This news service talked to a UK-based specialist investment firm that concentrates on emerging market debt. With uncertainties and policy changes in countries ranging from Turkey to Nigeria, the idiosyncratic nature of the market calls for close understanding of local developments.

For emerging market investors overall, the past nine months haven’t been a reason to break out the champagne as indices of bond performance have struggled to make headway. Rising interest rates to curb inflation, wobbles in China’s economy and geopolitical nerves took a toll.

To make money in this space, particularly on the debt side of the fence, means investors have to pick their shocks precisely, looking beyond the “noise” of the market and hopefully find value in specific situations.  

This is the approach of Pavel Mamai, founder of ProMeritum, a firm that concentrates on sovereign and corporate credit special situation opportunities and has a specific focus on the former Soviet Union, central and Eastern Europe, Middle East and North Africa, and sub-Saharan Africa. The organisation has 10 full-time staff, all based in London, and is licenced by the FCA. Its fund has $370 million in assets.

“You have to be very tight with local politics and economics,” Mamai told this news service, stressing his ProMeritum’s footprint of experts working in individual countries.

There are about 14 debt situations in the portfolio, which is a niche investment area. 2022 was bad for fixed income. However, the firm was able to finish the year with positive returns, Mamai said. 

Within its regional holdings, Russia is off-limits, for obvious reasons. The fund holds exposure to Poland, Czech, South Africa, Nigeria, Ghana, Tunisia, Egypt, Serbia. About six per cent of the fund is in Kazakhstan now, for example, but largest exposures are South Africa and Tunisia

“We hold Baltics’ bonds from time to time. In central Europe, Serbia, Czech Republic, Poland, and Hungary are more interesting,” he continued. 

A number of these countries’ have more experience managing high inflation in contrast to members of the Group of Seven industrialised nations, Mamai said. For example, Polish inflation peaked earlier because the country’s central bank hiked more aggressively than in the US and the outlook for interest rates now in a number of these countries is more dovish as in G7 countries. 

As far as the Middle East and sub-Saharan Africa is concerned, the weaker countries in these regions are getting under credit stress because of tighter global monetary conditions and higher global rates. In certain cases, these nations are helped by the International Monetary Fund, while others restructure or default, and that creates opportunities for ProMeritum to hold long and short positions in credit.

Mamai said economic changes in Turkey and regime change in Nigeria create concerns – but also opportunities. Turkey and Nigeria had monetary policy regimes which were not sustainable in the current environment. ProMeritum could benefit from resulting currency devaluations, he said, but now both countries are embarking on economic reforms, which creates additional opportunities.

Data certainly shows that 2022 – when interest rates were pushed up by the US Federal Reserve and others – was a shocker for emerging market debt. According to the JP Morgan EMBI Global Core Index, this measure of e-market debt slumped more than 18.3 per cent last year, and slipped 2.05 per cent in 2021, although 2020 showed total returns of 5.77 per cent, and 2019 was positively scorching, at 16 per cent. Since January this year, the Index has returned an average of 4.07 per cent (as of August).

Asked what sort of end-investors use this fund, Mamai gave examples of Japanese pension funds and Swiss multi-family offices. Clients regard this fund as a good diversifier. The fund is also liked by family offices looking to supplement their own offerings, Mamai said. 

“We try to keep our portfolio as simple as possible, and we don’t use leverage. Assets are sufficiently volatile in their own right,” he said.