Risk, reform, return. How emerging markets grew up

CDQ: Michael’s point on not having a favourite country from an investment standpoint is crucial. We have no biases towards a particular country. From a personal standpoint, though, the countries closest to my heart are those that have surprised me. For instance, I went to Almaty, Kazakhstan with no expectations. But seeing the snow-covered mountains from the plane before landing in 36 degrees heat demonstrated the multi-faceted nature of the city – it is a true melting pot of Russian, Asian and central European influences. I love to experience the local flavour – it’s a waste of time to travel 12 hours to just stay in a hotel.

What role does on-the-ground research or company engagement play in identifying investment opportunities?

CDQ: Being on the ground is really useful to see the efficiency of the country: the traffic, how long it takes to travel, how long you wait at reception. It’s important to speak to the taxi driver because they are typically quite honest; they talk about politics, football, sport and it really gives you a flavour of the macro side and of the business efficiency of the country. In fact, in Kazakhstan to understand the local flavour, I went as far as to eat a piece of dried horse meat and a pint of fermented camel’s milk!

Meeting the management team in person is essential for investing, you can learn so much from just body language. Additionally, taking the time to do a proper site visit makes investments so much more tangible – it requires more time and allocation of resources but it is worth it.

MB: It’s very important to visit countries and companies to understand the local energy and efficiency. I fully agree with Charles on that point – it really helps to get a feel for what is happening on the ground, whether it’s an informal chat with the taxi driver or hotel staff or a just getting a sense of the place by walking around. As active investors meeting people is crucial for us. We don’t have analysts in every EM country and nor do we believe we need that. There is a myopia that can emerge from being too close to any individual market. We can take more of an analytical perspective – we’re able to think about how a country looks relative to other countries where locals might have a blind spot. 

What is exciting about EM now?

CDQ: Structurally, EM debt looks much better than it has looked for a long time. It looks even stronger than the early 2000s boom when EM was still a smaller, less diversified asset class and still very cyclical and tactical. Now, we are really seeing EM shift from being a tactical to a core allocation. It’s a more diversified asset class and an exciting story in the long term.

MB: As Charles said, EM equities had a tough decade prior to 2025, which was heavily linked to an economic slowdown in China. China is associated with top-down drivers which often have poor profitability outcomes. But that is shifting quite markedly following the real estate crisis. We are seeing better capital allocation and a proven profitability story which helps the rest of the asset class. China is the second largest economy in the world so that has a huge impact on a number of other emerging economies.

The outlook in broad terms looks positive. The asset class has been tested by a number of crises over recent years and it has come through in a robust way. I think that’s a testament to its improving foundations. We’ve seen this reflected in the turnaround in investor interest.

What’s a misconception about EM you would like to dispel?

CDQ: There are so many. One we have touched on is a lot of investors still consider EM to be a high beta play when this is not the case. The EM hard currency corporate debt market alone is two times the size of the US high yield market and it’s still growing and becoming more diversified. EMD may be higher yielding but that doesn’t mean it’s a junk asset class. In fact, it’s predominantly investment grade.

Over the past 20 years, EM debt hard currency has performed like a US high yield product, offering a 7-8% coupon a year, but with more diversification. Local currency has been more volatile but the outlook is better, particularly supported by the de-dollarisation trend which makes EM local currency a stable and attractive prospect. 

MB: Many investors still see the asset class as discretionary in nature without acknowledging how much has changed. We are increasingly seeing a disparity in economic growth between EM and parts of DM as EM becomes the economic engine of the world.

There is a misunderstanding of how influential EM economies are becoming in the global economy. In the West, we are used to being influenced by the US but if you are in Asia, the world looks very different. The historical strength of US equities has meant investors didn’t feel compelled to invest in EM when they could invest in their own back yard but this is changing.

CDQ: That’s a good point. As much as EMs are strengthening, we are also seeing the US institutional framework weakening. We are very much seeing a convergence between DM and EM.

MB: Maybe historians will debate whether we are at the turning point of dollar dominance in the world. Every EM saw the US take the unprecedented measure of freezing another country’s foreign assets following Russia’s invasion of Ukraine, and now will be careful to avoid the excessive accumulation of dollar assets. Following the ongoing events in the Middle East, we can see the repricing of the commodities complex into non-dollar currencies. That’s potentially transformational for the long-term dominance of the dollar. It won’t be an overnight process but we are facing a shift away from dollar dominance which will have a big impact on asset pricing in favour of EM.

How do you cope with investing in EM?

CDQ: You need a certain amount of resilience for trading EMD because it’s more volatile. But I have learnt to be disciplined. I have to force myself not to check emails when I wake up because I realized that if I check emails immediately, there’s nothing I can do faster than if I check them 30 minutes later. 

MB: I think people that inhabit the asset class generally love it. The stress is recognisable and manageable. But it’s the confidence in one’s own philosophy and team that enables us to disassociate from the market volatility. One has to have a self-belief in what will create value and stick to that. Having a peer group helps and being able to discuss the debt side with Charles is very valuable: discussing ideas is very beneficial.

CDQ: There are great synergies between the teams.

MB: We are really connecting the dots.