Emerging market debt is typically synonymous with increased risk. It is certainly true that emerging markets are more sensitive to global capital flows while the often more volatile economic and political backdrop means investors in emerging markets demand a higher risk premium.
However, this means that companies in emerging markets often take more effort to attract investors. At the basic level for a corporate bond issuer this means offering higher yields than developed market counterparts but it also means signalling to investors that there is little difference between an investment in an emerging market corporate bond and one issued by a similar company from a developed market. Over time, therefore, corporate governance standards have improved and are converging on developed market standards.
At an aggregate level, emerging market companies tend to be more financially conservative than their developed market counterparts. The chart below shows the lower leverage (debt to equity) ratio of emerging market companies compared with their US counterparts. Similarly, emerging market companies tend to hold more cash on their balance sheets than US companies.
In our view, this creates a valuable opportunity because investors can take advantage of the relatively high yields on emerging market corporate bonds while simultaneously investing in companies with stronger balance sheet and earnings fundamentals than some of their developed market peers.