Emerging market debt in an Australian context

The fast view

• With Australian yields finally succumbing to the low yields experienced by other developed markets, the spread to emerging market debt has widened. At the time of writing, emerging market debt yields over 4% more than Australian government debt.
• The yield per unit of historic volatility an Australian investor could achieve is around 2.5 times higher in emerging market debt than it is in Australian government debt.
• In this low-yield environment we believe that Australian investors will be forced to look for higher yielding alternatives. Diversification will be key and, due to the high correlation of the Australian dollar to emerging market assets, emerging market debt, with its relatively high yield, should be a strong consideration.
• The Australian dollar acts as a natural hedge for Australian’s investing in emerging markets which puts Australian investors in an advantageous position compared to other developed market investors.
• Investors can further improve the risk-return profile, we believe, by hedging out any USD exposure in an emerging market debt portfolio. Historically a partial USD/AUD hedge has reduced volatility and drawdowns.