The Case for Emerging Market Debt

Over the last decade the emerging market debt universe has undergone rapid growth and is becoming more important to a wide range of investors. The reasons behind this are:

• Improving credit quality has led to greater liquidity - Many emerging market countries have implemented sound fiscal and monetary policies. This has resulted in a structural improvement in creditworthiness and has served to reduce considerably the historically high volatility of the asset class.
• Significant diversification benefits - Emerging market debt, both hard and local currency, offers low correlation to developed markets and emerging market equities and suggests that it has a valuable role to play in portfolio diversification, particularly for portfolios that already have significant stock allocations.
• Attractive valuations - Valuations have improved with emerging market hard currency bond spreads at seven-year highs. This has followed a period of a perceived “flight to quality” into US Treasury Bonds, which paradoxically are offering negligible yields to investors.
• Positive outlook - Emerging markets long-term growth expectations are supported by solid fundamentals that include positive demographics, economic reform, improving governance and increasing industrialisation.