Partner Insight: Adding emerging market debt exposure? Look to local bonds.

Judging by my conversations with clients around the world in the first quarter of 2024, many investors have realized that they are underallocated to emerging markets in their global fixed income portfolio. This is, in part, a response to the eye-catching returns of emerging market debt in 2023, when it easily outperformed both global developed market bonds and U.S. investment-grade debt.1  

While some investors may be wary of exposure to faltering growth in China, the fundamental strength of emerging market bond sectors—external “hard currency” sovereign debt denominated in U.S. dollars or euros, corporate bonds, and sovereign bonds denominated in local currencies—and their attractive portfolio diversification characteristics are enough to make the case for a structural allocation to emerging markets.  

Here are five factors that I think make a strong case for emerging markets in a global fixed income portfolio: 

1. Improved credit quality, deeper capital markets 

As various developing countries exited crisis periods in the 1990s and adopted needed reforms to make long-term growth and debt more sustainable, emerging market bonds have seen significant improvements in credit quality. In the mid‑1990s, there were no investment‑grade external sovereign issuers. Today, more than half of the emerging market opportunity set has investment-grade credit ratings. 

Paralleling this improvement in credit quality, capital markets have deepened for emerging markets. The countries now primarily fund themselves in local currencies versus hard currencies, and emerging market corporate debt has seen steady growth over the last 10 years to become a larger opportunity set than emerging market external sovereigns. We expect the corporate market to continue to rise in prominence over the next 10 years and maintain its status as a less volatile way to access the strong economic growth of emerging markets. 

2. Recent debt distress is catalyzing reforms 

Those long-term improvements don’t hide the fact that some emerging market countries entail more risk than their developed market peers. This is particularly evident on the external sovereign side, which is only recently recovering from one of its most acute periods of debt distress since the 1990s. Today, nearly 50% of the credit spread in emerging market sovereign bonds2 originates from a handful of distressed markets. We’ve seen several CCC rated issuers default and restructure since the COVID crisis crippled many parts of the global economy and the Federal Reserve embarked on its most aggressive hiking cycle since the 1970s.  

The upside is that the market should come out stronger

Berkshire’s next move

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Good morning. Two years ago I wondered in Unhedged about what could possibly have been going through Bill Hwang’s head as he blew up his Archegos hedge fund with hyper-concentrated, super-leveraged, impossibly risky bets on stocks. “Hwang is not just (allegedly) dishonest. He is also (apparently) out of his dang mind,” I wrote. Today, the incomprehensibility of Hwang’s scheme has become a tricky issue in his trial. The judge has wondered aloud, “To what end?” Readers, I still have no idea. Send your thoughts: robert.armstrong@ft.com.

After Buffett

Does Berkshire Hathaway need to change, and if so, how?

Yesterday in this space I wrote about Berkshire’s last two decades of share performance, which have mirrored the S&P 500. The fact that at Berkshire’s current size, it will be very difficult to meaningfully outperform the index is widely acknowledged, including by Warren Buffett. The more interesting and difficult point is about the claim, made by Buffett and his fans, that the conglomerate is nonetheless a superior investment because it is less risky than the big-cap index.

The definition of risk is important. Buffett and other long-term investors rightly reject the notion that risk can be analysed as volatility. But using the main alternative definition — risk as risk of permanent loss — it is not clear in what sense Berkshire is less risky than the diversified and dynamic S&P index. The lower-risk claim is often explained in terms of Berkshire keeping pace with the market in good times but outperforming in bad. But Berkshire did not permanently increase its performance edge on the S&P in the years surrounding the great financial crisis. Its outperformance in the crisis years was counterbalanced by underperformance in the years immediately before and after.

Several readers emailed yesterday to make the Berkshire-is-better-because-of-lower-risk claim in terms of Berkshire’s large cash holdings. They pointed out, approvingly, that the group managed to track the index while holding a large cash reserve. But holding cash for cash’s sake does not earn companies a gold star. The company has to show that, at the right moment, it can deploy the excess cash to its advantage.

