Hello everyone, and welcome back to the Institutional Beat podcast, where we discuss interesting and relevant topics for institutional investors. I'm Jeff Roberts and I'm an institutional portfolio manager on the PH&N Institutional team. And I'm also your host for today's episode. Today we're going to be talking about emerging market debt, which over recent years has become a key component for many institutional fixed income portfolios, whether through direct allocations or through comprehensive fixed income strategies such as core plus or multi-asset credit.

And there's a good reason EM debt is growing in prominence. Emerging market bonds offer institutional investors diversification, a deep set of unique opportunities, and access to some of the world's fastest growing economies. It's a complex and dynamic asset class, and one that requires deep expertise and careful analysis to navigate successfully. So here to help us wrap our heads all around it, is our guest today, Polina Kurdyavko.

Polina is the head of emerging markets on the BlueBay Fixed Income team at RBC Global Asset Management UK Limited, based in London. And for those who aren't familiar, BlueBay are RBC Global Asset Management's global fixed income and credit specialists, and they oversee about one quarter of all our assets under management here at RBC GAM. And a meaningful amount of those assets are in debt strategies that are managed by Polina and her well-resourced team of emerging market specialists.

And that's exactly why we're hoping to tap into your expertise today, Polina, to help us understand how we're thinking about emerging markets right now and to give our listeners some practical insights into the asset class. So welcome to the podcast, Polina. Thanks so much for joining us today.

Jeff. It's such a pleasure to be here. Thank you.

So kicking things off, our main goal today, Polina, is just to get your views on the present and the future, especially since there's so much going on at the moment. But I do want to start with a short look back at the past year just to set the stage for our conversation today. This might surprise some of our listeners who don't follow emerging market debt closely, but despite quite a volatile geopolitical environment and shifting global narratives last year, emerging market debt had a great year in 2025.

In Canadian dollar terms, most EM bond indices provided returns in the high single digits to mid-teens, significantly outperforming developed markets. So, Polina, as we begin here, can you help to explain what drove this strong performance in your asset class last year?

Thank you, Jeff, for the question. And if I think about emerging market fixed income – and by the way, let's not forget this is a US$30 trillion universe, which is equivalent to the size of the U.S. Treasury market, split across four sub asset classes, across local, corporate, hard currency, corporate, local sovereign and hard currency, sovereign debt, as you mentioned – all of the asset classes outperformed their developed market peer group pretty well last year.

And I think that there are three reasons which really drive the outperformance of our asset class. Firstly, it's the outlook on defaults. And last year, defaults in both corporates and sovereign hard currency debt were very close to zero. Secondly, it's the outlook on the monetary policy. And if you think about the biggest change in emerging markets over the last two decades, it has been the growth of the local currency market, which now accounts for about 85% of the size of the total asset class.

That reduces vulnerability in hard currency debt. When it comes to the sovereign’s ability to rely on domestic sources of funding and hence, potential for reduction in default rates in hard currency debt going forward. Moreover, not only monetary policy became more orthodox, which has been the biggest change in the asset class for the last two decades, we're also coming to a point where last year and this year, we're seeing high real rates, in fact, highest in the last decade, combined with dollar still being quite an overvalued currency on the trade-weighted basis compared to the emerging markets over the last 50 years.

So, you had a combination of orthodox monetary policy and lower default rate that drove positive performance both in hard currency and in local currency debt.

Last but not least, the geopolitical risks, while present, actually translated into potential opportunities in emerging markets where some of the distressed investments in the countries where geopolitical risk is elevated were the biggest contributor to positive return.

Perfect. So all in all, a few different drivers helping to push along a very, very strong year. And just for our listeners who may be a little less familiar with the terminology in emerging markets. Hard currency debt refers to a bond issued by an emerging market issuer that is denominated in a major global currency. So you can think of a Mexican government bond, for example, issued in U.S. dollars.

And on the other hand, a local currency bond would be in an issuer's home currency. So this would be something like, a Mexican government bond issued in Mexican pesos, for example. And also when you mentioned an overvalued dollar, you do mean, of course, the U.S. dollar, not the Canadian dollar. As we have a Canadian audience here, we can be a little sensitive to hearing about the valuation of our dollar. So I just wanted to clarify that you're speaking about the U.S. here.

