Historically, a combination of high yield and minimal default risk has led emerging markets debt ((EMD)) investors to enjoy strong returns-but the impact of COVID-19 has called into question the potential for such favorable returns in the future. Historically speaking, however, markets have overestimated the probability of default and underestimated eventual recovery rates.
Defaults Priced In
The bad news is that we believe in 2020 we will likely see more sovereign defaults than we have ever seen before in a single calendar year.
On a positive note, we believe the asset class is already priced