Presenters |
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Carl Ross |
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Tina Vandersteel |
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Overview
Emerging sovereign debt investing spans a broad opportunity set that includes very high credit quality countries, single/double B type countries, distressed countries, and defaulted countries. The 2020 pandemic brought a bumper crop of sovereign defaults and pushed some credits into stress/distress. We discuss how GMO positions its portfolios in the stressed, distressed, and defaulted countries, showcasing alpha techniques as well as future total return potential coming from the defaulted countries getting back on their feet.
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Key Points
- GMO’s Emerging Debt team has navigated numerous defaults over the past 30 years, and 2020’s pandemic brought us seven at-bats, far more than normal.
- Our three-stage investment strategy around default involves:
- Ahead of the event: Where possible, we carefully use security selection to navigate deep uncertainties that come when countries become stressed and either get official sector help or end up in default/restructurings; we estimate ranges for recovery values in default, based on fundamental analysis.
- During the restructuring: We are active participants and, in some cases, lead default negotiations with the country, enhancing recovery for investors.
- After the event: We carefully choose securities positioned to benefit from a country’s return to “normal”.
- We estimate circa 400 bps of total return for the asset class coming from a base case analysis of our current set of defaulted or just-post-restructuring countries, and we highlight which currently stressed and distressed countries offer promising security selection alpha as we discover whether they will default.
Default timing is also very relevant
As Hemmingway said, it happens gradually, then suddenly
As of 10/6/2021 | Source: J.P. Morgan
Related Strategies
Please click on the links below to access strategies related to this event.
Related Research
Please click on the links below to access additional research related to this event.
- Gaming Out Sovereign Default When China is a Major Creditor (Jul 2019)
- Sovereign Contingent Bonds: How Emerging Countries Might Prepay for Debt Relief (Aug 2020)
- Venezuela: Implications of a Default Forestalled (Dec 2016 - Please contact your Relationship Manager for this article)
- The What-Why-When-How Guide to Owning Emerging Country Debt: 2017 Edition (Mar 2017)