But all in all, thank you very much, Polina. That's a great look back to start us off. And so now, if we can turn our attention back to the present day, it's been pretty impossible to think about global investing without considering U.S. policy under the current American administration.

And the U.S. clearly seems to be taking a more forceful approach around the globe. And we're seeing that right now with the ongoing conflict in Iran. And just for listener clarity, we're recording this on April 10th at the onset of what's been so far, a pretty fragile truce between the warring parties. So, Polina, it's been more than a month since these hostilities in Iran and the surrounding regions began. Can you help to walk us through how EM debt markets have responded to the conflict so far?

Sure. Well, interestingly, as I look at my screens, I would observe that firstly, emerging market fixed income asset classes again outperformed their developed market counterparts. So for example, if I look at my screens, the year to date, the performance of emerging market hard currency sovereign index is just shy of 90 basis points compared to, for example, USIG, a corporate index of 24 basis points in a positive territory.

But another interesting observation would be the outperformance of local currency debt, which, despite the volatility that we've seen, still delivers best absolute return with a year to date return over one percentage point. Now, if I look at the spreads in emerging market fixed income, even though we have seen some widening, it has been much more measured than widening in other developed market fixed income indices.

And in fact, if I look at the performance over the last few days as the excitement has built up behind a potential ceasefire, we have seen spreads reversing again. The widening spreads reversing, quite sharply, almost back to the pre-war level. So, so far, the asset class is weathering the storm really well.

Oh that's great. And I trust that all those returns that you stated are in U.S. dollar terms.

Correct.

I believe those believe those returns have been quite similar as well in Canadian terms. And maybe a follow-up question to you, Polina. Still thinking about the US, but looking beyond the ongoing conflict in Iran, the U.S. has really been a lot more forceful with other countries as well, particularly in the Western Hemisphere, and we know all about that, as Canadian investors. How do you see U.S. foreign policy impacting the outlook for EMEA in the coming years ahead? As well, are there any particular regions that you might expect to struggle or to benefit more than others?

Sure. Well, I would start by saying that Latin America is the single biggest winner from U.S. foreign policy, in particular what I would call Donald Trump’s backyard policy. If you think about historical approach to Latin America, U.S. was mostly providing support militarily rather than economically. And that was the area where China historically dominated worldwide.

However, with Donald Trump, we have seen the change in that where the support is coming not only from a military perspective, but also from economic perspective and in particular countries like Argentina and to a lesser degree, Ecuador would be beneficiaries of this policy mix. To add to that, the fact that most of commodity that are in high demand nowadays are produced in South America and in general, the region is net commodity exporter.

I would almost go as far as saying that Latin America, as a region is seeing the biggest economic renaissance over the last two decades. And of course, this year is also very important for the region because we have countries like Colombia, countries like Brazil that are going through the election cycle again. In both cases, incumbents are probably our status quo is the worst case scenario, and therefore there is potential for positive surprise in both cases. And that in itself, should that materialize, could be a positive contributor to strong performance.

Perfect, perfect. It's great to call out Latin America, and I know your team has been extremely successful investing in Latin America over the past few years. If we can maybe move past the topic of conflicts and think a little bit more long term, especially since as institutional investors, we want to think about long-term investing.

Are there other broad trends in emerging markets that are helping to shape your view towards the asset class in the years ahead?

So if I take a step back and think of the most commonly asked question, over the last 12 to 18 months, it is the view on the dollar, U.S. dollar. I would specify, if you think about local currency, that it has been the asset class which has underperformed. Well, for over a decade. If I think back, perhaps starting from early 2012, 2013, yet over the last few years, we started to see the reversal in that performance.

I already mentioned the attractive valuation, both on the real rate side and on the effects side. But I also think it's important to highlight the fact that most investors have been over allocated to dollars and we’re at the very beginning of the journey where investors are starting to reevaluate their dollar allocation. Interestingly, while from our client base, we are being asked the view on the dollar from our investors, equally, we're hearing more investors approaching us, highlighting their concerns on high share of U.S. dollar allocated assets in their portfolios and therefore looking for alternatives to diversify their holding base.

