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The Active Opportunity in EM Corporates

Samy Muaddi, CFA, Portfolio Manager

There are a variety of reasons why active management has durably provided value in emerging corporates. I wanted to discuss four of those.

The first is that there are fewer dedicated investors in emerging corporate credit. We think this will gradually change over time, as seen in the rising sponsorship in recent years. But the inverse of this is good news. It offers opportunity for active management to come in and generate durable excess return, because it is a less competed credit category.

The second has to do with the regional composition and the diversity of that with respect to emerging market debt. The emerging equity category has become much more heavily weighted towards Asia in the last ten years, whereas the emerging bond category still has meaningful opportunities in Latin America, Emerging Europe, along with the Middle East and Africa. we think this is reflected in the number of countries available for us to invest in, with over 70 countries in the bond market versus fewer than 30 in the equity market.

The third topic would be the wide dispersion of valuations. The line is showing you the average yield for new issues on single B credit in emerging market corporates, while the marks are showing you the yield for individual bonds that  were issued into the market. There's a range of 4% to 14% on single B new issues, it shows you that there's an inefficiency in the category where rating agencies have often struggled to appropriately assess the risk of the asset class and i think that really just underscores the value of doing bottom-up research.

Undoubtedly this is a research-intensive asset class. This chart is showing you the number of new issuers for EM corporates in both investment grade and high yield. Very steadily, we have a lot of supply from new companies. This can be daunting for the industry, because the underwriting period for our market can be as short as 2-3 days. For T. Rowe Price, we feel we have a real competitive advantage here, and it's leveraging the collaboration across the platform, both for the countries, which we already know from our sovereign research, but also the companies. They may be a new bond issuer, but we may have 4 decades of contacts and experience for that company or that industry in our equity business.


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