Jason Pasquinelli

Hello all and welcome! I’m Jason Pasquinelli, Managing Director and Head of Client Solutions in the US.

I would like to thank you for joining us today for our ninth Emerging Markets Perspectives Webinar. This year we’ve named it ‘Global Shifts, Local Opportunities’.

A few housekeeping items before we begin. In addition to today’s discussion, we’ve included a number of market insight pieces from both our equity and debt desks. These can be accessed by clicking on the links at the bottom of your screen.

Regarding questions, please feel free to submit during our chat. Depending on your device, you will see Q&A functionality on your screen.

We’ve already received a number of questions from the registration process and will do our best to weave additional questions into our discussion. Lastly, at the end of the webinar, we encourage your feedback using polls which can be found next to where you submit questions. Thanks in advance for your submission.

Now that the admin is out of the way, I can introduce our experts. I once again have the pleasure to be joined by Laurence Bensafi, Deputy Head of Emerging Markets Equity and Portfolio Manager, as well as Polina Kurdyavko, Head of BlueBay Emerging Markets Debt and Senior Portfolio Manager. Appreciate both of you spending time with us today and look forward to hearing your insights from both an equity and a debt perspective.

2024 was a year of change in EM, with a record number of elections, shifting economic and monetary policies, and growing geopolitical tensions impacting markets. Before we dive into what could be the year to come, let’s set the stage of where we are right now. Markets are adjusting to the second inauguration of President Trump, with the expectation of higher inflation and rising rates resulting from his administration’s policies.

Polina let’s start with you. What does that mean for EM issuers? Will spreads widen and default rates go up?

Polina Kurdyavko

Thank you for the question, Jason. It's a pleasure to be here. When we think about what drives emerging market spreads, the single factor that has the biggest influence on the spreads is default expectations. We should start by asking ourselves what are the default expectations for the next twelve months in emerging markets hard currency corporate and sovereign debt.

And actually, the default expectations that we have for the year to come are the lowest they've been in the last five to seven-year cycle. The sovereigns have had a high default rate over the last four to five years. We expect default rates for the high yield segment of emerging market sovereign to be zero this year. On the corporate side, we expect defaults to be well below historical average. In other words, our own expectations of EM high yield corporate defaults are in the tune of 1% to 2%, which is meaningfully below 3.5% historical average.

Moreso, this number is actually below European high yield expected default rates and US high yield expected default rates. So, if that is the key driver, we would expect modestly spreads to compress over the course of this year, reflecting solid fundamentals. Last but not least, I would add that on the sovereign side we are also seeing more positive outlooks on high yield sovereigns than IG sovereigns for the next 12 months.

And we are also expecting relatively modest refinancing needs. Therefore, from a fundamental perspective, we think spreads are likely to go tighter, not wider. And the Trump effect will be that of volatility rather than the direction of spreads.

Jason Pasquinelli

Laurence, how about your thoughts from the equity side?

Laurence Bensafi

Yes, thank you. Thank you, Jason. Thank you for having me. So, I mean, first thing before we talk a lot more about 2025, I just wanted to again reiterate that actually 2024 was quite a good year for emerging market equities, with about 7.5% return for the year in US dollar and in local currency, 13.5%.

And actually, the biggest countries in emerging markets performing pretty well, the two biggest are Taiwan, returning 35% in US dollars so higher than US equities, and China, returning actually 20%. So in a very challenging environment, really we can wonder why this happened, right? Because we had a strong dollar, a lot of headwinds, and we had China still struggling really.

And then finally, we had obviously President Trump’s re-election. So, there are several reasons for that. The first one really is we had a low positioning and low valuation getting into the year so that really helped. But there's also a more important reason, I would say, and it's quite important to understand that EM equities have changed quite a lot over the past, even in the past few years. So first, when you look at sectors, the two biggest sectors by far are technology and financials. They add up to more than 50% of the index. They're obviously a lot less cyclical than energy and materials. They also have higher returns. So really, a completely different composition of the index. When you look at geography as well, first, a lot of our countries have learned their lessons. They're stronger than they used to be, especially when it comes to deficits, either fiscal or current, but also within the index, even though some of the smaller countries are still relatively fragile, more than 80% of our index is now Asia. And I mentioned some of the countries, with the four biggest countries - India, China, Taiwan, and Korea - making the huge majority of that. So, it means that asset class is a lot more resilient to those external factors. That applies to 2024, but we think that going into 2025, it is going to be a similar situation.

