Fear of adding volatility to their portfolio in the face of uncertain market conditions plus a general perception that emerging market (EM) debt involves greater risks are making investors hesitant to invest in EM although the asset class has delivered some of the most attractive returns in 2016.
The J.P. Morgan EM local debt index has returned just over 17% year-to-date, while the sovereign hard currency index is up over 14.8%. The EM corporate index is up over 11% through September. In addition, emerging markets are currently offering higher yields than their developed market counterparts.
“Despite concerns surrounding post-Brexit volatility, declining commodity prices and China’s economic slowdown, EM debt has in many cases been more resilient than developed market (DM) debt,” says Ricardo Adrogué, head of emerging markets debt, Barings.
Adrogue says increased volatility and heightened correlation typically accompany risky assets – characteristics not seen yet in EM debt markets.
“We believe continued negative headlines have unfairly labeled EM debt as a whole as more risky,” Adrogue says.
Uncertainty has emerged broadly across various asset classes in 2016. Both EM and US equities have presented annualized volatility more comparable to the 2009-2012 period than to the period from 2013-2015. Likewise, risk within the EM local bond index is elevated relative to its own history and has also grown proportionately more than the EM and US stock indices.
Aldrogue is also lead portfolio manager for the emerging markets local debt strategy, and co-portfolio manager for the emerging markets sovereign hard currency debt, and blended total return debt strategy.