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.
The Emerging Market Debt (EMD) market has grown strongly over the past two decades to account for more than 25% of the global bond market while trading liquidity has improved. We think this makes it too big for global bond investors to ignore.
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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