Emerging Markets Debt
Our Emerging Markets Debt (EMD) strategies seek superior risk-adjusted returns achieved through rigorous country, issuer and currency selection, sophisticated scenario-based stress-testing and downside risk management.
Getting to know opportunities in Emerging Markets
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.
We also believe that the flexibility to select from the widest universe of opportunities, across the full range of emerging markets debt instruments can provide investors with the best opportunity to potentially add value in portfolios.
- Against the backdrop of key macroeconomic and market dynamics, we focus on EM country and issuer fundamentals and relative valuations to determine our security selection and initial portfolio positioning
- A strict risk management framework is used to validate our investment ideas; we use robust stress-testing and scenario analysis tools to continuously calibrate and optimize portfolio exposures
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.
We capture macroeconomic views, catalysts and investment themes together with detailed EM country and currency fundamentals and relative valuation metrics to guide our investment approach. Reiterative risk management is a critical to our process. 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.
- We assess economic and fundamental EMD drivers with relative value analytics, market dynamics and technical factors to model the initial portfolio positions
- Our model portfolios then undergo rigorous stress-testing and scenario analysis to fine-tune initial position sizing/scaling as well as to recalibrate and optimize positions over time
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 per cent 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
- The connectivity provided by a Global Credit Platform comprised of over 40 credit analysts world-wide, including 20 on-the-ground dedicated emerging markets credit analysts, is essential in today’s world, and is particularly important in the management of emerging markets corporate debt assets
For more information or to discuss your investment strategy, contact us.
Emerging Markets Local Debt
As many EM countries have evolved and matured in terms of economic stability and policy, they been able to increase debt issuance in their own currencies. Today the EM local debt universe is over USD 8 trillion, representing the largest sector of EM debt with the highest average credit rating (BBB). EM local debt generally has low correlations with other asset classes and can help diversify an investment portfolio.
The market standard benchmark for local, or domestic, EM fixed income is the JP Morgan GBI-EM Global Diversified Index (GBI-EM GD) which includes 21 countries. For local currency, 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 and includes 23 currencies.
Our philosophy
Our Global Emerging Markets (EM) Local Debt strategies seek to maximize risk-adjusted returns by investing 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.
- By integrating macro, fundamental and valuation analysis along with market technicals, we aim to create diversified portfolios with selective exposures to local debt (and currencies)
- A robust risk management framework defines our portfolio construction process, enabling continuous portfolio calibration and optimization
Our process
Portfolio management decisions incorporate the expertise and analysis of a large, dedicated team of EMD specialists, credit analysts and economists. The process is collaborative and dynamic: specialists are each responsible and accountable for numerous investment inputs and decisions.
We integrate macroeconomic views, themes and catalysts with detailed country/ currency fundamentals and relative valuation analysis. Our initial investment positions are then modeled and calibrated via stress-testing and scenario analysis in an effort to create resilient and diversified portfolios.
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 one of the longest track records in the EMD universe, dating back to 1998:
- 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
- EMD capabilities range from US dollar-denominated sovereign, quasi-sovereign and corporate bonds to local currency-denominated debt and local FX. We offer both benchmarked and total return strategies in this space
Emerging Market Debt Total Return
HSBC’s Global Emerging Market Debt (EMD) Total Return strategies seek to capture as much upside of the entire EMD asset class as possible, while limiting volatility and drawdowns. Through a diversified blend of EMD assets, the strategy aims to calibrate both beta and duration management at the portfolio level, with rigorous country, issuer and currency selection at the security level.
Our total return strategies have the flexibility to tactically optimize long and short exposures to EMD assets.
Our philosophy
Our EMD total return strategies use an opportunistic approach to invest selectively (using long and short positions) across all EMD segments. They seek to provide superior risk-adjusted total returns with a focus on capturing maximum upside potential while minimizing volatility and drawdowns.
- Flexible asset allocation decisions across EM hard currency and local debt assets serve as a key performance driver for the total return strategies. The strategies exploit inefficiencies in the EMD asset class and can express short-, medium- and long-term views independent of a benchmark
- We use robust risk management tools to stress-test our portfolios under various scenarios and we continuously calibrate and optimize our portfolio positioning
Our process
Portfolio management decisions incorporate the expertise and analysis of a large, dedicated team of EMD specialists, credit analysts and economists. The process is collaborative and dynamic: specialists are each responsible and accountable for numerous investment inputs and decisions.
- We integrate macroeconomic views, themes and catalysts with detailed country/currency fundamentals and relative valuation analysis. We also analyze market pricing action, yield curves and spreads to help us determine our investment entry points
- A robust and reiterative risk management framework allows us to calibrate and optimize our positions and exposures using stress-testing and scenario-based analytics
HSBC Asset Management strengths
Emerging markets are part of our corporate DNA and we have one of the longest track records in the EMD universe, dating back to 1998
- 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
- EMD capabilities range from US dollar-denominated sovereign, quasi-sovereign and corporate bonds to local currency-denominated debt and local FX. We offer both benchmarked and total return strategies in this space
Global Emerging Markets Bond
HSBC’s Global Emerging Markets Bond strategies invest predominantly in EM sovereign and quasi-sovereign bonds denominated in USD. The strategies can also include some off-benchmark exposure to corporates and local currencies to control volatility and maximize risk-adjusted returns.
The market standard benchmarks for external, or hard currency, EM debt is the JP Morgan Emerging Markets Bond Index – Global (the EMBI-Global or the EMBI-Global Diversified) which covers 67 countries and consists of regularly traded, liquid government bonds.
Our philosophy
Our Global Emerging Markets Bond strategies aim to capture growth potential in external EM debt while managing volatility. Although they invest primarily in EM sovereign and quasi-sovereign bonds that have been issued in USD, our EMD hard currency strategies may include some off-benchmark positions in EM corporates, EM local debt and EM currencies for diversification potential.
- Exhaustive analysis of EM country and issuer fundamentals and valuations are critical inputs for our investment decisions. This analysis is evaluated within current economic, financial and market contexts to determine overall portfolio risk positioning
- We use a robust risk management framework through which we stress-test our investment ideas under various scenarios, continuously calibrating and optimizing our portfolio exposures
Our process
Portfolio management decisions incorporate the expertise and analysis of a large, dedicated team of EMD specialists, credit analysts and economists. The process is collaborative and dynamic: specialists are each responsible and accountable for numerous investment inputs and decisions.
We integrate macroeconomic views, themes and catalysts with detailed country/currency fundamentals and relative valuation analysis. Our initial investment positions are then modeled and calibrated via stress-testing and scenario analysis to create a resilient and diversified portfolio.
- We evaluate all EM country fundamentals, reviewing their economic situation (growth, debt, trade balances, fiscal discipline, inflation, etc.) along with more subjective factors (governance, politics, history of default, etc.) as well as current market technicals
- We use robust risk management tools to stress-test our investment ideas with enhanced scenario analysis. We also continuously calibrate the size and scale of our positions to optimize the portfolio
HSBC Asset Management strengths
Emerging markets are part of our corporate DNA and we have one of the longest track records in the EMD universe, dating back to 1998
- 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
- EMD capabilities range from US dollar-denominated sovereign, quasi-sovereign and corporate bonds to local currency-denominated debt and local FX. We offer both benchmarked and total return strategies in this space
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
Focus on
The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. The value of the underlying assets is strongly affected by interest rate fluctuations and by changes in the credit ratings of the underlying issuer of the assets.