Jason Pasquinelli

Polina, bouncing back to you. Trade policies seem to be top of list in terms of Trump's agenda. Any thoughts on countries or sectors that will be winners or losers given the expected trade policies from the incoming administration in the US?

Polina Kurdyavko

It's a very important question given that we're all monitoring headlines of Trump announcing more tariffs on countries. I guess I would observe, if we look at the top down, from a top-down perspective, most investors expect countries from the Asian region to be more affected than countries that are more domestically oriented, like Brazil, for example.

But I think it's also worth noting that these countries have a relatively small presence in the hard currency sovereign universe because they're mostly relying on local currency for their funding. So, it's much more of a local, if you will, sensitivity rather than hard currency debt.

The other point that I would mention is that if we look at the issuers, again, we often look at sectors that would be winners and losers. But we also shouldn't forget what sectors we have in emerging markets. For example, a majority of our issuers are commodity-oriented countries and companies. And therefore, when I look at a sector, for example, like automotives, which has been widely discussed as a potential area of vulnerability because of the Trump policies, we don't have issuers from that sector in our indices.

And ironically, it's actually US and European companies that have presence in emerging markets that are more impacted by these policies rather than domestically oriented or domestically based emerging market companies. And therefore, I would say again, from a hard currency perspective we see very little implications on the tariffs. From a local currency perspective, we think the area that is more vulnerable is the Asian region more broadly.

Jason Pasquinelli

Laurence, do you share those same perspectives on the equity side as well?

Laurence Bensafi

So that's quite different. Obviously, on the equity side, we don't really invest in exactly the same countries and the sectors are also quite different, as Polina mentioned. So, it's a very important question as well on the equity side and if you look at what everyone talks about when it comes to EM equities. But I would say we have a slightly different approach.

I think we really expect those tariffs to be a negotiating tool for Trump just because it's been the case in the past. I mean, it's a deja vu, right? That's exactly what happened in 2018 to 2020 when Trump went mainly after Mexico and China. And so, for that reason, we think that's really two of the countries that are going to be the most in focus once again.

But once again, for those countries, there's really deals to be made because they can offer something in exchange, obviously, for Trump. So, when it comes to Mexico, obviously, he made very clear he wants the border to be more secure and Mexico can help with that.

When it comes to China, he wants to rebalance kind of the trade. And again, China promised a few years ago that they would buy a lot more from the US. They didn't really do it that time, but maybe this time they understand that Trump is back and they're in a different position also than they were before COVID. So, I think there's really a lot more potential for good negotiation on both sides.

What is different as well for China is I think they understand that indeed the trade deficit with the US, even though it's not as big compared to other countries than it used to be, is actually really big still. And they can build factories in the US, create jobs in the US, which is obviously one of the priorities of President Trump. So, we think we would like the negotiations to happen sooner rather than later because it's just creating a lot of uncertainty. So, I think only a couple of days ago when people were relieved that maybe it's not going to happen straight away, I think it should happen as soon as possible, negotiate and move on from that.

So, we're fairly positive for those two countries and we think the consensus expects tariffs that are going to be higher than we think would be happening. Some of the countries that could be more exposed, in our view, because they have less to negotiate, less power to negotiate with the US, is countries such as Vietnam or Korea to a certain extent. They have a very, very, very large deficit where the US has a large deficit with them as well.

The country that could be immune is India, obviously. It's not big for them to trade with the US. It's a lot more of a domestic consumption economy. So, India could be one of the least impacted in that environment. But it's very important because once we have those negotiations out of the way, and the tariffs then are not has as high as people expect, it would have a positive impact on inflation expectations and then inflation could start to go down, which will be negative for the US dollar and positive for asset class. So it's really important that this is negotiated really soon for our countries.

