April 2021 / VIDEO
The Resilience of EM Corporate Debt
The upside of EM debt is relatively well understood, through the history of strong returns. I'd like to focus more on the downside, or client concerns about this category being too risky.
What you can see on this chart is periods of drawdown, or negative return, highlighted in grey. It also then shows you the relative performance of different risky asset classes. The green line - emerging corporate debt - shows a moderate drawdown profile during these bear markets. It very consistently has outperformed emerging sovereign debt, emerging local debt and emerging equity during those periods of negative return. We think this is likely to continue because emerging corporate debt is an average investment grade asset class, with a moderate duration profile.
Now let’s take a longer look at the volatility of emerging market returns.
This chart shows the rolling one-year return on the emerging sovereign market in dark blue and the emerging corporate market in light blue. The periods of selloff, highlighted in light blue, have gotten more shallow over time, and this has to do with the rising average credit quality of EM debt. Back in the 1990s, this was primarily a high yield asset class, dominated by countries like Argentina, Turkey, Brazil, Russia. Since then, the asset class has transformed. Asia credit has gone from 5% of the market to over 50% of the market.
This has deflated the historic volatility of returns, as evidenced in the most recent period of selloff.
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Samy Muaddi is the head of Emerging Markets in the Fixed Income Division. He is the portfolio manager of the Emerging Markets Bond Strategy and co-manages the Emerging Markets Corporate Bond and Global High Income Bond Strategies. He is a member of the Investment Advisory Committees of the International Funds, Inc., Global Funds, Inc., Short-Term Bond Fund, Corporate Income Fund, Global Multi-Sector Bond Fund, and New Income Fund. He is a member of the Fixed Income Steering Committee and previously managed the firm’s Asia Credit Bond Strategy from its inception until 2020. Samy also is a vice president of T. Rowe Price Group, Inc., T. Rowe Price Associates, Inc., and T. Rowe Price International Ltd.
