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Perspectives: Emerging Markets – new dynamics
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What’s unique about Emerging Markets and what themes should investors be paying attention to? Polina Kurdyavko, Head of BlueBay Emerging Markets, joins Craig Kussel, HSBC’s Head of Emerging Markets Macro Sales – UK, South Africa and Israel, for a discussion about the risks and opportunities across Emerging Markets against a dynamic backdrop, where investors are seeking diversification.
Watch or listen to find out more.
This episode was recorded on the sidelines of the HSBC Gulf Cooperation Council (GCC) Exchanges Conference in London on 18 June 2025.
Read more about the GCC conference here https://www.business.hsbc.com/en-gb/campaigns/hsbc-gulf-cooperation-council-conference-gcc
Disclaimer: Views of external guest speakers do not represent those of HSBC.
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Transcript
Introduction to HSBC Global Viewpoint
00:00:01
Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
00:00:22
Speaker
Welcome to this episode of the HSBC Perspective series.
Meet the Experts: Craig Cussell and Paulina Kudjavko
00:00:26
Speaker
And thank you so much for joining us for this timely podcast on emerging market dynamic and trends. My name is Craig Cussell and I run the Emerging Market Macro Sales Team for the United Kingdom, South Africa and Israel.
00:00:41
Speaker
I am honored to be joined today by Paulina Kudjavko, Head of Emerging Markets for Blue Bay Asset Management. Paulina, good morning and welcome. Thank you so much for joining us today.
00:00:53
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I would love to begin by giving our audience a brief introduction to how you ended up in emerging markets and what your current role is today.
Paulina's Career Journey and Insights
00:01:02
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Well, I'll start by saying it has been an unusual journey.
00:01:05
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I am half Armenian, half Ukrainian by background. I grew up in the Soviet Union and my family lost their money three times by the time I decided to start my career.
00:01:18
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So my father had a request to focus on ah career that would help us prevent the next crisis that occurs. Now, the truth be told, it has been very difficult to find job in the Soviet Union.
00:01:33
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So I started washing dishes in Redlands, California. um After which I found a job in the travel agency in France. And with a short stint ah in Russia during the 98-99 crisis where i worked with a macro advisor, I decided to look for job abroad, which was always easier, unfortunately, than the job in my home country.
00:01:59
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So I sent 40 faxes to all the top kind companies in Austria and got one reply saying that we'd like to meet you because we never saw the person who had the audacity for applying for a job without a financial degree, without a work permit and without the language.
00:02:16
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And that's how I started in asset management. um I got the job in a company called East Fund Management, which was a joint venture between Bank Austria and the Alliance Capital, and then was transferred to London, where i did emerging market equities.
00:02:31
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Following that, spent a few years on the bank side, covering emerging market credit just after Argentina collapsed. And for the last 20 years, I've been running emerging markets at Blue Bay. What an incredible story. And it's one of the reasons why i love being involved in emerging markets so much.
Emerging Markets: Challenges and Opportunities
00:02:48
Speaker
So emerging markets are currently at a dynamic crossroads at the moment. Global tensions across the world, uncertainty about interest rates and inflation, coupled with fiscal concerns across the globe, have provided one of the most difficult and challenging backdrops I can ever remember.
00:03:06
Speaker
How on earth do you cope with this? To me, it's a fascinating time to be investing in alternative strategies. And when thinking about alternative approach, you can take two different paths.
00:03:19
Speaker
On one hand, you can explore directional views in alternative strategies, where you optimize on the discount that you get to price at which you invest.
00:03:30
Speaker
And that is, in our case, a strategy which is focused on the emerging market loan, where you get a discounted entry point to generate your double-digit return. Another way for investing is to focus on volatility and generate returns through the volatility.
00:03:47
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And that has been also a very popular strategy for us, especially in the last decade, where volatility has been elevated. The truth is, both strategies have delivered close to 20% gross returns on the annualized basis and have performed particularly well over the last five years.
00:04:05
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And because of the focus on, again, generating returns either through price dislocations and taking advantage of volatility or taking advantage of EM always being the unwanted asset class, where actually if you forego liquidity, you get paid double digit returns without taking too much credit risk.
00:04:25
Speaker
That is really, really insightful. And I think to people who are hearing about EM for the first time in particular, I think that provides a really good overview for the different ways that you actually can manage at risk and make money. So thank you very much for that. How do you currently see the world at the moment and what is your outlook for the future?
