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The Case for Allocating to Emerging Market Debt Considerations for Australian Investors

Head of Investment Strategy & Research, Australia
Head of Strategy & Research, APAC
Senior Investment Strategist
Senior Investment Strategist

Emerging market debt (EMD) is a versatile asset.

It offers equity investors risk mitigation potential with modest return dilution. For fixed income investors willing to move out the risk spectrum, EMD presents a significant yield pick-up opportunity as fundamentals continue to be relatively healthy, notwithstanding some notable deterioration in the fiscal backdrop during 2020. Investors need to be comfortable with headline and idiosyncratic risk, but in a low (and in some quarters, negative) yield environment, EMD offers significant potential for Australian investors willing to take a closer look.

Key Points

  • Yield Enhancement - EMD provides an attractive yield pick-up relative to developed market bonds.
  • Diversification Benefits - The low correlation and higher growth factor exposures of EMD assets provide diversification benefits for global bond and equity investors.
  • Supportive Fundamentals - Emerging economies, on average, offer stronger growth potential and lower debt burdens than their advanced counterparts despite the negative effects of COVID-19.
  • Higher Volatility/Drawdown and Idiosyncratic Risks  - Investors need to be aware of the potential higher volatility and drawdowns as well as the idiosyncratic risks of EMD assets
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