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Emerging markets (EM) never fail to present a challenging and diverse investment landscape. While there are always opportunities for alpha generation, not all investment strategies pursue approaches that are likely to be fruitful in today’s climate.

Alongside familiar thematic factors, including ongoing pandemic restrains and the resurgence of inflationary pressures, we expect a number of countries to experience significant domestic developments as the year unfolds – policy shifts in Argentina and Tunisia come to mind, as well as elections in Colombia and Brazil. Staying with politics, Turkey could have an early election and we will be watching the Ukraine/Russia situation extremely carefully. In China, further clarity on the policy framework around the real estate sector is likely to be one of the key performance drivers for EM corporate credit.

We expect EM hard currency assets to have a muted beta return in 2022, driven primarily by carry. However, we think there will be plenty of opportunities to generate alpha by taking differentiated views on liquid names from a bottom-up perspective.

EM local currency debt remains in our focus, as this is an asset class that could potentially outperform if the timing is right.

The EM corporate asset class should continue to offer attractive diversification. We are likely to see interesting developments there in terms of new ESG trends while stable carry continues to play its part, combined with a benign default rate scenario with Chinese real estate being the wild card.

2022 could test investors’ agility; active and nimble portfolio construction will be essential. Here are five strategies we believe can take advantage of the investment landscape and harness EM’s return potential.

Investment aim: To capture the ‘earn high carry with the lower duration’ theme using liquid vehicles

Solution: EM short duration aggregate bond strategies

In an environment where US rates could go up, a short-dated strategy looks particularly attractive, especially one that capitalises on higher carry assets offered at the short end. We would highlight that EM short duration aggregate is one of the few EM hard currency indices to have posted a positive return in 2021 and which can potentially do so again in 2022.

Investment aim: To capture the ‘earn high carry with the lower duration’ theme using illiquid vehicles

Solution: EM illiquid credit strategies

Investors able to take illiquid positions should consider EM illiquid credit strategies. These approaches allow the investors to capitalise on the illiquidity premium in EM loans. This asset class can generate robust returns without being too exposed to the rates curve.

Investment aim: Generate positive returns in a volatile environment

Solution: EM unconstrained strategies

A well-constructed unconstrained strategy should be flexible enough to generate returns through robust rallying cycles as well as providing protection on the downside. Current market dislocations, such as in Chinese real estate or the oil and gas sector, present these strategies with opportunities to take positions now that could prove accretive in the future.

Investment aim: Liability matching

Solution: Buy & maintain strategies

Buy & maintain solutions can be suitable for investors looking for a low turnover, hard currency strategy to either match their liability or capitalise on the prevailing attractive yields. In a changing regulatory environment, this offering could allow investors to achieve their financial objectives in a customised manner.

Investment aim: Responsible investing

Solution: Specialised ESG solutions

We believe new thematic ESG strategies will come to have more traction in EM. A carbon-conscious strategy designed to reduce investors’ carbon footprint in EM credit, or an impact-orientated strategy could be a suitable vehicle for investors to potentially benefit from EM credit.

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