The market standard benchmark EM local debt is the JP Morgan GBI-EM Global Diversified Index (GBI-EM GD) which includes the local currency denominated bonds of 20 countries. For local currency only, the standard benchmark is the JP Morgan Emerging Local Markets Index Plus (JPM ELMI+) which tracks total returns for local currency–denominated money market instruments for 22 currencies.

Our Philosophy

Our Global Emerging Markets Debt investment strategies are based on our conviction that the active fundamental approach identifies valuation gaps and harvests alpha in a disciplined way. Our portfolios reflect our teams top-down view, combined with deep, fundamental research, which gives us the best opportunity to actively add value. We believe in alpha discipline, constructing portfolios with diversified sources of risk, to lower volatility and increase the information ratio.

The strategy invests selectively in EM local currency-denominated debt and in EM local FX. Central bank transparency and monetary policy along with a country’s credit quality are key drivers of our fundamental and valuation analysis for EM local debt. To evaluate EM currencies, we examine several valuation metrics for each EM currency along with the expected evolution of the country’s trade balance and market dynamics.

The inefficiencies we attempt to exploit are:

• Price anomalies resulting from the fact that information levels vary widely across markets
• Yield curves that are not firmly established because developing investor bases are unfamiliar with the asset classes, creating windows of opportunity prior to accurate price formation
• Securities denominated in local currencies are typically less efficient than hard currency instruments and offer additional return potential from the FX component

Our process

The Global Emerging Markets Debt team combines top down and bottom up views based on rigorous fundamental research to build active portfolios with a keen focus on delivering attractive risk-adjusted returns. Fundamental analysis is the foundation of our country evaluation process to identify attractive sovereign EM opportunities. Before investment ideas can be properly evaluated, the team conducts detailed valuation work to determine whether or not their fundamental views are priced in by the market both across and within countries.

Reiterative risk management is a critical to our process. Our initial investment positions are modeled and calibrated via stress-testing and scenario analysis to create a resilient and diversified portfolio. We continuously assess the numerous external factors impacting EMD to fine-tune our positioning and to ensure we have optimized the portfolio for acceptable risk/return trade-offs.

Our approach to investing in EM local rates differs from that of local currencies:

• EM local rates. Each EM country’s local debt fundamentals are evaluated on both longer-term metrics (economic trends, central bank credibility and credit quality) and shorter-term metrics (inflation, local curve analysis and current market technicals)
• EM local currencies. EM currency valuations combine analysis of each country’s current account, capital account, and balance of payments to inform our portfolio positioning
• Our robust risk management framework then calibrates the size and scale of our positions in order to optimize the portfolio construction process using rigorous stress-testing and enhanced scenario analysis

HSBC Asset Management strengths

Emerging markets are part of our corporate DNA and we have over 20 years of experience managing Global Emerging Markets Debt portfolio – one of the longest track records in the space.

• A global investment platform allows us to leverage the insights and local knowledge of our on-the-ground network of analysts and investment professionals from across the world. As research drives our process, the dedicated corporate and sovereign analysts’ views drive the direction of portfolio manager trades. Portfolio managers focus on valuations, technicals and timing of investment entry/exit to harvest alpha most efficiently
• To analyze the large investment universe, the sovereign analysts are 100% dedicated to research, utilizing a focused balance of payments and debt sustainability methodology to forecast structural trends and predict relative credit spread moves for all 70+ countries within the investment universe

For more information or to discuss your investment strategy, contact us.

Risks in consideration

There is no assurance that a portfolio will achieve its investment objective or will work under all market conditions. The value of investments may go down as well as up and you may not get back the amount originally invested. Portfolios may be subject to certain additional risks, which should be considered carefully along with their investment objectives and fees.

• Fixed income is subject to credit and interest rate risk. Credit risk refers to the ability of an issuer to make timely payments of interest and principal. Interest rate risk refers to fluctuations in the value of a fixed income security that result from changes in the general level of interest rates. In a declining interest rate environment, a portfolio may generate less income. In a rising interest-rate environment, bond prices fall
• High Yield Investments in high yield securities (commonly referred to as “junk bonds”) are often considered speculative investments and have significantly higher credit risk than investment grade securities. The prices of high yield securities, which may be less liquid than higher rated securities, may be more volatile and more vulnerable to adverse market, economic or political conditions
• Foreign and emerging markets Investments in foreign markets involve risks such as currency rate fluctuations, potential differences in accounting and taxation policies, as well as possible political, economic, and market risks. These risks are heightened for investments in emerging markets which are also subject to greater illiquidity and volatility than developed foreign markets
• Derivative instruments Derivatives can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on performance