Ninety One - Wed, 11/09/2022 - 19:50

Emerging Market Corporate Debt with Vic Harling, Head of Emerging Market Corporate Debt at Ninety One


Stewart: Welcome to another edition of the Podcast. My name is Stewart Foley, I'm your host, and today's topic is Emerging Market Corporate Debt with Vic Harling, the Head of Emerging Market Corporate Debt at Ninety One. Vic, thanks for being on.

Vic: Thanks for the invite. I'm really excited to talk to you today about a subject that's very close to my heart.

Stewart: I love it. We're going to start this one off like we start them all. Hometown. First job. Fun fact.

Vic: Oh, first hometown, I grew up in Yorkshire, in England, so I'm British through and through, and I grew up in a beautiful part of the country with rolling hills.

Stewart: Good deal. And first job?

Vic: Well, when I was 13 I worked in a bookshop. That was my first part-time job.

Stewart: All right, so how about fun fact?

Vic: Oh, here's an interesting one, the king has actually stayed with us as part of ... My grandparents ran a hotel and yeah, the king was a guest of ours.

Stewart: Look at that. My wife is Royal crazy. She loves everything Royal, loves historic drama, documentaries, all of it; can't get enough. So, she'll be thrilled to hear that. So before we get going too far, can you tell me a little bit about Ninety One and a little bit about your background?

Vic: Well, of course. Yeah. Ninety One, I'm sure to many of you is a relatively unknown asset management company. We were founded over 30 years ago in South Africa. So, we have emerging markets as our core founding investment strategy and we have kept that throughout the business through the 30 years. So, we run approximately 58% of our assets in emerging markets.

We started as a business called Investec Asset Management. So, for any of you that are familiar with the Investec brand, that's where we were founded from. As an asset management company, we have 21 offices around 14 countries in the world, with over 1,000 full-time employees and over 250 investment professionals. And we run approximately 190 billion of assets under management in global strategies.

Stewart: Wow. I have come to know this firm and have a tremendous amount of respect for it, and you run a major portion of the assets in the EM asset class. This may seem like a silly question, but I think the world is changing at a pace that it makes it relevant. How are you defining EM today?

Vic: Yeah, so, the concepts of emerging markets have always been a bit blurred. Whether you look at sovereign, it has traditionally been any low-to-middle-income country in the world. But when it comes to EM corporates, the world is pretty much divided from Europe, the US, Australia, and Japan, and everything else is considered emerging markets. So, it's a pretty broad definition. And from a corporate perspective, the lines get even more blurred because as we know, companies are global today.

So, we define the corporate universe as where the majority of assets or head offices reside in an emerging market, but often a lot of these companies are delivering products that are probably household brands to you today.

Stewart: And with the amount of economic headwinds and geopolitical events that have been peppering us in 2022, can you talk a little bit about the fundamentals in EM corporates today, as you see it?

Vic: The asset class, if I take a step back and just put the meat on the bones around the asset class, we're talking about an asset class that back in 2012, for example, was $1 trillion in size. Whereas today, we're talking much more about an asset class that is $2.7 trillion and that's bigger than the US high-yield market. It's certainly bigger than EM sovereign market. It's roughly the size of European investment grade.

In 2002, for example, we were looking at an asset class with only companies from 15 countries, whereas today we have over 59 countries represented by corporates in the universe, and the asset class is about 57% investment grade. So, people always think about emerging markets and think it's risky, but actually a lot of these blue chip companies, some of the biggest companies in the world, operating truly on a global platform and many of them incredibly high quality.

So, when we put that into context and we think about corporate fundamentals, one of the really lovely things for me as an investor is the fact that these companies are often used to operating in challenging jurisdictions. And so, as a lender on the fixed income side, a creditor, I don't have to worry about dividends so much. I know that there's often a significant buffer for these companies to be able to service debt.