Which

Train maker Alstom plans €1bn rights issue to trim debt

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Train manufacturer Alstom is launching a €1bn capital raise to help cut its debt, after the maker of France’s high-speed TGVs was rocked last year by a cash flow warning under which it now hopes to draw a line.

The French group, the world’s second-biggest train maker after China’s CRRC, has been seeking to slice €2bn off its debt including through asset sales to avoid a credit downgrade to junk status.

It said on Wednesday it had earmarked €700mn in disposals so far and would issue a hybrid bond, but would now also pull the trigger on a capital raise that analysts had seen as increasingly likely and that Alstom had flagged as a possibility last November.

“There was a balance between opening a window of uncertainty, which we did, but at the same time showing some signs of the implementation of the plan — one was disposals, the other was the ability to achieve our cash target,” chief executive Henri Poupart-Lafarge said of Alstom’s decision to hold fire until now.

In an interview, Poupart-Lafarge said the group was showing the “first proof of this progress”, including free cash looking set to improve over coming quarters, and train deliveries speeding up.

Deliveries had partly caused its cash wobble last year when clients, including some in Britain, dragged their feet on accepting their orders.

Though boosted by record orders worldwide — its backlog stood at €91.9bn at the end of March — Alstom was also hit in 2023 by issues with contracts inherited from Bombardier, the Canadian company that it acquired in 2021, and problems in managing its inventory. 

Henri Poupart-Lafarge: Alstom is showing the ‘first proof of progress’ © AFP via Getty Images

It spooked markets last October by warning that free cash flow for the year to March 2024 would be negative to the tune of €500mn-€750mn, a drastic revision. Its share price has yet to fully recover after slumping to near 18-year lows, though the stock is up more than 28 per cent so far this year.

On Wednesday, Alstom said free cash flow came in at the better end of its forecast, at a negative €557mn, and said it would turn positive to between €300mn and €600mn in its next financial year, with operating margins set to increase even as annual sales growth

HD Hyundai Marine Solution doubles in South Korea’s largest IPO since January 2022

The trading debut of HD Hyundai Marine Solution represents South Korea’s largest IPO since January 2022, when LG Energy Solution went public. The ship-repair unit of South Korea’s largest shipping conglomerate HD Hyundai Group sold 8.9 million shares in the initial public offering. The IPO totaled 742.26 billion won, valuing the newly public unit around 3.71 trillion won at the offering price. Employees of HD Hyundai Marine Solution Co., during the company’s listing ceremony at the Korea Exchange in Seoul, South Korea, on Wednesday, May 8, 2024. HD Hyundai Marine, a ship repair company, jumped as much as 45% in its South Korea trading debut after a 742.3 billion won ($547 million) initial public offering that was priced at the top of a range and met strong demand. Bloomberg | Bloomberg | Getty Images

Shares of maintenance and repair firm HD Hyundai Marine Solution nearly doubled in their trading debut Wednesday, marking a strong start to South Korea’s largest IPO since January 2022.

Shares traded as high as 166,100 South Korean won ($121.59) apiece, representing a 99.1% surge from the IPO price of 83,400 won.

The ship-repair unit of South Korea’s largest shipping conglomerate HD Hyundai Group sold 8.9 million shares in the initial public offering. The IPO totaled 742.26 billion won, valuing the newly public unit around 3.71 trillion won at the offering price.

Half — or 4.45 million—of the IPO shares are newly issued.

The company’s IPO showed strong investor interest, with both the institutional and retail offering oversubscribed by over 200 times combined.

The Wall Street Journal, citing HD Hyundai officials, reported that the parent conglomerate, which held a 62% stake in its unit ahead of the IPO, will continue to be in control.

Meanwhile, KKR, the second-largest shareholder since 2021, plans to gradually reduce its stake, which currently stands at 38%.

