How to invest in the emerging market debt space

Investors need to consider a strategic allocation approach to such markets

How to invest in the emerging market debt space
Institutional investors are urged to shun the tactical approach to emerging market debt (EMD).

In a white paper, Manulife Asset Management portfolio managers Paolo Valle and Roberto Sanchez-Dahl said it would be better for these investors to follow a strategic allocation approach to assist them in their search for yield.

"The narrative for emerging economies has changed, and the market – along with EM economies – has become more sophisticated. It is time, we believe, to view the asset class in another light," the two said.

One of the reasons behind the need to shift perspective is the widening production growth gap between emerging economies and advanced economies, with the former having the lower debt-to-GDP ratio.

More so, the secular decline in credit spreads could be indicating the progress in structural reforms and the growth-oriented policy agendas of many governments within the EMD sovereign universe.

The two also cited the existing favourable demographics relative to many of emerging market debt advanced economy peers, particularly to the burgeoning middle-class population and younger consumers.

Additionally, there is the attractive return potential a strategic allocation approach could spur. Valle and Sanchez-Dahl stated that there is historical evidence of positive results derived from using a long-term investment horizon.

This flexible approach, they said, utilises a dynamic allocation to hard currency, uses sovereign and corporate debt, and employs tactical allocations to local currency sovereign debt.

Aside from offering the most value for investors, this approach also taps into the opportunities the asset class has in store.

"Bolstered by strong economic and demographic fundamentals, attractive risk/return profiles and portfolio diversification benefits, we believe EMD should be considered a strategic allocation decision rather than a tactical asset allocation embedded within a traditional investment framework," the pair concluded.


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