Historically, the region’s fast growth has led to a rather apathetic attitude towards poor corporate governance standards, but as the need for company restructuring grows this might be set to change. Ultimately, to ensure a key relative value opportunity is not missed, it is logical to be capital structure agnostic within emerging markets and to expand the investment universe.
Such an approach will ensure that in periods where emerging market equities look expensive, the opportunity to access higher-growth areas of the world is not forgone.
Rather than the role of fixed income becoming irrelevant, it is arguable that it is more important than ever as the opportunity set, both good and bad, has grown significantly since the financial crisis.
Low interest rates have incentivised corporates to take on debt while constrained bank activity has led them towards non-bank sources to meet their demand. The splurge in corporate bond issuance and the associated material increase in the size of the market neatly encapsulate these forces.
Sadly, the most intriguing investments that have emerged from bank disintermediation often carry a level of illiquidity that is too restrictive for many investors. In addition, the credit underwriting process is yet to be tested in the depths of a credit cycle. The birth of the peer-to-peer (P2P) lending market is certainly culpable of the latter. For that reason it is a market we avoid, although the champions of P2P would argue the sophisticated data analytics more than compensate for the lack of history.
Defining liability
So far we have only considered portfolio efficiency in isolation and shown no concern for liabilities. Yet the argument for fixed income within the context of asset liability management is even stronger, as the stability of the cashflows, nominal or real, is all the more attractive.
Even within wealth management, where explicitly definable client liabilities might not exist, the desire to maintain the real value of purchasing power can attract an investor towards real bonds and fixed income. However, in reality, the global prominence of negative real yields are a hindrance.
It is difficult to foresee an environment where some part of the fixed income universe would not play a role in a multi-asset portfolio; it is merely the definition of that role that may change. The diversity of the universe is so broad that it is possible to reflect any conceivable outlook.
Perhaps it would be more appropriate to ask why equities constitute such a large portion of a typical portfolio. The asset class is solely aligned towards a positive outlook on corporate growth and the component markets are interdependent.
