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UBP Outlines Emerging Market Fixed Income Opportunities In 2024

Amanda Cheesley

23 November 2023

The rapidly evolving economic landscape, geopolitical tensions and changing consumer behaviour and demographics are creating risks and opportunities for investors. With markets being likely to remain volatile, (UBP) believes that active management and high-conviction strategies will be attractive to investors in emerging market debt.

Speaking at a media event, UBP’s head of emerging markets fixed income Sergio Trigo Paz, who joined last year after a decade as Blackrock’s head of emerging market debt, said that large tetonic shifts are changing the way we make money. 

“The context of the next 10 years is very relevant to what we are building at UBP,” he added. “Long equities and longer bonds did very well and it was the era of exchange-traded funds which were delivering better. Investors could borrow at a very low rate. Banks were extending mortgages at a low rate and emerging markets were borrowing at a very low spread. But interest rates are now at 5 per cent. We are now back to reality,” he said.

“Deglobalisation is taking place too in emerging markets. Firms are moving out of China and moving closer to home. They are prepared to take higher production costs and bring it to a more secure place like Mexico. There will be winners and losers,” he continued.

Paz also announced the launch of the firm's new emerging market-focused hedge fund. “We believe an emerging market hedge fund is made for this time,” Paz said. “We’re launching "the walking tree." It’s an emerging market long/short hedge fund in the fixed income space. This tree is one in the rainforest. It actually walks. If it grows next to a big tree and gets no light, it adjusts to where the light is and where it can grow,” he contined. “We are very optimistic about the fund,” he added. There are more opportunities to have a long/short than long only fund, he said, as they are designed to maximise the upside of markets while limiting the downside risk. Further details will be released shortly.

After a turbulent 2023, Paz is optimistic about the outlook for certain emerging markets in 2024, saying that they are well positioned to deliver strong returns. "Many investors are underweight in emerging markets and are starting to see the opportunities there," he added.

Paz cited key drivers for emerging markets, highlighting how monetary policy is now looking favourably at fixed income assets. “It wasn’t up until three weeks ago and that’s a number one game changer. Investors are also starting to come back to emerging markets,” he said.

“China was another negative driver this year due to its real estate sector and now there will be less surprises and more restructuring in the sector. Consumption and services have stabilised there. But the export sector is deteriorating as we get deglobalisation,” Paz continued. "We are not incredibly upbeat about China," Alonso Perez-Kakabadse, who joined UBP earlier this year as senior portfolio advisor and strategist from Wellington Management, added. See more about China here.

“Saudi Arabia and Russia will also continue to maintain prices through oil production cuts. Demand for oil will be less also due to the economic slowdown and as we have passed the energy crisis, taking oil lower but not tragically lower which is key for emerging markets,” Paz said.

In view of the US elections, Paz expects market volatility to heat up in the second half of the year, and the dollar to weaken, enabling emerging markets assets to outperform. He thinks investors will move out of equities to fixed income, as the economy slows.

Latin America
Perez-Kakabadse is positive about the outlook for Latin America in particular, notably Mexico and Brazil. “We’ve become more confident and optimistic about Brazil on the back of the tax reform, after the election of Luiz Inácio Lula da Silva as Brazil’s next president,” he said.

Chetan Sehgal, lead portfolio manager of Templeton Emerging Markets Investment Trust (TEMIT) and senior managing director at also thinks that emerging market debt is an attractive opportunity. See more here about UBP’s growing emerging market fixed income team.