Pedersen stresses that this opportunity has been somewhat overshadowed by the attention around his Indian counterpart Prime Minister Modi and his reform programme in that country.
This emphasis on being selective is shared by Rob Drijkoningen, global co-head of emerging market debt at Neuberger Berman, who sees emerging markets as having become much more “heterogeneous, not a homogeneous bloc”.
He says: “Globalisation has caused convergence between emerging and global financial markets, and we find substantial regional themes in our data. But they also reveal extreme differences between regions and countries.
“Investors can take note of these idiosyncrasies not only in seeking to enhance return potential, but also in seeking to allocate capital efficiently to facilitate the next phase of ‘catch-up’ convergence with the developed world.”
In the immediate term, he stresses that this serves to remind us that, while a recovery may well be sustainable, it is unlikely to remain as broad-based as it has been so far.
Drijkoningen also addresses investors’ concerns worrying levels of corporate debt in China, where the median debt-to-EBITDA multiple is now around four times, double what it was in 2010.
“Ultimately, the level of defaults in China’s corporate sector will be determined by the success the authorities achieve in transitioning its economy from the high-investment, low-productivity model to a high-consumption, high-productivity model,” he explains.
“As part of this transition they are regulating the shadow banks much more closely and allocating credit to less-leveraged, more efficient sectors, such as the household and private tech sectors—which will actually push the number of non-performing and defaulting loans up.”
However, given its high savings rate, overwhelmingly domestic funding, state-ownership of its major banks and control of its capital account, he believes China can control the pace of non-performing loan recognition: “This gradual deleveraging could further suppress growth in China, but it makes crisis much less likely”.
