While emerging market debt remains deeply unfashionable, we believe it may have now reached an inflexion point. A lot of people have lost money in emerging market currencies but the flipside of that is that the sell-off has created value. Yields are back to where they were in 2005 or 2009. For the first time in a long time we see the potential for being paid to take on risk.
Yields on hard currency government debt in some EM countries illustrate the point, even at the investment grade level. El Salvadorian government credit, for example, has yields at more than 8%; on Saudi Arabian quasi-sovereign debt they come in above 6%. For Ivory Coast they are above 7% while for Kazakhstan they are 6%. There are good countries and there are bad countries. We believe the real cornerstone of emerging market investing is to question: am I sufficiently compensated for the risk I’m taking on?
Brazil and Russia are two countries where we believe current valuations could justify careful investing. If you consider Brazil, the selloff in 2015 was similar in scale to that of Russia in 2014. Both countries have huge problems. They’ve had credit downgrades, they’ve had a terms-of-trade shock from falling oil prices and they’ve experienced political or geopolitical upheavals. Our job as investors is to sift through the wreckage of the sell off and to ask ourselves whether we’re being paid enough to shoulder those risks. Now is the time to explore.
Colm McDonagh – Insight, a BNY Mellon company
 Source: Bloomberg as of 7 January 2016