00:04:43
Speaker
When I ask myself this question, I start by identifying the themes where I have relatively high probability. Firstly, we always have to start with the basics.
00:04:56
Speaker
Highest correlation that spreads in emerging markets have is to the expected default outlook. So let's start with that. The good news is we think the default in the emerging markets is likely to be very low.
00:05:10
Speaker
The default rate we expect this year to be zero for the sovereigns and below 2% for the corporates, well below historical average. The bad news, if I could put it this way, is that that default cycle might be short-lived because we are observing both US and China withdrawing liquidity from a more vulnerable emerging market countries.
00:05:35
Speaker
And therefore, our focus and opportunity set zooms in on how do we exploit the benign environment, but for a very short period of time in emerging markets.
00:05:47
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The second theme that I would focus on is the theme around geopolitics and trade tensions. To us, the key takeaways from those two factors are steeper curves and focus on higher quality.
00:06:06
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Why do I say that? We're spending more today than we were during the Cold War on military and defense equipment. That puts a lot more strain on the fiscal. Equally, we're in a world where growth outlook is at best uncertain.
00:06:22
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When you have a combination of lower growth and fiscal pressure, you tend to have steeper curves. And the third point that I would make is focus on different paths for global central banks in context of their economic cycle.
00:06:43
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We're seeing Asian region, which is the main beneficiaries at the moment of lower inflation trend, as well as still pretty supportive growth outlook that allows Asian central banks to be a lot more comfortable with cutting the rates and stimulating the economy, as opposed to their counterparts in the US, where Fed is a lot more uncertain given the outlook both on inflation and fiscal
Investment Strategies in Emerging Markets
00:07:08
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discipline.
00:07:08
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What is the main difference for you then between emerging markets and developed markets at the moment? What is it that makes them unique? Is it the stage where they are in the inflation cycle or is it a combination of factors?
00:07:22
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To me, whether we're talking about emerging market or developed market, if I think about two main drivers of return on your investment in a country, in current environment, it has to be fiscal and politics.
00:07:40
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And to a large degree, emerging markets are no different here. What is the difference, though, is that for the last 25 years, I've been investing in the asset class that has never been popular.
00:07:52
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Maybe there was a hope in mid-nots or 2000s, rather, where we might change the trajectory. But last decade has been a very, very tough environment for emerging markets.
00:08:05
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This is the first time where we're seeing investors turning away from their core markets and looking for alternative. And so to me, the difference this time around is that the focus on emerging markets is growing at a very fast pace compared to what we've observed over the last decade.
00:08:25
Speaker
And that's likely to potentially translate into flows, which could in itself be a self-fulfilling prophecy when I talk about the default forecast going forward. So just to make sure that I understand this correctly, effectively, we've been in an era of U.S. exceptionalism for the last however many years. And what we're looking at now is potentially people looking for alternative assets other than the U.S. and the dollar.
00:08:52
Speaker
And what you seem to be saying is that emerging markets is presenting itself as a suitable destination. Would that be correct? Absolutely. And is there any differentiation amongst emerging markets to decide where that differentiation should be?
00:09:09
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There is always a question on what are the bright spots to invest in. And I think we can cut it in many different ways. Are we looking at the local debt or hard currency debt?
00:09:22
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Are we looking at the differentiation by region? Are we looking at the differentiation within the corporate debt and sovereign debt? And all these questions are the ones that we're talking to investors about at the moment.
00:09:35
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But when I think about the flows that we've observed, we've had if I look at our platform, almost 20% increase in inflows in the emerging market fixed income platform since the beginning of the year, over 80% of those flows have been reallocation away from other managers.
00:09:52
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So while the questions are coming through, the new money coming into the asset class, it's at the very early stage. And so we would expect more flows to come in towards the end of the year, provided the fundamental narrative supports these numbers.
00:10:08
Speaker
How important is bricks in all of this? To me, if I think about BRICS as a group, the main implication today in these countries is the fact that 1% reallocation away from the US core markets might translate into 20 or 30% inflows in individual EM economies, because even larger EM economies like countries that are within the BRICS are still very small in the context of US market.
00:10:39
Speaker
And so to me, the theme that we're observing today more broadly when it comes to broader BRICS is that the flows that are starting to come in, and again, they come in from wealth network, and I believe your colleagues would have a much more interesting take on what the flows have been recently than institutional investors.
00:11:00
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But we are seeing very strong technical for all of those markets because of that reallocation of capital for now on the wealth side. So you mentioned earlier hard or local currency.
