Emerging Markets Debt: An Introduction
Emerging markets is a somewhat unfortunate term in some respects. It was coined in the mid '80s at a time when a lot of these countries were still quite early on in terms of their political and economic development.
If you look at where they are today, EM represents about 70 countries around the world that span a very broad range in terms of size, diversity of economies and political systems, from smaller countries like Ghana and Zambia, that may be quite poor, to larger and more developed markets at the upper end of the spectrum: places like Asia and Eastern Europe.
I would also say from a political standpoint we've seen quite a wide range. You see bonds from India, the world's largest democracy at one end, to countries that lean towards a more authoritarian system of government.
One trend that I would say we've seen develop across emerging markets, and something that they share in common, is that both fiscal and monetary policy are now made in a more orthodox and contemporary style. From an investor's standpoint, being able to rely on those systems is really important, and that's an area where we do see a good deal of commonality.
Emerging markets are quite large by a lot of typical measures. If you look at their contribution to global GDP it's about 50%. If you look at the fraction of the world's population that lives in emerging markets, it's about 80%. From an economic perspective you could argue that they represent the single largest economic block in the world.
The difference between emerging and frontier markets is not something you can draw a stark line on. We tend to think of it more as a continuum. I would say, though, that generally frontier markets are going to be characterized by less mature political and economic systems, typically less diversified economies. They also tend to carry lower credit ratings and have less penetration from foreign investors, be less integrated in the global economy.
We do see countries moving from being emerging to developed and frontier to emerging, although that's typically a trend that will take 10 or 15 years. Typically, it's something that the market recognizes before ratings agencies or indices recognize that development.
So, if you look at countries like Taiwan, Korea, Poland, those countries are still categorized as emerging markets, but when you look at the structure of those economies they look a lot more like developed, industrialized economies. Something that we think about a lot when we're thinking about where to invest, is the extent to which we can capture that trend and benefit as countries move through that progression. It also creates an opportunity for us because there are always countries at the bottom of that cycle that are going to continue to move up.
Credit rating is very broadly an indicator of something being emerging, but you see emerging markets carry ratings from investment grade all the way down to the lowest high yield rating, so generally speaking, emerging markets will have lower ratings than developed markets but emerging markets encompass the full credit spectrum.
Our opportunity set lies in what I would characterize as the core of emerging markets, so countries that are still certainly emerging markets, countries where there's meaningful credit work to be done, but where the fundamentals are good enough that investors are not risking the loss of their capital.
So, what we would eliminate would be countries at the very risky end of the spectrum, so countries like Iraq, for example, and then also countries at the upper end of the spectrum where investors are not really rewarded for being able to do credit work, so countries like Poland and Korea that behave a lot more like developed markets.
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