Emerging bond markets have rallied strongly since the sharp drawdown last year. Valuations have recovered even as some fundamentals – such as debt sustainability and fiscal discipline – have become challenged. But while the start of 2021 has shown that smooth sailing cannot be guaranteed, there are reasons to remain optimistic towards EMD.
Emerging market debt (EMD) is a versatile asset. It offers equity investors risk mitigation potential with modest return dilution.
India is making it easier for foreign investors to invest in the country's bonds – getting its sovereign bonds included in benchmark indices is a key pillar of that plan. Strong economic fundamentals, investment grade credit ratings and relatively high yields underpin the attraction to potential investors.
Emerging market debt (EMD) has rallied along with other risk assets, recovering a large part of the losses incurred earlier in the year
Emerging market hard currency sovereign debt presents a large and diversified investment universe with long-term upside potential.
The opportunity set for emerging markets investors has evolved considerably over the past three decades, as strong and sustained economic growth has underpinned increased breadth, depth and maturity in the EM capital markets.
Investment flows in emerging markets assets were hugely impacted by COVID-19. But the massive exodus has been followed by renewed inflows, attracted by the fundamentals underpinning EM growth prospects and potential return opportunities.
Gerben Lagerwaard joined State Street Global Advisors in 2012 and is the Head of our Dutch Branch and Head of the Benelux Institutional Client Group.
Investors looking to gain exposure to EM cannot overlook China with MSCI China Index outperforming MSCI EM ex China Index dramatically. However, the country has unique challenges as well – a way forward to confronting these challenges is to be selective and to stick with quality names.
Abhishek Kumar joined State Street Global Advisors in 2010 and is the sector lead for emerging market debt within the fixed income indexing team. From his home in London, he has been managing and overseeing our $24 billion of EMD assets across both hard currency and local currency EM portfolios while also working to develop new strategies and solutions for investors in EM debt.
Emerging markets have not experienced the humanitarian crisis that many feared as the pandemic spread. This has enabled EM assets to recover something reflected particularly in the recovery of emerging market debt. As these concerns around the COVID-19 threat abate, investor attention has refocused on potential opportunities in EMD. But not all segments of the market will hold the same appeal.
Policy-makers in China changed policy direction by implementing new security measures in Hong Kong and removing a target for GDP growth. These economic cum political decisions should continue to make Chinese assets attractive for global investors, though they could pose a relative headwind for other Emerging Markets. Yet, market dynamics will depend more on how DM countries manage their exits from lockdown.
State Street Global Advisors investment experts share their perspectives on emerging markets (EM) investing in the context of current market volatility and the COVID-19 crisis.
The COVID-19 pandemic represents both a serious public health and economic threat for emerging markets. The crisis has dented emerging market growth prospects and reversed years of strong performance.
The COVID-19 crisis has taken shape as a liquidity shock to global markets, resulting in substantial outflows and plunging prices in EM. It will be some time before EM investors are able to align their decision making to fundamentals. At this point, liquidity is the key factor to watch.
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