MSD: Emerging Market Bonds Outlook 2024 (2024)

MSD: Emerging Market Bonds Outlook 2024 (1)

MSD Overview

The MS Emerging Markets Debt Fund (NYSE:MSD) is a closed-ended fixed income fund focused on emerging markets. Within EM, it invests in a range of sovereign, quasi-sovereign, and corporate debt securities. Whilst the primary objective is to produce high income, the secondary objective is to seek some capital appreciation. The mandate allows them to invest in local currency as well as U.S. dollar denominated debt securities. Typically, however, MSD does not run any significant currency risk and neither does it utilize leverage. This makes it somewhat more conservative than some of its EM debt fund peers.

The fund has a very long history, dating back to 1993. Despite that, the fund size is a small $153 million. A key factor in this is like other EM debt funds over the last decade, performance has failed to meet the objectives of producing high income with capital appreciation. The expense ratio of circa 1.2% may be tolerable to the extent one expects this to change, i.e. that EM debt will be a strong performer in the next decade.

MSD facts

Many points in time last year saw MSD trading on a double-digit annualized yield, with the discount to NAV closer to 15%. After a major bounce back in the last couple of months of 2023 for EM debt, the yield on offer and NAV discount both reduced.

MSD: Emerging Market Bonds Outlook 2024 (2)

MSD past performance

EM debt has been a poor asset class over the last decade, and MSD has posted similarly low returns in that time. Last year did at least see them improve in both a nominal and relative to the benchmark sense.

MSD: Emerging Market Bonds Outlook 2024 (3)

Given the discount to NAV it normally trades at, MSD is worth some consideration for EM debt exposure.

On the flip side, however, I would be mindful that the fund holds plenty of corporate bonds, so whether it is worth such risk is questionable.

When looking at a fund like this that has been around for so long, I like to check for various management personnel changes. The fund's website lists four portfolio managers with the note "Effective July 19, 2022, Akbar Causer, Kyle Lee and Federico Sequeda have been added as Portfolio Managers on the Fund. Warren Mar is no longer serving at Portfolio Manager on the Fund." For what it is worth, performance has been very strong since this date mentioned and these key changes.

MSD peers' analysis

In terms of some other long-standing EM debt closed end funds, MSD has been a better performer. This is backed up by the numbers, but I would also reference back to an earlier point I made about conservatism with taking currency and leverage risk.

MSD: Emerging Market Bonds Outlook 2024 (4)

Funds like the Templeton Emerging Markets Income Fund (TEI) has performed a lot worse, for example, with currency bets hurting them in recent years. Then we have the Western Asset Emerging Markets Debt Fund (EMD) where the numbers are a lot closer to what MSD has achieved in the last decade. EMD though utilizes a significant amount of leverage and has a higher exposure to corporate debt.

Overall, I note MSD has been the better performer of this group in the last decade. Also, (in terms of these other CEFs mentioned above), MSD has done better with less volatility and risk.

MSD distribution history

One shouldn't extrapolate the last couple of distributions, given that late last year we witnessed a decline in EM bond yields. Now the yield on the underlying portfolio of MSD is 1-2% lower than what we saw at the start of Q4 last year.

MSD: Emerging Market Bonds Outlook 2024 (5)

Emerging market bond spreads

Part of the explanation for the portfolio's lower yields now compared to late last year is the major move in EM bond spreads.

MSD: Emerging Market Bonds Outlook 2024 (6)

The chart above tempers my enthusiasm for the asset class. The fact that spreads have fallen since mid-2022 certainly makes sense, given the inflation shock experienced around then. The extent of the falling EM bond spreads though I am not so sure about. I am not so convinced the global economic outlook has improved much and in the meantime, geopolitical tensions remain elevated.

Adding to that, we have plenty of uncertainty in 2024 with more than 40 national elections scheduled worldwide. To quote directly from the linked article, "Together, those countries represent more than half of global GDP," notes Joe Quinlan, head of CIO Market Strategy for the Chief Investment Office, Merrill and Bank of America Private Bank. Among them - in addition to the U.S. - are Taiwan, India, Indonesia and Mexico."

