Emerging markets account for about 60% of the world economy and 75% of global growth – almost double their share two decades ago.
Most emerging market economies entered the health crisis with improved debt dynamics and solid fiscal metrics. Furthermore, the global policy response to the Covid-19 crisis has eclipsed the ones of the past crises.
Covid-19 has pushed any 'normalisation' of global rates away to the horizon - bolstering the global search for yield.
EM debt currently offers around 4% yield pick-up to the dollar. Meanwhile, real EM yields are around 2.5%, compared to -0.86% for the US and -1.22 for Germany.
These spreads mean that EM central banks have scope to provide further easing, and to follow the descent in global rates. This reinforces the case for a structural long exposure to local EM duration.
Therefore, in the context of this 'lower for longer' environment, we expect to see a continuous rebalancing of global investments that will favour this asset class.
Of course, EM currencies exhibit high volatility, which necessitates active currency management - because understanding the sources of volatility is crucial to sorting winners from weak performers.
Our analysis indicates that many EM currencies remain undervalued.
At the same time, we expect the recovery of the global economy from the Covid-19 shutdown, and particularly China's resilience during this crisis, to cause the outlook for emerging markets assets should improve, leading risk premiums to be compressed.
Lastly, the gradual inclusion of China in global bond indices will significantly enhance the risk/return profile of the EM benchmark. The RMB bond market offers extremely low volatility, similar to DM, while providing relatively high yield.
Also, the increasing weight of China will gradually shift the weight of the index in favour of the more tech-oriented Asia.
Some of the most important factors that determine the outlook for emerging markets are global - from US-China relations to supply and demand in commodity markets - necessitating a top-down, active approach.
Local currency EM debt may well already be a core asset - so let's treat it as one.
Yasmine Ravaï is a senior portfolio manager at Eurizon SLJ