Karen Watkin
Welcome to AB's Alpha Females, the Multi Asset Investment Podcast from AllianceBernstein. I'm Karen Watkin and I'm a fund manager in the Multi Asset Solutions team here at AB. The Alpha Females are those women who have developed unique areas of expertise and made their mark in the investment industry. For many clients, generating income from their investments is a priority. But market conditions are very different now from those that we've had over the past decade. So, taking a flexible approach to income and getting original and informed perspectives to investing is more important than ever. In this series, my guests, the Alpha Females, share their expert insights on the key questions for investors on the hunt for income. They'll also be telling me about their career journeys, the challenges they've faced, and the lessons they've learned along the way. Emerging markets summon up an image of countries coming out of poverty and progressing along the road of development. They are sometimes seen as risky environments for investment that can offer rich pickings when looking for income. Yet how much of that is true? China, now the world's second largest economy, is still considered by some measures to be an emerging market. Meanwhile, emerging market bonds may offer attractive levels of income compared to their developed market counterparts. But how much extra risk do you really need to take? These varied perceptions of emerging markets illustrate some of the challenges when considering them for investment. They're often lumped together as one homogeneous asset class, and yet the economic and political drivers present across these different countries vary dramatically. In addition, when looking at bonds in emerging markets, investors have a broad spectrum of issuers to consider, ranging from governments to corporates. So how can you untangle this multitude of factors when considering emerging market investments? And what do you need to guide you through this sometimes-complicated path? What you need is someone like Liz Bakarich. She's a senior Vice president and Fixed Income Portfolio Manager at AllianceBernstein and is an expert on the subject of emerging markets, having worked in this area for over a decade. Liz's experience comes from a long history in studying the economies of different countries, from Brazil to China and beyond. She spent time on the ground seeing firsthand how these countries and the companies within them operate and closely follows the economic and financial developments of differing markets around the world. Liz understands the complex dynamics that need to be considered when investing in emerging markets and how to manage these risks. Liz, thanks so much for joining me on the podcast.
Liz Bakarich
Thanks for having me, Karen.
Karen Watkin
So, let's start by just getting an understanding of the basics. What do we really mean when we talk about emerging markets and, you know, what makes any given country an emerging market. Is China really still an emerging economy, do you think?
Liz Bakarich
I do think it is. What can happen often in labelling everything emerging markets in terms of asset classes, it can get confusing. So, within emerging markets you have sort of sovereign debt, you have corporate debt. You also have something that's rather unique to emerging markets as quasi sovereign debt. And additionally, you have that both in hard currency or US dollar based and local currency. So many times when people talk about emerging markets, they really can be speaking about many of the different asset classes within the group. And so, it can sometimes be confusing. And similarly, as you mentioned for country classification, also it can be confusing when you look at different index providers or different definitions from the industry. Some countries can be included, some countries can be excluded, depending on what metrics that you look at.
Karen Watkin
And so, what are perhaps some of the assumptions that investors may have about emerging markets? You've talked about the kind of breadth of what that investable universe can look like. But are there other things that people might assume about investing in emerging markets that might actually be somewhat misplaced?
Liz Bakarich
Yeah, I think one is that it's an immature asset class. And you know, emerging markets have been around for a very long time in very different forms, and we have seen a strong growth of the asset class. So, I think that is one common misconception that people under think where it's a very small group of bonds, but really it's a very large asset class. And then also more particularly on the corporate side is people think these are very small companies. But really in actuality, if they're coming to the US dollar bond market, they are very strong companies.
Karen Watkin
And you know, as an income investor, you know, we like emerging market bonds because we know it's typically a place where we can perhaps find some higher yielding companies or governments. But what are the benefits that those emerging market bonds offer over their developed market counterparts?