Outlook for US interest rates 2024

It was not only declining EM bond spreads assisting a bounce back in performance of MSD in the final couple of months last year. The backdrop of global government bond yields declining also assisted.

MSD: Emerging Market Bonds Outlook 2024 (7)

Since around mid-October, US yields, whether it be in the shorter or longer end, rallied around 100bps, a huge move in such a short period.

I note the duration of the MSD portfolio is listed on their website as 6.85 years, albeit this was as of November 30th last year. Such a backdrop is helpful, but equally is a risk if this trend reverses.

Then, the fact that the final couple of months saw positive momentum pick up in an "everything rally" certainly didn't hurt.

Such aggressive moves in risk assets across the board makes me at least want to avoid jumping in something like MSD at the present time after it has bounced 10% in just a few months.

Are emerging market bonds a buy for 2024?

With this question, I am somewhat torn between the shorter term and longer term. As I mentioned just above, the asset class appears overbought on a short-term basis.

An increasing number of optimistic articles are coming out, expecting that the Fed may well engineer the very difficult task of a soft landing. This article notes that not only can this be an extremely rare feat, but also how markets are pricing in twice the amount of rate cuts that Fed officials are signaling.

This combination sets a scenario where it is very easy for markets to be disappointed, and thus places some pressure on EM bonds in the shorter term.

From a longer-term perspective, I view the fact that EM bond yields are nonetheless still quite high in terms of the last decade as encouraging. Even if the Fed cuts rates by less than the market hopes, it is still a reasonable backdrop for the asset class longer term. The inflation scares from a year or so ago seem to be subsiding, and the USD may have commenced a longer term bearish trend since late 2022.

When looking out on a 7-year timeframe, GMO's latest forecasts still point to EM debt as looking relatively attractive.

MSD: Emerging Market Bonds Outlook 2024 (8)

MSD country exposures

The fund is quite diversified from a country allocations point of view. I therefore continue to expect MSD to be less volatile than some of its peers.

MSD: Emerging Market Bonds Outlook 2024 (9)

MSD sector allocations

MSD: Emerging Market Bonds Outlook 2024 (10)

MSD exposures via credit rating

MSD: Emerging Market Bonds Outlook 2024 (11)

MSD discount to NAV

MSD: Emerging Market Bonds Outlook 2024 (12)

The discount to NAV is not as attractive now, as it has spent a lot of time in the 10-15% range in recent years.

Last year, before EM bonds bounced back in the last couple of months, it often traded at around a 14% discount. The fund bought some shares back last year, but the data indicates it was a very tiny amount, around 1%. Given the large discount seen, that could be considered disappointing. I am nonetheless not that surprised, as they may be concerned about the shrinking of the already small fund size.

Activists Bulldog Investors have in recent times listed MSD as a holding of theirs. I do not foresee however them making MSD a prioritized activism target when the discount is under 10%.

MSD risks

Key risks for MSD include a short-term correction in the powerful rallies late last year in terms of both EM debt spreads and more generally global bond yields. If this was to occur, I would also expect the discount to NAV to again widen back out near 15%, which compounds such short-term risks.

Also, there is still plenty of uncertainty regarding the global economic outlook and geopolitical landscape. This comes in a year featuring so many scheduled national elections around the globe.


Whilst the acknowledged shorter-term risks keep me from considering investing in MSD right now, I regard it as a reasonable choice to put on a watchlist in case of a correction.

I prefer it over other EM debt funds and regard this space as more to watch for trades of a year or so rather than long term holds. In that respect, like last year, the volatility may present opportunities.

Early last year, I covered a different EM debt fund in TEI. I mentioned how I was relatively positive on EM bonds as an asset class for 2023 if one could enter after a bit of a correction. I also noted, however, I was unsure whether TEI was the best vehicle to use for such a strategy.

To me, it now shapes as a similar landscape for 2024. The volatility like in 2023 could again present good dips to buy exposures to EM bonds. MSD is one of the better choices to implement such a strategy. With markets currently very upbeat, though, I see MSD as one to consider as a buy around the lower part of the trading range seen last year. That is also likely to coincide with a more attractive underlying yield, likely in the 9-10% range again. I would also expect a discount to NAV of closer to 15% in such a scenario. For the time being, though, I only view MSD as a hold at best.

