Emerging-market debt (EMD) has struggled since the start of the COVID-19 pandemic and performance this year has lagged that of other risk assets. Slow vaccine deployment and the spread of the highly contagious Delta variant have forced many developing countries to restrict activity, tempering economic growth, particularly in countries where the scope for policy support is limited. But we still think there is attractive value to be had by investors who take a selective approach to EMD.
Here are five reasons why we think EMD still belongs in a diversified fixed income allocation.
- Growth differentials may shift in favour of emerging market (EM) economies.
- EMD offers attractive yields in an environment where income is hard to come by.
- The pandemic has improved EM current account balances, reducing capital flight risk.
- Debt levels in most emerging markets are manageable given low interest rates.
- EMD valuations appear attractive.