And particularly because of the nature in which they're used to operating, their leverage metrics, they tend to be a lot more conservative than the developed world. And it does change over time, but certainly, in a world post-COVID, we've seen corporates really take advantage of a low interest rate environment to issue debt, which means that they have preempted any needs for the coming future. And at the same time, their earnings have been amazing. So, their leverage metrics have dropped right down, such that actually in such a turbulent world, we've seen a lot of corporates that have bought back debt this year and we think that that's a theme likely to continue, as they think about whether it's better for them to finance locally or finance with the banks. So, we have this really nice dynamic with the companies, that they continue to demonstrate very strong fundamentals.

Stewart: And I just didn't realize that EM corporate market was that big. I mean, bigger than US high yield?

Vic: Yes.

Stewart: Really kind of takes you back a little bit, right? I mean when you think about EM corporate, does that have an impact on the industries that you're able to access? Are there industries that are more highly represented or less represented in the EM corporate asset class?

Vic: Definitely. What's been really great to be part of is an asset class that has grown roughly at about 20% annually, for the last decade. When I first started, there were about 315 companies. And today we have, well, I look at 1,400, but if you wanted to pick a standard benchmark, there are around 800 companies.

Now, we've seen this evolution. So in the beginning, and if you think about all of the world that you can represent, if you look at a frontier country where they're not very well diversified, typically if we take South Africa, for example, you would find in that country there may be some banks and usually there would be a mining company or an oil and gas company. And then more and more, we started to see telecom companies coming through and utility companies.

So, where you see frontiers, they are your big issuers, where they're infrastructure-led and resource-led companies. But as you start to move into the bigger, more diversified economies like Mexico, Brazil, China, you tend to find a lot more consumer-led companies and more intricate companies, industrial companies, that are either car manufacturers or food producers. There's a lot of agriculture in our space, food producers, but more processed food or lots of different types of businesses.

So we are, I would say in the emerging market, you could call us old school, there's a lot less technology than you see in the developed world and we're a lot less services-led, which if you look at the fundamental strength of companies in the height of COVID, with shutdown, it was emerging market companies that thrived, because they were your traditional manufacturing bases, your traditional business models. So, there's been a huge evolution and the asset class will continue to evolve. And as I say, it provides a really nice balance for me to be able to go and cherry-pick good industry, good countries, and then see those deeper economies evolve with newer companies. For example, we traditionally get about 100 debut issuers coming to our market every year, from all sorts of sectors.

Stewart: That's interesting. And so, when you've got a debut issuer, what's the due diligence process like for you? When somebody is new to the space, that's a great opportunity to diversify, right?

Vic: Yeah.

Stewart: But you've got to roll up your sleeves and start from scratch, at that point, with somebody. How do you attack that?

Vic: So, as lovely as our job is, it is hard work. You can leave no stone unturned. So, even with investment grade companies, we model every single one of them, cash flow, income statements, are really where we're focusing. We do background checks on management. We put them in the context of their sector. We do a lot of work covering the banks. We know whether the banks are lending money to these companies, so that we can get a really good sense of how robust the companies are. Domestically, how are they viewed? And really what we're looking for is tail risk.

So, where any red flags appear, we are very quick to turn companies down, and it's important to us to really understand what the trajectory of the company is. So, we always come back to the financials and we always stress test the models, because we also have to think about whether the company is earning revenues domestically or internationally and also what its cost base looks like. So, we spend a lot of time thinking about that and we're blessed that we have a very big team and we have a big team of sovereign specialists who can give us their view on each individual country and the backdrop, and whether that company is well placed to benefit from the macro environment that they're operating in.

Stewart: And you run a large portfolio at Ninety One, you work with a lot of insurance companies. One of the things that always comes up is liquidity. So, can you talk a little bit about the liquidity profile, what you've seen in the EM corporate space generally, and then specifically in this calendar year?

Vic: Yes. I mean, I've been in the markets for 25 years and I remember the good old days when Brazil, EM sovereigns, you could trade 50 million by 50 million on a 10 cents bid off a spread back in the turn of the century, and it was super, super liquid. And then the financial crisis happened and the liquidity completely turned on its head. And I think, what we saw with the asset class, when you think about it, we have many regions. So, we have Latin America, SEMEA, we have Asia, and so, they all have different trading desks. We have different types of investors that buy our universe.

