Emerging-Market Corporates’ Most Underappreciated Quality? Resilience

Emerging-market (EM) corporate bonds have demonstrated resilience across market cycles, offering participation in market upswings while minimizing exposure during downturns. This resilience is attributed to the barbell structure of EM corporates, which balances interest-rate risk with credit risk, providing independent and negatively correlated sources of return. EM corporate debt, often priced in US dollars, is sensitive to US interest rates, offering a defensive buffer in volatile markets, while lower-rated credits enhance upside potential in risk-on environments.

The EM corporate market encompasses the entire credit spectrum and is rated investment-grade in aggregate. This diversity contributes to a higher Sharpe ratio over the past decade compared to US investment-grade corporates and the Bloomberg Global Aggregate Index, indicating superior risk-adjusted returns. The balance of interest rates and credit positions EM corporate bonds as a strategic choice for navigating varying market conditions.

While generating alpha through credit selection remains challenging, new methodologies are emerging to aid investors in this pursuit. Systematic fixed-income investing is gaining traction, yet requires specialized skills and resources, raising questions about the capabilities of investment managers in this area. Bond yields are expected to trend lower, albeit with potential volatility, and strategic approaches are suggested to capitalize on these movements.