Matthew Murphy, senior institutional portfolio manager in the emerging markets debt team at Morgan Stanley Investment Management (MSIM), and Vikram Raju, head of the 1GT platform and head of climate investing for the private credit and equity division at MSIM, discuss opportunities for emerging markets and climate impact investing

What core challenges do insurers currently face in navigating emerging markets?

Matthew Murphy: Navigating a multi-faceted regime change is the core challenge for insurers navigating emerging markets debt. The prior regime featured China's rapid industrialisation driving developing country growth, developed markets' interest-rates near, at or below zero fueling a global search for yield, and limited defaults expanding market access to many first-time issuers.

Now, Chinese policymakers are addressing the prior decades' misallocation of capital, limiting the growth impulse upon which developing countries relied. Further, with developed markets' yields much higher now, countries and corporations must contend with a combination of scarcer capital and higher borrowing costs. And that scarcity of capital and higher risk premium has been accentuated by a spike in defaults that kicked off in 2020.

To support insurers through this regime shift, MSIM delivers peer-leading active management. MSIM's emerging markets debt team is one of the most well-resourced and experienced teams in the industry, consisting of 50 professionals across six global offices.

The team's historical success, and likely future success, is attributed to three distinct competitive advantages. First, the team scours the entire investable universe, looking well-beyond the constraints of the benchmark for alpha opportunities. Second, the team's decentralised investment process permits multiple portfolio managers to focus on structural shifts in country-level policies that are historically proven to lead to spread compression, and each risk-taker held is accountable for their individual investment performance.

And, finally, the team's dedicated trading and operations professionals have a proven track record of improving liquidity and reducing transaction costs across the spectrum of sovereign and corporate credits. MSIM's insurance solutions team works closely with the emerging markets debt team to support our insurance clients with bespoke investment solutions and a comprehensive, innovative fund range.

How does MSIM view the outlook for emerging markets in 2024?

Following a strong 2023, in our opinion, emerging markets sovereign and corporate debt is in a favorable position to continue its rally through 2024. The macro environment is attractive: developed markets easing cycles have historically been supportive of the asset class, emerging markets central banks are also poised to ease policy to support growth, and the spike in defaults has receded with very few credits in near-term distress.

Additionally, valuations in emerging markets debt remain inexpensive relative to its past and relative to similarly rate developed markets corporate debt. This combination of a positive and improving macro environment, with compelling absolute and relative valuations, is likely to spur asset class inflows this year following meaningful outflows over the prior two years, which would provide further support.

What added value and benefits does the MSIM 1GT platform bring?

Vikram Raju: The 1GT platform brings an innovative approach to investing in climate solutions in the growth equity segment of the market. Two factors influence the team's ability to add differentiated value: (i) the team's in-house expertise and (ii) their positioning within a leading global investment bank.

The purpose-built team combines private equity veterans with climate specialists to bring a differentiated perspective to climate impact investing. The team can draw upon significant in-house expertise to add value during the entire investment process. For example, their carbon impact modelling specialists not only help provide diligent potential opportunities, they can also help portfolio companies quantify the impact of their products, potentially generating additional levers for company growth.

Additionally, as one of the premier global financial services firms and with its top-level commitment to sustainability, Morgan Stanley offers the team worldwide and expert resources relevant for investing in growth-oriented companies that it believes will mitigate climate change.

These resources help across every aspect of the investment process, including sourcing unique deals, supporting investment/climate due diligence, and adding value throughout the holding period. It is highly unusual for a fund focused on the hard-to-access small-/mid-cap growth segment of the market to have resources of this extent.

Are there any recent achievements from the MSIM 1GT team you would like to highlight?

On the fundraising side, the 1GT Platform recently welcomed more investors from across the globe including pension funds, insurers, and banks, demonstrating the platform's appeal to limited partners.

Investors have recognised three 1GT platform innovations as a real differentiator in the market: (i) the platform's predefined, ambitious fund-level impact goal, (ii) a significant portion of the team's carried interest tied to that goal, and (iii) completely independent measurement and verification of the achievement of the impact goal.

On the investment side, the platform recently closed on its third investment, Instagrid, a provider of battery-based portable power solutions for professional users to replace fossil fuel-powered generators in diverse industries including construction, film and media, rescue services, and utilities.

Reducing emissions in highly CO2e intensive sectors like construction and logistics are squarely in focus for the 1GT platform. With Instagrid, the team believe they have found the opportunity to back a visionary team with game-changing technology and a compelling growth trajectory.

Instagrid now joins the platform's two other portfolio companies: Huel, a provider of nutritionally complete plant-based meal replacements; and Everstream Analytics, a software provider of supply chain management solutions and adaptive tools to multinational corporations based in North America and Europe.

www.morganstanley.com/im