So, in Asia for example, 80% of the flow would be local. And there's global insurers, we have EM sovereign investors, we have US high-yield investors, US investment grade investors that come over into our space. And then you have the humble, dedicated EM corporate investor. That is actually a very small part of the universe. So, there is usually, in normal market conditions, a very nice two-way flow and a lot of liquidity. What we saw as the asset class grew and as regulation in the States got tighter and tighter and certainly as yields have come down and returns were down prior to 2020, we saw liquidity start to disappear, because in the run-up to 2020, we had much deeper liquidity than US high-yield, US investment grade. And that started to ebb a bit and we saw that in 2020, but equally, we've seen the same in the US Treasury market.

So, liquidity's been a theme for all fixed income asset classes. But this year specifically, when you have outflows and you have an asset class where there are lots of non-dedicated players and they run for the exit, it's the herd mentality that really hurts. And we have seen every risk manager across every book shut down their risk and there has been very few buyers. So, liquidity has been really dire, quite frankly. But as an investor that's been doing this for a long time, this is when I get excited because when elasticity breaks in the market and it becomes totally illiquid, you get bargain-basement deals. And that's what we're seeing in a lot of fixed income today, but specifically in my universe, there are some really, really cheap, good quality companies that will provide handsome returns in years to come.

Stewart: It's interesting to hear you talk about clear value in a market. That's not something that we hear a lot of. Right now, I think a lot of people are looking for clear value, and that's great to hear. And I think every insurance investment conversation somehow or the other ends up at ESG. In particular, I've said this countless times, but nobody has more skin in the game than the insurance industry on climate in particular. Right?

Vic: Yeah.

Stewart: So, can you talk a little bit about ESG and transition financing in particular, in your market?

Vic: Yeah. So, the challenge with emerging markets, as we started when we talked about the shape of the universe and the sectors, we have a universe that is quite heavily biased towards heavy emitters. Now, when you take the universe and you see, if we really are serious about climate change, and a lot of my dedicated clients have already set carbon reduction targets for me, and they're really thinking about how to evolve in this space, it's really important that we engage because decarbonizing a portfolio is not the same as saving us all from cooking. Right? We have to actually solve the problem. And moving from a heavy emitter to a telecom company is going to do nothing to reduce carbon emissions.

So, when we look at our companies and what they're actually doing, it's still early stage, and certainly the work that we do with our existing clients on carbon, the data is not yet resilient enough and stable enough to draw any conclusions from trends in the carbon information. Companies are evolving, a lot of carbon data is modeled and therefore, when companies move from modeled to actual data, there are differences that are spurious.

And so, we have to be a little bit patient when we are thinking about targeting climate and carbon reductions due to the data that we get, because it's not good enough to draw conclusions. Now having said that, what we do is work with a lot of the heavy emitters, because they also have plans, and if you took a country like India, it's incredibly exciting thinking about the energy transition for them. Hydrogen's going to play a huge part in helping them transition from coal. And some of the big companies, the reliance industries, the Adanis of the world, they want to spend billions and billions on this. So, this is an amazing commercial opportunity to be part of new industries that don't exist.

Then you have other companies, utility companies, and actually, in Latin America, one of the challenges is not so much, “Can they reduce their carbon?” It's the effects of climate change, because a lot of Latin America's energy is based on hydro, but you see that transition to solar and wind energy for example. And that's exciting. We've got a lot of mining companies that actually are thinking about how to move to solar and they have been constrained by their energy grids, but those energy grids are changing as well.

So, it's a really exciting space to be in, because every company I talk to recognizes the merits of doing it. Sometimes the technology is not commercial enough to put it into practice, but they're all working hard to make it commercially viable. So, looking at the numbers alone and making decisions on the numbers as a snapshot today, in my opinion, is totally the wrong approach. And what we should be doing is thinking about how these companies can help us cumulatively sink carbon to help us get to one and a half degrees. And that's the bit that excites me.

