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A practitioner's guide to finding alpha in fixed income trading in emerging markets Emerging fixed income markets are both large and fast growing. China, currently the second largest economy in the world, is predicted to overtake the United States by 2030. Chinese fixed income markets are worth more than $11 trillion USD and are being added to global fixed income indices starting in 2019. Access for foreigners to the Indian fixed income market, valued at almost 1trn USD, is also becoming easier - a trend repeated in emerging markets around the world. The move to include large Emerging Market (EM) fixed income markets into non-EM benchmarks requires non-EM specialists to understand EM fixed income. Trading Fixed Income in Emerging Markets examines the principle drivers for EM fixed income investing. This timely guide suggests a more systematic approach to EM fixed income trading with a focus on practical trading rules on how to generate alpha, assisting EM practitioners to limit market-share losses to passive investment vehicles.  The definitive text on trading EM fixed income, this book is heavily data-driven - every trading rule is thoroughly back-tested over the last 10+ years. Case studies help readers identify and benefit from market regularities, while discussions of the business cycle and typical EM events inform and optimise trading strategies. Topics include portfolio construction, how to apply ESG principles to EM and the future of EM investing in the realm of Big Data and machine learning. Written by practitioners for practitioners, this book: Provides effective, immediately-accessible tools Covers all three fixed income asset classes: EMFX, EM local rates and EM credit Thoroughly analyses the impact of the global macro cycle on EM investing Examines the influence of the financial rise of China and its fixed income markets Includes case studies of trades that illustrate how markets typically behave in certain situations  The first book of its kind, Trading Fixed Income in Emerging Markets: A Practitioner's Guide is an indispensable resource for EM fund managers, analysts and strategists, sell-side professionals in EM and non-EM specialists considering activity in emerging markets.

A practitioner's guide to finding alpha in fixed income trading in emerging markets Emerging fixed income markets are both large and fast growing. China, currently the second largest economy in the world, is predicted to overtake the United States by 2030. Chinese fixed income markets are worth more than $11 trillion USD and are being added to global fixed income indices starting in 2019. Access for foreigners to the Indian fixed income market, valued at almost 1trn USD, is also becoming easier – a trend repeated in emerging markets around the world. The move to include large Emerging Market (EM) fixed income markets into non-EM benchmarks requires non-EM specialists to understand EM fixed income. Trading Fixed Income in Emerging Markets examines the principle drivers for EM fixed income investing. This timely guide suggests a more systematic approach to EM fixed income trading with a focus on practical trading rules on how to generate alpha, assisting EM practitioners to limit market-share losses to passive investment vehicles. The definitive text on trading EM fixed income, this book is heavily data-driven – every trading rule is thoroughly back-tested over the last 10+ years. Case studies help readers identify and benefit from market regularities, while discussions of the business cycle and typical EM events inform and optimise trading strategies. Topics include portfolio construction, how to apply ESG principles to EM and the future of EM investing in the realm of Big Data and machine learning. Written by practitioners for practitioners, this book: * Provides effective, immediately-accessible tools * Covers all three fixed income asset classes: EMFX, EM local rates and EM credit * Thoroughly analyses the impact of the global macro cycle on EM investing * Examines the influence of the financial rise of China and its fixed income markets * Includes case studies of trades that illustrate how markets typically behave in certain situations The first book of its kind, Trading Fixed Income in Emerging Markets: A Practitioner's Guide is an indispensable resource for EM fund managers, analysts and strategists, sell-side professionals in EM and non-EM specialists considering activity in emerging markets.

This chapter describes how the development of China has shaped emerging market ever since it joined the World Trade Organization in 2002. The impact of China on commodities deserves special attention. China is important for commodity exporters because its growth has been highly commodity intensive. As of 2019, the financial and capital account linkage between China and the rest of the world is still much more limited than for the average emerging market country. China's capital account was mostly closed and is only slowly being opened. The Chinese authorities see foreign capital inflow as a solution to outflow pressures, rather than overly relying on the sale of accumulated foreign exchange reserves. One financial asset price already matters intensely to global markets: the Chinese Yuan (CNY). Currency trading also started out with an offshore version, but foreign investors actively trade the CNY, and they do so to a greater extent than Chinese bonds or equities.