00:11:13
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Any preference at the moment or is a country and region specific? I would say when investors decide between hard and local, you've got to pick your poison. And the differentiation is expected returns versus volatility.
00:11:31
Speaker
If I think about expected return, we would expect local currency this year and next year to outperform hard currency. If I think about the volatility, we would also expect local currency index to still have higher volatility than hard currency to the tune of 2% to 3%, which has been in line with historical vol.
00:11:54
Speaker
So when I say pick your poison, it's really very much driven by what is the tolerance for volatility of investors that want to decide where to start from.
00:12:05
Speaker
With that said, I would say that usually the first step tends to be hard currency debt. And that's why if I look at our flows year to date, even on the reallocation, um as well as new queries, 80% of it starts with hard currency debt.
00:12:23
Speaker
Provided we see more interest coming from ah to towards emerging markets in the end, towards the end of the year and fundamental outlook growth wise being relatively supportive, I think next year is the year for local currency.
Regional Focus: Middle East and LATAM Strategies
00:12:39
Speaker
Great to hear. So you mentioned thematics earlier. So I want to just look at the oil price briefly, if we may. Given its impact on the Middle East, as well as Asian importers and exporters, who do you think are going to be the biggest winners and the losers with the volatility that we've seen in oil at the moment?
00:12:58
Speaker
You know, Craig, I would say that while we focus so much on oil, to me, when I think about global winners and losers, In this environment, it always comes down to fiscal and politics.
00:13:12
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Why do I say that? If you think about the fiscal challenge, Looking at the three regions, Latin America at the moment is split in have and have nots.
00:13:25
Speaker
You have the Mexicos and the Perus of this world and to some degree Chile and even Argentina, dare I say the word out loud, that actually have managed to have fiscally prudent policies.
00:13:38
Speaker
They also largely have been on the right side of the politics, especially with recent transition. And then you have countries like Colombia, like Brazil, where fiscal can be more of a challenge and combined with a political transition creates uncertainty for investors.
00:13:56
Speaker
If you look at this time zone, Eastern Europe is fiscally challenged. And the question is, can the growth be created from the spending that is sufficient to counter that fiscal challenge?
00:14:10
Speaker
Whereas in Asia, we feel that, generically speaking, Asia is a net winner fiscally. And therefore, these are the countries that are allowing, that are in a more comfortable spot to start cutting and support growth. So if we can drill down into the regions, I think the Middle East is probably a good place to start, given the current transition it's going through at the moment. now I once had a boss who said to me that carry is what you get paid for having the wrong positions.
00:14:37
Speaker
And if I look at the Middle East, clients at the moment are very focused on two of the big carry trades there at the moment. They are the trades which have low volatility or relatively low volatility and tend to give much higher yields, and that's Egypt and Turkey.
00:14:51
Speaker
In three or six months time, are these still going to be the trades that people are going to be happy to be owning? The short answer is yes. But the key challenge in owning those trades is being able to size the risk appropriately.
00:15:06
Speaker
Because both trades have relatively thin markets. And both trades are subject for different reasons to headline risk. And we've seen that with Turkey recently, and we've seen that with Egypt.
00:15:20
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um pretty much consistently through the last couple of years, despite being a new important strategic partner for the Middle East. So to me, if you want to hold those trades and we like those trades, make sure that they're not going to be destroying your P&L if tomorrow we get FT issuing another headline.
00:15:38
Speaker
So staying with the region, what do you think the biggest risks are in the Middle East right now? Military escalation, no matter how much we try to predict it, we are unable to accurately expected or other accurately predict the assets performance in the military conflict, as Russia and Ukraine has demonstrated.
00:16:02
Speaker
However, the beauty of fixed income is that when the spreads are tight, the cost of hedging is very small. And so for us, from the alternative perspective, we love ah the ability that we the market provides to take hedges against those geopolitical escalations given the such low cost of hedging. In fact, we've generated positive return both on Russia-Ukraine war by taking those
00:16:33
Speaker
hedge trades ahead of the war. And we have also so far made positive returns on the geopolitical tensions in the region. And we continue to see opportunities to effectively hedge your risk.
00:16:44
Speaker
Wow. I mean, that's absolutely remarkable. Well done for doing that. So what are the biggest threats to you then in the region? Military as well? Or is there anything else that people should be concerned about?
