November 14, 2023 | Emerging Markets Debt

4 Reasons to Consider Emerging Markets Debt Now

Marcelo Assalin, CFA, Partner

Head of the Emerging Markets Debt Team, Portfolio Manager

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WEDIX

Emerging Markets Debt Fund
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Over the past few years, emerging markets debt has underperformed as interest rates have increased to fight inflation. Marcelo Assalin, CFA, partner and head of our emerging markets debt team, explains why it’s an interesting moment to consider this asset class.

Watch the video or read the transcript below.

1. The End of Central Bank Tightening Could Generate Demand for Emerging Markets Debt

With the current global disinflationary trend, we believe that central banks are either at the end, or close to the end, of the global monetary tightening cycle. This could, in turn, generate stronger demand for fixed income.

We believe that this will result in stronger inflows into emerging markets over the next few months.

2. Declining Rates Could Drive Growth in Emerging Markets

Emerging markets growth has surprised, and it does look quite resilient. But more importantly, inflation in emerging market countries has decelerated more rapidly and significantly than it has in developed economies.

This should allow central banks within the emerging markets world to start reducing the level of interest rates, which should translate into additional support for economic growth in these countries.

3. High Yields Could Lead to Strong Returns

Emerging markets debt high-yield credit spreads have been attractively valued against high-yield spreads in other asset classes, such as U.S. credit or European credit.

That, in turn, translates into higher-yield levels for emerging markets debt. And we know that over the long term, higher yields tend to lead to stronger returns because of the higher carry.

4. Alpha Generation Opportunities Abound

Emerging markets debt is a very diversified asset class, which provides ample scope for fundamental differentiation. We see value in different regions and countries and how to position and take advantage of these differences.

Yield levels are very high, credit spreads are very wide, and we see value within the higher-yielding frontier markets debt space, where we believe investors are mispricing the risk premium. Investors are overestimating default rates and underestimating recovery events.

With our strong, bottom-up focus, we are well-suited for uncovering value for our clients in the emerging markets debt space.

Marcelo Assalin, CFA, partner, is the head of William Blair’s emerging markets debt team, on which he also serves as a portfolio manager.

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