Emerging market debt has its origins in the 1990s, when defaulted sovereign bank loans were restructured into tradable hard currency (US dollar) bonds known as Brady bonds.
The asset class has grown hugely since then – many more issuers have come to market and total assets have boomed (see Exhibit 1). Yet some negative attitudes formed in the early days of the asset class have proved persistent, even though they no longer reflect reality. In this article, we will puncture some of the myths about emerging market debt.
Myth I: Emerging market debt is suitable only for a few specialised investors
Emerging market debt is sometimes considered a niche asset class that is appropriate only for a limited set of investors with a high risk tolerance. The perception is that liquidity is low and credit events frequent in this space. For those who hold this view, it is no wonder that emerging market debt accounts for a small or non-existent allocation in many portfolios.
Reality: Emerging market debt is a large and well-diversified asset class
Emerging market debt has undergone a remarkable transformation over the last 30 years. Today, emerging market hard currency bond issuers span over 70 countries and include a wide array of opportunities across geographies and credit profiles (Exhibit 1). The landscape of emerging market local currency opportunities has also developed significantly, with the number of countries in the main reference index – the JPMorgan GBI-EM Global Diversified index – growing from 11 in the early 2000s to 19 today. Indeed, most emerging market issuance is now in local currency, reflecting growing and deepening domestic debt markets. With local dynamics taking on more importance, local currency opportunities have become a richer source of investment outperformance, or alpha. This evolution underscores what we see as the maturity and relevance of the asset class as a core component of global fixed income.
Read the rest of the article in our Emerging Markets Watchlist from Allianz Global Investors.
