Investors Should Consider Emerging Markets Corporate Debt – J Stern & Co

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Investors, who could treat all emerging market debt equally, are making a mistake. A European investment firm says it should also consider emerging corporate debt as an attractive entry point.

Emerging market debt is criticized when investors think of sovereign bond defaults or sudden changes in government, but the field is much broader and contains opportunities that look attractive now, argued J Stern & Co, the European partnership. In particular, the firm says corporate debt deserves attention.

And the firm, which has offices in Zurich, London and Malta, is so convinced of its case that it is considering launching the Emerging Market Debt Stars Fund. The fund, which aims to generate a total return after fees of 5-6% over the medium term, focuses on private and quasi-sovereign issuers.

“I think there’s a lot of misconceptions about the asset class…and we’re at a very attractive entry point and able to get a new revenue stream,” said Jean- Yves Chereau, co-portfolio manager of the new fund, to reporters at a recent briefing.

As his colleague and co-portfolio manager Charles Gelinet said: “Whenever emerging market corporate debt comes up, many investors associate it with emerging market sovereign debt. However, the risk/reward profile of sovereign debt is very different from that of emerging market corporate debt.

Emerging corporate debt investors receive a higher return for investing in companies based on the rating of the country in which they are based, even if they are global companies with a diversified earnings stream, a he declared.

In 2022, high inflation and central bank monetary policy tightening hit key risk assets, but emerging market hard currency corporate debt declined less severely than most asset classes (- 9.6%), while the S&P 500 index of US stocks fell 16.1 percent and the MSCI World index of developed country stocks fell 17.5 percent. On an annualized basis, returns, from 2002 to the present, are over 7% for emerging market high-yield debt, with only U.S. high-yield debt ahead of all other fixed-income classes, according to the data. of J Stern & Co. . The asset class has also had relatively few down years (four out of 21) over the period 2002 to 2022. Strikingly, the company said, corporate borrower net debt in the United States is higher than for emerging markets.


Concentration
The fund, which is available in a US dollar share class, requiring a minimum investment of $1 million, aims to hold between 30 and 50 issuers – making it a relatively concentrated portfolio – and only holds bonds denominated in hard currencies among a mix of investments. investment grade and high yield debt. The duration is relatively short: maturities of five years or less. J Stern & Co smiles on emitting sectors such as infrastructure, communications and digital; energy transition sectors and companies that benefit from strong government support.

The philosophy governing the portfolio means that, for example, the portfolio is able to hold the Argentinian oil and gas company YPF, even if J Stern & Co does not hold any other Argentinian debt, because YPF has enough positive qualities to pass the course. . Other examples of holdings include Alsea, a restaurant operator in Mexico, South America and Europe, and KOC Holdings, a Turkey-based conglomerate. The portfolio strategy does not hold assets in China or Russia.

One reason to avoid China is that “we just couldn’t get comfortable with the visibility of the underlying companies,” Gelinet told this publication when asked.

Chereau argued that the size of the emerging market corporate debt market is not very large, which can be a deterrent for large institutions, but is ideal for smaller players such as J Stern & Co and its clients. .

This news service reported that J Stern & Co has opened an office in Malta, giving the company a continued presence in the European Union, as the Mediterranean island is an EU member state.

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