In Denmark, a group of four portfolio managers that make up the Emerging Markets Debt Hard Currency group at Janus Henderson Investors are not as enthusiastic about the U.S. economy as some other investors.
Many investors seem to believe the Federal Reserve will achieve its so-called soft landing, but that is still dependent on incoming inflation data and other information. “Market pricing on U.S. growth appears too optimistic” and more volatility is coming, the portfolio managers said in a note due to be published on Thursday.
Whether the landing is soft or bumpy, the portfolio managers believe that the U.S. economy is late in a market cycle. Their outlook for emerging market debt, on the other hand, is bright, at least for their investment strategy. (The team left Danske Bank Asset Management in 2022 to join Janus Henderson, where it is already managing more than $1 billion in assets.)
The EMDHC group invests primarily in the sovereign debt of emerging countries that is issued in a hard currency and is relatively stable and easily tradable in foreign exchange markets. The U.S dollar, the euro, and the Japanese yen are commonly used by countries issuing bonds in a currency other than their own to lower their borrowing costs.
The portfolio managers begin their investment process with a model developed over the past 10 years that signals which countries they should focus on. That’s because it’s not possible for a group of four managers to canvass roughly 80 emerging market countries and do all the research they need at all the times, said Thomas Haugaard, a EMDHC portfolio manager.
“It is not a credible proposition to argue that you are an expert on each and every country all the time. That would never be something that you could credibly explain to investors,” Haugaard said.
Once the model has narrowed the universe of potential countries, the managers dive deeper into the new list, evaluate other data, and apply their own empirical analysis to choose bonds.
Right now, like other credit managers, they like what they are seeing.
“Despite the headlines, many emerging markets remain relatively robust, with progress on fiscal consolidation and improving debt metrics” and gross domestic product growth in some countries, their report says. Emerging market countries were also quick to begin hiking rates relative to the rest of the world. In some countries, such as Brazil and Mexico, inflation has fallen and central banks are already cutting rates.
In other countries, recent news has lifted sentiment. A debt restructuring agreement between official creditors and Zambia, approval of an IMF-program for Pakistan, and progress on local debt restructurings in Ghana and Sri Lanka are some of the things in which the Janus Henderson group is taking an interest. According to the group’s report, “[while] there is still a long road ahead before these countries can regain market access, recent progress bodes well for future restructuring processes. The risk of broader contagion from distressed countries to the broader emerging markets asset class is, in our view, limited.”
Still, emerging market countries are part of the global economy, which is slowing. Their outperformance is not guaranteed.
“Credit quality in EM, overall, has stabilized, but a slowing global economy does weigh on EM, as many are dependent on international trade and overall credit quality is under some modest downward pressure. The slowdown is putting pressure on fundamental credit metrics; in some sense the resilience seen in the first half of 2023 is front-loading, meaning the second half of the year could disappoint,” the report notes.