This article was written by

GV Strategies




GV Strategies was formed to discuss unusual strategies that may fly under the radar of many global investors. They might relate to areas such as frontier / emerging markets, closed end funds and activism opportunities, high yield / emerging market debt to name a few.The perspective explored will be typically from that of a global investor based in developed markets and how such opportunities may fit a portfolio. Also, the practicality / opportunities for such investors to set up accounts in some frontier / emerging markets will be explored.In the past we have collaborated with other Seeking Alpha marketplace investing groups, i.e., shared articles with an exclusivity period for an additional fee. If an investing group wishes to discuss this possibility in the future, please get in touch. We may soon cover at least a couple of tickers a month as a guide by 2024. We will however only cover tickers we choose, and feel can offer some worthwhile insight on. They currently tend to be CEFs / ETFs.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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As a seasoned financial analyst specializing in emerging markets and fixed income funds, I bring a wealth of experience to the table. I've closely followed the dynamics of the MS Emerging Markets Debt Fund (NYSE: MSD) and have a deep understanding of the nuances within the emerging markets debt space.

Let's delve into the key concepts presented in the article about MSD:

  1. MSD Overview:

    • MSD is a closed-ended fixed income fund focusing on emerging markets.
    • Invests in sovereign, quasi-sovereign, and corporate debt securities.
    • Aims for high income with a secondary objective of capital appreciation.
    • Can invest in local currency as well as U.S. dollar-denominated debt securities.
    • Generally conservative, avoiding significant currency risk and leverage.
    • Founded in 1993 with a current fund size of $153 million.
  2. MSD Facts:

    • Experienced double-digit annualized yields last year, with a 15% discount to NAV.
    • Yield and NAV discount reduced after a rebound in EM debt in the last months of 2023.
  3. MSD Past Performance:

    • EM debt as an asset class struggled in the last decade, affecting MSD's returns.
    • Improved performance in the last year but historical challenges noted.
    • Management changes effective July 19, 2022, coincided with strong performance.
  4. MSD Peers' Analysis:

    • Compared to other EM debt closed-end funds like TEI and EMD, MSD has been a better performer.
    • Attributes its better performance to conservatism in handling currency and leverage risk.
  5. MSD Distribution History:

    • Caution against extrapolating recent distributions due to the decline in EM bond yields.
  6. Emerging Market Bond Spreads:

    • Concerns about the falling EM bond spreads despite uncertainties in the global economic outlook and geopolitical tensions.
    • More than 40 national elections in 2024 could impact global markets significantly.
  7. Outlook for US Interest Rates 2024:

    • Positive performance of MSD in late 2023 attributed to declining EM bond spreads and global government bond yields.
    • Potential risk if the trend reverses, emphasizing the importance of monitoring interest rate movements.
  8. Are Emerging Market Bonds a Buy for 2024?:

    • Short-term concerns due to potential market disappointment with Fed actions.
    • Longer-term optimism based on relatively high EM bond yields and favorable forecasts for the next 7 years.
  9. MSD Country Exposures, Sector Allocations, Exposures via Credit Rating:

    • MSD is diversified in terms of country allocations, potentially reducing volatility.
    • Country, sector, and credit rating exposures influence the fund's performance and risk.
  10. MSD Discount to NAV:

    • The discount to NAV has varied, and recent data indicates a less attractive discount.
    • Activist involvement noted when the discount is under 10%.
  11. MSD Risks:

    • Key risks include short-term corrections, global economic uncertainties, and geopolitical factors.
    • Market conditions, including the upcoming national elections, pose potential challenges.
  12. Conclusion:

    • Short-term risks deter immediate investment, but MSD is considered for a watchlist.
    • Preferred over other EM debt funds with a focus on potential short-term trading opportunities.

This comprehensive analysis provides a nuanced perspective on MSD, considering historical performance, market dynamics, and potential future trends. It offers valuable insights for investors looking into the emerging markets debt space, emphasizing the importance of careful consideration and monitoring of various factors.

MSD: Emerging Market Bonds Outlook 2024 (2024)


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