Jason Pasquinelli

Laurence, you said the word ‘uncertain’ a couple of times, and I think uncertainty not only speaks to trade policies, but also the geopolitical landscape that we're facing in 2025 where we've got ongoing tensions with Eastern Europe, Middle East, East Asia, and US foreign policies from the incoming administration, potentially creating a lot of volatility over changing military conflicts around trade, especially with China.

Can you share your thoughts on where you see the biggest risk from a geopolitical perspective to investors?

Laurence Bensafi

Yeah, and I would say you mentioned it at the very beginning. Last year, 2024, was a very volatile year for emerging markets because we had a lot of elections, big elections, in the countries with some unexpected results and that created a lot of volatility. I would say at least this year, we don't have a lot happening on the election front. So actually, we are fairly positive on geopolitical for emerging markets, and the main driver for performance should be more growth, GDP growth, EPS growth. But having said that, one on the geopolitical that I think is quite important, is China and domestic China. And again, it is likely to us that we find out through the year that what is more important as a driver for Chinese equity and EM in general is not as much as the tariffs, but really what happens internally in China.

And clearly, China is still facing a lot of challenges. There's been talks, but we don't know. There's a lot of uncertainty about what's going to happen in China, the kind of stimulus that's going to be announced. So, the government will deal with the issues. And I think that's one of the biggest risks we see for the year in terms of geopolitical.

Jason Pasquinelli

Polina, how about your perspective from the debt side?

Polina Kurdyavko

Well, I would say that if we look back at last year, we had, as Laurence said, not only the highest percentage of elections in the decade in emerging markets, we also had the biggest geopolitical escalation. And yet, if I look at last year's performance of EM hard currency debt, it outperformed developed market debtin every single category. High yield corporate was the best performer in global fixed income, outperforming US high yield and European high yield. And EM sovereign debt and EMIG corporates outperformed European and USIG.

So the question then becomes, well, given that we've outperformed so far, surely this time around the geopolitical risk can start weighing on spreads. But actually, I would counter this argument by saying we could equally see the biggest geopolitical solutions or resolutions of the conflicts through the course of this year.

You know, it's been long discussed that Trump is potentially good news for a Russia-Ukraine peace deal if it were to be reached. Now, we know it's on the agenda. It remains to be seen if that agreement can be put in place.

We also know that Israel and Hamas have signed a ceasefire agreement and that has been very much a positive driver for emerging market fixed income. So much so, that year to date the best performing sovereign in the asset class is Lebanon, which is up 35% in bond terms on the prospects of restructuring, followed by Ukraine, which is another double digit performer, on the back of peace deals.

I think we shouldn't forget that these geopolitical risks can be a potential positive or resolution of those risks for emerging market fixed income performance. When I think about real risks for our asset class, performance this year, for me the key remains US rates and US rate volatility and the potential for US hikes.

Because we feel that if we are in the environment where the cutting cycle continues, we're actually in a pretty benign environment, whether it's two cuts or four cuts we can debate, but the trend is set and that's what is important, which will underpin support for our asset classes.

If we see a reversal in that trend and inflation getting out of control, Fed needing to hike this year, then despite those positive solutions for geopolitics, the asset classes that are risk asset classes will be challenged, and EM will not be an exception.

Jason Pasquinelli

Interesting. I think there's a lot of attention on China, and Laurence, given that you mentioned China by name about six or seven times during your previous response, I'll punk this question over to you to begin with. Will the government be able to be successful in getting growth back on track and what this will mean for other EM countries?

Laurence Bensafi

Yeah, so before I answer that, I must say, you know, China is not as big as it used to be in emerging market equity. So that's pretty good because it's not all about China. But having said that, China is still a very important driver as you said, for a lot of other countries.

Look, China is very interesting and very tricky at the same time. On one hand, you've got a very attractive valuation. I mean, China really trades at the lowest valuation. A lot of investors have given up on the asset class, really.

And whether you look at low quality, high quality names, everywhere we see attractive valuation. So, a lot of opportunities.

Then when you think about what the government has said over the past few months, they've said all the right things. They've said that the country needs to move away from relying on the property market, infrastructure spending to grow.

