Amer Bisat Webinar Replay Petiole
Webinar ·

Emerging Markets Debt in a Rising Interest Rate Environment

Naji Nehme, CFA

Naji Nehme, CFA

CHIEF INVESTMENT OFFICER

Dr. Amer Bisat, Managing Director and Head of Sovereign and Emerging Markets at BlackRock, joined our webinar to discuss the performance of emerging markets amidst a high-interest rate environment.

Watch the replay here, with summary notes on key topics covered:

  • Were Emerging Markets prepared during this crisis?

  • The China-US relationship

  • Current and Future Outlook in Emerging Markets

Emerging Markets' Readiness to Weather the Covid-19 Pandemic

Although emerging markets were better prepared for this economic crisis than in previous episodes, they were not prepared enough. On the positive side, they had better economic conditions compared to previous crises: lower Debt to GDP levels, lower current account deficits and a level of reserves which allowed them to implement significant fiscal policies. These conditions allowed emerging markets to weather the shock better than in previous crises. However, on the flip side, they entered the crisis with lower economic growth and turbulent political circumstances in the last few years which is not a stable environment to conduct monetary and fiscal policies.

Themes to Look for in 2021

Dr. Bisat is eyeing global growth in developed markets and whether this will translate into global growth in emerging markets. He is also more optimistic on the rollout of vaccines and subsequently the opening of the economies. The servicing of the debt in emerging markets is a concern for Dr. Bisat as debt has increased by 11% in the last years to reach 60% average debt to GDP for all EM countries.

Chinese Bonds and the China-US Relationship

Chinese bonds are attractive with a 10-year yield at 3% compared to the U.S. 10-year yield at 1.4%. China enjoys strong economic conditions to tolerate high levels of indebtedness with high saving rates, high reserves and very low public debt to GDP. He does not regard China as an emerging market. On the political front, the China-US relationship is clearly changing: the Trump administration thought that by pushing hard enough, China would collapse whereas the Biden Administration's approach is more systematic and comprehensive, applying pressure on multiple fronts besides trade. Tensions may seem to have eased, but the Chinese are far more wary of the Americans than they were last year. Dr. Bisat expects that tensions will continue between the two countries and will be long and slow, and away from headline news.

Super Cycle?

Despite stronger fiscal policies and more liquidity being put in the market, Dr. Bisat does not foresee a 10-year cycle of growth. Rather, he sees 12-24 months of strong growth from the re-opening of the economies and pent-up demand but policies, especially in the developed world, cannot remain easy forever and some form of tightening will be needed to offset inflation fears. The implication on emerging markets will be supportive in the short-term for commodity exporters and producers like Brazil and Columbia but more as a tactical trade than a long-term hold. Dr. Bisat also warns investors of potential bouts of volatility in the future when tapering is needed, as experienced in 2013.  

With the strong expansionary policies, Dr. Bisat worries the most about inflation risk - which can accelerate the removal of monetary policy similar to the Volcker rule. In a fixed income portfolio, he recommends shortening the duration as a means to hedge inflation risk.  

Conclusion

Dr. Bisat is still positive on emerging markets in the short-term with good macro fundamentals and strong technicals (i.e. many investors still underweight this asset class.). He is, however, negative on valuations as a lot has been priced in. From a bottom-up perspective, the three emerging markets countries that he favors are Mexico, which has strong fundamentals and should benefit from US growth; Brazil, which should greatly benefit from commodities; and Indonesia, the true emerging market in Asia. He applies caution with Turkey.

Dr. Bisat does not foresee a long market cycle as he is worried about inflation risk, strong headwinds from tightening policies, and the risks of emerging markets in servicing their high level of debt.

The webinar was held on June 16, 2021 in collaboration with The Family Office Bsc (c).

Interested in learning more?