Why Emerging Markets are Finally Outperforming Developed Markets | Robert Koenigsberger | Gramercy

Episode Summary

Executive Summary: Robert Koenigsberger argues that emerging markets have matured from a fragile, benchmark-driven niche into a diverse source of alpha, especially in debt. He says EM offers strong risk-adjusted returns through disciplined underwriting, local expertise, and structured private credit—while developed market private credit increasingly suffers from liquidity mismatches and looser lending standards.

Main Topics: The evolution of emerging markets investing (Priority: 5/5): Koenigsberger traces EM from the 1980s debt-crisis era to a more sophisticated asset class with broader tools, better policy, and greater investor relevance. EM debt versus EM equity (Priority: 5/5): He argues investors can often achieve equity-like returns in EM debt with better downside protection, especially through senior secured and structured private credit. Policy convergence and EM resilience (Priority: 4/5): EM central banks and corporates were often ahead of developed markets in responding to inflation, making EM look more like DM and DM more like the old EM. Alpha through underwriting, not indexing (Priority: 5/5): Koenigsberger emphasizes case-by-case analysis, avoiding benchmark traps, and focusing on what to own and what not to own rather than passive beta exposure. Private credit opportunities and governance (Priority: 5/5): He highlights market failures in countries like Turkey and Mexico, where banks cannot or will not lend, and where private credit can impose governance improvements. Distressed investing, restructuring, and catalysts (Priority: 4/5): He describes how value is created in sovereign and corporate restructurings through legal structure, creditor coordination, and identifying genuine asymmetry. Risks in developed market private credit (Priority: 4/5): He contrasts EM’s explicit liquidity constraints and institutional structure with DM private credit’s rapid growth, retail inflows, and hidden liquidity risk.

Key Arguments: Emerging markets are no longer a single high-volatility trade; they are a diversified set of countries and instruments that require nuanced underwriting. The biggest source of EM alpha is avoiding index-driven mistakes and owning only what has been independently underwritten. EM debt can deliver low-double-digit or equity-like returns without the same currency and governance risks as EM equity. Local-currency EM debt performance was driven roughly half by currency moves and half by rate moves in the prior year. Post-COVID EM central banks responded faster than developed market central banks, helping narrow the policy gap between EM and DM. Private credit in EM often fills genuine financing gaps where banks cannot lend due to regulation, currency constraints, or balance-sheet issues. In EM private credit, lenders can require covenants, collateral, governance upgrades, and dollar-linked cash flows, improving downside protection. Developed market private credit’s headline problem is liquidity mismatch: funds promised liquidity to retail investors but cannot always deliver it. Distressed investing should be based on absolute-value asymmetry and restructuring analysis, not simply on price declines or benchmark weight. True opportunities often come from catalysts such as restructurings, legal structures, creditor coordination, and political transitions. EM investors should be explicit about liquidity tradeoffs; if they accept less liquidity, they can often receive more yield and lower credit risk than in public markets.

Data Points: Years in emerging markets: 39 years - Koenigsberger says he has been investing in EM since the mid-to-late 1980s. EM index concentration example: Argentina was 18% of the EM bond index - Used to illustrate how benchmark-driven investing can force ownership of risky names. Local EM debt return split: About 50% currency / 50% rates - His estimate of last year’s local-currency EM debt performance drivers. Turkey lira move (2018 to today reference): From 1.5 to 7 to 12, later cited at 44 - Illustrates extreme FX volatility and why dollar-based lending can be safer. Typical EM equity return target: 10%–12% - He says EM debt/private credit can target similar returns with less risk. Typical private credit returns in EM example: 15%–18% - Illustrated with senior secured lending in Turkey. China property sector supply: Hundreds of homebuilders, then about 50 with offshore bonds - Shows how an index can become distorted and leave only a handful of investable distressed credits. China property names of interest: 5 to 10 names - His estimate of the subset that still looks attractive after screening. Argentina bond price example: 30 cents then 85 cents - Used to show how an opportunity can pass as prices recover. Pakistan example: 30 cents to 80 cents - Cited as an example of something that was opportunistic at 30, not at 80. Sri Lanka example: 40 cents to 90 cents - Another illustration of diminishing asymmetry as prices rise. Russia 1998 asset collapse: 100 cents to 6 cents - Used as an example of deep distress followed by restructuring value. Venezuela example: Single digits / low double digits to 35–50 cents - He says select restricted claims and subsequent political developments created large returns. EM private credit average tenor: About 2–3 years - He contrasts this with much longer structural lockups often discussed in developed markets. EM debt dislocation count: About 13 dislocations - Over the last 35 years, according to his estimate. Peak-to-trough EM debt drawdown: About 27% on average in 5 months - He says liquid EM debt can still suffer large short-term losses during dislocations. Post-dislocation recovery: Up 30% to 50% in 12–24 months - He notes EM debt often rebounds strongly after selling pressure. GCC capital outflow/repatriation expectation: Expected outflows, then short-run repatriation back to GCC - He links Middle East conflict and regional capital allocation shifts to private credit opportunities. Indicative yield uplift in EM private credit: Around 10% more yield than public market - His estimate of the premium for explicitly giving up liquidity.

Pivotal Quotes: "EM has become a lot more like DM with all sorts of different flavors and options to invest in along the way." — Robert Koenigsberger: He explains how the asset class has matured from a crisis-driven niche into a broader strategic allocation. "The indices have done more damage to emerging market investors than any idiosyncratic event itself." — Robert Koenigsberger: He criticizes benchmark-driven EM investing for forcing ownership of poor risks and reducing flexibility. "We want to do the happy trade, not the grumpy trade." — Robert Koenigsberger: He describes a disciplined approach to buying on conviction and scaling in, rather than waiting for perfect bottoms.

Implications: For allocators, EM may offer more attractive, better-structured risk than many assume—especially in private credit. The key is active underwriting, governance discipline, and explicit liquidity tradeoffs, not passive benchmark exposure.