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

Q&A: Open Season For Closed-End Funds

Aug 29 2014 | 10:00am ET

When Maury Fertig and Bob Huffman, former Salomon Brothers coworkers, launched...

Lifestyle

Och Funds Women In Finance Initiative At U-M

Aug 28 2014 | 3:01pm ET

Och-Ziff Capital founder Daniel Och and his wife have made a "generous donation"...

Guest Contributor

Looking Ahead: What’s In Store For Managed Futures?

Aug 22 2014 | 12:52pm ET

The last five years were phenomenal for investors in equity indices. Will the next...

 

Editor's Note

    Get A Sneak Peak Of The Alpha Pages

    Aug 25 2014 | 11:21am ET

    As many of you know, FINalternatives was recently acquired by the owners of Futures magazine, a firm called The Alpha Pages LLC. Today marks the soft-launch of a new sister site for both publications. As its name suggests, The Alpha Pages will cover all types of alternative investments, going far beyond the more well-known ones such as hedge funds and private equity. Read more…

 

Futures Magazine

July/August 2014 Cover

The time was right

Commodities/Futures magazine launched at the precipice of a revolution in the futures industry—really a revolution in the idea of risk management—that would move it from a small niche industry to ...

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.