Why Emerging Market Debt Is Moving From Satellite to Core

SPEAKER_1 (0:01)

All right, let's switch gears to the macro, and particularly emerging markets. Now joining us is Robert Koenigsberger, who is the founder, chief investment officer at Gramercy Funds Management. Thank you so much for your time this morning. Look, it's been really interesting watching these market dynamics playing out, which seem to be blurring the traditional safety lines here, you know, when developed markets have been performing like emerging markets.

I do wanna talk about what's been happening with French government bonds, which have sort of been typically seen as risk-free assets. And some of the kind of conversations I've been hearing about how that has sparked a massive sell-off, prompting people to start to look at EM for stability. Is that what you're seeing right now?

Robert Koenigsberger (0:44)

Yeah, good morning. Thank you for having me. Yeah, I mean, I think there's a lot to unpack there. And one of them certainly is this notion that, you know, historically emerging markets were about emerging or converging with developed markets.

And what we're seeing now is we have emerging markets, we have developed markets, and we have sub-merging markets. And those sub-merging markets aren't coming out of the traditional EM, they're coming out of the DM. You mentioned one, perhaps France this morning. But certainly the allocators that we're talking to are looking for diversification. And this goes back to not just over the last quarter or two, but to last year, which is, if you're looking for diversification, if you're looking for an alternative to Japan, if you're looking to an alternative to the euro, whatever it may be, well, EM has definitely got to be in your sights.

SPEAKER_1 (1:27)

All right. So where are you seeing the most attractive, risk-adjusted appetite or opportunities right now across EM? Because obviously, we know that EM is massive. Are you looking at Latam? Are you looking at EMEA or Asia in particular?

Robert Koenigsberger (1:44)

Yeah. I mean, I think embedded in that question is the trap that most people fall into in emerging markets. When they just start to think about EM, what do you do? What do you like?

They think less about how to do it. I think the opportunity in emerging markets today is maybe the opportunity that was in developed markets 15 years ago, which is there's market failures that are present here, that can be solved through private credit in emerging markets. If you look at the traditional approach, and I think there's been this huge disappointment with what emerging market debt has done for investors over the past 10, 15, 25 years, it's really not the asset class, it's been the behavioral mistakes that clients have made going into the asset class. You know, active versus passive, taking a beta approach, kind of a more of a yes-no as opposed to how should I do it. So when I think about how to do EM today, that is the opportunity itself, the how, not necessarily the where. We think that looking at highly secured asset-backed, private credit in emerging markets, which is quite frankly about 15 years behind where developed markets were in terms of structure, lack of competition, etc. I think that's the opportunity that investors may want to double-click out here.

SPEAKER_1 (2:50)

What has fundamentally changed then in EM over the years to make it a more sort of attractive opportunity right now? I mean, particularly when you talk about EM debt having moved from satellite to core, what makes it a core allocation now?

Robert Koenigsberger (3:09)

I think there's both fundamental and technical reasons to respond to you. So one, if you think about it, and we talked about the beginning of that conversation, emerging markets have indeed emerged. If you go back to post-COVID, developed markets were trying to figure out whether inflation was going to be transitorial or not, and EM didn't have that luxury, they just acted. I think that's been the beneficial factor for emerging markets, it's weathered many, many storms, its policy set has matured, the people that are implementing those policies have matured, and it's become a much safer place.

Historically, emerging markets risk was an endogenous, it was within the asset class itself. Quite frankly, the risk that emerging markets have had to deal with over the past five to 10 years are less about endogenous risk and what's going on in an individual country, and quite frankly, what's going on in places like Europe or whatever it may be. That's one. Then two, technically, it's just like if you go back 25 years ago, there wasn't really much of a legitimate asset class, this wasn't a strategic allocation for sovereign wealth funds, retail, pensions, etc. It is a strategic part of people's portfolio and that has created a much more stable technical base for the asset class.