Emerging Markets, Emerging Political Change - Context

Everyone in 2018 is watching emerging markets for political risk because there are a number of elections on the calendar. We are obviously watching that very carefully.

We’ve seen political change happening in countries such as Ukraine [and] in South Africa. So this is really a theme that has been emerging in global emerging-market countries, and that is something we believe that is not being captured in emerging-market asset prices. Emerging-market asset prices are still demanding a political risk premium even though political risk is going down, whereas in developed markets you don’t get paid for political risk; however, political risk is going up.

We have seen positive political change in Brazil and Argentina. We’ve seen governments come in, correct many of the issues of the previous governments and implement reforms in the country. On the other hand, active management is extremely important in emerging markets because you also have countries like Venezuela where things have been deteriorating for a number of years and so far there hasn’t been a change in that country.

Homework’s especially important when you’re investing in emerging-market corporates because the bankruptcy system in many of these countries is still very young, and it’s not fully tested. What we do as investors is that we have a sense of how many of these shareholders have treated bondholders in their past, and that is invaluable in this analysis and it’s really related to our experience in this market. If you are invested in the wrong shareholders, they can really destroy your recovery value. And knowing who’s who and their history has been a very important part of our analysis.

What we really like in the local rates space is not only the larger countries like Brazil and Argentina where local rates are attractive but also many frontier countries, which are actually a great hedge to systemic market movements because they’re very idiosyncratic. So the Dominican Republic, Sri Lanka, Nigeria, countries like these we believe add real value to the portfolio not only because of the carry and the attractiveness of the fundamentals in the countries but also because they don’t move with the rest of the market.

Mongolia is a country which we analyzed very deeply last year, and it was another one of those countries where we experienced political change, and other investors got concerned about the political change and thought that it may actually lead to a default. We did our homework, our on-the-ground research, and came to the conclusion that this government is going to do the right thing and will try to get an IMF program as well as a lot of bilateral and multilateral support. We are always watching to find value where other investors may be missing the bigger picture.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.