The case for Strategic Asset Allocation
Emerging market debt
27 Jan 2021 - Estimated reading time: 5 minutes
An investment in emerging market debt (EMD) provides access to debt issued by governments (and companies) in emerging economies. The EMD universe can be broadly divided into three categories:
- Local currency – Sovereign and quasi-sovereign government bonds issued in each country’s own currency;
- Hard currency – Sovereign and quasi-sovereign bonds denominated in major international currencies, most commonly the US dollar; and,
- Corporate debt – Debt instruments issued by public and private sector corporate issuers issued in both hard currency and local.
In addition to the shorter-term supports the expected global economic recovery may provide, EMD may be considered an attractive strategic allocation for the following reasons:
- Structurally low real yields in developed markets will likely influence a rotation into EMD, an asset class where investors are typically underweight;
- Lower inflation than in the past means yields may offer more adequate compensation;
- Attractive EM fundamentals versus the developed markets; and
- A weaker dollar will influence investors to look to non-dollar assets that have potential to perform.
Aside from a source of meaningful return, EMD offers investors a broad diversification across a heterogeneous opportunity set. With EMD comprising one-quarter of the global bond universe, it is a strategic allocation that should not be ignored.
Given the current variables of the market, a blended active approach whereby managers have the flexibility to rotate across hard and local currency, government and corporate, to allocate to the best relative value is the approach to get the best value from such a diverse asset class.
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