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Why Emerging Markets Debt Now

January 8, 2020 | Emerging Markets Debt


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We believe a strategic allocation to emerging markets debt can improve risk-adjusted return potential for portfolios of all degrees of sophistication. Marcelo Assalin, CFA, head of William Blair's emerging markets debt team, explains why.

Watch the video or read the recap below.

Emerging markets debt is still an asset in our perspective that's under-owned.

Some investors associate emerging markets debt with something very risky, something very exotic. The annualized default rate in the emerging markets sovereign debt over the past 30 years has been less than 1%.

Higher Yield Opportunities

It's under-owned; it's less covered; it's not properly understood. And because of that, part of the investment universe tends to display higher risk premium and higher yields.

But the asset class has evolved substantially over the past few years. We're talking now about 70 plus countries within the broader investable universe—more than 600 corporate credit issuers.

It's an asset class that provides very attractive investment opportunities, but also offers very important diversification benefits to investors as well.

Moreover, in the higher-yielding part of the universe, correlations tend to be lower with relation with other broader fixed-income asset classes.

2020 Outlook Attractive

The landscape going into 2020 looks very solid.

Emerging markets countries are expected to grow close to potential into 2020, displaying some acceleration vis-a-vis growth in 2019. Importantly, the growth differential between emerging markets economies and developed economies will continue to rise. And this is very important. Because in the long term, we have seen very strong correlation between this growth differential and capital flows into emerging markets economies.

But it's not only growth. Inflation is very benign, which will allow central banks to continue to provide monetary stimulus throughout the emerging markets universe.

And this combination provides a very strong tailwind for emerging markets debt.

Marcelo Assalin, CFA, is a portfolio manager on and head of William Blair's Emerging Markets Debt team.

Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks. These risks may be enhanced in emerging markets. Investing in the bond market is subject to certain risks including market, interest rate, issuer, credit, and inflation risk. High-yield, lower-rated, securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Diversification does not ensure against loss. Past performance is not indicative of future results.