Emerging-Market Corporates’ Most Underappreciated Quality? Resilience

Emerging-market (EM) corporates have a track record of resilience across market cycles. Over the past decade, EM corporate bonds have allowed for participation in rising markets, while exposing investors to less downside during market downdrafts (Display, left). This is due to an especially pronounced inherent barbell structure that balances interest-rate risk with credit risk, providing independent sources of return that are negatively correlated to each other (Display, right).

This dynamic comes naturally to EM corporates. EM corporate debt priced in US dollars is sensitive to US interest rates. This helps provide a defensive buffer against volatile markets. Meanwhile, the sector’s lower-rated credits boost upside participation in risk-on environments. (While the EM corporate market is rated investment-grade in aggregate, it reflects the entire credit spectrum, from high-grade through high-yield debt.)

This natural barbell feature also partly explains why the EM corporate market’s Sharpe ratio, or risk-adjusted return, for the past 10 years has been meaningfully higher than that of both US investment-grade corporates and the Bloomberg Global Aggregate Index.

That’s why we believe EM corporate bonds’ balance of interest rates and credit can help prepare investors for whatever conditions lie ahead.