They've said that consumption would be a big driver of growth for the coming years. They've said that private sector companies are very important for innovation and creating jobs. So that's what we want to hear. The problem is there hasn't been a lot of action on the back of all those discussions.

One, I mean, there's several reasons for that. One of the reasons is I think they were waiting for the elections and after they were waiting for the inauguration and then they waited to see what Trump was going to do for sure. They don't want to be the first one. They want to keep some ammunition for after if tariffs come.

Another reason is obviously it's limited what they can do. The balance sheet is quite stretched in China.

And also, what we've seen is that we've seen that the consumer is still under a lot of pressure. This year, the pickets that have been announced by the government are starting in January. So that's not going to really help. People are really worried about losing their jobs.

We hear from the ground that some teachers are not paid. For instance, a lot of civil servants are not paid. So something needs to be done. When you look at the private sector companies, they suffer really from competition from state-owned enterprises because the state-owned enterprise sector continues to be very well supported from the government, which creates issues in terms of profitability. So, when you operate in areas where you cannot make a profit, it's very difficult for you to make the decision to invest any money. I think for this year, the government again will probably reach the 5% GDP growth target they have, like they did last year, on the back mainly of strong exports, very competitive exports at the moment. Obviously, China exports is deflation to the world. But this is not sustainable over the long term.

So look, we'll see. We still believe, you know, at the end of 2023, we were quite positive on Chinese equity and have actually done well because valuations were too low and some actions, the right things, have been said. And I think this year we should continue with that trend and that China could actually do fairly well on the back of that.

Jason Pasquinelli

Polina, anything to add from the debt perspective on China?

Polina Kurdyavko

Well, I think maybe firstly, just a quick reminder that debt importance of China, if you will, can't be compared to the equity given the index composition in hard currency indices.

China is less than 5% of the total index. And most of the corporates that are in the index side are durated, so if you will, the opportunity cost of being invested or not being invested in China is relatively low, and that's the reason why we are underweight China at the moment.

However, I would say that to echo Laurence's point, the key is in the timing. In our view, China, if they want, have a lot of ability to stimulate, and yet, why would you want to provide fiscal stimulus before you know what the external policies and environment is like? So, we do feel that it's strategic to delay the stimulus announcement until there is more visibility on Trump policies.

What we also find very interesting is that we are all focusing on Trump’s response to China and other countries. But we're not talking about what these countries will use as a countermeasure. And what we've found quite interesting, in fact our economist was just in China over the last few weeks doing some on-the-ground due diligence, that the rapprochement, if you will, or improvement in the relationship between China and countries like Japan, countries like South Korea, its near neighbors, has been very meaningful. And we feel that other countries, like China, are also worried about implications from the US policies.

And in this environment, strategically, it's important to actually improve your relationships with the counterparties like China. So, we feel that the market is discounting the potential, if you will, effect that can come from cooperation within other countries, and I wouldn't even call it just emerging markets because I think it's broader than that, including Europe.

Jason Pasquinelli

Thanks, Polina. Before we move on, my producers have asked to remind everyone to still submit questions using the Q&A functionality on your screen. Thanks to everyone who has submitted questions so far.

Maybe to get back into the Q&A, let's pivot to EM FX, where EM currencies have become undervalued over the past few years as capital continues to be drawn to the US, maybe starting with Polina. What's your outlook for the US dollar versus EM currencies and is there any value in local markets or will they be essentially un-investable if we see a strong US dollar?

Polina Kurdyavko

It's a very important question for an EM investor, Jason, and I think that for us, there are two aspects to consider.

You know, the first is the direction of travel. And secondly is the pace of that direction.

So, if I look at last year, emerging market local currency underperformed hard currency indices. In fact, the overall returns for local corporates were modestly positive, just under 2% positive given the carry that we get from the spreads. And for local sovereign debt were very modestly negative to the tune of 2%.

Now, this is to some degree not surprising given that we've been climbing the wall of worry through the course of 2024.

While its early days, year to date actually, despite the fact that we've been waiting for Trump policies, EM local currency is outperforming hard currency debt. And largely it's driven by the technicals of the market because investors have been very light on local currency debt for a very long period of time.

