The Case for Emerging Markets Distressed, Stressed and Dislocated Credit Investing
By Sandglass Capital Management
Aug 6, 2020
Hedge Funds
Aug 6, 2020
The Growing Opportunity set for Emerging Markets Credit
The Emerging Markets credit offers a huge opportunity set, with the Emerging Markets tradeable debt stock growing 15% annually from 2000 to 2020. We asked Sandglass Capital Management, a hedge fund focused on investments in Distressed, Dislocations, and Deep Value across the Emerging Markets and the frontier world to walk us through that opportunity set.
Emerging Markets foreign currency debt universe has doubled since 2008 and now exceeds $4 trillion, while domestic debt outstanding is getting close to $25 trillion. The universe of Emerging Markets credit assets continues to grow across both external corporate and local currency credit assets. And yet most institutional portfolios are under-allocated to Emerging Markets credit despite the asset class having a higher sharpe ratio than even US treasuries and weak correlation to beta factors. Emerging Markets Credit assets broadly exhibit low correlation, relatively low (portfolio) volatility, and robust returns.
- Emerging Markets High Yield total notional outstanding is larger than US High Yield markets
- Recent BAML report includes a long-term cross-asset study and concludes that Emerging Markets credit is an attractive, high sharpe ratio asset class, and yet is grossly under-represented in institutional portfolios.
Distressed Credit Dynamics
1. Periods of USD strength often trigger Emerging Markets distressed and stressed credit opportunities.
