Local currency emerging market debt: deserving of a closer look

20 Apr 2018

  • Local currency debt has become one of the largest fixed income universes over the past eight years, yet remains under-appreciated
  • We can see a number of triggers for a pick-up in demand
  • We believe growth is the main forward indicator for currencies
  • The asset class offers multiple opportunities, collating a heterogeneous group of bond issuers including countries in different stages of the economic and monetary policy cycle

 

At a time when many bond investors vacillate between concerns over rising interest rates and the belief that the multi-decade bull market in fixed income is not over yet, local currency emerging market debt deserves to be given more attention than it often gets these days. Or so argue Bryan Carter and JC Sambor, Head and Deputy Head of Emerging Market Fixed Income, respectively.

 

Under-appreciated, so under-owned

In part, the cold shoulder for local currency debt reflects an underappreciation of the size of the asset class and the opportunities it offers. It has become one of the largest fixed-income universes over the past eight years, with local currency debt issued by emerging market governments rising to USD 8 trillion by January 2018 and corporate debt in local currencies exceeding USD 7.6 trillion. The asset class has become deeper, with market liquidity improving, and broader, with more countries now issuing debt as well as more EM corporates. This has expanded the range of investment opportunities, also in high-quality, investment-grade debt. The bad rap can also be attributed to the perception among certain investors that local currency bonds tend to be very volatile. This is indeed a perception. The reality is that historically, the volatility has been well below that of emerging market equities. Over the last 15 years, the volatility of local currency debt has averaged around 12%, which is well short of the level of over 20% for emerging market equities.

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