There has been a fair amount of criticism with respect to fixed‐income benchmarks in recent years. Higher index weights force indexed investors to add the most money to bonds of countries where debt is rising the fastest. This makes it easier for profligate governments to avoid necessary fiscal adjustments. Frontier markets refer to the less developed capital markets in the emerging world. They are often used to generate alpha by adding them as off‐benchmark positions to the portfolio. It is well known that the Markowitz mean variance framework does not work overly well in practice. It commonly produces corner solutions that are difficult (and risky) to implement. In this chapter, the authors analyse several other contenders for portfolio allocation and apply these techniques to EMFX. They pick EMFX because it is the most liquid of the emerging market asset classes under consideration, and also one of the more volatile.

Generating alpha from emerging market (EM) rates is of rising significance to investors. Interest rate cycles in developed market (DM) have been a major source of alpha for investors broadly and for leveraged investors in particular. The distinction between EM and DM for rates becomes the clearest during times of rising risk aversion. The behaviour of rates during risk aversion is the litmus test for understanding whether a country is a developed market, and much more so than traditional classifications by GDP per head. There are two aspects of trading EM rates: there is the structural compression trade relative to G3 rates and the business cycle trade. This chapter starts with the basic rules of how to trade US rates. It focuses on the time period, from 1990 until 2009, as the relevant monetary policy framework for EM is mostly still one of positive nominal rates.

The overall investment appeal for emerging market (EM) is based on the notion that EM structurally grow faster than developing market until their GDP per head has mostly caught up. This should over time structurally lower the credit risk and lead to spread compression. There has been strong ratings migration in EM, as a strong upgrade cycle has led to a rising ratio of IG‐rated constituents in the EMBI. The easiest way to see how carry performs in EM credit is to chart the EM HY index relative to the IG index on a cash‐neutral basis. Warren Buffett focuses on safe companies, as levering up portfolios of safe companies tends to result in higher IRs than taking the same amount of risk in risky companies. Using the business cycle, one should be able to improve on the simple Buffett rule to lever up high‐quality credits at the short end of the curve.

Two main growth stories in the emerging market fixed‐income space offer major opportunities and lead to increased investor interest and participation: local markets and external debt. Ever since the emerging markets (EM) crisis of the late 1990s and 2000s, EM countries have tried to unwind the original sin of previously having issued large stocks of USD‐denominated debt. Rising EMFX trading volumes are therefore logically going hand in hand with the rise in outstanding local currency debt. This chapter looks at the local market index and split the performance into FX and rates, where the rates performances is measured as the EM bond index with FX hedges. It explains that there are substantial alpha opportunities in EM and that EM cannot be easily replicated by the equivalent developed markets assets.

This chapter outlines how global macro can be applied to emerging market (EM). It suggests some trading rules that rely on unsustainable divergences between EM and developed markets (DM). Having established the importance of global macro for EM investing, the chapter investigates in more detail several key global macro events and how they impact EM. It also investigates how the DXY cycle, the commodity cycle, and risk aversion impact EM assets. Among the more important global macro events that occur on a regular basis are US recessions. US recessions are more important for global macro and the EM asset class than recessions in the rest of the G3. From a trading perspective, the main opportunities going into and during US recessions are potential receivers. If EM central banks are able to follow the Fed in interest rate cuts, it often happens with a lag – and lags create opportunities.

This chapter explores the trading rules that are found useful for more idiosyncratic events. Most of the events are caused by policies that are implemented by authorities during crises. FX is more important for inflation in emerging market (EM) than in developed market (DM). FX intervention is the first line of defense because costs to policy makers are quite low. In DM, the main distinction is between bilateral and multilateral intervention, with the presumption being that the likelihood of success is much higher for the multilateral kind. In EM, though, intervention is almost always bilateral, as the US Treasury does not get involved. Emergency rate hikes come only after FX intervention has not been able to stabilize FX markets. Costs are seen as higher by policy makers, given that emergency rate hikes slow down growth and can contribute to recessions.