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

investable universe1

60

countries with diverse economic cycles1

500

corporate issuers1

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.

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1. Data as at June 2015

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