EM debt: What’s driving investor appetite?

August 01, 2022
Polina Kurdyavko 80 x 80.jpg
Polina Kurdyavko

Emerging markets (EM) expert Polina Kurdyavko explains why the current macro environment looks positive for long/short strategies, with signs of medium-term beta opportunities also on the horizon.

We anticipate the next 6–9 months are likely to provide a fruitful environment for hedge fund strategies that can take advantage of market volatility. There are several areas that we would point to from both a beta and a long/short perspective.

In terms of beta, yields on the asset class sit at a 13-year high. Even though there could be further downside in the short term, the medium-term value proposition in select parts of the asset class looks compelling, in our view.

Historically, investors have generated robust total returns by taking advantage of sell-offs in EM fixed income and we expect this period to be no exception.

We believe there are three preconditions that need to be met before the beta of the asset class is likely to turn more substantial:

  1. US rates: Although inflation remains persistent, the long end of the US Treasury curve is starting to price in a higher recession probability and therefore has become better anchored. High-carry assets such as EM are more dependent on the stability of the rates curve to perform, rather than a rally in the rates curve.

    From this perspective, we may not be too far from seeing the longer-dated part of the curve becoming more stable.

  2. Russia/Ukraine war: Investors are looking for some resolution to the war and the consequential impact on both energy and agricultural commodities. As long as the uncertainty continues, it will be difficult for some EM assets to stabilise. While this could create challenges on the beta side, it also creates an environment where the flexibility to express long and short positions can prove advantageous.

  3. Political volatility: A number of EM countries are simultaneously going through political transitions. In many cases, the result of the transitions would determine their levels of engagement with the IMF, for example in Sri Lanka, Tunisia and Pakistan, but also to some extent in Argentina. Our expectation is that in a number of these cases, the outcome may be positive on the margin.

    Nevertheless, as the stories play out, we believe having flexibility and the ability to be nimble will be paramount for delivering positive returns.

Regarding long/short trade structures, opportunities abound due to high levels of differentiation. In China alone, the mix of Covid policies has led to significant weakness in some sectors, while others remain relatively robust. Likewise, we anticipate increased opportunities on the local rates side as inflation peaks in some countries.

Conversely, in countries such as Turkey, the ineffective monetary policy could further exacerbate inflation and put more pressure on the currency and in turn the banking sector.

On the distressed side, while we maintain high conviction in select names in the sovereign space, along with certain corporate names, we are cautiously watching developments in some other areas where we expect further stress as a result of government policy. Corporates in China and Turkey provide two examples.

If we are successful in harnessing both the long and short opportunities in these markets, the resultant returns should be attractive.

What’s driving investor appetite for EM?

Although the asset class has seen an unprecedented amount of investor outflow, we have also seen signs of institutional investors looking to re-engage – but this will take some time to fully materialise.

Much of the interest from traditional investors has focused on hard currency assets and unconstrained total return strategies, where they do not have to commit to any single asset class at any given time – a strategy we think makes sense, given the lack of conviction they have regarding the beta of the sub-asset classes.

We have also seen momentum for low turnover/index-plus/buy-and-maintain strategies, notably from German and Dutch insurers, alongside Japanese investors who want to take advantage of the yield offered in EM.

Interest in long/short strategies has picked up in the last six months, as some investors consider allocating to hedge funds, seeking more flexibility and uncorrelated investments in their portfolios.

Click here for more information on our EM investment solutions.

See all insights

Related insights

Strong tailwinds in EM debt
3 mins read
Polina Kurdyavko 80 x 80.jpg
Polina Kurdyavko
November 23, 2022

Frontier markets
10 mins listen
Polina Kurdyavko 80 x 80.jpg
Polina Kurdyavko
November 15, 2022

Emerging Markets: A key piece in the climate puzzle
5 mins read
Jana Velebova 80 x 80.jpg
Jana Velebova-Harvey
November 10, 2022

Sign up for insights by email

Subscribe now to receive the latest investment and economic insights from our experts, sent straight to your inbox.

Sign up now

This document may be produced and issued by the following entities: in the European Economic Area (EEA), by BlueBay Funds Management Company S.A. (the ManCo), which is regulated by the Commission de Surveillance du Secteur Financier (CSSF). In Germany and Italy, the ManCo 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 BlueBay Asset Management LLP (BBAM LLP), which is authorised and regulated by the UK Financial Conduct Authority (FCA), registered with the US Securities and Exchange Commission (SEC) and is 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 of the registered office of the Swiss representative shall have jurisdiction pertaining to claims in connection with the distribution of shares in Switzerland. The Prospectus, the Key Investor Information Documents (KIIDs), where applicable, the Articles of Incorporation and any other applicable documents required, such as the Annual or 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 Australia, BlueBay 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, BBAM LLP is not registered under securities laws and is relying on the international dealer exemption under applicable provincial securities legislation, which permits BBAM LLP 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. The BlueBay group entities noted above are collectively referred to as “BlueBay” within this document. The registrations and memberships noted should not be interpreted as an endorsement or approval of BlueBay by the respective licensing or registering authorities. Unless otherwise stated, all data has been sourced by BlueBay. To the best of BlueBay’s knowledge and belief this document is true and accurate at the date hereof. 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. 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. This document is intended only for “professional clients” and “eligible counterparties” (as defined by the Markets in Financial Instruments Directive (“MiFID”) ) 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. 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 BlueBay. Copyright 2022 © BlueBay, is a wholly-owned subsidiary of RBC and BBAM LLP may be considered to be related and/or connected to RBC and its other affiliates. ® Registered trademark of RBC. RBC GAM is a trademark of RBC. BlueBay Funds Management Company S.A., registered office 4, Boulevard Royal L-2449 Luxembourg, company registered in Luxembourg number B88445. BlueBay Asset Management LLP, registered office 77 Grosvenor Street, London W1K 3JR, partnership registered in England and Wales number OC370085. The term partner refers to a member of the LLP or a BlueBay employee with equivalent standing. Details of members of the BlueBay Group and further important terms which this message is subject to can be obtained at www.bluebay.com. 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.

Sign up now