What Investors Need to Know About Emerging Markets Debt

In a recent episode of the Excess Returns podcast, Eric Fine explains how growing up as the son of two U.S. diplomats and his experience building the first clearing system in Russia led him to a career in emerging markets debt. Eric also breaks down the current investment opportunity in the asset class. Emerging markets (EM) countries have lower debt than their developed country counterparts, and the asset class offers higher real yields. In addition, emerging markets countries are better positioned to navigate changes in the global supply chain, as ongoing geopolitical turmoil continues to impact the flow of goods, especially commodities.

EM Countries Have Lower Debt

Emerging markets in general have moved much more quickly to increase interest rates compared to the U.S. and other developed markets in order to stay ahead of inflation. For investors, this fundamental backdrop means less issuance and rolling over of debt, a favorable supply/demand dynamic that should help support EM bonds. Additionally, if needed, EM central banks can hike interest rates without bankrupting the government (like we saw in the UK).

EM Debt Has Higher Yields

The primary focus of EM central banks is to focus on controlling inflation, and they do this by maintaining high real interest rates. For investors, the result has been not only higher nominal yields but higher real yields. The benefits to EM local currency investors are a more substantial level of income that is not eroded by loss of purchasing power (through a potentially weaker currency).

EM Debt Benefits from New Supply Chain Dynamics

Unlike developed markets, which experience higher commodity prices as a price shock, emerging markets export more commodities than they import, which means they benefit from higher prices.

Highlights of the Discussion Include:

02:13 - Eric's background as the son of diplomats and how he ended up designing weapons systems
13:44 - The overall emerging markets debt landscape
16:23 - The benefits of emerging markets debt for the U.S. investor
21:12 - Some of the unique issues in emerging markets debt relative to developed markets
25:37 - Eric's investment process
30:08 - Sovereign vs. corporate emerging markets debt
32:02 - Eric's views on country concentration
44:28 - The overall growth of emerging markets
53:01 - Political risk in emerging markets
58:41 - The one lesson Eric would teach the average investor

Listen to the full podcast here.