EM debt gets a bad rap, says BOC Life CIO

Yield-hungry investors are looking to invest more in emerging market corporate bonds, which are seen recovering more slowly from the pandemic crash than those in developed markets.
EM debt gets a bad rap, says BOC Life CIO

Hong Kong’s BOC Life took the opportunity to “reload” its emerging market debt portfolio after de-risking amid the Covid-19 crisis this year and is positive on the asset class, which the firm's investment chief says still faces a perception problem.

Nonetheless, investors are looking to increase their allocation in this area despite the recent turmoil, it emerged from a webinar* hosted on Tuesday (November 24) by AsianInvestor and Credit Suisse Asset Management.

BOC Life took a little risk off the table in March, but then it was able to re-enter again at favourable levels before the rebound, said Alvin Ying, the firm's newly appointed chief investment officer. Emerging market corporate and sovereign debt was slower to recover from the pandemic-driven crash in the first quarter, he explained. 

Another pleasant surprise for Ying was that emerging market corporate bonds held up better than emerging market sovereign debt during the pandemic-driven market crash in the first quarter.

Alvin Ying, BOC Life

“The traditional wisdom is that when you are risk-off as a top-down investor, you want to stay with sovereigns,” said Ying. “But [probably] due to a combination of a different country mix, higher ETF [exchange-traded fund] flows and higher liquidity … sovereigns actually underperformed corporates.”

However, in a poll during the webinar, nearly half (45.8%) of the audience said their emerging market credit exposure fared worse than its developed market equivalent during Covid this year. One third said emerging market debt performed better, with the remainder (about 20%) saying it was in line with developed market bonds.

Of course, performance will vary depending on the asset manager, but emerging markets also face a perception problem, which leads to higher volatility, said Ying. So it pays to have a longer-term focus to emerging market debt, he suggested.

“If you look at the realised volatility and if you look at historical returns, emerging market corporates do pay you for the lower transparency and the lower governance standards … if you're in the asset class strategically,” he said.

But bad headlines tend to spark outflows, even if the country or company is in no worse shape than its developed market equivalent, Ying added. “So [it’s through] long-term commitment and sticking through the cycle, through some of the [bad] headlines, that an investor can reap the benefits of the higher risk premia in emerging market corporates."


In any case, emerging market credit seems to be gaining favour. Two-thirds of the webinar audience said they were planning to increase their emerging market corporate bond exposure in the coming year and only 5% aimed to reduce it.

In Europe, for instance, institutional investors have shown more interest in investing into emerging market corporate bonds to boost returns, despite the additional risk they entail, Andreas Fischer, senior portfolio manager at Credit Suisse Asset Management (CSAM), said during the webinar.

Gonzalo Borja, 
Credit Suisse AM

And a growing number of European institutions and pension funds are moving to set up a dedicated allocation for emerging market corporate debt, he added.


“As the asset class itself has grown and is still growing, it becomes more important for investors to look at emerging market corporate debt,” Fischer said.

Gonzalo Borja, head of fixed income for emerging markets at CSAM, added: “When you look at the contribution of emerging markets to global GDP, it is close to 60% and you can see the allocation for emerging markets this year is still small. This transformation we have seen with emerging market corporates and sovereign local currency will continue to develop.”

One thing that may attract more flows into emerging market debt is that companies in developing countries are improving when it comes to providing information on environmental, social and governance (ESG) factors, as they are increasingly being asked about them, said Kate Hollis, director of investment research at consultancy Willis Towers Watson.

Nonetheless, there remain concerns that investors harbour about the asset class, not least lower liquidity and higher political risk.

“If you are investing in a country where the authorities are running non-conventional monetary policy, you run the risk of exchange controls being imposed on very short notice,” Hollis said. “In which case your company may have problems finding dollars to pay the coupons.”

Hence the sovereign political risk is something that EM corporate debt investors need to keep an eye on, said Hollis. “You have to accept that and you have to trust your manager to manage it, but you have to accept that some of these risks can come completely out of left field.”

* 'Emerging Markets Corporate Debt - Navigating the Unknown' took place on November 24 and is available on demand by registering here.

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