CNBC

Pandemic-era winners suffer $1.5tn fall in market value

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Fifty corporate winners from the coronavirus pandemic have lost roughly $1.5tn in market value since the end of 2020, as investors turn their backs on many of the stocks that rocketed during early lockdowns.

According to data from S&P Global, technology groups dominate the list of the 50 companies with a market value of more than $10bn that made the biggest percentage gains in 2020.

But these early-pandemic winners have collectively shed more than a third of their total market value, the equivalent of $1.5tn, since the end of 2020, Financial Times calculations based on Bloomberg data found.

Video-conferencing company Zoom, whose shares soared as much as 765 per cent in 2020 as businesses switched to remote working, has been one of the biggest losers. Its stock has fallen about 80 per cent, equivalent to more than a $77bn drop in market value, since the end of that year.

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Cloud-based communications company RingCentral also surged in the remote working boom of 2020 but has since shed about 90 per cent of its value, as it competes with technology giants such as Alphabet and Microsoft.

Exercise bike maker Peloton has been another big loser, with shares down more than 97 per cent since the end of 2020, equivalent to about a $43bn loss of market value.

Peloton on Thursday said chief executive Barry McCarthy would step down and it would cut 15 per cent of its workforce, the latest in a series of cost-saving measures.

The losses come as the sharp acceleration of trends such as videoconferencing and online shopping driven by the lockdowns has proven less durable than expected, as more workers migrate back to the office and high interest rates and living costs hit ecommerce demand.

“Some companies probably thought that shock was going to be permanent,” said Steven Blitz, chief US economist at TS Lombard. “Now they’re getting a painful bounceback from that.”

In percentage terms, Tesla was the biggest winner of 2020. The electric-car maker’s market value jumped 787 per cent to $669bn by the end of that December, but has since slipped back to $589bn.

Singapore-based internet company Sea came in second, as its market value jumped from $19bn to $102bn following a pandemic-era

Angola agrees deal with Chinese state bank to ease debt crunch

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Angola is using an unusual deal with China to relieve a debt crunch in Africa’s second-biggest oil producer by unlocking cash from a Chinese-controlled account to pay interest on a crucial loan, its finance minister said.

Vera Daves de Sousa told the Financial Times the southern African nation had agreed with the China Development Bank, the country’s largest single creditor, to release cash held as collateral for a multibillion-dollar loan.

Her comments on the deal offer a rare window into behind-the-scenes efforts by Chinese banks to provide payment support short of outright debt relief to poor countries that are struggling to pay them back.

China has in recent years provided other forms of support, from currency swap lines to loans, to emerging market borrowers from Argentina to Pakistan.

Chinese creditors had granted Angola a three-year moratorium on its debt payments after the coronavirus pandemic. But the resumption of those payments in 2023 exacerbated a sharp economic downturn in Angola’s economy and hit its currency, the kwanza. Angola had been required to continue other payments such as on US dollar bonds throughout the pandemic.

Angola owes about $17bn to China — just over one-third of its total debt — mostly in the form of loans backed by oil. The nation is Beijing’s biggest borrower on the continent.

State-owned CDB’s lending required Angola to top up cash collateral in a special escrow account as security, to a minimum amount of $1.5bn. Daves de Sousa said Angola had been required to pay in extra money when the oil price was more than $60 a barrel.

The new deal “will allow us to release the funds [for interest payments] . . . $150mn to $200mn will be available monthly”, she said.

The arrangement avoids a broader debt restructuring. “We understand that it is not restructuring, because we didn’t ask for a change of maturities and we didn’t ask for a change of payments,” Daves de Sousa said. On the contrary, she said, in order to keep servicing the debt without defaulting, “we are asking to pay this debt quicker”.

Asked about the arrangement, China’s foreign ministry said Chinese financial institutions had made “significant contributions to the development and revitalisation of Angola and the improvement of people’s livelihoods”.

