By Zsolt Papp, Senior Investment Specialist at J.P. Morgan Asset Management

Having lived for almost three decades in London, AI assured me that I am entitled to call myself a Londoner. Becoming a Londoner is not so much about time spent in the city but rather local habits and mindset, for instance “embracing the groan”, which is complaining about the weather, the cost of a pint and Tube delays. On that measure, I undoubtedly qualify. However, whilst I enjoy living in London, its diversity and vibrant communities, the “magic lantern” as Dickens described it, I have remained a Swiss at heart.

Born and raised in the city of Zurich, I can confidently state that I am indeed a “Zürcher” as we call it. Whenever I have the chance to visit, I try to visit The Lindenhof, a small tree-covered square not far from busy Bahnhofstrasse. It is a place of peace and tranquil inviting visitors to slow down from the daily rush and enjoy the fabulous views of the old town and the river Limmat.

Living abroad has taught me to better appreciate the unique qualities of Switzerland, that I tended to take for granted when I was still living in Zurich. This includes the exceptionally high quality of public transport, which seems an unattainable goal for London (here go, moaning about the Tube). 

Secular improvements drive EM bond market returns

Why invest in emerging market bonds and why now? EM bonds fulfil two key functions in a portfolio: yield enhancement and risk diversification. This remains true even (or especially) in today’s volatile and challenging global backdrop. On average, EM bond yields continue to trade approximately 200-300 basispoints higher than US or Eurozone treasuries and some 600 basis points higher than Swiss government bonds.

EM economies are also substantially more resilient to external shocks than 10 or 20 years ago thanks to prudent monetary and fiscal policies, balanced external balances and more developed institutional frameworks. These improvements are secular in nature and likely to continue. Current valuations may look tight in parts compared to the past, but in fact they are supported by economic fundamentals. We believe current valuations reflect fair value.

Where can Swiss investors find value in this market? The challenge for every active manager is to separate value opportunities from value traps. The best way is analyse ability and willingness to pay – if either of the two looks doubtful, chances are it’s a value trap. One area that stands out is Latin America in this period of geopolitical volatility. It is generally better insulated from supply shock as it is not as reliant on Middle-East energy supply as some other regions including the EU. Many countries are commodity/energy exporters themselves or trade more between Americas in energy supply chain. 

We also find selectively value in frontier markets supported by improving fundamentals or international agencies such as the IMF as well as non-GCC oil exporters benefiting from elevated crude oil prices. In contrast, we are less enthusiastic about Asia or GCC as valuations do look tight.

How can Swiss investors best invest in EM Debt?

We believe there are a couple principles that Swiss investors should keep in mind when investing in the asset class. First, always active. Given the inherent broad dispersion of opportunities and risks, active approaches tend to deliver better results. Secondly, individual EM bond issues are typically for institutional investors requiring minimum investment of 100,000 or 200,000 USD. Investment funds and ETFs offer investor diversified solutions and exposure to markets – for example in local currency – that are difficult to access. Lastly, don’t panic. EM debt should be used as a strategic addition to portfolios. Market timing is notoriously difficult - even professionals can get it wrong – and expensive. A long-term approach delivers the full benefits of compounding higher-yielding EM debt investments.