Fast view
- Emerging market (EM) debt can provide useful portfolio diversification properties, but accessing the opportunity set through global fixed income indices has various shortcomings, including a China/Asia bias.
- Other factors in favour of a standalone allocation to EM debt include robust fundamentals, thanks to proactive monetary policy and prudent fiscal policy in many EM economies in recent years.
- The EM Debt investment universe is emerging from its default cycle as global inflation falls, core rates ease and markets re-open (having been buffeted by COVID and the war in Ukraine); the outlook is much clearer for investors.
- Valuations remain compelling, presenting an attractive entry point and significant yield pick-up relative to domestic Australian fixed income, with current levels supportive of the return outlook.
- Australian investors remain in the sweet spot of EM Debt investing, as the Australian dollar acts as a natural hedge for Australians investing in emerging markets, with potential to further enhance risk-adjusted return potential through hedging.
