fixed income emerging markets sovereign debt: does active ... emerging markets sovereign debt: does

Download FIXED INCOME Emerging Markets Sovereign Debt: Does Active ... Emerging Markets Sovereign Debt: Does

Post on 15-May-2020

1 views

Category:

Documents

0 download

Embed Size (px)

TRANSCRIPT

  • OC TOBER 2019 1

    Emerging Markets Sovereign Debt: Does Active

    Management Pay?

    The performance of Emerging Markets Sovereign Debt can—and does—vary widely from

    country to country. In this piece, Barings’ Cem Karacadag explores how an active approach

    can be key to selecting the most attractive opportunities, while also avoiding the bad apples.

    While general market conditions for emerging markets debt (EMD)—conventionally known as market beta—may be the main

    driver of EMD returns over short time horizons (days or weeks), idiosyncratic country fundamentals and risks ultimately

    drive prices and performance over the long term. As a result, there is sizable dispersion in the total returns on the debt of

    70+ emerging market sovereigns in the J.P. Morgan EMBI Global Diversified (EMBIGD) bond index.

    BARINGS INSIGHTS

    FIXED INCOME

  • BARINGS INSIG HT S OC TOBER 2019 2

    In the first three quarters of 2019, for instance, the EMBIGD returned 12.9%.1 While the great majority of EM sovereigns

    generated positive returns, some countries’ debt returned significantly more than others’. Eleven sovereigns outperformed

    the index by more than five percentage points in total return, and 10 sovereigns underperformed the index by more than

    five percentage points in total return (FIGURE 1). On an absolute basis, while “only” four countries generated negative returns

    during this period, three of them fell sharply. Lebanon returned -10%, Argentina returned -37%, and Venezuela returned -57%.

    Performance data for three years through September 30, 2019 paints a similar picture. In the past three years, the EMBIGD

    returned 14.4%.1 Once again, the vast majority of sovereign debt delivered positive returns, but some countries much more

    so than others. Seventeen sovereigns outperformed the index by more than 10 percentage points in total return (FIGURE 2).

    And once again, on an absolute basis, Lebanon (-11%), Argentina (-46%), and Venezuela (-78%) fell precipitously.

    1. Source: J.P. Morgan. As of September 30, 2019.

    FIGURE 1: Country Excess Returns Relative to EM Sovereign Index (Year-to-Date)

    FIGURE 2: Country Excess Returns Relative to EM Sovereign Index (3-Year)

    SOURCE: J.P. Morgan. As of September 30, 2019.

    SOURCE: J.P. Morgan. As of September 30, 2019.

