For Institutional Investors in the US

Case for emerging markets debt hard currency

Diversification and yield are some of the reasons why investors access emerging markets debt hard currency. We explore the potential benefits and risks of the asset class.

The Case for Emerging Market Corporate Bonds
Bent Lystbæk

Bent Lystbæk

Portfolio Manager


Jacob Ellinge Nielsen

Jacob Ellinge Nielsen

Portfolio Manager


Thomas Haugaard

Thomas Haugaard

Portfolio Manager


Sorin Pirău, CFA

Sorin Pirău, CFA

Portfolio Manager


Sep 28, 2022
2 minute read

Key takeaways:

  • Emerging markets constitute the bigger share of the global economy, but often institutional portfolios are strikingly under-represented in the asset class.
  • The emerging markets debt hard currency (EMD HC) universe spans around 70-80 countries that are subject to different economic cycles and are at varying stages of economic development, resulting in a diverse set of fundamental drivers.
  • EMD HC offers the potential to isolate some of the EMD return drivers, helping institutional investors with asset allocation. Focused credit analysis can be rewarded, as country allocation and security selection can help to capture alpha in EMD.

Institutional investors face the challenge of capturing yield, diversification, and growth from their fixed income allocations. Over time, emerging market (EM) government bonds have provided investors with higher yields and differentiated returns relative to developed markets, showing modest correlation to global equities and global bonds.

This is one of the ways to invest in emerging markets debt (EMD) asset class. Over the past two decades, the universe has grown substantially, encompassing three key investible areas:

  • Hard currency (HC) sovereign bonds – mostly US dollar-denominated bonds issued by EM sovereigns.
  • HC corporate bonds – predominantly US dollar-denominated bonds issued by companies.
  • Local currency sovereign bonds – local (domestic) currency denominated debt issued by EM governments.

The universe based on these sub-asset classes is US$16.8 trillion1. This represents a material portion of fixed income markets. As the HC asset class is driven by the credit risk of lending to the sovereign, it is most comparable in terms of risk factors to corporate credit. Yet, it is also different in that credit risk tends to be overpriced in sovereign EMD HC when comparing the default perception to reality.

Historically, average default rates for the asset class have been 1.03% pa2. Perceived default risk is higher than actual default risk and often defaults are in smaller frontier markets, while the bigger part of EM has become quite resilient over past decades. While defaults and restructurings do happen, unlike with corporate bankruptcies, the country continues to exist and serve its population going forward. Coupled with the greater involvement of institutions such as the International Monetary Fund, this creates wider scope for debt negotiation between the country and its creditors.

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1Source: J.P. Morgan, total debt stock, June 2022.
2Source: J.P. Morgan, 1 January 2003 to 31 August 2022. EMBIG default rate notionally weighted. Note: Although Ukraine is not being treated as a defaulted issuer in the EMBIG, we are factoring it into the rate due to the restructuring, as credit default swaps were triggered.

Bent Lystbæk

Bent Lystbæk

Portfolio Manager


Jacob Ellinge Nielsen

Jacob Ellinge Nielsen

Portfolio Manager


Thomas Haugaard

Thomas Haugaard

Portfolio Manager


Sorin Pirău, CFA

Sorin Pirău, CFA

Portfolio Manager


Sep 28, 2022
2 minute read

Key takeaways:

  • Emerging markets constitute the bigger share of the global economy, but often institutional portfolios are strikingly under-represented in the asset class.
  • The emerging markets debt hard currency (EMD HC) universe spans around 70-80 countries that are subject to different economic cycles and are at varying stages of economic development, resulting in a diverse set of fundamental drivers.
  • EMD HC offers the potential to isolate some of the EMD return drivers, helping institutional investors with asset allocation. Focused credit analysis can be rewarded, as country allocation and security selection can help to capture alpha in EMD.