Liz Bakarich
For our income strategies, we do think that emerging markets offers one, I'd say diversification away from the US or developed markets so they can be exposed to different risks, good and bad. One of the things that we like about many, both sovereigns and more particularly in the corporate space is actually if you compare emerging market corporates to the developed market counterparts, they typically have better fundamental metrics, so they have lower leverage. They typically run with higher cash balances. Now in many cases that's because maybe they've had experiences with inflation crises in their countries or not being able to access the market during a political event. So, we like them for that also too. If you look at the EM corporate space, it actually has a better Sharpe ratio than other fixed income assets, excluding US high yield if you look at kind of over the past 10 years. So, you are getting solid returns for lower risk. And as the asset class emerging market corporates is actually an investment grade asset class. The index that is commonly used averages or rating of investment grade and not high yield. Another thing that needs to be considered for emerging markets is for companies. They can be very strong companies on a fundamental standalone basis, but because of the country that they're operating in, their actual published rating may be notched down by what we call a sovereign ceiling. So, in actuality you can be investing in a company that is a triple B rated company, but based on the location where they are, they actually have a lower published rating. So, it really allows you for an income strategy to get access to those spreads and those yields at a pickup to developed markets. In actuality, you might be, you can be getting a better rated bond when you're buying it.
Karen Watkin
So how do you think about navigating some of those risks? Right. Like you said, they're pretty multifaceted because you're not just looking at the corporate in isolation. You are having to understand the country within which it operates. And in particular with emerging market economies, there often can be greater political uncertainty.
Liz Bakarich
I think the way we meet them is really through very detailed and strong fundamental research. So, it does start, as you pointed out, from our sovereign research. So, our economists are forming a view again looking at fundamental metrics, but also looking at other metrics that may not be as quantifiable, such as the political risk, as you mentioned. And on the corporate side, it is something that has to be incorporated because there can be overarching factors. When you're thinking about a company, if they're selling domestically and the GDP of that economy is expected to decline, that's something that should be impacting these companies or vice versa. Sometimes we can get insight when we're talking to our companies that can inform what we're thinking about the sovereign. So, if we're hearing from companies that they're slowing down investment, it can also influence our views on what we might be seeing coming forward on a sovereign basis. So, it's really that type of fundamental research that we do on sovereigns and on corporates. It's a lot of work. It requires going to the countries and meeting with government officials, meeting with the corporates in the country as well to gain that additional insight. And then it's talking to others as well. In the space such as the IMF or who else might be lending to countries and companies to get a really full picture of the risks involved.
Karen Watkin
And so, you mentioned, you know, the importance of some of that on the ground research. Right. And actually, visiting some of these countries and the companies that operate there. Can you perhaps share some stories of your road trips and what you've seen when you've done some of those research visits?
Liz Bakarich
I can recall when going to Brazil, one thing that does stand out to me in Brazil is the traffic. So, getting across town in Sao Paulo, you have to budget about an hour. So that was an interesting, interesting feature to learn. But when you're meeting with these companies on the ground, one, you get to see their operations. So, you get to see, you know, in certain cases, visitors, a mine visit, visit the banks, visit the retailer and actually see what. How their operations are doing. Also, generally, we find if you're going to visit someone's home, it creates a different level of comfort for them. They have a bit more of a relaxed feel. They're. They're more open and talking. Also, in many cases, a lot of places, I like to do what you call the taxi tab poll, talking to the wait staff, talking to your hotel staff, talking to taxi drivers, especially when there's an election coming up, and trying to understand the implications of how the voting base is feeling. Some of those can give you a real sense of the sentiment on the ground, and that is extremely helpful. Just last year I went to China and that was really helpful in both understanding the supply chains that companies are facing. As you know, we were heading into the US elections and heading into a potential tariff scenario, and then also, like I said, visiting retailers in Hong Kong. When we went to a mall construction, this new site that was being developed by a property developer and operator, they were very much focused on the access that they were going to be offering. So, near a harbour, near where Hong Kong investors can come onshore to China, which was a bit cheaper market to access it. So, it was understanding those points, it was also understanding where competitors were located. So, seeing that the mall construction here was actually only maybe two miles from another mall that had very similar stores and very similar operations, that type of understanding was very helpful. And then going to that next mall and seeing what the occupancy was, those little details and features can really provide deep insight.
Karen Watkin
So, Liz, you know, we talked about emerging markets perhaps being a riskier place potentially for investors. And, you know, there's a lot to think about when you're investing in emerging markets. You've Talked a bit about in particular how that on the ground research can help with those idiosyncratic kind of issuer specific risks that you're trying to dimension. But what are some of the other broader risks that you need to navigate when you're investing in emerging markets on.