“Recently, Chinese financial institutions have had friendly and in-depth communications with Angola regarding the loan issues between the two sides, reaching

The next critical mineral source could be volcanic soup

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The writer is a science commentator

Volcanoes house more than molten rock. Alongside the magma sits a mysterious substance called magmatic brine, a mineral-rich soup that collects underneath both active and dormant volcanoes. Geologists are now exploring whether these deep subterranean pools can be tapped for dissolved treasure such as lithium, copper and cobalt. The extraction could be powered by geothermal energy, leading some scientists to call it “green mining”. 

Drilling into volcanoes would be a technically challenging and potentially seismic twist on the net zero minerals rush but, given the ethical and environmental concerns linked to mining on land and at sea, the prospect is justifiably attracting geological and commercial interest. Sub-volcanic brine mining could also be of strategic geopolitical importance, by expanding the supply of critical minerals and breaking the stranglehold enjoyed by China.

Magma, housed in a chamber beneath a volcano, releases metal-rich gases that rise towards the Earth’s surface. As they rise, the pressure drops; the gases then separate into steam and brine. The steam belches out of the volcano; the brine, which retains most of the minerals, collects in the rocks. These brine “lenses”, so-called because of their distinctive shape, tend to settle about two to four kilometres beneath the surface.

Jon Blundy, an earth scientist at Oxford university, calls these magmatic brine lenses “liquid ore”. He and colleagues have estimated that a single lens formed over 10,000 years could contain 1.4 megatonnes of copper. The exact balance of precious metals, base metals, lithium and rare earth minerals dissolved within depends on the location and type of volcano, he told the Royal Academy of Engineering magazine Ingenia recently. But he added that “this would be a viable alternative to scraping polymetallic nodules off the seabed — and it would do less damage to vulnerable ecosystems”. Samples of volcanic vapours collected by drone, plus volcanic surface outflows or deposits, can point to the metals likely to lie beneath.

With the minerals already in solution, the brine requires less processing, and creates less waste, than land-mined material. In traditional copper mining, for example, around 99 per cent of the crushed rock is waste.

Shallower oilfield brines, produced by drilling for oil, are also attracting commercial interest. The Smackover formation in Arkansas, for example, has long been exploited for fossil fuels and is already pumped for its

Deutsche Bank’s DWS inflated client asset inflows by billions of euros

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Deutsche Bank’s asset manager DWS inflated the amount of money it won from clients by billions of euros through an accounting approach that it failed to disclose for years, and which fed into executive bonus calculations. 

Quarterly results for the Frankfurt-listed company, in which Deutsche Bank holds an 80 per cent stake, last month showed for the first time how it included so-called advisory mandates in its overall assets under management and annual flows. 

Advisory mandates are a low-margin business, where an asset manager gives a client its view on matters such as asset allocation but the client makes its own independent investment decisions, and are distinct from higher-margin “assets under management”, where the company makes investment decisions on the client’s behalf.

DWS did not expressly disclose that its assets under management also included assets managed by third parties until late 2022 — months after former chief executive Asoka Wöhrmann was ousted — and that changes in the market valuation of advisory assets were counted in its flows. Even then, the practice was only referenced in a footnote. 

The size of DWS’s advisory assets has grown disproportionally in recent years, according to the new disclosures and people familiar with historic data.

Three people with direct knowledge of DWS’s internal discussions told the Financial Times that the asset manager started to place significant emphasis on the acquisition of new advisory mandates when Wöhrmann took the helm in late 2018, months after the company floated.

Since its IPO, bonuses for executives and other staff have been directly linked to net flows.

DWS’s pay policy tasked executives with lifting net inflows as a percentage of assets under management by 3 to 5 per cent a year as one of four targets in their long-term incentive plans. In 2021 — the first year for which data is available — DWS management achieved 150 per cent of their inflow target. 

DWS told the Financial Times that “advisory asset inflows, and in particular the inclusion of market movements when calculating them, have not had a material impact on executive compensation in any year.” 