00:16:57
Speaker
Regime change politics? When I think about the region two, three years from now, I think the biggest challenge would actually be corporate governance. Because these regions, or these countries, in particular countries like Saudi Arabia, are expanding at phenomenal pace and transforming their financial markets, as well as their manufacturing sector, their logistics sector, all at the same time.
00:17:24
Speaker
However, what we're lacking in the region is deep corporate history and memories. And so my advice would be to all investors in the region, especially as we go deeper in the corporate sector, make sure you don't just visit the country, but look at 20, 30 year history, all the corporates in this country and read your prospectuses.
00:17:49
Speaker
That is really, really good advice. It's something that only professionals would really truly understand. Staying in the Middle East, but taking a step back, the Asia-Meanat trade corridor has been really instrumental in helping many of the emerging markets. You and I were chatting beforehand about how we started our careers. And we look at the emerging markets from the 1990s who have become global players today.
00:18:13
Speaker
Many of them in the Middle East and Asia have been able to do that because of this Asia-Meanat trade corridor. Looking at this corridor, who do you think are going to be the winners going forward?
Strategic Partnerships and Economic Alliances
00:18:24
Speaker
And is there anybody who you think may have peaked already and the best days are behind? Well, let me identify the themes first and then translate that into the winners and losers.
00:18:39
Speaker
What are the old themes and the new themes? The old theme between the two regions has been oil. The new theme is that the magnitude of the oil trade has increased dramatically. And today, India and China the two biggest buyers of Middle Eastern oil.
00:18:57
Speaker
The old theme has been logistics. As we know, given the regional proximity, in fact, it always surprised me that when I travel from Delhi to Abu Dhabi, it's a quicker journey than the journey from Delhi to um one of the larger other other larger cities within India.
00:19:15
Speaker
But the new news is that logistical hub has transformed in terms of Asian participation um within the region. We're seeing China aggressively buying a number of ports within the region, and we feel that that increases substantially the collaboration between the two countries.
00:19:34
Speaker
The third theme would be location and resources. Again, historically, the region was a hub for cheap resource from Asia. However, today we're seeing two world-class wealth-creating hubs that are cooperating as well as competing.
00:19:56
Speaker
Now, the implication for us is that this region has always been important as a fundt um ah fundraising region, as well as investment region. It's just taken and next step up.
00:20:09
Speaker
And if you put those three themes together, to your question, who are the winners and the losers? To me, it's difficult to identify the losers within the two hubs because to put it simply, it's a partnership made in heaven.
00:20:25
Speaker
Therefore, the losers are likely to be countries outside the club rather than the countries within the club. And the winners, I think the partnership between Saudi and China has improved beyond what I could have foreseen.
00:20:40
Speaker
And it's very interesting to see what is the next step to that evolution. But ultimately, should that continue to develop as we're seeing, we can see ah investments in the equity markets, I would imagine, being quite ah fruitful from a return perspective in both of the regions.
00:21:00
Speaker
In these regions in Asia, we spend quite a lot of time on the Middle East. What are your favourite themes in Asia at the moment? So to me, there are two ways to generate returns in the Asian region, if I were to generalize it.
00:21:13
Speaker
One is betting on the monetary cycle. And that to us is the clear trade, whether it's effects appreciation on the back of the weaker dollar theme, whether it's a rates trade on the back of disinflation and cutting cycle.
00:21:29
Speaker
These are the themes that we think are more ingrained. The other theme is, of course, growth, and that's where you look at the equity markets. The challenge in the Asian region is that when we talk about hard currency credit, there aren't that many opportunities in our view, and therefore we really have to go into local markets to generate the returns.
00:21:50
Speaker
So look, no discussion on emerging markets is ever gonna be complete without a segue into Letain. So has the hype around tariffs been overplayed? In short, yes.
00:22:03
Speaker
And I do think we often forget that LATAM as a region is the one that is has the closest proximity to the US, and therefore, US strategically should look at this region as a partner.
00:22:16
Speaker
Now, the best partners come from the situation where, again, you have political alliance as well as economic alliance. And that is the single factor in our view that will determine which countries are the main winners and the losers from the relationship between the two countries going forward.
00:22:37
Speaker
At the start of this podcast, you smiled when we spoke about Argentina, and it's a country which I think is very close to both of our hearts. Is this year going to finally be the year for Argentina and maybe even Venezuela to finally reemerge?
00:22:55
Speaker
Well, um i yes, I can't stop smiling when I think about Argentina because um at some stage even journalists thought that Argentina was a swear word when you would start talking about emerging markets. But interesting how quickly um perspectives change.
