A REFORMED MARKET
High yields, forecast rises in economic growth and strong fiscal policies are what asset managers look for when they consider buying emerging market sovereign debt.
This is why Argentina was back on investors’ radars in July despite its reputation in the capital markets. The country remains one of Lazard’s largest dollar-denominated debt positions thanks to Mauricio Macri’s election as president in 2015.
On the US dollar side it also has exposure to Ghana, while in local currency debt Brazil is its largest position due to policy changes by the country’s new leadership and a hawkish central bank tackling inflation. “So in a country where you have overnight rates that are 550bps higher than inflation, you are getting paid a significant amount of real yield to compensate you for any type of central bank lack of credibility and frankly we think that credibility is getting a lot better since the new regime took over in Brazil,” Joshi says.
“This is an example of where we are starting to see policy make a significant difference in overall capital returns,” he adds. “Indonesia, India, Argentina, Brazil – some of these large emerging market countries have had a change from what we call fiscally liberal to fiscally tight policy.”
So it is not just about the size of economic growth, but fiscal policy, too. Argentina and Ghana are examples of where the policies of new governments could drive the growth needed to pay coupons promised to investors.
Looking ahead, countries that the fund has its eye on include South Africa, which is set for a general election in 2019. Joshi will be watching the outcome closely, which could lead to the same governance reform seen in Argentina, Brazil and Ghana if, he believes, Cyril Ramaphosa is selected as the ANC candidate later this year.
The investment case for emerging market paper is strong. Reform, economic growth and high yields will tick a few boxes on investor checklists, but pension funds will have to make sure that the pressure they are under to pay members benefits does not leave them exposed to another sovereign that cannot pay its bills.
