Unlocking opportunities: a guide to investing in emerging market corporate debt

Why is emerging market (EM) corporate debt an attractive investment? 

Imagine a world where opportunities are abundant, but still remain largely untapped. This is precisely the case in the emerging market corporate bond space. Since the early 2000s, the market has grown from $74 billion to around $1.4 trillion in 2024. However, beyond these impressive numbers, it’s the diversity of sectors and regions that can make this asset class so appealing to investors.   

The investable universe of EM corporate debt spans companies across twelve industries and more than sixty countries. Investors have opportunities to diversify across regions such as LaTam, Asia, Africa and the Middle East. Portfolios can be adjusted by calibrating exposure between more defensive sectors such as utilities and TMT, and more pro-cyclical industries like consumer, financials or industrials. Companies in the EM corporate debt space, often leaders in their respective countries, benefit from strong fundamentals in fast-growing economies with young and dynamic populations. The asset class is predominantly investment grade, but offers a range of credit ratings, allowing investors to adjust exposure based on their risk appetite. According to our calculations3, investing in EM corporates allows investors to increase diversification whilst potentially achieving strong risk-adjusted returns compared to more traditional fixed income assets. 

In short, the asset class opens the door to a dynamic investment opportunity that is attractive in its own right or as a part of a diversified portfolio. 

What are the risks to be considered when investing in emerging corporate debt? 

Investing in emerging markets is not without risks, but as with any strategy, the key is understanding and managing them. Since our primary aim is to generate risk-adjusted returns, we continuously analyse the risks associated with this asset class.  

The first risk factor to monitor is the US interest rate policy. Higher US interest rates translate into higher borrowing costs for EM corporates, who often borrow in US dollars. This can impact their ability to repay their obligations.  

Moreover, the volatility of the US dollar is also a major concern. On the one hand, a stronger dollar can increase the hard currency debt burden for emerging market corporate issuers with local currency denominated revenues. On the other hand, it can support margins for companies with a high share of exports or other hard currency denominated income.  

Raw materials are another key factor. Given globalized supply chains, a sudden rise or fall in commodity prices can impact margins for emerging corporates across the globe.   

Apart from that, shifts in geopolitics and country-specific headlines can have a significant impact on EM corporates. Elections, trade wars, military conflicts – these factors can significantly affect the performance of the asset class.  

Finally, company-specific business performance and policies may significantly affect risk of default for any particular corporate bond. For instance, overly aggressive growth plans, shareholder distributions or weak business strategy can result in significant underperformance of the company’s bonds in the market.  

As a result, a comprehensive understanding of these risks is essential to making informed investment decisions in EM debt. 

What is your investment approach in the EM corporate market? 

Our strategy focuses on investments in hard-currency bonds issued by corporate debt issuers that are domiciled or have exposure to EM economies. The corporate issuers in the portfolio vary across credit ratings (including both investment grade bonds with credit rating at or above BBB- and high yield with credit rating below BBB-) as well as across geographies and business segments.  

Our investment approach seeks to eliminate companies with excessive ESG (Environmental, Social and Governance) risks, limited liquidity or overly aggressive capital structures from the investment universe. Instead, we target robust corporates that we believe may be mispriced by the market, aiming to create a diversified portfolio capable of outperforming the benchmark. To achieve this, we rely on proprietary quantitative tools to screen for risk reward opportunities. 

How does the strategy implement security selection? 

Our investment process is predominantly focused on bottom-up4 issuer selection. The selection is based on rigorous fundamental research that integrates ESG factors. The main objective for us is to identify the issuer’s creditworthiness, i.e. the likelihood that it will be able to meet its required debt payments. To assess this, each issuer is analysed and assigned an internal credit rating, which guides our investment decisions. Once we have identified all the risks related to an issuer, we decide whether to invest through our conviction-based approach.  

We complement this bottom-up approach with top-down analysis5 that leverages on Candriam’s in-house macroeconomic and EM sovereign research. At this stage, we implement  – and regularly update – our view on major macroeconomic drivers of the asset class that include US interest rates, Foreign Exchange, commodities and our outlook on the Chinese economy among others. We also utilize the EM team’s expertise in sovereign and geopolitical analysis to adjust exposure to particular geographies and regions. 

What are the main strengths of Candriam’s EM corporate debt strategy? 

Our methodology was developed – and is continuously being improved – to meet our objective of generating risk-adjusted performance. Our multifaceted approach aims to identify investment opportunities through rigorous bottom-up analysis of issuers and instruments, while controlling for risk.  

Our team draws on a comprehensive set of analytical tools, developed in-house, to identify investment opportunities. Our process is based on rigorous fundamental analysis and relative value assessments. We seek to avoid the most illiquid parts of the market using proprietary filters. Our process also incorporates ESG factors, which are essential for us to judge the creditworthiness and long-term development potential of countries and companies. ESG integration is a key differentiator of this strategy, enhancing our decision-making with a broader perspective on value and impact. Candriam’s market-leading position as a sustainable investment expert allows us to implement best practices in close collaboration with the specialist ESG research team.  

We pay close attention to risk, not only when choosing where to invest, but also during the implementation phase. Our internal investment limits, together with an analysis of the overall market environment, guide us in building the portfolio. We only take those risks that we consider worth taking. 

Additionally, our dedicated investment team and collaborative decision-making process allow us to remain agile and responsive, leveraging our expertise in the EM space along with complementary product and regional knowledge.