A number of myths remain about emerging market corporate credit, according to Barings’ Omotunde Lawal.
That it is a new market, for example, that it is volatile, or subject to the whims of international investors. In reality, she says, it is a large, increasingly mature market, supported by stable domestic investors such as pension funds, and the opportunity set is growing all the time.
Lawal is the head of EMEA corporate credit and emerging markets corporate debt at the group. She points out that the asset class is now $2.5trn (£2trn) in size, having grown by about 250% since 2010. It is bigger than the emerging market sovereign debt market, and even the US high yield market – “much more of a teenager than a baby”, she says.
With that maturity has come more stability. “We don’t see everyone rushing in and out as they did before. It is often supported by local pension schemes investing in their own companies. Peru, Chile, India, China and Hong Kong all have deep pools of domestic capital that buy in, so the markets are not reliant on investors in the US or Europe.”
The market is also much more diverse than its reputation might suggest. Far from just commodities, Lawal says a range of different sectors is well represented in emerging market credit. “You’ve got healthcare, agriculture, oil, metals and mining, banks, transport, airports and toll roads. It’s very diversified.”
The asset class has been supported by growth in specific emerging markets and will often reflect the strength and weakness of individual economies. For example, Asia’s share of the overall pie has shrunk following the weakness in China, though this has been balanced to some extent by the growth in supply from India.
There has been significant growth in the Middle East, explains Lawal, particularly Saudi Arabia. The Saudi government’s ‘Vision 2030’ has sparked a range of projects. It has also had a knock-on effect for other countries in the region, with Dubai and Abu Dhabi also trying to diversify their economies away from hydrocarbons. It has created the opportunity to invest in renewable power projects, semiconductor or electric vehicle plants.
There are also fast-growing countries such as Georgia and Uzbekistan. “As those countries are becoming more prosperous, there is a lot of new issuance. There are also countries such as Kazakhstan, plus Nigeria, Morocco and South Africa,” she notes.
The Barings method
Lawal took over as head of the team at Barings in 2018. She has been at the group since the inception of the emerging market credit business, and helped shape the process and philosophy. She started out as a chartered accountant, before realising auditing was not the right option for her. Her first markets career was at Barclays Capital on the structured credit team, before moving to Standard Bank of London as an analyst. She ended up on the group’s emerging market proprietary trading desk.
The proprietary trading team left and launched its own hedge fund, but the timing wasn’t great, coinciding with the ‘taper tantrum’ in 2013. The fund wasn’t the commercial success they’d hoped for and when a former colleague at Standard Bank approached her about building a team at Barings, she jumped at the chance.
Read the rest of this article in the February issue of Portfolio Adviser magazine