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Emerging markets (EM) debt performed well in the first quarter of 2024, and we anticipate more of the same in the next quarter, thanks to a benign global macro backdrop, solid EM credit fundamentals, improving technical conditions, and still-decent valuations.

We continue to believe that there are attractive opportunities for investors to increase exposure to long-duration securities to lock in attractive real and nominal yields.

Despite strong performance this year, we also see selective value in high-beta, high-yield credit because we believe the global market environment will be conducive to its outperformance.

We also continue see scope for fundamental differentiation and prefer countries with easier access to multilateral and bilateral funding (including frontier and distressed credit).

Meanwhile, the corporate credit space continues to exhibit a combination of differentiated fundamental drivers, favorable supply technical conditions, and attractive relative valuations to select sovereign curves. We are seeking investment opportunities where corporate credit fundamentals and attractive spreads coincide. Short-maturity bonds have outperformed, but opportunities in longer bonds are appearing. We continue to focus on issuers with low refinancing needs, robust balance sheets, and positive credit trajectories.

Below, we break down some of our largest active positions by beta bucket, which is how we allocate our risk budget.

A View of the Potential Opportunities: Overweight/Underweight

High-Beta Bucket

In the high-beta bucket, our largest overweight positions are in Egypt, Ukraine, and Ghana, and our largest underweight positions are in Rwanda, Kenya, and Nigeria.

Egypt (overweight): Significant external financing—which was unlocked through the recently announced International Monetary Fund (IMF) package and foreign direct investment (FDI) deal—is more than adequate to meet Egypt’s needs. The external sector could also prove resilient following the sharp depreciation of the Egyptian pound. We also believe there is room for further spread compression toward peers in the high-beta bucket and curve steepening.

Ukraine’s potential restructuring could be more favorable to eurobond holders than previously anticipated.

Ukraine (overweight): We have increased our overweight based on a potential restructuring that we have interpreted as more favorable for eurobond holders than previously anticipated. Multilateral and bilateral support also remains strong.

Ghana (overweight): We believe the restructuring process is regaining momentum. The prospect of lower core rates and the rally in high-yield names could support recovery values.

Rwanda (underweight): Imbalances in the external sector and unattractive valuations make Rwanda vulnerable.

Kenya (underweight): Spreads have tightened to levels at which we believe there is better value in other high-beta names.

Nigera (underweight): Valuations are tight relative to peers.

Medium-Beta Bucket

In the medium-beta bucket, our largest overweight positions are in Ivory Coast, Guatemala, and Benin, and our largest underweight positions are in Bahrain, Romania, and Dominican Republic.

Ivory Coast (overweight): We believe valuations are favorable relative to peers. The country’s debt is also supported by strong fundamentals and support from development partners, including the IMF. We also believe Senegal’s peaceful post-election political transition will bolster confidence in the Ivory Coast’s political process ahead of its own elections next year.

Benin (overweight): We believe the country’s bonds will continue to be supported by strong fundamental performance and prudent macroeconomic policies. The country will also receive further support from the IMF under the Resilience and Sustainability Facility in late 2024.

Guatemala (overweight): Macroeconomic conditions are strong and valuations are attractive, and although President Bernardo Arévalo will likely face political obstacles, we believe strong leverage ratios and low fiscal deficits will keep Guatemala a strong credit.

Dominican Republic’s valuations are at their tightest levels since 2007.

Bahrain (underweight): Weak fiscal reform efforts, a deterioration in regional geopolitical risks, and tight valuations make us cautious.

Romania (underweight): We are concerned about deteriorating fiscal risks and political noise ahead of this year’s elections. Romania has already been a prolific issuer this year and is running the risk of an abundance of supply.

Dominican Republic (underweight): Although fundamentals continue to be among the strongest in the region, valuations are at their tightest levels since 2007.

Low-Beta Bucket

In the low-beta bucket, our largest overweight positions are in Saudi Arabia, Bermuda, and Paraguay and our largest underweight positions are in Poland, Uruguay, and Indonesia.

Saudi Arabia (overweight): Efforts to diversify the economy away from the energy sector remain largely on track. Oil prices are supportive of the current investment spend, and we see value in Saudi Arabia relative to some of its regional peers.

We believe Paraguay is on an improving fundamental trajectory.

Bermuda (overweight): Bermuda’s bonds have similar valuations to those of Peru and Chile, but we believe the country has a stronger fundamental trajectory with less institutional uncertainty.

