Emerging Market Debt
With compelling yields and strong fundamentals, Emerging Market Debt (EMD) benefit from an attractive risk reward. This remains an underinvested asset class becoming more than a simple alternative within the Global Fixed Income universe.
Emerging Market Debt Outlook
An attractive risk/reward profile
- More compelling yields compared to other fixed income asset classes
With over 5% annual yield for carry strategy as of June 2015, EMD is a real source of yield enhancement within a fixed income portfolio
- Strong credit quality
- GDP annual growth rate of Emerging countries remains significantly higher than developed countries over the past 15 years, with 4,4% GDP growth expected in 2015 for Emerging countries compared to 2,4% for Developed countries.
- Fiscal and external accounts are improving in EM
- EM leverage is lower than US/EU
- Corporate default rates are expected to be in line with US/EU in 2015
Source: Bloomberg, IMF, Amundi AM as of June 2015
EMD is more than a simple substitute within the Global Fixed Income universe
Sergei Strigo, Head of Emerging Debt and Currency Management, Amundi London
Valuation: a good entry point
- Sovereign and corporate spreads are wider than during the 2013 “taper tantrum”
- Spreads over US and EU credit are near 3-year highs
- More than 250 bps extra spread over EU BBB and 150 bps over US BBB for EM sovereigns: about twice the spread than in developed credit markets for similar ratings and durations
Source: Amundi as of June 2015
Emerging Market Debt in key figures
USD 14 tn
countries with diverse economic cycles1
Supportive technical factors
EMD remains an underinvested asset class: EM has 12% of global debt but only less than 8% share of assets are in EMD funds. A move toward 12% share implies inflows USD 1 tn into EMD.
Low supply: net EM sovereign issuance in HC is expected to be negative in 2015
Global Quantitative Easing programs – Europe and Japan – will support the hunt for yield, increasing inflows in EM bonds
Source: EPFR, PWC, Amundi as of June 2015
The Fed will likely increase its interest rates gradually, a risk which is largely priced in by markets.
Abbas Ameli-Renani, Global Emerging Markets Strategist at Amundi London
Hunt for yield likely to continue
Possible increase of Fed funds rate is a risk for EMD carry trades. But we believe that the rise of interest rates will be gradual and this risk is largely priced in by markets.
Conversely, Japanese and European Central Banks are maintaining very low interest rates and providing liquidity through unconventional monetary policies – QE programs. These measures ensure that G3 fixed income yields will remain low for longer driving investors to look to alternative solutions for return.
The hunt for yield should continue within the Global Fixed Income universe and fuel flows into EMD.
Emerging Market Debt and the Greek crisis
1. Data as at June 2015
This information is exclusively intended for “Professional” investors within the meaning of the MiFID Directive 2004/39/EC of 21 April 2004, and articles 314-4 and following of the General Regulations of the AMF. It is not intended for the general public or for non-professional individual investors within the meaning of all local regulations, or for “US Persons”, as defined in the Securities and Exchange Commission’s “Regulation S” under the 1933 U.S. Securities Act.
This non-contractual information does not under any circumstances constitute an offer to buy, a solicitation to sell, or advice to invest in financial instruments of Amundi or one of its affiliates (“Amundi”).
Investing involves risks. The performance of the strategies is not guaranteed. In addition, past performance is not in any way a guarantee or a reliable indicator of current or future performance. Investors may lose all or part of the capital originally invested.
Potential investors are encouraged to consult a professional adviser in order to determine whether such an investment is suitable for their profile and must not base their investment decisions solely on the information contained in this document.
Amundi assumes no liability, either direct or indirect, resulting from the use of any of the information contained in this document, and shall not under any circumstances be held liable for any decisions taken on the basis of this information. This information may not be copied, reproduced, modified, translated or distributed, without the prior written approval of Amundi, for any third person or entity in any country or jurisdiction which would subject Amundi or any of its products to any registration requirements within these jurisdictions or where this might be considered unlawful.
This information is provided to you based on sources that Amundi considers to be reliable, and it may be modified without prior warning.