So while the technicals are supportive, if I think about the fundamentals, we have to differentiate between the rates outlook and the currency outlook.

From a rates perspective, we feel that there's a strong case to be made for actually being long rates in Central and Eastern Europe, as there we feel that growth is likely to disappoint and therefore the central bank governors are much more open to having a dovish policy stance to stimulate growth. And that's how core long.

On the Latin American side, while the carry is quite substantial given that countries like Mexico and countries like Brazil are running double-digit policy rates, we do feel that the central bank governance will be reluctant to continue and cut aggressively until they get more visibility on Trump policies. So therefore, we're more neutral in that segment of the market.

In FX, overall. We do feel that the performance will be more nuanced. So, if I think about the currencies that would do well in this environment, they are currencies that are perhaps less tied into Trump policies like the Turkish lira or some of the frontier markets like Egypt.

Yet, for the beta currencies, we feel that while devaluation has been quite substantial last year, it is hard to see these currencies performing until we get the direction of travel and clarity from Trump policies.

Now, with that said, can I just point out that what Trump really would like to achieve is emerging currency strength because ultimately his policies would like a weaker dollar and perhaps what the market is discounting is the fact that a more nuanced tariff policy might be more successful in achieving precisely that.

Because as we've seen modest tariffs being announced, we’ve seen currencies rally. So, in our view, the fear of hard devaluations, the double-digit devaluations, in EMFX are not likely to materialize. And ultimately, we could see even an environment where local currency actually outperforms hard currency by the end of the year, but it's too early to say at this junction.

Jason Pasquinelli

Polina, you mentioned uncertainty around some policies with Trump, but I think one thing that is certain is that he has an appetite to increase oil production.

So maybe sticking with you, what's your outlook in commodities in EM given this expectation that the US is going to bump up their oil production.

Polina Kurdyavko

Yes, you're absolutely right, Jason. It has been very consistent policy from the US, and we do think that that policy will keep oil prices at relatively low level.

Because in addition to the policy coming out of the US, we're also seeing an imbalance in the supply chain demand dynamic so far.

And therefore, we're not seeing Saudi or OPEC open for very modest or no cuts at the fear of an oil price drop.

So, we think there will be divergence between the performance of oil prices and performance of other minerals, for example. We think prices of rare minerals as well as copper, are likely to stay well supported while the price of oil could actually be on the downward trend.

Jason Pasquinelli

Laurence, anything from your perspective on the equity side as it relates to commodities?

Laurence Bensafi

Yeah, so it's quite interesting because even only a few years ago, that would have been a big topic.

First on the direct exposure because energy materials used to be a large part of the index. And then on the indirect exposure, because quite a few of the big EM countries, such as China and India, were quite impacted by movements in, especially, the oil price. That has changed quite a dramatically, as I mentioned at the very beginning. So, energy and materials are less than 10% of our index. And energy itself is less than 5%, a really, really small sector.

And when it comes to the indirect exposure, again, as the countries have worked, as I mentioned, also at the beginning, have worked to reduce the fiscal drag, one of the main things that those countries did was to remove subsidies, for instance.

So, India is a good example. India used to really suffer when commodity prices, and especially oil, were moving as a net importer and was paying huge subsidies. So, any move in the oil price really had a big impact on the government finances. That has been completely removed for quite a long time. And it's not a coincidence that China and India are really at the forefront of the kind of renewable revolution, I would say. And those two countries have built massive infrastructure when it comes to solar, especially. And obviously, China also owns the manufacturing chain. So, for them, it's really like a no brainer. And so it means that by increasing this exposure also to renewables, you obviously lower your dependence and that's the end game for those countries, obviously, to really reduce the dependence.

So, I would say for us, when we look now at the countries that have direct or indirect positive and negative exposure to all price and commodities in general, it's fairly balanced as in it’s offsetting each other. And so that's not really something that moves emerging market equities as an asset class one way or the other.

And to be honest, we spend very little time on that segment. As I mentioned at the beginning, EM equities are all about technology, financials, domestic consumption. That's really where everything happens at the moment. Obviously, some of the smaller countries would have a bigger exposure, but it's a tiny minority.