Liz Bakarich
The local side, which is what we would define as the riskier piece of emerging markets. You have the currency piece. And currency is the most volatile piece within emerging markets. When you're thinking about the risks in the other space, the hard currency asset class, it really performs like a credit market. And I think that's one of the common misconceptions that people have of emerging markets being riskier is they're thinking about the local debt grouping as opposed to the hard currency grouping. And the hard currency grouping is very much exposed to the same type of risks that the US credit market is exposed to. If we look at history of some of the biggest drawdowns, the lowest return periods in emerging markets, it's the same thing that impacted the U.S. credit market, the global financial crisis Covid. So, these were things that affected the global risk market and affected them as well. So, I think the common misconception is that while yes, there are idiosyncratic risks per country, Russia, Ukraine was a very idiosyncratic risk, but it very much impacted those two countries. The overall broader emerging market spreads weren't very impacted. So, I think that's a common misconception. And really the risks around EM credit investing would be similar risks to what you would get in other broader developed market credit aspects. And then again to your point, sometimes a little bit better spread and yield.
Karen Watkin
And is there anything on the current horizon that you think poses some greater risks for emerging market debt? You know, we've obviously been navigating a lot of market volatility recently, you know, as a consequence of the US Administration's tariff policies. But there's other potential changes afoot in terms of say, immigration, you know, and other kind of fairly big policy changes. We've seen a lot of volatility with the US dollar. How does all of that feed into your views on emerging market bonds at the moment?
Liz Bakarich
It's very important. And you mentioned a lot of different factors. And what's interesting is those factors will affect countries differently. So, for example, remittances is a very important piece of what we look at for many countries, but in some countries it's a non-factor. The same thing with the US dollar. In many cases, countries can be helped by a depreciating US dollar, especially as I mentioned they issue debt in hard currency, so they're issuing debt in dollars, and their currency is appreciating that can help them. We also focus on countries that might be pegged to the US dollar. So, there are all those factors are very important in considering investment within emerging markets, but sometimes it might not impact every sovereign the same. You mentioned tariffs, which is obviously one of the biggest topics that we've. And so, there's two aspects that we're looking at. Obviously, the impact on a sovereign. So, when the tariff announcements come through, we look to see what the expected announcement was on different countries and then looking more specifically at the corporate space. So, to understand, okay, well now these are the companies that are operating in these countries that are now targeted by tariffs. What is the potential risk there? And analysing that, we know there's many companies there that are very domestic exposed. Think of utility companies or telecom companies that aren't impacted by tariffs or ones that maybe are global exporters but don't ship to the United States, so are a little impacted. So, there's so many layers in looking at it and I think really the biggest misconception on EM is looping everything or grouping everything together as an EM class. And there's so many differences underlying that that it really takes additional research or additional understanding to invest.
Karen Watkin
Yeah, it sounds like a really kind of complex asset class and environment that you're having to navigate. How do you, how do you bring all of that research together?
Liz Bakarich
Yeah, you know, one of the things we've, we've really tried to improve upcoming, because I do look across the globe and, and how do you compare a Brazilian paper company to a South African oiler to a Chinese tech company? It's very broad and very different and it's a strength of the emerging market class to have that much divers. But obviously in the investments and comparison. And so, we've done a lot of work with our research and our quantitative team to kind of analyse what really moves spreads. So, identifying the different risks, whether it be industrial risk, whether it be country risk, whether it be rating risk, to see what the main drivers of spreads are. And it allows us to compare countries and corporates more particularly across the globe, comparing a bit closer to apples. To apples, as opposed to, you know, I would say apples to, you know, cars even in some cases.
Karen Watkin
And I guess as you, as you think about that kind of risk framework that you use, there's been a lot of discussion over the last few years about, you know, understanding material ESG risks and how they Might impact various parts of the market. But I guess, you know, really for emerging markets, the G part or the governance piece has always been a risk that you've needed to, to consider. So how does, how does that fit into your risk framework when you're evaluating investments?
Liz Bakarich
Yeah, it's a very big factor within EM as I mentioned, these are bigger companies, these are multinational companies. But there do exist a large number of private companies that are family operated. So, it's a very big piece of our research. Really, the two questions we always ask is who am I lending my money to and how are they going to be paying me back? And so that who part is very important. You can look up the history of families on different failed investments, how they've treated investors over time. A big piece as well is the governance and the bankruptcy laws within a country. So, understanding the jurisdictions and the rules that they may have. If you were to go have a company that got in stress situations, what are your legal rights as an investor? So those are some of the governance things that we think about. And then obviously there's a lot of other factors that can influence in terms of, we've had many different cases of bribery over the years. So, they're obviously a big issue that we do need to focus on.