So, we already have identified companies that have aggressive targets, that are working their way, and we can invest in those companies. And you have to think about two different things. One is carbon reduction, and then the other is carbon avoidance. And if you really believe that the world can get to net zero, it's not going to happen without electrification. Now, I mentioned some of these heavy emitters, resource companies, most of the renewable metals in the world come from emerging markets. So, you have to back the mining companies if you want to get the lithium to make the batteries, to allow for the evolution. And this technology is changing all the time, but EMs play a crucial role in helping us have a planet for our children in the future.

Stewart: I find your take on this fascinating, and I was at the MSCI/PRI conference climate event in New York, and one of the panelists mentioned that data is a challenge. And the way that they quoted it was, "Best data is IG corporates." You go to high-yield loss, this, that and the other thing. How do you find the availability of data in EM corporates to make a decision on an ESG framework? I mean, it's another layer of fundamental analysis, right?

Vic: It is. It absolutely is. How we think about ESG, they're structural drivers of a credit. It's management's decision and direction that leads the future of the company, but it can often be quite slow-moving. What most people focus on are individual events and then the tail risk of what companies are doing. Does it really make a difference to your quarterly alpha if there are women on a board? No, but over the long run these trends are incredibly important to steer the company to much stronger fundamental strengths.

And I think it's important because people want to see real-time ESG scores, but they don't really think about the positivity and how long that can take to play out. So, in terms of data, it's important. We get asked a range of questions and many of them are more or less relevant depending on sectors. And so, we have to identify what is relevant for a sector, what is relevant for a country, and think about those structural drivers and the impact that they're going to have on the credit rating of the company and the future trajectory of that company.

Now, as a fixed income investor, we are a bit more cushioned, because as an equity investor, any costs associated with failure to keep up or incident and things like that, they're going to come out of your dividends, which we come back to the fundamental strength of EM companies. But what you want to see is that companies are well prepared, whether it's with carbon, in case carbon trading comes in and carbon taxing is a global phenomenon. Or whether, you end up without a mining license because you've caused natural disasters and the fines associated with that. Or whether you have strikes because you don't pay your workers well enough and you don't treat your workers well enough.

So, there's a whole range, in emerging markets, you really have to consider them all, but you also have to identify the length of time it will take for that to play out. And then you can associate the risks with investing in that company and then engaging with that company to help them get better. And that's what we do here at Ninety One.

Stewart: Vic, I'm learning a lot. I'm loving this, every bit of it. The next topic I want to talk about is China. And I was at a dinner last night, an industry dinner, and I'm not at liberty to say who the speaker was, apparently, but this person ... I mean I think everybody, there's a lot of concern, "Oh, China's going to take over the world." And this woman put forward a hypothesis that said, "This was the thought of Japan at one point." And she said, "It's possible that China gets old before it gets rich and that it could be that China's GDP never surpasses the US." She was very bullish on the US. What's your view of China? If you can just talk about it generally.

Vic: Yeah, I think from my experience, first of all, we'll come onto China specifically, but governments don't dictate economics on their own, businesses play a crucial role in that. And that's been one of the amazing things that I've learned over the years of investing in companies, having started my career in sovereign investment to move to corporate investment and understand the symbiotic relationship between business and government.

Now, if you look at China and you look at what's happened over the last 10 years, there's been a lot of pro-market growth. And now what we're seeing is this shift back into a more centralized government, possibly a less business-friendly government, possibly, but we don't yet know the context around some of the bigger statements that have been made most recently with the new government. But we do know that Xi Jinping is firmly at the helm again and has indicated that his closest leaders in the firm are aligned with his strategy. So, we have to assume that there's going to be less thought diversity in government. 
Now, we know that there is an edict from the top and China is more authoritarian than democratic, but they have stressed that they want business and security to be the two key pillars of the next five years. So, they want economic growth. And only today we had a headline of Xi Jinping saying that he's happy to find a way to work with the US together, as the two biggest economies in the world, it is important that there's stability. And I think that's the really important thing.

