Emerging markets

A fresh take on local emerging market debt

A growing number of investors are seeking the compelling return potential of EM local currency debt markets over the market cycle at a lower level of volatility than the overall market. Enter our total return approach to investing.

Jun 3, 2021

15 minutes

Can EM local currency bonds deliver on investor’s needs?

  • A growing number of investors are recognising the role an EM local currency bond allocation can play as a source of diversification and returns. However, volatility across the market cycle is a key consideration.
  • Investors looking to capture the upside potential of the asset class while limiting the downside and pursing a relatively smooth return path may need to look beyond traditional benchmarks.
  • Although the EM debt universe is diverse across a variety of metrics, from credit quality to liquidity and volatility, almost 60% of the volatility in the main local EM debt index is concentrated in five countries.
  • In our view, that means many investors in the asset class are effectively forced to take risk that does not fully compensate them in terms of return potential. This acts to dampen the risk-adjusted returns of both the index and benchmark-relative strategies.
  • A total return approach can help investors to get around these challenges. By favoring the low volatility markets in the investment universe and economies with improving long-term structural dynamics, our total return EM local currency debt strategy has done just that.
  • In a short paper we explain the approach that lies behind the delivery of all of the market upside but less than the market volatility plus cushioning in down markets.

Download the PDF

Specific risks

Emerging market: These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.

General risks

All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results.

Authored by

Antoon de Klerk
Portfolio Manager
Werner Gey van Pittius
Portfolio Manager
Peter Eerdmans
Portfolio Manager

Important Information

This communication is provided for general information only should not be construed as advice.

All the information in is believed to be reliable but may be inaccurate or incomplete. The views are those of the contributor at the time of publication and do not necessary reflect those of Ninety One.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.

All rights reserved. Issued by Ninety One.