Manager View: Opportunity Abounds In Emerging Market Corporate Bonds

Dec 15 2009 | 8:55am ET

By Chicky Mahtani -- Emerging market corporate bonds are neither well known nor well understood as an asset class. In fact, they are not even regarded as an asset class by most financial institutions.  

While emerging market equities have been in the news of late for their outperformance against the S&P 500 over the last decade, there is hardly any mention of emerging market corporate debt. This asset class has returned 9.6% annualized for the period from Jan. 1998 to Nov 2009 compared with just 5.89% annualized for the US High Yield Master Index.

During the period up until the subprime crisis, emerging market corporate yield spreads over U.S. Treasuries have fluctuated between 500 basis points (bps) at market tops and 1,900 bps during times of crisis. However, last November at the height of the recent financial crisis, spreads blew out to around 2,800 bps. In hindsight, this turned to be the buying opportunity of a lifetime. The asset class is up 71.3% year to date outperforming all fixed income, and most equity indices as well.

With spreads still at distressed levels (1045) it seems that these bonds still offer value.  Spreads on U.S. high-yield bonds are 749 bps over Treasuries despite trailing 12 month U.S. Speculative grade default rate standing at 13.4% at the end of October 2009. By contrast, defaults in the emerging market high-yield corporate universe are expected to reach 10.8% by the end of the year. Clearly the market is mispricing these securities compared to their high-yield cousins in the United States.

Ironically, hedge funds, usually good at sniffing out unrealized potential, haven’t gone all in. There are no dedicated high-yield emerging markets hedge funds out there. In fact, there are no dedicated emerging markets corporate funds available in the U.S.  

As the rollout of infrastructure development—including roads, airports, telecoms, power plants, housing, shopping malls and the like—continues to gather pace in the developing world, we expect this asset class to expand as more emerging market companies issue U.S. dollar denominated bonds to expand their businesses. However, we feel opportunities will continue to exist for investors as the rating agencies remain harsh in their grading of these securities compared to their counterparts in the developed world, further helping to misprice the asset class.

Chicky Mahtani has 10 years of portfolio management experience in the Emerging Market Debt sector. He currently manages portfolios for SeaCrest Investment Management, LLC


In Depth

Hedge Funds Take Interest In ‘Soft Deposits’

Nov 19 2014 | 11:56am ET

New York-based Winchester Equities, headed by Avi Benamu and Jack Hazan, funds soft...

Lifestyle

Cohen Buys $101 Million Sculpture

Nov 12 2014 | 9:17am ET

Steven Cohen was the sole bidder for a rare Alberto Giacometti sculpture at Sotheby...

Guest Contributor

Why The Big Money Is Going To Europe

Nov 14 2014 | 6:03am ET

Peer-to-peer lending was invented with the individual investor in mind. But despite...

 

Sponsored Content

    For Hedge Funds, Mastering Data Is Key To Success

    Nov 4 2014 | 9:45am ET

    Data management is important to every business, but for hedge funds, it is critical. FINalternatives recently asked Peter Sanchez, CEO of Northern Trust Hedge Fund Services, how fund managers can deal with the demands of managing data while at the same time remain transparent and abide by operational best practices. Read more…

Editor's Note

    Guidelines for Guest Articles

    Oct 22 2014 | 9:46am ET

    We are always looking for guest articles from hedge fund managers and buy-side firms.

    If you are interested in submitting a contributed piece for possible publication on FINalternatives, please take a look at the specs. Read more…

 

Futures Magazine

November 2014 Cover

Building a better market

Reg NMS created a huge bifurcation in equity markets and while much of what has followed has been positive, in terms of lower fees and greater liquidity, many traders would like to see the market come...

The Alpha Pages

TAP July/August 2014 Cover

The Alpha Pages Interview: Senator Rand Paul

Senator Paul sat down in the debut series of the Alpha Pages Interview to discuss the broken tax code, regulation surrounding Bitcoin, and his plans for the 2016 Presidential election.