It is the second time since its 2018 IPO that DWS has faced questions about disclosure. Last year, DWS paid $19mn to settle charges with the US Securities and Exchange Commission about greenwashing, and an investigation by Frankfurt prosecutors into the allegations is

M&A will not help with looming copper shortage, warns Barrick chief

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Mark Bristow, one of the mining industry’s most prolific dealmakers, has warned that M&A will do nothing to grow the supply of copper that the world needs to go green, as sector leader BHP pursues a £31bn mega-deal for Anglo American.

The chief executive of Barrick Gold said miners needed to invest more in exploring for and developing new deposits of the world’s most important industrial metal — needed for power lines, data centres and electric cars — as he dismissed making a rival bid for Anglo American or First Quantum, another copper producer.

Bristow told the Financial Times that the BHP approach for Anglo “reinforces that the industry needs investment in its future”. He added that “you can consolidate but it doesn’t build the production profile. On consolidation, you can always reduce production.”

The South African executive’s comments come as the world faces a future shortage of copper because of a lack of new mines under development — even as demand is set to almost double to 50mn tonnes per year by 2035 because of the boom in renewables, EVs and AI — according to S&P Global Commodity Insights.

Anglo American chief executive Duncan Wanblad said earlier this year that copper M&A is like “rearranging the deckchairs on the Titanic”, referring to its impact on solving the looming shortages of the metal.

BHP must decide by May 22 whether to make a formal offer for Anglo, which holds coveted copper mines in Peru and Chile. Under the Australian group’s initial proposal, Anglo would have to sell its majority stakes in its South African platinum and iron ore businesses to its shareholders for the deal to go ahead.

Barrick has a strategic aim to boost copper production by developing the ambitious $7bn Reko Diq project in Pakistan, which Saudi Arabia is considering taking a significant minority stake in, and a “super pit” expansion at Lumwana in Zambia.

The $29bn gold miner has been touted as one potential rival bidder for Anglo, as well as a potential saviour of First Quantum, whose giant copper mine in Panama was ordered to be shut down by the government following environmental protests. Yet Bristow played down the possibility of making a foray for either of the copper industry’s foremost targets, especially given BHP’s $145bn market capitalisation.

“BHP is the ultimate 800-pound gorilla.

Sweden expected to cut rates in test of divergence from Fed

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Sweden’s central bank will announce whether it will start cutting interest rates in an early test of whether European monetary policymakers are prepared to diverge from the US even if it puts their currencies under pressure.

Two-thirds of economists polled by Bloomberg expect the Riksbank to cut interest rates by 0.25 percentage points from 4 per cent at its Wednesday meeting, its first reduction in more than eight years. Markets indicate an 80 per cent chance of a cut, a move that would provide support for Sweden’s stuttering economy.

“I do expect them to cut,” said Christina Nyman, chief economist at Handelsbanken and a former Riksbank official, citing differences in the US and Swedish economies. “It’s the currency that could be potentially be a problem. Sweden is a small open economy and we are dependent on what happens around us,” she added.

A rate cut by the Riksbank, following similar moves in the past few months by the Swiss, Czech and Hungarian central banks, would show Europe’s growing willingness to take a different path from the US on monetary policy, economists say.

An expected cut by the European Central Bank at its next meeting would confirm that divergence. Due to the size of the US economy and the outsized influence of its financial markets and the dollar, the Federal Reserve usually leads the way on changing rates.

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With US inflation remaining higher than expected and its economy continuing to produce solid growth, the Fed last week signalled it was likely to keep rates higher for longer.

However, inflation and growth in Europe have been weaker in recent months than in the US, opening the door for the region’s central banks to start lowering borrowing costs before the Fed.

The ECB has signalled it is likely to start cutting rates at its next policy meeting on June 6 if price pressures keep fading as expected. The Riksbank has moved ahead of the ECB before: in 2019 it ditched negative interest rates more than two years before they ended in the Eurozone.

An EU member-state, more than two-thirds of Sweden’s imports and half of its exports are traded with the bloc, making the Nordic economy sensitive