Scott Moses, head of emerging market debt at MetLife Investment Management, talks through the main trends in EM investing for insurers right now

What are the main trends in EM investing at the moment?

Investing in Emerging Markets in the current environment remains challenging, aggravated by limited liquidity and a hawkish Fed. Security selection has proven to be more important than ever in identifying issuers with strong fundamentals despite a sell-off due to market technicals. This is especially important in the high yield market, where some lower quality issuers have restricted access to capital markets and need to find alternative sources of funding.

While risk-off sentiment has damaged the high beta space, longer duration investment grade securities have seen significant spread widening and price declines as the 10-year yield has risen over 225 basis points year-to-date. Therefore, the up-in-quality, shorter duration bias has been a favorable place to invest in the current environment. The strong balance sheets of corporates, while sovereigns continue to lag, have caused investors to favor corporate issuers in EM. This trend has played out throughout the pandemic into the current downturn.

How have EM assets held up in the wider downturn?

Emerging Markets has been no exception to the fixed income market weakness we have seen as treasury yields soar and recession fears linger. However, strong fundamentals in the corporate space, along with a significant decrease in net financing from previous years, have been supportive technicals for the asset class. We have seen dampening of commodity demand due to recession concerns, which has reversed some previous strength that commodity exporting countries recently experienced. Yet with brent still sitting above $80/barrel, EM energy exporters' current accounts are benefiting. Despite the weak macro environment, EM investment grade has outperformed versus Developed Markets. High yield corporates have performed in line with DM, while sovereign HY has underperformed, with single-B sovereigns under further pressure.

What's your outlook for the sector over the next year?

Macro uncertainty will continue to present challenges in the near term for Emerging Markets; however, as inflation peaks and interest rate volatility subsides, opportunities will likely arise in the space. We believe this current environment presents opportunities in the EM space, where yields on the indices are at levels not seen since 2009. With corporates down 16% year-to-date and on track for the second worst year on record since the inception of the index, this weakness could drive performance over the next year horizon. Sovereigns, down 23% year-to-date, are also poised for strong upside if inflation peaks, if countries are able to stabilize currencies, and if IMF support remains strong for lower quality issuers.

How has MetLife helped insurers access EM?

MetLife Investment Management manages $12.8 billion of EM debt (as of June 30, 2022), making it a large player in the universe. We believe that given our amount of AUM, depth of our team, and traders' rapport with the sell-side, we have greater access to liquidity for our clients in both the primary and secondary markets. MIM offers four different EM strategies and multiple different vehicles, providing insurers a variety of options for investing in the EM market based on client specific needs.

Is there an ESG angle to EM investing right now? 

ESG is an important factor that we take into considering as part of the overall Emerging Market credit research process, and we have grown more selective in our investment process given this importance. Before investing in companies, our analysts look for a change of stance towards companies' ESG policies or changes that will impact issuers' scores in the future. From a sovereign standpoint, the Social and Governance aspects of ESG have always been taken into consideration. Policies that governments outline will establish how they will do as a credit over the long term.

We have seen governance become a larger issue as of recent. We can think of that from unclear policy within China as it relates to the homebuilding space or even a Brazilian telecom operator's struggle to close the sale of assets. Over the last several years, environmental considerations have played a more important role in EM security selection. Understanding how company or country wants to progress forward from an ESG standpoint is just as meaningful as where it sits today. There are times when the transition phase is more powerful than the end result, which, coupled with strong valuations, presents opportunities for ESG investing in EM.