00:23:12
Speaker
So on Argentina, the first thing I would say is Argentina this time around has both been lucky and smart. They've implemented the right policies.
00:23:23
Speaker
finally on the fiscal and that gave them the anchor to growth. But also they happen to be one of the very few countries in the region who had the political alignment.
00:23:35
Speaker
And so when it comes to the US and the theme that we've just talked about, when they look at the neighbors, there are very few countries that ticked these boxes and Argentina happened to be one of them.
00:23:45
Speaker
And so the best thing that Argentines have done, they've seized this opportunity. Now, we don't know how long it lasts. We know we have political transition in countries like Colombia, in Brazil, and that could change the dynamic.
00:23:58
Speaker
But while this dynamic is happening, Argentines are rightly so taking advantage of it. With that said, and Do I think that Argentina has migrated from a serial default of frontier economy to the beta emerging market countries?
00:24:16
Speaker
Not yet. What is the key variable? They've got to be quick enough to translate this into growth. If we don't see growth while they have this window, there are ah bigger challenges ahead. But for now, we are constructive.
00:24:30
Speaker
Venezuela. Venezuela. might be one of the losers of the current um geopolitical and political environment. Because there while there was a point where it was very important for US to reestablish relationship with Venezuela,
00:24:50
Speaker
Given the additional oil supply that's coming to market over the last over the next 12 months, which could be up to 10% of global oil supply from places like Guyana, from places like Kazakhstan, from places like Brazil, the relevance of Venezuela is diminishing at the very fast pace.
00:25:06
Speaker
And my advice to the current Venezuelan government would be the time is running out. You've got to act now if you want to have a chance of re-emerging as the performing economy in a couple of years time.
00:25:21
Speaker
This has been absolutely fascinating. Thank you so much. But the moment of truth has now arrived. It's
Closing Remarks and Future Frameworks
00:25:28
Speaker
time to put you on the spot. How are you going to monetize these ideas? What are your favorite trades at the moment?
00:25:36
Speaker
Well, let me come back to the themes and translate them in the trades.
00:25:42
Speaker
The theme of low defaults, but maybe not for longer, for us is best translated into absolute return strategy that takes advantage of volatility, where on one hand, we have a long view and the long bias to some of the serial defaulters that have just recently defaulted, anyone from Ecuador, you know even Argentina and a few other countries.
00:26:05
Speaker
And on the other hand, we're positioning more on the short side in the vulnerable countries that we think have high probability of default over the next 12 to 24 months and are still not trading at distressed levels, given that market is relatively sanguine when it comes to provision of capital.
00:26:25
Speaker
And most of those countries are at the moment in the sub-Saharan African regions.
00:26:30
Speaker
The second theme that I outlined, the divergent central bank policies. Again, the best way to play that theme is to position it um from the long side in the local markets and in the Asian region. But to us, given that the low starting level of yields in this region, this trade works equally good as a hedge, not only as an alpha trade.
00:26:55
Speaker
This is not our top double digit return opportunity. The best way to play geopolitics in our view is through hedges in the region, both in credit and effects. As I mentioned earlier, the beauty of fixed income, it's always asymmetric risk reward, and you have very cheap hedges available, both through CDS and cash bonds in the regions with high geopolitical tension.
00:27:19
Speaker
Last but not least, I want to come back to EM loans. There's been so much hype about private debt in developed markets, but the minute you mention the two letters EM, m the hype disappears.
00:27:32
Speaker
And that's exactly where we see opportunity. Today, you are able to generate double digit returns in some of the EM loans if you can lock up your money for three to five years without taking a lot of credit risk, but actually just taking illiquidity risk.
00:27:50
Speaker
This is the correct premium for liquidity when you get paid double what you're making in the bond market, and it's still present in the emerging market loans. Thank you. That was really, really insightful.
00:28:02
Speaker
I can't believe how the time has flown and we've actually come to an end. I speak to clients every day about markets across the globe and it amazes me how confused people are about markets at the moment.
00:28:14
Speaker
Yet I speak to you and you seem to have provided this amazing framework and a certain degree of clarity, which I think when people listen to this podcast might give people a new framework to be able to use to decide how to look at emerging markets. So firstly, let's just hope you're right.
00:28:32
Speaker
And secondly, thank you so much for doing this podcast for us. Goodbye and good luck. It's been an absolute pleasure. Thank you so much, Greg. Thank you. Thank you for joining us at HSBC Global Viewpoint.
00:28:43
Speaker
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