    20%

    10%

    0%

    -10%

    -20%

    -30%

    -40%

    -50%

    -60%

    -70%

    U kr

    ai n

    e Se

    n e g

    al K

    e n

    ya N

    ig e ri

    a E

    c u

    ad o

    r U

    ru g

    u ay

    K az

    ak h

    st an

    C ô

    te D

    'Iv o

    ir e

    C o

    lo m

    b ia

    C o

    st a

    R ic

    a Jo

    rd an

    P an

    am a

    P e ru

    G h

    an a

    E l S

    al va

    d o

    r Ja

    m ai

    c a

    E g

    yp t

    R u

    ss ia

    A n

    g o

    la In

    d o

    n e si

    a P

    ar ag

    u ay

    M e xi

    c o

    C h

    ile P

    h ili

    p p

    in e s

    G ab

    o n

    O m

    an E

    M B

    I I G

    B e liz

    e M

    o za

    m b

    iq u

    e G

    u at

    e m

    al a

    C am

    e ro

    o n

    B e la

    ru s

    B ra

    zi l

    E th

    io p

    ia T

    ri n

    id ad

    & T

    o b

    ag o

    B o

    liv ia

    Ir aq

    In d

    ia U

    A E

    D o

    m in

    c an

    R e p

    u b

    lic So

    u th

    A fr

    ic a

    N am

    ib ia

    R o

    m an

    ia E

    M B

    IG D

    A ze

    rb ai

    ja n

    M o

    ro c c o

    V ie

    tn am

    M al

    ay si

    a P

    ak is

    ta n

    B ah

    ra in

    A rm

    e n

    ia H

    o n

    d u

    ra s

    Sr i L

    an ka

    T u

    n is

    ia P

    ap u

    a N

    e w

    G u

    in e a

    E M

    B IG

    D H

    Y H

    u n

    g ar

    y T

    u rk

    e y

    M o

    n g

    o lia

    C h

    in a

    G e o

    rg ia

    C ro

    at ia

    P o

    la n

    d Se

    rb ia

    T aj

    ik is

    ta n

    Sl o

    va ki

    a Li

    th u

    an ia

    Z am

    b ia

    Su ri

    n am

    e Le

    b an

    o n

    A rg

    e n

    tin a

    V e n

    e zu

    e la

    50%

    30%

    40%

    20%

    0%

    -20%

    -40%

    -60%

    -70%

    -80%

    10%

    -10%

    -30%

    -50%

    -90%

    Ir aq

    G h

    an a

    A n

    g o

    la B

    e liz

    e

    E M

    B IG

    D H

    Y In

    d ia

    Sr i L

    an ka

    Se rb

    ia H

    u n

    g ar

    y P

    h ili

    p p

    in e s

    E M

    B IG

    D

    M o

    ro c c o

    G u

    at e m

    al a

    T ri

    n id

    ad &

    T o

    b ag

    o

    M e xi

    c o

    G e o

    rg ia

    In d

    o n

    e si

    a

    V ie

    tn am

    B e la

    ru s

    R u

    ss ia

    C h

    ile

    P ar

    ag u

    ay

    H o

    n d

    u ra

    s

    M o

    za m

    b iq

    u e

    E g

    yp t

    B ra

    zi l

    N ig

    e ri

    a

    C am

    e ro

    o n

    K az

    ak h

    st an

    Ja m

    ai c a

    M o

    n g

    o lia

    E c u

    ad o

    r

    A rg

    e n

    tin a

    C ro

    at ia

    M al

    ay si

    a

    So u

    th A

    fr ic

    a

    C o

    st a

    R ic

    a

    E M

    B I I

    G

    D o

    m in

    c an

    R e p

    u b

    lic

    P e ru

    C ô

    te D

    'Iv o

    ir e

    P an

    am a

    C o

    lo m

    b ia

    Jo rd

    an

    P ak

    is ta

    n

    Se n

    e g

    al

    A ze

    rb ai

    ja n

    U ru

    g u

    ay

    A rm

    e n

    ia

    E l S

    al va

    d o

    r

    K e n

    ya

    E th

    io p

    ia

    G ab

    o n

    U kr

    ai n

    e

    Le b

    an o

    n Z

    am b

    ia Sl

    o va

    ki a

    Li th

    u an

    ia B

    o liv

    ia T

    u rk

    e y

    P o

    la n

    d T

    u n

    is ia

    O m

    an C

    h in

    a R

    o m

    an ia

    N am

    ib ia

    V e n

    e zu

    e la

  • BARINGS INSIG HT S OC TOBER 2019 3

    The moral of the story is simple yet powerful: country selection matters and matters a lot. Selecting

    the right countries requires active management and an investment process that seeks to pick the right

    apples, and avoid the bad apples in the basket. Similarly, a specific country’s sovereign debt should

    never be bought just because it is in the index, or without a full understanding of the risks and whether

    or not potential returns compensate for the risks. A remarkable—and unusual—feature of EM sovereign

    debt performance over the past few years is that investment grade-rated sovereigns have delivered

    higher returns than high yield-rated sovereigns. This is partly because of the longer-duration bonds

    of the former, but it also highlights the importance of discriminating among countries, especially high

    yield sovereigns.

    A few selective comments on some of the best and worst performing countries:

    Argentina has been one of the most difficult emerging market sovereigns to analyze and forecast in

    recent years: President Mauricio Macri won a historic election in 2015, effectively ending Kirchnerism,

    and embarked on a macroeconomic stabilization program with heavy reliance on market financing

    and subsequently an IMF program. In the end, the pain of adjustment led to Argentina’s traditionally

    populist electorate delivering an unexpected and heavy defeat to President Macri in the primary

    elections this past August. Barings’ EMD sovereign strategies were moderately overweight going into

    the primary elections, but have since moved Argentina to underweight.

    Lebanon’s financial challenges, including a high fiscal deficit and high debt burden, have been

    well-known for a long time, but the country’s repayment capacity has been supported by non-

    resident (Lebanese) deposit inflows. The sustainability of these inflows, in our view, has always been

    unforecastable and potentially reversible in response to challenging domestic and regional politics.

    Barings’ EMD sovereign strategies have not had any exposure to Lebanon in recent years.

    Venezuela’s financial challenges have also been well known for many years, yet its futur

Recommended

View more >