall have jurisdiction pertaining to claims in connection with the offering and/or advertising of shares in Switzerland. The Prospectus, the Key Investor Information Documents (KIIDs), the Packaged Retail and Insurance-based Investment Products - Key Information Documents (PRIIPs KID), where applicable, the Articles of Incorporation and any other document required, such as the Annual and Semi-Annual Reports, may be obtained free of charge from the Representative in Switzerland. In Japan, by BlueBay Asset Management International Limited which is registered with the Kanto Local Finance Bureau of Ministry of Finance, Japan. In Asia, by RBC Global Asset Management (Asia) Limited, which is registered with the Securities and Futures Commission (SFC) in Hong Kong. In Australia, RBC GAM UK is exempt from the requirement to hold an Australian financial services license under the Corporations Act in respect of financial services as it is regulated by the FCA under the laws of the UK which differ from Australian laws. In Canada, by RBC Global Asset Management Inc. (including PH&N Institutional) which is regulated by each provincial and territorial securities commission with which it is registered. RBC GAM UK is not registered under securities laws and is relying on the international dealer exemption under applicable provincial securities legislation, which permits RBC GAM UK to carry out certain specified dealer activities for those Canadian residents that qualify as "a Canadian permitted client”, as such term is defined under applicable securities legislation. In the United States, by RBC Global Asset Management (U.S.) Inc. ("RBC GAM-US"), an SEC registered investment adviser. The entities noted above are collectively referred to as “RBC BlueBay” within this document. The registrations and memberships noted should not be interpreted as an endorsement or approval of RBC BlueBay by the respective licensing or registering authorities. Not all products, services or investments described herein are available in all jurisdictions and some are available on a limited basis only, due to local regulatory and legal requirements.
This document is intended only for “Professional Clients” and “Eligible Counterparties” (as defined by the Markets in Financial Instruments Directive (“MiFID”) or the FCA); or in Switzerland for “Qualified Investors”, as defined in Article 10 of the Swiss Collective Investment Schemes Act and its implementing ordinance, or in the US by “Accredited Investors” (as defined in the Securities Act of 1933) or “Qualified Purchasers” (as defined in the Investment Company Act of 1940) as applicable and should not be relied upon by any other category of customer.
Unless otherwise stated, all data has been sourced by RBC BlueBay. To the best of RBC BlueBay’s knowledge and belief this document is true and accurate at the date hereof. RBC BlueBay makes no express or implied warranties or representations with respect to the information contained in this document and hereby expressly disclaim all warranties of accuracy, completeness or fitness for a particular purpose. Opinions and estimates constitute our judgment and are subject to change without notice. RBC BlueBay does not provide investment or other advice and nothing in this document constitutes any advice, nor should be interpreted as such. This document does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product in any jurisdiction and is for information purposes only.
No part of this document may be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, in whole or in part, for any purpose in any manner without the prior written permission of RBC BlueBay. Copyright 2023 © RBC BlueBay. RBC Global Asset Management (RBC GAM) is the asset management division of Royal Bank of Canada (RBC) which includes RBC Global Asset Management (U.S.) Inc. (RBC GAM-US), RBC Global Asset Management Inc., RBC Global Asset Management (UK) Limited and RBC Global Asset Management (Asia) Limited, which are separate, but affiliated corporate entities. ® / Registered trademark(s) of Royal Bank of Canada and BlueBay Asset Management (Services) Ltd. Used under licence. BlueBay Funds Management Company S.A., registered office 4, Boulevard Royal L-2449 Luxembourg, company registered in Luxembourg number B88445. RBC Global Asset Management (UK) Limited, registered office 100 Bishopsgate, London EC2N 4AA, registered in England and Wales number 03647343. All rights reserved.
Sign up for insights by email
Subscribe now to receive the latest investment and economic insights from our experts, sent straight to your inbox.