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The Case for Emerging Markets Distressed, Stressed and Dislocated Credit Investing

  • Writer: PrimeAlpha Thought Leadership
    PrimeAlpha Thought Leadership
  • Aug 6, 2020
  • 2 min read

Updated: Mar 18

The Case for Emerging Markets Distressed, Stressed and Dislocated Credit Investing


The Growing Opportunity set for Emerging Markets Credit


The Emerging Markets (EM) credit sector has witnessed significant growth, with its tradeable debt stock expanding 15% annually from 2000 to 2020. The foreign currency debt alone has doubled since 2008, surpassing $4 trillion, while domestic debt is nearing $25 trillion. Despite this substantial growth and higher Sharpe ratios compared to US Treasuries, EM credit is still underrepresented in many institutional portfolios. This asset class offers attractive features such as robust returns, relatively low volatility, and low correlation with global market movements, making it a valuable option for portfolio diversification.


Distressed EM credit opportunities have surged due to factors like strong USD periods, rapid increases in foreign debt, and economic downturns affecting corporate revenues. Currently, there is over $300 billion in distressed bonds, with an even larger volume in off-index bonds. The inefficiency in this market, due to limited participation, contrasts with the comparable recovery prospects seen in developed markets, presenting unique investment opportunities for substantial returns.


Despite the strong performance and significant outperformance of other asset classes from 2010 to 2020, distressed EM credit remains largely overlooked. Loans in this segment often offer higher returns for similar credit risks and come with a strong liquidity premium for less liquid assets, leading to pronounced pricing discrepancies between loans and bonds. This market's limited competition for distressed loans presents considerable opportunities for investors willing to take on some illiquidity for potentially high gains.


Access the full article to delve deeper into the burgeoning opportunities within the Emerging Markets credit sector. Uncover how this underrepresented asset class can significantly enhance your investment portfolio through diversification and robust returns. Explore the dynamics of distressed EM credit and learn how to capitalize on these opportunities for substantial financial gains.



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Table of Contents

  • The Growing Opportunity set for Emerging Markets Credit

  • Distressed Credit Dynamics

    • Periods of USD strength often trigger Emerging Markets distressed and stressed credit opportunities.

    • Emerging Markets distressed credit opportunities likely to continue growing.

    • Emerging Markets distressed credit, despite its equity-like features, has dramatically outperformed other asset classes in the last cycle (from 2010 – 2020).

    • Strong liquidity premium for less liquid assets.

    • Stressed / distressed loans further benefit from an even more limited audience of prospective buyers.




Thanks to our Contributor

Sandglass Capital Advisors Logo


Sandglass Capital Management focuses on investments in Distressed, Dislocations, and Deep Value across the Emerging Markets and frontier world. Sandglass founders believe that the space represents an Alpha rich universe of potential investment opportunities with significant convexity of returns and limited correlation to global market factors. Asset prices in emerging markets are prone to frequent dislocations and mispricing that can create asymmetric return opportunities for diligent investors.

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