Now, to put it into perspective, if I look at the size of the asset class, i.e., emerging market fixed income, and if you recall I did mention it was the size of the U.S. Treasury market. If we look at all the four sub asset classes, today, on average, the allocation to fixed income portfolios, dedicated to emerging markets, fixed income is in single digit, mid-single digits on average, in some cases low single digits.

When I started my career, in late 90s, we were not in a too dissimilar situation. So even though the asset class itself has grown tremendously, the allocation to the asset class has not increased in the same fashion. And in fact, you have a much higher allocation to equities percentage-wise, than to fixed income. The key reason behind it has been concerns with regards to volatility of this asset class.

And I think this is the key point for us to discuss. Because if I look at the evolution of the volatility in the asset class, really starting from COVID, we have noticed a reduction in volatility in the asset class. I would go even further by saying that last year we've seen, the lowest volatility in all EM fixed income products, on a historical basis and also lower volatility than their developed market counterparts as in terms of asset classes.

If that were to continue, we do think that there could be a substantial shift in allocation to emerging market fixed income across all four sub asset classes, much beyond the mid-single digits of where we are today.

Okay, that's very interesting. And I think it speaks to the the maturation of the asset class. And you make a good point that emerging market equities have seen a lot more interest over the past few years. And I think there's some technical benefits for investors there as a result. And maybe those benefits might move over to the emerging market debt side if more demand comes into the asset class, which would obviously be great to see.

Now, moving on. If we think about active investing in emerging markets as an active manager, when we've looked at EM debt markets in the past, we've noticed that they tend to be quite an attractive universe for the majority of active managers, such as yourselves, Polina, to generate alpha or to outperform your benchmark indices and actually at PH&N ourselves, we've done some research that just helps to confirm this over the past few years using institutional analytics platform, eVestment.

So, Polina, can you help to explain why this is, what helps an active manager to outperform in your asset class, specifically?

Thank you for the question, Jeff. It is true that this segment or this asset class is quite beneficial for active managers, and there are a number of reasons behind it. Firstly, I would say replicating the asset class in an ETF format is extremely difficult, partially because you have very high transaction costs in the context of the carry of the asset class, partially because you don't have a high-quality bias, i.e. in equities, the better the company does, the bigger the weight of this company in the index. In fixed income, this correlation doesn't necessarily exist.

And so you could actually go into bigger issues that with deteriorating asset quality, not to mention the fact that in some sub-IG sub-asset classes like corporates, it's extremely difficult to replicate the breadth of the corporate issuers. With that said, when we think about active management in the asset class, I think the key characteristics that we discussed just now, the fact that you only have single percentage allocation of global investors in the emerging market, fixed income as a percentage of their fixed income bucket means that generally you have a big dislocation between the fundamentals of the asset class and the valuations in the asset class.

And often when you see these dislocations, that's when you have opportunities for active managers to generate positive alpha in the asset class. I would also say that when we started investing in the asset class over two and a half decades ago, we took a simple rule that we still follow today: We don't invest in a corporate or sovereign issuer without direct engagement.

And that rule allowed us to, not only be the source of price information, but sometimes be the source of price formation. Because as we engage with the issuers and we can influence, if you will, and help them, improve their strategy on the corporate side or, for example, address some of the ESG risks on both corporate and sovereign side.

We can also lead the issuer to better spreads, which is a mutually beneficial outcome for both parties involved. So I would say that contrary to common belief, EM fixed income is an asset class where you can generate positive performance and help improve the issuers. And again, this simple rule would always apply where issuers that have limited access to capital are more willing to change in order to get the access to capital.

And that's why we do see the difference with some of the emerging market issuers that we fund, which also supports the improvement of the credit story, as well as compression spread, which is a beneficial outcome for investors.

Perfect. Thanks for that, Polina. And I think what you just said speaks to the more hands-on investigative side of investing where working closely with your issuers and moving away from an approach where we believe that all market information is already safe, baked into market prices. It sounds like there's an opportunity there for hands-on managers like yourselves to have influence and to gain an informational advantage.

