Emerging markets debt: High conviction for higher rewards

To explore this strategic move, we spoke with Erik van Leeuwen, Head of Fixed Income, and Diliana Deltcheva, Head of EMD and Portfolio Manager.

What about the current market conditions, do they align with Robeco’s timing to bring EMD on board?

“There is considerable global debate about local conflicts, geopolitical tensions, and tariffs as we enter a 'higher for longer' interest rate environment, particularly in the US. In such a volatile landscape, active management becomes even more critical. We believe that heightened tensions and increased market volatility also present opportunities. Having a strong, experienced team in place allows us to navigate these challenges effectively and deliver value to our clients.”

“We have always been a research-driven organization. Our research processes, particularly in credit, set us apart and we have consistently driven strong outcomes. At the same time, we’re seeing developed and emerging markets becoming increasingly interconnected – it positions us to not only capture global opportunities but also proactively manage risks.”

Erik, how does the addition of the team align with Robeco’s focus on sustainability and transition investing?

“Robeco has been pursuing sustainability research for more than 25 years covering global equity and fixed income markets. Since 2009, we have published sustainability rankings that cover over 160 countries, analyzing social sustainability patterns and qualities across regions.”

“The growing trend toward transition investing, particularly in emerging markets, makes the addition of the team a perfect fit with Robeco’s focus on sustainability. By combining the team’s deep market knowledge with Robeco’s established sustainability and research capabilities, including the SDG framework, we are developing a dynamic, forward-looking strategy. This approach addresses the unique challenges and opportunities in emerging market debt through the lens of sustainability and transition investing.”

Diliana, can you elaborate on your investment framework? How will this contribute to the strategies’ success?

“The team’s DNA lies in a disciplined and exhaustive investment process, combined with an active management style designed to deliver strong outperformance in any market environment. To do this, we’ve developed a comprehensive framework for evaluating sovereign creditworthiness and relative value opportunities, in both hard and local currency markets. We enhance this bottom-up analysis with a global macro environment, top-down assessment of asset class risks and opportunities. The top-down framework allows us to gauge interest in the asset class and assess its potential performance over a one-to-three-month horizon, which in turn guides our beta, duration, and risk budget allocation.”

“In practice, this means we position for global macro directionality while focusing on emerging markets that are suited to outperform. By collaborating closely with the global macro team and tapping into our SI capabilities, we gain a structured perspective of macroeconomic and political factors shaping the asset class and integrate sustainability considerations into our approach.”

The team utilizes an extensive toolkit, how do you implement a high-conviction approach in today’s market?

“EMD investors don’t want performance to be overly reliant on global macro factors, and we’re mindful of that. Highly convicted positions are carefully implemented and diversified across global macro and country-specific drivers to deliver a well-rounded and robust portfolio strategy. Balancing top-down analysis with an enriched bottom-up, country-specific assessment of rates, FX, and market dynamics enables us to efficiently implement views into the portfolio – while keeping the overall duration deviation versus the index within reasonable bounds.”

“Sovereign creditworthiness analysis often falls short when it comes to capturing political risks. We draw on research from sell-side banks and conversations with policymakers, investment conferences, and roadshows to form opinions on country-specific political events. We have a strong local presence and an important advantage via our EM equity analysts and global macro specialists based in Asia.”

Erik touched on the uncertainty of the current environment – what challenges and opportunities does this pose?

“The US economy and monetary policy are key drivers for the asset class and further potential of market instability makes it crucial to approach positioning with precision. In hard currency, we are selective to idiosyncratic countries that offer improving fundamentals and upgrade trajectories such as Argentina, Sri Lanka and Egypt, whilst being underweight to regions more sensitive to US rates and policy volatility.”

“Within the local currency strategy, we find value in countries like Brazil, Hungary, and Mexico for their resilience and prefer frontier markets such as Turkey, Egypt, and Ghana for high yield opportunities. We have a long dollar exposure, versus underweights in Asian (China, Thailand) and CEE (Czechia, Poland) currencies as these open economies are more vulnerable to potential trade disruptions. ¹”