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

David Yarrow On Growing His Hedge Fund And Shooting The Animals And People Of Africa - As A Photographer

Jul 23 2014 | 6:44am ET

While he’s always been a photographer, recent expeditions to Iceland, Ethiopia...

Lifestyle

Einhorns Busts At WSOP, Finishes In 173rd

Jul 15 2014 | 10:48am ET

Greenlight Capital founder David Einhorn’s World Series of Poker won’t end at...

Guest Contributor

Common Risk Parity Misperceptions

Jul 16 2014 | 11:02am ET

Over the past few years, risk parity has become a component of most investors’...

 

Sponsored Content

    Northern Trust Helps Hedge Funds Navigate Derivatives Regulations

    Jul 8 2014 | 10:48am ET

    The surge in derivatives regulation is among the most complex challenges facing the financial services industry today. Northern Trust’s Joshua Satten recently spoke with FINalternatives to share insights into the challenges presented by new regulation and explore how the industry is responding. Read more…

Publisher's Note