Spotlight on Denis Cole, Principal & Portfolio Specialist, Emerging Markets Debt, PGIM Fixed Income
Global Thought Leader Spotlight
Denis Cole, Principal & Portfolio Specialist, Emerging Markets Debt, PGIM Fixed Income
In my capacity as a Principal and Portfolio Specialist at PGIM Fixed Income, I work with the emerging market debt team to manage portfolios and analyse longer-term themes impacting emerging markets (EM). I adopt a strategic approach with our clients to find their optimal EM allocations and take pride in keeping our clients informed about EM markets and assisting them with their EM debt exposure.
Factors warranting a fresh look at EM Debt
Prior to the onset of the COVID-19 pandemic, much had been written about the appeal of emerging market debt (EMD), touting the yield advantage as well as its lower correlation to other fixed income asset classes.
However, EMD has underperformed since the pandemic, and this has left investors wondering if and how EMD fits into their broader asset allocation decision. After a difficult start to the 2020s amid sharp increases in inflation and rates, U.S. dollar strength, rising geopolitical risks, and meaningful capital outflows, conditions in the asset class warrant a fresh look.
As the sector continues to develop and mature, we acknowledge that EMD performance may moderate. Yet, this does not limit its attractiveness, but helps us refine our investment themes.
From our perspective, we see five structural factors that should support emerging market debt over the coming years, and should encourage investors to diversify their country exposure.
Cyclical headwinds turning to tailwinds: A reversal of inflationary pressures leading to EM central banks easing cycles,
A maturation of EM economies: More sustainable debt structures and a growing share of GDP,
Solid fundamentals: Lower debt-to-GDP and total debt burdens,
Favourable demographics: Younger, growing populations fuel economic growth,
Great power competition: EM economies expected to benefit from the global realignment.
Implications for Institutional Investors
Current yields (actual cashflows generated) in hard currency sovereigns are near 6.25%. This provides a significant cushion for any near-term spread volatility or potential rise in U.S. treasury yields. With a duration in the range of 6.5 years, it would take over 100 bps of higher spreads/treasury yields to erode that carry and result in negative total returns over a one-year period. Conversely, we believe that a realistic amount of spread tightening or treasury yield compression would take EM hard currency returns into the double digits.
Within local markets, our conviction is growing that more EM central banks will be cutting rates as the disinflation process is more mature in EM than in developed markets and a more dovish Fed gives the go ahead for EM central banks. We see opportunity in EM currencies to generate strong returns against the U.S. dollar as many have meaningfully repriced since 2012.
Denis will be presenting at Global Investment Institute’s upcoming Fixed Income & Alternatives Investment Forum, taking place on Thursday, 12 September 2024 at the Grand Hyatt Melbourne, Victoria.
To register your interest in attending, click here or for more information email zlatan@globalii.com.au.
Denis Cole, Principal & Portfolio Specialist, Emerging Markets Debt, PGIM Fixed Income
Denis is a Principal and Portfolio Specialist for PGIM Fixed Income's Emerging Markets Debt Team with over 14 years of industry experience.
Prior to joining the Firm in 2020, Denis was a Portfolio Manager for Gramercy Funds Management’s Emerging Markets Debt Team. At Gramercy, he was a member of the firm’s investment committee as well as the sovereign and corporate debt committees. Prior to Gramercy, Denis worked at Nexar Capital Group and LaBranche Structured Products.
Denis holds a BA in Political Science from the University of Pennsylvania.
If you have enjoyed reading this article, please subscribe to GII Insights, delivered monthly, direct to your inbox and it is FREE!
Disclaimer
The views expressed in this publication are solely those of the individual and do not reflect those of their employer organisation. These views should not be relied on as research or investment advice regarding any stock and are subject to change. There is no guarantee that any forecasts made will come to pass. Forecasts are subject to numerous assumptions, risks, and uncertainties, which change over time, and the individual undertakes no duty to update any such forecasts. International investing may involve risk of capital loss from unfavourable fluctuations in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations.
All information contained within this publication is general advice only, as the knowledge levels and needs of all individual and corporate investors vary greatly this publication should not be used solely as a decision-making tool, further opinions and information should be sought before making an investment decision. It is the recommendation of Global Investment Institute (GII) that you seek the opinions of a fee-for-service, independent investment adviser before making any investment decision.
The authors, directors or guest writers may have a financial interest as investors, trustees or directors in investments discussed or recommended in this document. It has been assessed by the editors that these financial interests have not had an impact on the material contained here within.
All material appearing in GII’s Global Investment Insights is copyright, reproduction in whole or part is not permitted without written permission from the Publisher, Global Investment Institute.