Unravelling myths: The hidden truths of Emerging Markets Debt
The EMD HC Team highlight how emerging markets debt (EMD) has evolved into a rapidly growing and maturing asset class, one which deserves closer attention from investors seeking diversified and resilient portfolios with attractive long-term return potential.
6 minute read
Key takeaways:
- The hard currency sovereign universe (EMD HC) is now a mature asset class spanning over 70 countries across the full ratings spectrum, with 50% of the universe rated investment grade. The breadth of countries brings fundamental diversification of risk (versus domestic US-dollar denominated assets) within an investor’s portfolio.
- EMD HC provides investors with access to the EM “risk premium” combined with the more defensive properties of bonds.
- Investment outcomes can be enhanced through active management due to the complexity of the asset class and prevailing market inefficiencies.
Emerging markets (EMs) as an asset class have been accessible for over two decades, yet misconceptions surrounding them continue to deter some investors. Despite EMs accounting for over 60% of global gross domestic product (GDP) and being home to nearly 90% of the world’s population,[1] European investors have on average a 6% allocation to EMD in their portfolios.[2] Many miss the chance therefore to diversify their portfolios by not incorporating exposure to EMs.
Some of the key attributes of Emerging Markets Debt Hard Currency (“EMD HC”) are:
- Attractive yields: EMD HC offers yields that are much higher when compared to developed market (DM) debt, with a significant portion of the universe rated investment grade (IG), presenting robust return potential over the long term.
- Resilience and stability: Despite preconceptions, EM countries have demonstrated marked improvement in economic fundamentals, making them more resilient to global economic shifts.
- Diversification: EMD HC provides fundamental diversification of risk by offering exposure to a multifaceted range of countries. It provides access to the EM risk premium combined with the more defensive properties associated with hard currency (HC) bonds.
- Active management opportunities: The complexity and inefficiencies inherent in the asset class necessitate active management strategies to successfully navigate and capitalise on opportunities that, in our view, indices and passive exchange-traded funds (ETFs) overlook.
In this paper, we address key misconceptions about EMs that may be preventing investors from embracing this asset class, with a specific focus on hard currency EM sovereign debt. We highlight how EMD has evolved into a rapidly growing and maturing asset class, one which deserves closer attention from investors seeking diversified and resilient portfolios with attractive long-term return potential.
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All opinions and estimates in this information are subject to change without notice and are the views of the author at the time of publication. Janus Henderson is not under any obligation to update this information to the extent that it is or becomes out of date or incorrect. The information herein shall not in any way constitute advice or an invitation to invest. It is solely for information purposes and subject to change without notice. This information does not purport to be a comprehensive statement or description of any markets or securities referred to within. Any references to individual securities do not constitute a securities recommendation. Past performance is not indicative of future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
Whilst Janus Henderson believe that the information is correct at the date of publication, no warranty or representation is given to this effect and no responsibility can be accepted by Janus Henderson to any end users for any action taken on the basis of this information.
6 minute read
Key takeaways:
- The hard currency sovereign universe (EMD HC) is now a mature asset class spanning over 70 countries across the full ratings spectrum, with 50% of the universe rated investment grade. The breadth of countries brings fundamental diversification of risk (versus domestic US-dollar denominated assets) within an investor’s portfolio.
- EMD HC provides investors with access to the EM “risk premium” combined with the more defensive properties of bonds.
- Investment outcomes can be enhanced through active management due to the complexity of the asset class and prevailing market inefficiencies.