Spotlight on Denise Simon, Managing Director, Portfolio Manager/Analyst, Lazard Asset Management
Global Thought Leader Spotlight
Denise Simon, Managing Director, Portfolio Manager/Analyst, Lazard Asset Management
Despite a challenging market environment since the taper tantrum of 2013, EMD has outperformed global fixed income alternatives over longer time horizons. We believe the conditions are once again in place to support an allocation to emerging markets debt. Growth differentials increasing in favour of emerging markets, peaking developed markets policy rates, and still elevated emerging markets real yields offer opportunities, particularly within local debt.
The global inflation surge in 2021-2022 caught the attention of central banks worldwide. However, EM central banks were quicker to respond to this inflationary shock, initiating a remarkable series of rate hikes in early 2021 – albeit from low starting levels – that continued until early 2023. This swift action allowed EM countries to witness falling core inflation in recent months, unlike the developed world, which continues to grapple with entrenched core inflation.
Across local rates, currencies, and credit, we currently see the most attractive opportunities in local rates. Even with the recent rally, emerging markets real yields remain high as inflation has declined. Emerging markets central banks appear largely to be at the end of their respective cycles, and we believe they will likely be ahead of developed markets in terms of easing with a number of Latin American central banks recently taking steps in this direction.
Emerging markets currency valuations remain depressed following a strong USD environment over the past decade and we are awaiting signals that this cycle has turned, supported by growth differentials shifting in favour of emerging markets.
Emerging markets credit is a large universe consisting of nearly 1,000 sovereign, quasi-sovereign, and corporate issuers, contributing to significant differentiation. In the current environment, we favour BB sovereign and corporate credits that offer attractive valuations and solid fundamentals.
Meanwhile, we are avoiding both the highest quality countries – where spreads are near multi-decade tights – as well as lower quality credits that have issued as the asset class expanded in recent years but may be unable to absorb shocks.
Given the current late cycle dynamics and significant dispersion across countries in terms of fundamentals and valuations, we believe being selective among both the different segments of the market and individual countries will be key to capturing opportunities and mitigating risk in emerging markets debt.
For investors with the flexibility to allocate across the capital structure – including sovereign credit, corporate credit, local rates and currencies – unconstrained approaches can offer the potential to avoid or hedge risks that are not well compensated and dynamically manage the portfolio’s beta to various risk factors.
We believe the current phase of the market cycle is suited to an unconstrained approach, which we expect to deliver asset class plus returns with lower volatility over the medium term. While investors should expect the performance to deviate meaningfully from the broader asset class over the short term, a benchmark blending external and local currency debt could provide a good indication as to whether a manager has achieved an attractive risk-adjusted return over the long term.
In my role as the Co-Head of Emerging Markets Debt at Lazard, I work with a team of 15 dedicated investment professionals and leverage additional resources across Lazard’s emerging markets platform to invest across the capital structure in emerging markets debt. I am primarily responsible for top-down decisions including usage of the risk budget and asset allocation. Ultimately, I share decision-making authority across our investment strategies, including portfolio construction and individual security selection decisions based on the work of my team’s portfolio managers and research analysts.
Denise will be presenting at Global Investment Institute’s upcoming Fixed Income and Alternatives Investment Forum, taking place on Thursday 7 September 2023 at Westin Melbourne.
To register your interest in attending, click here or for more information email zlatan.kapetanovic@globalii.com.au.
Denise Simon, Managing Director, Portfolio Manager/Analyst, Lazard Asset Management
Denise is a Portfolio Manager/Analyst on Lazard’s Emerging Markets Debt team. She began working in the investment field in 1986 and has been investing in Emerging Market Debt for over twenty years. Prior to joining Lazard in 2010, Denise was with HSBC Asset Management (formerly Halbis) where she was a Managing Director and Portfolio Manager for three global emerging markets strategies. Prior to HSBC, she was a Partner and senior portfolio manager at The Atlantic Advisors (acquired by HSBC in 2005). Prior to this, Denise worked abroad from 1987-1998 in London and Germany, where she worked for major financial institutions trading global bonds and EM Debt.
Denise has a BA in International Economics from George Washington University. Denise’s outside activities are focused on Mexico and music. She currently sits on the management board of the US-Mexican Chamber of Commerce. She is also on the board of the Richard B. Fisher Center of the Performing Arts, is the chair of the board of the Bard Music Festival, and is a member of the IC for the Bard College Endowment.
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