Jason Pasquinelli

Thanks, Laurence. Probably makes sense to conclude our main discussion with a conversation around relative performance, EM versus DM. Maybe Laurence we’ll stay with you. The outlook for EM equities after years of underperformance relative to DM. Any comments there? And then as you look forward into 2025, where are you seeing interesting opportunities and where are you cautious as an equity investor?

Laurence Bensafi

Yeah, no, you're right. Even though EM had a decent performance last year, EM equities had a decent performance last year, we again underperformed developed equities. And it's been the case for a few years.

We continue to believe that EM equities are attractive. They represent 80% of the world population and the young population. That's where the young population is. 70% of the global growth is trading at the lowest valuation ever compared to developed markets. And so we think it's due a rebound and investors will come back to the asset class eventually. There's a lot of really good long-term stories in emerging markets. India is obviously one of them. The technology sector, I keep mentioning, in Korea and Taiwan. The biggest name in emerging market equities is now a technology company in Taiwan, which is 11% of the index. It's a trillion dollar, more than a trillion dollar, market cap. So, it's a really attractive sector.

There's also Latin America, even though 80% is Asia, as I mentioned, but Latin America is becoming a lot more interesting on the equity side. Everyone is looking at what's going on in Argentina. It's quite phenomenal what's happening. We'll see as things progress.

But in the meantime, with the achievement we've seen over the past year, neighboring countries which have struggled often, are looking with interest what's going on. And clearly, we're going to have one of the very few elections we're going to have in EM is Chile at the end of the year. And it's very likely that the right and the pro-business comes back into power.

And a big one will be Brazil next year, where also we may see again a more pro-business government coming back. And Latin America, trade also, even in absolute terms, not even compared to developed at the lowest valuation it's ever had. So very interesting.

In the short term, we continue to be cautious about India. This is the call we had already at the end of 2023 where we called for China to outperform India because the gap of valuation was so big that we thought it was not sustainable and it was kind of a bubbly environment also in India, especially in the small and mid cap segments.

We had to wait until September last year, but that happened over the year. China had performed. But India continued to perform positively. So, we're still seeing that India is overvalued. And actually, we've started over the past few months to see some beginning of sell-off in India for several reasons, but the main one is that people were really pricing a blue-sky scenario and GDP growth came back as a big disappointment recently. Because India remains a great story with probably a game changer from the administration, the Modi administration over the past few years, but there's still a lot to do in the country. It's great to build infrastructure. You need to do that, but then you need to attract investment in the country. You need to create jobs.

And at the moment, that hasn't happened yet. So, there's a lot of hope, but it hasn't happened yet. And the market went ahead of itself. So, this is really the area where we're a little bit cautious, even though we think it's a great opportunity long term and in a sell-off, we're obviously going to be able to increase our exposure so it's quite positive.

Jason Pasquinelli

And Polina, same question to you, as you look into the 2025 crystal ball, where are you seeing opportunities in EM debt, where are you cautious right now?

Polina Kurdyavko

If I look back on the last few years, the area which has seen the biggest dislocation in spread terms has been emerging market hard currency sovereign debt given the default that we've seen in some of the frontier markets.

And that has been a very strong performer last year, but we think that the spread will continue to compress as we're still dislocated in the historical level. And as I mentioned, underpinned by a strong view on low default rates, we think that the high yield segment of the market will still perform.

In corporates, actually, we're seeing different trends because in corporates we're seeing very low volatility. In fact, I'll remind everyone that corporates in emerging markets have the best Sharpe ratio compared to all other fixed income products on the index level. That's because they have higher ratings and relatively low volatility.

And actually, the corporate news flow has been relatively subdued, but the performance continues to be strong because they continue to deliver given the commodity backdrop and strong commodity prices that we've seen. And now the average leverage in EM corporate on the index level is just over one turn.

I mean, that is very low if you measure it by the ratio of debt over EBITDA. So that's what driving the performance on the corporate side. So, on the sovereigns, we think on the index level, we will see a bigger compression on high yield versus IG.

