Posted inAsset Class in Focus

Emerging market debt: A key component in the search for yield

With government bonds looking less attractive, investors may consider expanding their fixed income horizons beyond the developed world in the search for yield, said Jack Lin, head of Asia-Pacific, Middle East & Africa at Pioneer Investments.

Given government bond yields have decreased even further, emerging market (EM) bonds could play a bigger role as the search for yield continues, he said.

Since the start of the year, EMs have generally benefitted from accommodative monetary conditions, proactive fiscal policy stance, a rebound in commodity prices and greater stability in Chinese growth. This has seen EM bonds outperform, as investors are attracted not only by these improving fundamentals but also by their higher yields.

In addition, investors may have been driven toward EMs by greater scepticism about the stability of developed economies in the wake of Brexit and populist political movements.

Long-term economic drivers

Aside from these short-term developments, the long-term case for EMs is also relatively robust. EMs are wealthier than ever before. The developing world’s share of global financial wealth is expanding and there is no scarcity of potential growth sources to ensure this expansion continues.

“EM demographic growth compares favourably with that of the developed world,” Lin said. “The rapid pace of urbanisation among developing nations has spurred a demand for higher standards of living, empowering a new wave of middle class consumers.”

The EM fixed income universe has also witnessed material growth and innovation since the 2008 financial crisis. Spurred on by lower sovereign debt levels and high macroeconomic growth rates, the asset class has experienced a substantial market deepening. Credit market issuance, in particular, has expanded and the value of credit now exceeds that of sovereign debt in the EM world, according to data from Pioneer Investments and BofA Merrill Lynch.

Yet while both the short-term and long-term fundamentals of EM debt appear attractive, there are always risks to consider that can impact investors’ perception of the asset class. A rise in US interest rates could negatively affect many fixed income asset classes, not only EM debt, while negative newsflow such as ratings downgrades for EM sovereigns – Brazil being a notable example – can adversely impact investor sentiment. Finally, China’s capacity to generate shock waves across international markets cannot be discounted.

With this in mind, it is our view that a research-led, flexible investment approach is required to successfully navigate the demands of the expanding EM universe.

Access through multi-asset credit

But it’s not just the investment approach that needs to be active when it comes to EM debt. Given the risk and volatility profile of this asset class, a portfolio’s allocation needs to be actively monitored and this can be challenging.

 “It makes sense to consider accessing EM debt through a multi-asset credit strategy, where a dedicated team of investment professionals are constantly monitoring the portfolio’s exposure and can quickly adjust their positioning in response to a changing investment case,” said Lin.

“Moreover, EM debt is just one of a wide range of attractive opportunities available within the multi-asset credit universe and it is our view that maintaining a well-diversified portfolio can help to protect assets during periods of market volatility.”


Important Information: Unless otherwise stated all information and views expressed are those of Pioneer Investments as at November 2016. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital invested. This article is for informational purposes, and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security, product, service or investment. The opinions expressed in this article do not constitute investment advice and independent advice should be sought where appropriate. Pioneer Investments is a trading name of the Pioneer Global Asset Management S.p.A. group of companies.

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