The focus of the capital markets is shifting back to investments in the emerging markets debt space. Greater political and economic stability, the reduction of current account deficits and the recovery of commodity prices are just some of the arguments in favour of emerging markets (EMs). Future US policy is creating uncertainties, but EM fixed income investments continue to offer plenty of potential. For example, there are a number of promising turnaround stories at country and company level. However, issuer selection remains key – as does an in-depth analysis of the extremely diverse investment universe.
The EMs have grown at a tremendous pace over the past 15 years to become an important driver of the global economy. During this period, their share of global economic output climbed from 20 per cent to more than 50 per cent – and is set to continue rising. This growth has largely been sustainable. A look at the external debt of the EMs, for example, reveals a far healthier structure than in the industrialised countries. Since 2002 the EMs have, on average, reduced their dependency on foreign capital from 80 per cent of their gross domestic product to today’s level of 43 per cent. By way of comparison, average government debt in the developed world stands at around 120 per cent of economic output.
Bonds that have been issued in US dollars or euros continue to play a relatively small part in the funding mix in the EM world. To minimise exchange-rate risk, EM countries mainly borrow in their local currencies. And this is exactly the reason why EM paper is becoming increasingly popular with local investors too. Even in the more international corporate sector, hard-currency bonds play only a minor role – which is a real ad- vantage for the companies when their local currency does fluctuate against hard currencies.
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