In the middle of a credit crisis, it is somewhat ironic that Ashmore Investment Management has announced a new emerging markets high-yield corporate fund and Credit Suisse has created a new index for such securities.
In previous financial crises there’s little chance that investors would have even considered buying emerging markets debt, never mind paper issued by non-investment-grade corporates. These two breakthrough launches are another indication of the growing maturity and sophistication of emerging market debt.
The initiatives from Ashmore and Credit Suisse also show that this debt can no longer be viewed as a homogenous entity, with emerging sovereign and corporate bonds lumped together and considered as a single asset class. But just as local-currency debt has established itself as a separate asset class over the past five years, now it’s the turn of credit.
Throughout the 1990s and at the turn of this century the emerging markets were, to all intents and purposes, sovereign debt. That is no longer the case. Emerging government bond issuance, except in Africa, is growing at a restrained pace. There is now three times more emerging corporate bond issuance than that from sovereigns. This year, JPMorgan estimates that corporates will place more than $150 billion of debt in the international capital markets, compared with $111 billion last year.
It’s not just an argument about volumes, though. Corporate debt has different dynamics to that of sovereigns – a point that might be obvious in developed bond markets such as the US and Europe but still has to hit home in the emerging markets. It has a much more diverse set of potential investors, including dedicated accounts, cross-over high-yield/credit funds, hedge funds as well as sector specialists, which means it has a separate risk/return profile.
Crucial to investment success will be the research and sourcing process. One of the problems in the emerging markets industry is a lack of top-quality credit analysts. This is where a firm with the experience and specialist skills of Ashmore has a big advantage.
The biggest limitation of the emerging corporate bond market is a lack of liquidity. With the exception of Ashmore, asset managers that invest in corporates do so via multi-strategy funds, so their allocation to these securities is relatively small. Moreover, most investors tend not to stray too far below quasi-sovereign or high-grade level for fear of getting caught with too risky an asset. What is needed is for more institutions to follow Ashmore’s lead and set up dedicated funds.
