Event Voice - Emerging Markets: Your Gateway to Smarter Returns
Eoghan McDonagh, Senior Portfolio Manager, Allianz Global Investors
16 April 2025
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9 min read
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Eoghan McDonagh, Senior Portfolio Manager at Allianz Global Investors discusses their fund at the recent Channel Islands Summit.
For fund distributors and professional investors only. This is a marketing communication. Please refer to the prospectus of the Fund and to the KID/KIID before making any final investment decisions.
What are you trying to achieve for investors and what role could your fund play in an investor's portfolio? How do you structure this fund?
History shows us that investors can benefit from the higher return provided by Emerging Markets (EM) relative to Developed Markets, for a given unit of volatility. Hard currency sovereigns and corporates look particularly attractive on this metric versus GBP hedged Developed Market (DM) assets, while local currency Emerging Markets can offer tactical opportunities to enhance alpha. We aim to harness this extra return for investors in the Allianz Emerging Markets Select Bond Fund, while maintaining rigorous risk sizing discipline. This fund can access the full Emerging Markets opportunity set (the benchmark is 33% hard currency sovereign, 33% hard currency corporates and 33% local currency assets) and acts as a suitable diversifier in any fixed income allocation given the multi-currency and multi-sector allocation.
Our prudent, high conviction, macro-based approach results in investments in countries and companies with a positive direction of travel. We are benchmark aware, but not constrained - we have many zero weight positions in the fund, as experience shows us that avoiding losers is often as important as picking winners. Regardless of conviction, we apply strict risk budgets based on beta and liquidity.
What are the big opportunities and risks for your strategy in 2025?
EM fundamentals are robust. Debt-to-GDP ratios in EM are healthier than Developed Markets (DM), with post-COVID trajectories further reinforcing this positive outlook. EM versus DM growth differential forecasts favour EM in 2025, which historically correlates with stronger total return outcomes for the asset class. Additionally, a light electoral calendar this year allows sovereigns to prioritise reforms and policy initiatives. Following a handful of sovereign restructurings in recent years after the pandemic, few countries have concerning credit fundamentals and we anticipate minimal impact from sovereign defaults in 2025. On the corporate side, fundamentals are also strong. EM investment-grade (IG) and high-yield (HY) bonds exhibit lower leverage than their DM counterparts, while interest coverage ratios are comparable. Looking at the asset class, EM absolute yields currently exceed their 5- and 10-year historical averages, presenting an attractive entry point for investors.
The main risk to our investment thesis is the unpredictable decision making coming from the US administration, particularly regarding tariff announcements in early April. Some EM economies are more exposed than others when it comes to tariffs – eg Mexico, where we expect to see a renegotiation of USMCA, albeit one where they end up with better terms that the 25% tariff already proposed. Overall, the impact of tariffs should mainly affect general risk-taking sentiment, with small open economies in focus. That said – given positive fundamentals, a positive tailwind from negative net financing requirements, and increased buying of EM from "Cross-over" accounts – we would use any tariff related spread widening as an opportunity to add to EM debt.
Can you identify a couple of key investment opportunities you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
One interesting sovereign in which we are invested is Egypt. Post the sizeable Ras el-Hekma international investment support last year, Egypt has financial breathing room in which to enact reforms. The IMF just completed the fourth review of their Extended Fund Facility and agreed a new Resilience and Sustainability Facility – allowing Egypt to draw down on $2.5bn. Inflation in Egypt has dropped 11% yoy to 12.8% in February as a result of base effects. The Central Bank of Egypt should start their easing cycle at the next meeting. We are invested in hard currency bonds, local currency T bills and FX, attracted by compelling valuations and an improving external backdrop over the next three to twelve months.
Another turnaround story is Colombia. This has been trading wide of the BB peer group for some time, due to President Petro's agenda and the country's fiscal underperformance. Elections are coming up in May 2026. Given the President's diminishing approval and congressional opposition, we see limited room for policy changes ahead of elections where we see a change in government from centre left to centre right. As such, we own bonds in an effort to benefit from this change in direction.
