In 2019, Argentina once again dominated the headlines for all the wrong reasons, with Alberto Fernandez’s victory in the Primaries sparking a 50% slide in the price of Argentine bonds. But such flashpoints distract from the other stellar performance of the EM external debt asset class throughout 2019, Dehn argues.
“Serious institutional investors are fully aware are that Argentina is not typical of EM countries and that the asset class delivers excellent returns.”
Dehn points to the development of the EMBI GD, which has become increasingly diverse. At its inception in 1993, the index contained only 12 sovereigns; now, it contains over 73, and the largest index weighting is just 4.7%. Not only does this reflect a huge growth in the range of investible EM assets, but it demonstrates the declining threat of EM volatility.
For investors, the asset class has grown increasingly transparent. Whilst less than half of the countries included in the index in 1993 were rated, now almost all are. Credit quality has increased too – with over half now enjoying an investment grade rating, compared with just 3% in 1993.
“The fact that the asset class is investment grade on average is clearly also important. Yet, one of the most reassuring aspects of the external debt asset class is that most EM countries no longer rely on external debt as their primary source of financing. External debt makes up only 4.7% of the total EM bond financing, so many issuers would simply not consider defaulting on their bonds even in a situation of stress, because the resulting savings would be too small to make it worthwhile to default, given the massive reputational damage.”