EM corporates will rival US HY, says Alt Ucits manager

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The emerging market corporate debt sector will rival the US high yield market for size due to the strong sovereign picture and increased appetite among institutional investors.

That is the view of Arif Joshi (pictured), who co-manages the $602 million Lazard Emerging Markets Total Return Debt Fund with Denise Simon.

The duo was highlighted by Citywire Global in July for having the strongest three-year track record in the Alternative Ucits Credit Strategy sector.

In Joshi's latest investor conference call, the former HSBC fund manager said investor interest is helping fuel a ‘dramatic increase’ in the size of the emerging market corporate debt universe.

‘It genuinely is where emerging market sovereign debt was 10 years ago. There is a significant amount of paper coming in the future and there are very strong technicals for the asset class in terms of a sustainable high yield and investor flows into EM corporates.’

‘If you look at the new issuances, 80-85% are in emerging market corporate debt, leaving 15-20% from the sovereigns. So from a pure market view, that means emerging market corporates now make up 55% of the emerging market debt universe compared to 45% which is sovereigns.’


The comments echo an increased belief among emerging market debt investors that the corporate sub-sector is becoming strong enough to be regarded as an asset class in its own right, with the likes of ING’s Rob Drijkoningen and Invesco’s Claudia Calich having previously discussed this.

Joshi suggested the growth will be rapid and sustained and, at current projections, will stand to rival the size of another current investor favourite – US high yield.

‘On a purely dollar basis, the market cap has grown to the point that, at the end of 2012, according to our estimates, emerging market corporates comprise $1.1 trillion. To give you an order of magnitude, US high yield as a whole is between $1.1 trillion and $1.3 trillion.’

‘We are on pace, over the next two or three years, to be the exact same size as the US high yield bond market. But, it is part of the asset class which has had little institutional client interest to now and it is something a lot of people are just starting to look at and invest in.’

Improving climate

Institutional investor interest has seen many seek to add emerging market corporates to their indices in order gain access, said Joshi

This, he added, is coupled with emerging market sovereigns proving themselves to be as stable – or, in some cases, more so – than their developed world counterparts.

‘A better emerging market sovereign backdrop will be a positive and mean a better back drop for corporate debt. Ten years ago, we had around a seven notch difference between emerging market sovereigns and developed market sovereigns and today that is one notch.’

‘That is a mark that the credit rating agencies are starting to see the line blur between emerging market sovereign debt and developed market sovereign debt. So, naturally, that will lead to a blurring between developed market corporate bonds and their emerging market equivalents.’

The fund’s performance has altered slightly in the three years to the end of October, with Joshi and Simon posting the second strongest performance with returns of 38.1%. The average manager in the Citywire Alternative Ucits Credit Strategies sector returned 12.9% over the same period.