Now, ‘will China get old before it gets rich’ is something we've been talking about for a very long time, because of the demographics and we have seen a clamp down on technology, we have seen them come out and say that they don't necessarily want an inequality in wealth. So, not quite as democratic and free as you and I have the luxury of being in economies that are truly democratic and capitalistic. 
What I would say is that if you can strike the right balance, and I've been investing in emerging markets from many jurisdictions, there is lots of different approaches to how you tax a company. And you can be quite authoritarian about it. You can do stealth taxes. We're seeing a whole range of approaches to energy companies today, through developed market worlds, because we have to be fair to our people. And I think the one thing that I would say is, if you turn the table on its head and you look at the wealth distribution in the developed world, it's actually a very sad picture.

And so, I'm not condoning an autocratic approach. I think there's a right balance to be struck. It is far too early on to know exactly what the execution policy looks like of the government in China today. But I do think that there's still a degree of pragmatism, and seeing that headline today, reaching out to the US, I think demonstrates some pragmatism. But we should recognize that we're living in dangerous times in the world and unprecedented times, and governments are in very difficult positions today. And it's easy to see how geopolitics can really dominate headlines and investment preferences, and maybe China isn't a place that people feel comfortable investing.

What I would say, is that there is still enormous opportunity to invest in China, and we shouldn't just think that because governments come out with big headlines that countries are un-investible. I firmly hope that China remains investible and we will certainly get more headlines, more direction between now and February, in that regard. But I think the US, by the way, has its own problems. So, China might get old before it gets rich, but the US may not be able to grow if it runs out of people to go to work. And so, we have to be balanced when we think about opportunities around the world.

Stewart: I want to just turn the conversation a little bit back on Ninety One. Ninety One has what I would refer to as meaningful diversity. You have women running major portions of your firm. You're running a major book there in the EM corporate space. I've met your CEO. The company is very progressive. Can you talk a little bit about the diversity and how do we get meaningful diversity into the institutional asset management space? How have you done it? Would you talk a little bit about that?

Vic: Absolutely. I think coming from an emerging market background, as we do, we are open to change and we always say we're investing for a world of change because of all the things we've seen over the years. So, we're always looking for an opportunity, and that comes in many different places, and places that you wouldn't necessarily expect. So, we always look for cognitive diversity and that comes in many shapes and forms, but there's a guiding principle I think that we operate here and it's, people have to want to work hard and give their best and they need to show a degree of humility. There's no egos in our organization.

And I think that's the key actually to hiring a diverse workforce is that you have to listen to people, be open to opportunity, and look for talent in places that you wouldn't necessarily find it. And that's what we do. That's how people operate in emerging markets and that's been our core DNA. And as a result, we are blessed with an array of diverse individuals. And I have people in my team that come from lots of different countries around the world, and I have a lot of ethnic diversity. And I've through the time, had a team of 100% women and now I have more men than women in my team, because that's where the talent has appeared. So, I think just being open to everyone and hiring the best talent you can, is exactly ethos at Ninety One.

Stewart: I love that. You mentioned the challenges in the world. It's a scary place today. Unprecedented times. I was a professor for a number of years and I have a real soft spot in my heart for college students and people who are early in their careers. And so, I come to this and ask you the following. As you look out today in the financial services opportunity set, the insurance community, all of it, what would you tell your 21-year-old self today, if you were starting out?

Vic: Well, if I was just based on, how do I get the most out of my career and be exposed to the most opportunity possible, I'd say, be a nice person, it goes a very long way. And be open, be a yes person, don't close down opportunity, embrace it. Get out of your comfort zone and get used to being out of it. And work hard, and then the rest will just come naturally.

Stewart: I love that.

Vic: I would just second that by saying, I encourage people to get into the office, because I am so much smarter than I would ever have been if I hadn't been surrounded by some of the best brains in our country throughout my 25 years. I have learned so much from conversations I've overheard, from just meeting people at the coffee point. It is imperative if you want to grow and learn, that you surround yourself with really smart people.

Stewart: Great advice. Vic Harling, Head of EM Corporate Debt at Ninety One. Vic, thank you very much for being on. I learned a lot and it was a pleasure to meet you.

Vic: Thank you very much. I've enjoyed our conversation.

Stewart: That's great. Thanks for listening. If you have ideas for podcasts, please email me at My name's Stewart Foley, and this is the Podcast.

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