Unlocking potential in EM hard currency bonds

Emerging market (EM) hard currency bonds, originating in 1989, have seen a significant transformation over the years. In light of this evolution, asset management firm Ninety One suggests that the current moment presents an opportune time for investors to explore this asset class.

In the last decade, the JP Morgan Emerging Market Bond Index (EMBI), a prominent benchmark for EM hard currency bonds, has witnessed a significant expansion, with the number of participating countries increasing from 38 to 69.

“A key feature of the EMBI’s growth has been the increasing number of smaller markets…These smaller and often less-liquid markets are also typically under-researched by the mainstream investment community, bringing greater potential for alpha..,” writes Werner Gey van Pittius, Co-Head of Fixed Income at Ninety One.

EM fundamentals have also improved significantly, with fiscal strength, healthy primary fiscal balances, and stabilising debt-to-GDP ratios, highlights Ninety One. The asset manager also sheds light on the fact that EM debt has delivered attractive returns and diversification benefits, with hard currency-denominated debt having a higher correlation with developed market fixed income. 

Subsequently, it talks about the attractive valuations offered by the asset class. “Some EM hard currency markets are still pricing in significantly more risk than we believe is justified. Spreads remain above their long-run averages, creating attractive valuations, and we expect the asset class to benefit from peaking global rates as well as the tentative bottoming of the ratings cycle,” opines Thys Louw, Portfolio Manager for the Emerging Markets Hard Currency Debt Strategy at Ninety One. 

Louw also elucidates how light market positioning and supply and demand dynamics make EM hard currency debt an attractive option for investors. He asserts that as interest rate volatility decreases, greater demand is expected.

“The positive cyclical dynamics and strong fundamentals underpinning this asset class – coupled with attractive valuations – make now a great time to consider EM hard currency debt, in our view,” concludes the asset manager. 

Read the full insight here.