Karen Watkin
I mean it's fascinating and it sounds like there's so much thought and research that goes into your investment process. But I'm interested as well in just learning, I guess what brought you to investing in emerging markets. I know you've been doing it for a long time, but you weren't always focused on that part of the market.
Liz Bakarich
I've always been interested in fixed income. Even my internships in the university were focused on fixed income. Learning the U.S. treasury market and growing in my career. I had the opportunity to move to our London office to help work on our global credit portfolios and I really enjoyed it. It gave me a completely different perspective. And so, after my time working on global and European credit, I was moving back to New York, and it really gave me an interest in working in more global markets. And so thankfully the emerging market team, it had an opening that I really, I really jumped at. I liked the currency aspect, understanding the risks that are involved when that is a factor. And I really liked looking at companies. So, I really liked learning more about the underlying financials of companies. So that really sparked my interest. And I don't know if I was a glutton for punishment coming over because I remember coming over and we had the first Russian engine of Ukraine. So, it was a really, really great start to my EM experience. But yeah, it's fascinating and I think, you know, one of the things I, I always say is like I'm still a student, I just constantly learning. And I think what's very nice about the emerging markets, it's kind of limitless in terms of the countries and new countries coming in, new countries starting to enter the market. You know, in the past year we've had Uzbekistan issuing bonds. They were never an issue before. So, the world is continuing to grow and there's continuing to have new countries come and access the market. And so, it's more opportunity to learn.
Karen Watkin
You said it's a constant kind of learning experience. What are some of the key lessons that you've learned along the way?
Liz Bakarich
Oh, I think I've become a bit more of a pessimist. You know there's one thing that's taught me in corporate analysis is question everything that you do here. Trust but verify, I think is one of the common phrases that we look at. And so, I think that's one of the things that I have probably learned more in my career. There are people who will know things more than you. That's definitely true, especially as we have our in-depth team of researchers. And so really relying upon the people who know more than you about a particular topic is key. You know, it's always been a team-based approach and appreciating really in the emerging markets team even more given the breadth of the asset class.
Karen Watkin
Fantastic. And before we wrap up, what would you want to leave our listeners with in terms of your three key insights? What people should remember when they're investing in emerging market bonds.
Liz Bakarich
One, it's many flavours and there are different opportunities for every different type of investor. We have insurance investors focused on investment grade. We have more total return investors focused across the asset class. They have blended benchmarks and then we have riskier investors that may be more focus on fx. They're often lumped together but there's really many different opportunities depending on the type of investor that you are. I would say. Again, another thing I would say is looking under the hood as I mentioned, that a lot of them have better metrics and better underlying fundamentals than DM counterparts. Many companies are the low-cost producers in their space so they actually can withstand the volatility more. And then lastly, I think the importance of research, like any credit market, you really do have to do your due diligence on companies. You have to understand the importance of a culture factor in understanding countries. And so, both meeting with management and going to countries is really important on gaining that really 360 degree view of research.
Karen Watkin
That's fantastic. Liz, some really important insights. Thank you so much for joining me today. I've really enjoyed our conversation.
Liz Bakarich
Thanks Karen.
Karen Watkin
So I think some of my key takeaways from my conversation with Liz were really how complex the emerging markets are and really, as Liz said, how many different flavours there are when you're looking across emerging markets that there's so much breadth to explore from the different economies and countries to all the different companies and corporates that there are within this space. And I think it was really how she described about the importance of looking under the hood. So really doing that deep dive to understand the specifics of what each of these bonds may be offering an investor. I really like the way she talked about the need to trust but verify. So really understanding on a deep level ultimately you know who they're lending their money to and how they're going to be paid back. Which I think just captures in a nutshell the key question that you need to ask yourself when investing in emerging market bonds. And with that, this brings to a close this episode of AB's Alpha Females, the Investment Podcast with me, Karen Watkin. It only remains for me to thank Liz Bakarich. If you've enjoyed this episode, don't forget to tell your colleagues and friends about it. This episode was produced by Richard Miron from Earshot Strategies.
