Wall Street reaps 97% return by trading emerging markets like Pakistan

May 15, 2024 (MLN): Buying debt sold by the lowest-rated countries scares off most investors. On emerging markets desks across the globe though, that type of risky wager is being dubbed “special situations” — and its popularity is growing, as Bloomberg reported.

These bets have flourished in the past year as nations including Pakistan and Nigeria push through economic measures or strike funding agreements with multilateral lenders.

Buying bonds from those countries has become so popular that fund managers identified “EM special situations” as the strategy they’re most interested in pursuing, according to a JPMorgan Chase & Co. survey in April of more than 300 investors.

The strategy has been gaining traction across Wall Street, helping a handful of money managers beat the returns across traditional emerging-market investing.

Vontobel Asset Management and Abrdn Plc, whose flagship EM hard-currency funds have beaten at least 89% of peers over the past year, are among those who’ve benefited from the trade.

Some of the money managers have plowed into bonds likes those from Argentina, a serial defaulter, and Sri Lanka and Ukraine, both of which are restructuring their debt.

The top five performers in a broad-based gauge tracking sovereign, emerging-market dollar notes — all of which are “special-situations” trades — averaged a 97% return over the past year, versus a 13% gain for the index, according to data compiled by Bloomberg.

While it’s a bet that can easily backfire if, say, the market dries up for debt from a struggling frontier nation or a restructuring stalls, the bonds of countries on the edge are less risky than they were even a year ago, according to Vontobel’s Carlos de Sousa. A worst-case, domino effect never came to pass.

However, so many money managers have moved into the trade that spreads in distressed countries including Argentina and Ecuador have tightened, suggesting the room for additional gains could be limited.

Goldman Sachs Group Inc. recently closed the bullish recommendation on a basket of distressed bonds including dollar notes from Pakistan, Argentina, Ecuador, Egypt, and Ghana, a trade idea originally touted in December.

The bank said that while “many of these credits” still offer upside, the path to continued outperformance is now narrower.

Copyright Mettis Link News