For super funds and their advisers

Global managers get behind emerging market debt

Two big global managers – Franklin Templeton Investments and Wellington Management – have produced papers espousing the virtues right now of emerging market debt strategies. Emerging market debt is “fixed income’s most dynamic asset class”, one of them says.

According to Franklin Templeton: “Over the last three decades emerging market debt has evolved into fixed-income’s most dynamic asset class. No longer the exotic terrain of specialist investors, emerging markets boast highly liquid, local-currency sovereign and corporate bonds as well as hard-currency ones.

“Since the 1990s, regional governments have reformed their currencies and transitioned their economies away from manufactured-exports as primary growth engines in favour of domestic consumption. Public debt, though high by local standards, is modest compared with the debt-saddled developed world after a decade of quantitative easing.

“At the same time, a rapidly expanding middle class is creating demand for local, fixed-income securities that trade largely independently of US monetary policy. At a time of rising US interest rates, we provide an overview of the emerging market landscape and its prospects. Despite strong inflows, investors should know that debt portfolios could be further diversified to reflect the diversified character of this asset class.”

According to Wellington Management’s paper: “Emerging local debt offers an attractive opportunity for investors. Fundamentals are improving, valuations are attractive, and supply/demand trends are favourable. While emerging local debt may be riskier than bonds issued by some developed market issuers, the higher average coupons can potentially enhance income levels and play a role in generating attractive returns…

“We believe that emerging local debt offers an attractive opportunity today. Structural and cyclical fundamentals are improving, valuations are attractive, and supply/demand trends are favourable.

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