Paraguay (overweight): Although Paraguay has lagged year-to-date, we believe the country is on an improving fundamental trajectory and has attractive valuations for the low-beta bucket.

Poland (underweight): Although the medium-term policy framework looks more favorable under the new government, we remain cautious near term due to an increase in political noise following last year’s elections.

Uruguay (underweight): Credit fundamentals in Uruguay remain strong, but bond prices have compressed materially since the COVID-19 pandemic, and we believe this results in limited scope for additional spread tightening.

Indonesia (underweight): Valuations are unappealing. The country’s fundamental outlook became murkier after presidential elections in February, and there is risk of fiscal slippage should the new government increase spending. In addition, a slowdown in the windfall from commodity exports and a persistently strong U.S. dollar could weaken external positions.

Marco Ruijer, CFA, is a portfolio manager on William Blair’s emerging markets debt team.

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The post EM Debt 2024: Solid Beginnings appeared first on William Blair.

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On plastic chairs made from discarded obesity and diabetes drug pen injectors, Novo Nordisk is literally sitting on its blockbuster GLP-1 solution. The cafeteria in its newest site in Denmark is full of chairs and other furniture made from discarded and recycled diabetes and obesity single-use pens.

As millions of prescriptions get written, leading to even more millions of discarded pens, the average person may also someday sit on a chair made from the upcycled byproducts of a trending obesity treatment.

It won’t be easy, though. Beyond the expense and complexity of recycling contaminated medical waste like injection pens, in the medical waste big picture, injector pens are a smaller part of the larger problem.

Helping to spur pharma recycling are the many new users of Novo Nordisk’s Wegovy and Eli Lilly’s Zepbound, who are starting to raise their voices. Reddit threads for both drugs include many questions and comments about the wastefulness of the one-time pens.

“Does anyone else feel guilty about the plastic syringes we just throw away? Must be millions filling up the landfills right now,” one user wrote recently.

Patient interest in recycling is also building in Europe, where some programs and test pilots are already running.

“Particularly in European countries, we are seeing greater interest from patients,” said Katrine DiBona, Novo Nordisk corporate VP for global public affairs and sustainability. “We depend on patients having interest and the willingness to take them back.”

Novo Nordisk has a ReMed program, featured recently on its social media channels with videos of piles of bright plastic pellets and the modern furniture the pens are upcycled into. ReMed is currently the most extensive upcycling plastic pen effort among the fledgling trials and plans across pharma.

The pilot began in five Denmark cities in 2020 during the Covid-19 pandemic, but evolved into the now-established national program. It’s collected 2.4 million of Novo’s pens in Denmark to date, currently with a 50% recycling rate, but aiming for an 85% rate by the end of 2024.

Eli Lilly, Sanofi and Merck joined ReMed last year, and the effort has expanded into the UK, Brazil, France and Japan. There are still no plans set for the US.

“It’s not feasible to collect pens all around the world, and then we fly them to Denmark, and then process them here,” DiBona said. “The numbers are clear. Within Europe, we can ground transport to Denmark for the backend solution. And it’s still a positive business case from a CO2 and environmental perspective. But the minute we start going into different regions, we need a regional back end solution.”

Separately, Eli Lilly is working with Sanofi on a pilot program in France called Recypen, a Lilly spokesperson said. On its own, Lilly is also running a recycling pilot in five cities in Germany and with more partners on “several take back and recycling pilots” in the US and in Europe.

The pharma companies’ efforts mirror those made by industries in general struggling with balancing convenience and consumer demand for environmental responsibility.

“This is not unique to the healthcare space right now. We are seeing a major shift and trends in adopting a circular economy across industries,” said Jamie Pero Parker, sustainability lead and innovation advisor at RTI International, which does research in medical waste and medical device recycling. “The issues come in different flavors, but they’re happening pretty much everywhere.”

Still, though the efforts and collaborations are nascent, Novo Nordisk is hopeful ongoing patient sentiment will help change the future.

“We moved the market to disposable devices. And I think increasingly that will become a challenge from an environmental point of view and also a scalability point of view when you get into large millions of patients,” Novo Nordisk CEO Lars Fruergaard Jørgensen said at the JP Morgan Healthcare Conference in January, according to an AlphaSense transcript. “I think there’ll be a day where a patient as a consumer would not fancy throwing out a device after having used it once.”

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