Key Takeaways
- Emerging-market debt looks like an attractive way to broaden the opportunity set, global bond managers say.
- An excessive focus on political headlines can distract from emerging economies’ underlying strength.
- Some frontier markets may be better bets than the broader emerging market.
Amid geopolitical uncertainty and a growing deficit, investors can find attractive opportunities in fixed income beyond developed markets, according to a panel of global bond fund managers at the Morningstar Investor Conference in Chicago.
For decades, emerging markets have had a reputation for political instability, currency volatility, and unpredictable policy. But portfolio managers argue that the investment landscape has changed significantly. Analysts say some emerging and frontier economies have strengthened their policy frameworks, even as fiscal pressures have intensified across developed markets such as the United States and the United Kingdom.
Emerging Markets Look Attractive
Anujeet Sareen, portfolio manager at Franklin Templeton’s Brandywine Global, highlighted Latin America as one of the most attractive areas of emerging-market debt. “This is the greatest opportunity for investment in Latin America that I’ve seen in my 20-year career,” he said.
He cited Argentina, Venezuela, and Pemex (Mexico’s state-owned oil company) as examples of improving debt market conditions. “Over the past three decades, these were the biggest sources of emerging-market debt market volatility,” he said. But now, “each of those three is notably better. We have a really good runway for at least three to five years.”
Sareen continued: “Latin America is probably the most grossly underinvested region that we cover.” He highlighted Brazil and Mexico as well-positioned to benefit from a fragmented global economy: “Brazil has a very diverse commodity mix, and the world needs what they have to sell. China needs them, the US needs them, Europe needs them.” Meanwhile, Mexico could benefit from its proximity to the US as companies diversify supply chains. “The US can’t fully rely on China anymore, so to build some of what we were getting from there, the US will need to turn to Mexico for its commodities.”
Brazil and Mexico are among the countries that are “well-positioned to take advantage of this multipolar world in terms of commodities they have to offer and the commodities that are in demand,” explained Sareen.
Frontier Markets: A Niche Within Emerging Markets
Shamaila Khan, head of fixed income emerging markets and Asia Pacific at UBS Asset Management, said she was looking beyond mainstream emerging markets to smaller frontier markets, such as Egypt, Zambia, Ghana, Pakistan, and Sri Lanka. “The biggest opportunities may be found where investor attention remains limited,” she said. “For us, that’s frontier markets. The mainstream emerging market countries probably have not had as much of an improvement in policy mix as those frontier countries.”
Across these countries, “typically, investors are not going in because they have a history [of political instability] which has them concerned,” said Khan. “But the reality is that the fundamental improvement there has been the most significant.”
Looking Beyond Politics
Samy Muaddi, head of emerging markets in fixed income at T. Rowe Price, stressed the importance of looking beyond political turmoil for a better picture. He used Peru as an example: “Peru has experienced repeated political crises, but investors who focused only on headlines would have missed the country’s underlying strengths. If [politics] was all I told you about Peru, you probably wouldn’t put any client assets there, but Peru has been a fantastic equity market and one of the most stable parts of the emerging bond market.”
For Muaddi, the key factor is institutional resilience. “The most important person is not the president; the most important person is the central bank governor,” he said, pointing to the role of independent institutions in managing volatility. The broader lesson is that “emerging-market investing is about identifying the guardrails that allow countries to function despite political uncertainty.”