The statements contained herein may include statements of future expectations and other forward-looking statements that are based on management's current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. We assume no obligation to update any forward-looking statement. Securities mentioned in this document are for illustrative purposes only and do not constitute a recommendation or solicitation to buy or sell any particular security or strategy. These securities will not necessarily be comprised in the portfolio by the time this document is disclosed or at any other subsequent date. Past performance does not predict future returns.
Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors might not get back the full amount invested. Investing in fixed income instruments may expose investors to various risks, including but not limited to creditworthiness, interest rate, liquidity and restricted flexibility risks. Changes to the economic environment and market conditions may affect these risks, resulting in an adverse effect to the value of the investment. During periods of rising nominal interest rates, the values of fixed income instruments (including positions with respect to short-term fixed income instruments) are generally expected to decline. Conversely, during periods of declining interest rates, the values of these instruments are generally expected to rise. Liquidity risk may possibly delay or prevent account withdrawals or redemptions. The volatility of fund unit/share prices may be increased or even strongly increased. If the currency in which the past performance is displayed differs from the currency of the country in which the investor resides, then the investor should be aware that due to the exchange rate fluctuations the performance shown may be higher or lower if converted into the investor's local currency. This is for information only and not to be construed as a solicitation or an invitation to make an offer, to conclude a contract, or to buy or sell any securities. The products or securities described herein may not be available for sale in all jurisdictions or to certain categories of investors. This is for distribution only as permitted by applicable law and in particular not available to residents and/or nationals of the USA. The investment opportunities described herein do not take into account the specific investment objectives, financial situation, knowledge, experience or specific needs of any particular person and are not guaranteed. The Management Company may decide to terminate the arrangements made for the marketing of its collective investment undertakings in accordance with applicable de-notification regulation. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer companies at the time of publication. The data used is derived from various sources and assumed to be correct and reliable at the time of publication. The conditions of any underlying offer or contract that may have been, or will be, made or concluded, shall prevail. The duplication, publication, or transmission of the contents, irrespective of the form, is not permitted, except for the case of explicit permission by Allianz Global Investors GmbH.
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For investors in the United Kingdom:
This Fund is authorised overseas, but not in the United Kingdom. This fund is domiciled in Luxemburg and is authorised by the Commission de Surveillance du Secteur Financier (CSSF). The fund is recognised in the UK under the Overseas Funds Regime but is not a UK authorised fund. The fund is managed by Allianz Global Investors GmbH which is domiciled in Germany and is authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (www.bafin.de). The Financial Ombudsman Service is unlikely to be able to consider complaints related to the scheme, its operator or its depositary. Investors in the United Kingdom can submit a complaint about any of the Funds, the Management Company, or the Depositary to the Facilities Agent (Allianz Global Investors UK Limited). A copy of the Management Company's complaints process leaflet is available on request from the Facilities Agent. Please see the prospectus of the Fund for information on applicable alternative resolution schemes applicable to UK Investors. Any claims for losses relating to the operator and the depositary of the scheme are unlikely to be covered under the UK's Financial Services Compensation Scheme. Neither the Management Company nor any of the recognised schemes participates in a compensation scheme. The Depositary participates in compensation schemes and Investors may potentially be able to claim compensation if the Depositary was unable to meet its obligations to return money to the Investor. A prospective investor should consider getting financial advice before deciding to invest and should see the prospectus of the Fund for more information. For a free copy of the sales prospectus, incorporation documents, daily fund prices, Key Investor Information Document, latest annual and semi-annual financial reports, contact the Facilities Agent or the issuer at the addresses indicated below or regulatory.allianzgi.com. Please read these documents, which are solely binding, carefully before investing.
This is a marketing communication issued by Allianz Global Investors GmbH and approved by Allianz Global Investors UK Limited, 199 Bishopsgate, London, EC2M 3TY, www.allianzglobalinvestors.co.uk. Allianz Global Investors UK Limited (FRN 959195) is authorised and regulated by the Financial Conduct Authority (www.fca.org.uk). Allianz Global Investors GmbH's registered office is Bockenheimer Landstrasse 42-44, 60323 Frankfurt/M. The Summary of Investor Rights is available in English, French, German, Italian and Spanish at https://regulatory.allianzgi.com/en/investors-rights.The duplication, publication, or transmission of the contents, irrespective of the form, is not permitted; except for the case of explicit permission by Allianz Global Investors GmbH.