1. Newsroom
  2. Emerging-market debt: old prejudices die hard
Menu
Analysen 16.10.2017

Emerging-market debt: old prejudices die hard

Emerging-market debt: old prejudices die hard

Although they are often regarded as too risky, hard-currency emerging-market corporate bonds have their attractions, including a very competitive risk/return profile. As economic fundamentals improve, investment flows into this asset class are likely to continue growing.


Emerging markets have become more attractive in the last few months. However, many investors still see emerging debt as a highly risky asset class. They have clearly not taken the time to look at the changes taking place in emerging-market countries: for example, they appear not to be aware that almost 65% of emerging corporate debt denominated in dollars (the benchmark currency in this market) is investment grade (IG).

In addition, IG emerging corporate bonds in US dollars show lower volatility than equivalent bonds in the US market. As a result, Sharpe ratios – a measure of risk-adjusted returns – in the IG emerging corporate bond market are higher than those on IG US bonds. Investors looking for IG corporate bond investments should therefore not think in geographical terms, ruling out emerging markets straight away, but focus more on issuer ratings. An emerging-market issuer with a BBB rating is no riskier than a US or European BBB-rated bond if you look at the default rate.

Insurance companies have already made some progress in this direction as a result of the new Solvency 2 regulatory framework. The regulator does not impose any investment constraints based on the issuing company's geographical origin. Both German and Brazilian BBB-rated bonds are subject to the same prudential calculation rules. This sensible approach allows investors to take a holistic view of risk.

Growth differentials are moving back in emerging markets' favour

The economic situation in emerging-market countries has improved considerably since last year. In 2014 and 2015, fundamentals were poor in these markets.

An economic slowdown caused partly by a decline in commodity prices, weakening currencies relative to the dollar and an increase in local interest rates meant that emerging markets held little appeal for investors.

Since the summer of 2016, however, there has been a major turnaround. Growth is accelerating again, and the growth differential between emerging-market and developed countries is widening again in favour of the former. Risk arising from the uncertain situation in the Chinese economy has faded substantially. Some emerging currencies have gained against the weaker dollar, but the phenomenon is not widespread. The strong euro has pushed up the currencies of emerging Central and Eastern European countries that tend to track the euro. The Mexican peso, which had fallen sharply after Donald Trump was elected in November 2016, is gradually regaining its strength.

In conclusion, emerging-market fundamentals are likely to continue improving, attracting new money into funds specialising in those markets. 2017 has already brought a significant upturn in investment flows. Opportunities include dollar-denominated emerging debt, which allows investors to take positions on the US yield curve, now that there is greater visibility on the US Federal Reserve's monetary policy. Even including the cost of currency hedging, these bonds are delivering a higher return than investments on the euro yield curve.

More about Emerging Markets Fixed Income

Denis_GIrault_150x150.jpg

Denis Girault
Head of Emerging Markets Fixed Income

 

Expertise

Impact investing - Contributing to a more sustainable future

What are the key features of impact investing?

Read more

Meistgelesene News

Analysen 19.02.2020

Changes in consumption patterns

Despite being fast-moving and quite unpredictable, changes in consumption patterns are expected to reshape the economic landscape.

Analysen 15.04.2020

The Case For Frontier Debt

India’s total infected cases (979) and fatality rate (25) remain low but it has been escalating. According to the World Health Organisation (WHO), this can become overwhelming, if uncontrolled.

Analysen 24.01.2020

Gaming - Game on!

Now more than ever, video gaming is at the heart of the entertainment industry.

Auch lesenswert

Analysen 06.07.2020

US-Präsident-schaftswahl Rückt in den Fokus

Spotlight - Die Zustimmungswerte von US-Präsident Trump sind auf den tiefsten Stand seit Beginn der Umfragen zur Präsidentschaftswahl 2020 gefallen, sodass ein Wechsel im Weissen Haus wahrscheinlicher geworden ist.

Analysen 03.07.2020

COVID-19: Die UBP hält Sie auf dem Laufenden

Seit dem Ausbruch des Coronavirus begleiten und unterstützen wir unsere Kunden während dieser ungewöhnlichen Zeit einer weltweiten Gesundheitskrise. Die Bank informiert Sie regelmässig über die Anpassungen ihrer Massnahmen an die von den Gesundheitsbehörden vorgegebenen Vorsichtsregeln. Ausserdem kommen unsere Experten zu Wort, welche auf die Auswirkungen der Pandemie auf die Weltwirtschaft und die Finanzmärkte eingehen.

Analysen 30.06.2020

Aktualisierter Ausblick 2020

Weltwirtschaft - quo vadis?