Emerging market debt is one solution to issues fixed income selectors are facing in a new environment.
That is according to Omar Gadsby, head of fixed income and multi-asset fund selection at Credit Suisse, whose big strategic objective is increasing clients’ exposure to emerging market debt.
‘I think you have to go beyond the developed world and reduce exposure there, that’s very clear. You have to go sensibly into emerging markets,’ Gadsby says.
In an exclusive interview with Citywire Switzerland's sister publication Citywire Selector, Gadsby said EMs represent around 5% of total debt outstanding in the world but deliver over 50% of global growth.
‘There’s an imbalance there, right? Emerging markets have historically been associated with high volatility, and that’s why the weights have been quite low.'
The asset manager said his strategic asset allocation for the fixed income component captures 5-8% emerging market debt.
'I think that’s the fundamental problem. We have a majority of the OECD countries with negative interest rates or very low interest rates, and high debt to GDP. But you’re not being compensated for that risk, so how do we solve this?'
Gadsby said in order to build an emerging market portfolio you should always have your core/satellite. However, he added, the historical core was made up of noon-efficient “market value” benchmarks.
'For hard currency it’s the EMBI Global Diversified. That index is horrible, it’s the old Brady Bond index, and the top 10 issuers represent over 50% of the market cap, so you’re investing in 10 countries, right? But this index has over 60 countries. It’s a bad index.'
‘The GBI EM Local Currency index is even worse, the top seven countries represent 70% of that index. So these are the historical core exposures. That’s wrong. Those old benchmarks should not be core.'
Gadsby says you can keep the core-satellite structure, but should change the core.
'The new core is more defensive and we try to keep volatility at around 5 to 6%. How do we achieve the new core? With short duration EM debt, total return EM debt strategies, and then I surround that new core with high conviction satellites.'
The full article originally appeared in the March edition of Citywire Selector magazine.