Can Emerging Markets Be Antifragile?—Debt Perspective

Historically, emerging markets have exhibited significant fragility, particularly during periods of global economic strain. In 2013, for instance, the term “Fragile Five” was coined to describe Brazil, South Africa, Turkey, Indonesia and India; all of which struggled with fiscal deficits and economic instability. Fast forward to today, and the landscape has changed dramatically.

Emerging markets are now better equipped to weather economic storms. A crucial factor is the improvement in their basic balance (which combines the current account and foreign direct investment). Today, many emerging markets boast a positive basic balance, reflecting a reduced reliance on volatile inflows, which can rapidly exit during crises (Display). This shift indicates a stronger foundation, as countries are less dependent on “hot money” and more reliant on stable, long-term investments. 

Furthermore, EM central banks have learned from past experiences. In the recent tightening cycle, many EM central banks proactively adjusted their monetary policies ahead of their developed-market counterparts, completing over 70% of their intended tightening before the last major tightening in developed markets began. This proactive stance demonstrates an enhanced understanding of macroeconomic dynamics and a commitment to maintaining stability.

Counterintuitively, many EM corporates currently exhibit stronger fundamentals than their developed-market counterparts. Because of concerns about economic stability, EM companies generally maintain lower leverage ratios and higher cash reserves. This financial prudence is reflected in credit ratings, with many EM corporates achieving ratings that surpass those of US investment-grade firms (Display).

For instance, companies like Taiwan Semiconductor Manufacturing, a leading semiconductor manufacturer, and Suzano, the world’s largest pulp producer, are prime examples of how EM firms are not just surviving but thriving. Suzano, in particular, stands out for its impressive environmental metrics, sequestering 54 million tons of carbon annually, comparable to Australia’s forest carbon sequestration. Such examples highlight the robust operational and financial health of many EM corporates.

Moreover, active management in the EM corporate-credit space is essential. By identifying high-quality companies that may be undervalued due to geopolitical factors, investors can capitalize on opportunities that others may overlook. Companies in Turkey, for instance, might have strong fundamentals but suffer from downgrades due to their geographical location (Display). If you look at the financial sector, for example, there are very strong high-quality double-B issuers in Turkey, but they receive multiple downgrades because of their location. This discrepancy creates attractive investment opportunities for savvy investors.

As the world pivots towards sustainability, emerging markets are poised to play a significant role in the green transition. Investment in green technologies and renewable energy not only addresses external vulnerabilities but also enhances the quality of life in these regions. India, for example, has ambitious plans to generate 500 gigawatts of non-fossil fuel power capacity by 2030, with half of that coming from renewable sources.

Investing in the green transition in emerging markets presents a dual benefit: supporting crucial infrastructure projects while also reducing dependence on global energy prices. This strategic focus on sustainability can mitigate economic cyclicality, particularly in historically volatile regions.

As global capital reallocates towards sustainable initiatives, EM corporates stand to benefit significantly. The emphasis on environmental responsibility positions them well to attract investment, thereby improving their market standing and financial resilience.