I would agree with you, but I would also go even further than that. Perhaps another point worth highlighting is that when you think about those asset classes, even though we have corporate issuers, sovereign issuers, and local currency issuers, at the end of the day, there is high causality and correlation within the issuers. And for us, the best way to invest in all those sub-asset classes is to use mosaic approach, where while we're engaging with the issuer is we're not having separate, if you will, engagement by the corporate team vis a vis the sovereign team – we're actually engaging, with a corporate issuers as well as sovereign issuers, local players, domestic pension funds, restructuring lawyers, very different pool of decision makers within one country. And having that engagement, what we call mosaic due diligence. We then conclude what is the best risk reward in this country. And that approach has helped us generate consistent positive performance across a number of our strategies, given that we are not biased to a particular sub sector versus sub asset classes when it comes to our decision making,

And could you give us an example of one of these issuers that you've worked with and taken this approach with to make a really successful investment decision?

Sure. I think that when it comes to the example of mosaic theory, often, we feel that additional information from either on-the-ground due diligence or from, let's say, a certain corporate sector, can help us position in the sovereign universe, or in fact, can help us have that edge on the information. And for example, at the end of last year, we visited a couple of countries in Africa, namely Angola and Kenya.

In fact, the investors can read about it in my police perspectives, which we publish on LinkedIn and our website as well, where we observed that there was a classic case on miscommunication, for example, in particular when it comes to Angolan government, where the country was not rewarded for the improvement in fundamentals given the relatively poor communication with investors.

And we quite like this type of disconnect because that's the one that we can help fix. Rather than the deterioration in the fundamental story, which is very different, and which we would have to take a very different approach on. So that would be, perhaps a recent example and then the example of the correlation between different sectors within the same country would probably be Turkey.

You know, the market focuses a lot on Turkish monetary policy. And again you will see another Polina’s perspective earlier this year on that topic, but for us, for example, often the best way to determine the future monetary policy lies in the feedback we collect from the banks and the financial sector, as well as the corporates in Turkey.

So for us, we actually spend two thirds of our due diligence talking to the corporate sector in order to determine a policy move going forward. So that's another example of the mosaic approach, if you will, where it's important to connect the dots between the corporate and the sovereign sectors.

Wonderful, wonderful. And maybe a last question just before I let you go, I know you touched on Latin America earlier and you've just touched on issuers in Africa, in the Middle East. Would you mind highlighting which region you're most excited about for the rest of this year? And in 2026, where you're seeing the most opportunity and maybe this short to medium term?

So I would have to go back to Latin America, given that this is this region that gives us opportunity both in hard currency as well as in local currency, given that it’s the region with the highest real rates, globally, perhaps worldwide, in countries like Brazil, Colombia, Mexico. I would also have to go back to Latin America, some of the opportunities for the distressed players, again.

And depending, especially in the current high oil price environment, which is very topical, I would go back to Latin America as the region that can generate more volatility on the back of policy mix, given my comments earlier on the election.

But I think it's not all about Latin America. I think away from Latin America, we're seeing a number of interesting opportunities in the African region. And again, some of the issues that have come to market have double-digit yields on them, and are about to engage with the IMF. And I think that it's fair to say on the 12 months horizon, some of those issues will positively surprise the market and are unlikely to trade at double-digit yields, and others might have more strains on their balance sheet.

So that's another area of differentiation within, the African issues that we are focusing on at the moment. As I'm about to jump on the plane to Washington, DC for the set of IMF meetings, I think in the Asian region for us, the opportunity lies more on the local currency side. And I think China in particular is very interesting, where we feel that we have a currently constructive view on the local currency and particular effects. And we do think that despite the ongoing volatility in the market, Chinese recovery is likely to translate into positive returns and superior returns, potentially both on the equity side as well as on the local currency side within the region.

That's wonderful. Well, thank you very much, Polina. And that does conclude our time today. So we really appreciate you sharing your expertise with us and walking us through a fascinating part of financial markets. It was a pleasure to have you on the podcast today.

It's always a pleasure to be here. Thank you, Jeff, and wishing you a good day.

Great. And for all our listeners, you can find a link to Polina's latest perspectives newsletter in the episode description and on our website. We hope you enjoyed this episode. Don't forget to subscribe to the podcast so you can catch future episodes. Thanks for listening.

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