In corporates, we like actually both corporate bonds and loans, mostly underpinned just by expectations of lower default rates. And we would expect them to be relatively resilient asset classes and we also like the illiquidity premium that we're being paid for EM loans.

And then on the local currency, we're a bit more opportunistic. As I mentioned, we're neutral to small underweight EMFX at the moment. We're just waiting for more clarity. And we have a modest long in the Central Eastern European rates. So that's how we look at the EM Debt universe.

Jason Pasquinelli

Thanks, Polina. We've got about seven minutes left, so maybe we'll wrap up with a couple of quickfire questions from the audience.

Thanks again to everyone who submitted questions so far. If we don't get to your question given time constraints, we'll certainly follow up with you after the event.

And also, a quick reminder to encourage you to fill out the poll section for your feedback, which is next to the Q&A. I've been told that two questions are now accessible so, thanks again in advance for your feedback.

First question, Polina, this one certainly sits in your camp. Where do you see more opportunity, EM private credit or public credit?

Polina Kurdyavko

I would say that in private credit, we're seeing a lot bigger pick up in yield for illiquidity. In fact, I would say within all private credit, and by the way, when I say private credit or private debt, I actually refer mostly to EM loans.

And the reason why they're put in private camp is just because it's better to have a locked up vehicle given the very low liquidity of loans compared to EM bonds.

But we, you know, looking at some of the opportunities that we've explored, we're harvesting double the yield of the public bonds for the same issuers in loans just for the illiquidity premium. I really like that risk. So we remain quite constructive on the, if you will, emerging market private credit, which is mostly loans.

In public credit, I think the driver will be really the default rate. And so, if I had to make a bet, I do think EM corporates will outperform developed market corporates this year in the public markets. But I do think that the spread compression that we've seen so far last year in global credit means that in absolute terms, the return in private debt will be much higher than the returns in public credit.

Jason Pasquinelli

Laurence, this one's for you. We recently saw a well-known name in the index be added to the Chinese military blacklist restriction list. How do you go about managing portfolios given these ever-evolving lists, whether they be government or client-imposed?

Laurence Bensafi

Yeah, you're right. That's been a change, I would say. We've seen more and more names added. I would say on our side, the main changes have been really more on clients’ lists. So, a lot more clients want to create their own list of restrictions where it could be an entire country they want to exclude for several reasons. It could be some sectors they want to exclude, could be some type of company, for instance, state-owned enterprises.

So, we've seen a big rise in that. And the other one is obviously, as you mentioned, the names that are on some countries’ lists where we cannot invest in. So, I would say that side is a lot smaller. There's really maybe a few names that we cannot invest in. And I would say the majority would be names that we don't invest in anyway. They're involved in weapons or things like that. So, it's only a few names that are completely restricted to us. And then when it comes to client restrictions, we're very happy to tailor our portfolio to apply their restrictions. It is not a big issue for us. Often what we find is that we quite align with those restrictions. So usually, it doesn't mean a big change from our portfolio. But I would say overall that remains relatively low impact.

Jason Pasquinelli

Thanks, Laurence. Polina, last question for you. And I'm going to be honest, I read it wrong the first time that I saw it come through. But the correct question is, your three favorite longs in local currency debt for 2025.

I did initially read it as your three favorite songs in 2025. So, feel free to answer both or just stick to the local currency debt.

Polina Kurdyavko

I would say that on the local currency debt, if I split it between rates and FX, my three favorite longs would be Czech rates on the long side, Turkish FX on the long side, and probably something like dollar BRL. Again, just thinking about the most beaten up currency in emerging markets. And in terms of my favorite song, I only came up with one which is called Austin. So, I recommend to listen to Dasha.

Jason Pasquinelli

Excellent. Thank you, Polina. Well, that looks like it brings us to the end of the webinar. I'd like to thank Polina and Laurence for sharing their insights. Hopefully everyone enjoyed today's discussion. We will follow up in email, including video replay and responses to those questions that didn't get answered.

Thanks again for everyone's feedback and the questions that were submitted so far. Hope everyone has an excellent 2025. Thank you all.