Emerging market debt (EMD) presents a strong investment case but is frequently overlooked and under-allocated as a fixed income asset. The asset class has traditionally been perceived as a tactical investment opportunity. However, given the favourable macroeconomic outlook, the growth and transformation of the universe and the diversification benefits it offers, EMD has now become a core allocation in many investors’ portfolios.

EM countries now account for over half of global GDP. EMD has evolved significantly in the last two decades, given the remarkable growth in the breadth and depth of countries and the number of issuers. Issuance has increased, thereby improving liquidity and yield curves have become more developed, allowing active investors to add value via positioning across different maturities. As emerging markets matured, many countries began issuing bonds denominated in their respective local currencies rather than US dollars. This has created a valuable sub-asset class worth almost US$4 Trillion.¹

For investors seeking a high level of current income and US dollar diversification, EM local currency bonds can offer an attractive risk-reward trade-off. Countries that issue local currency debt tend to have independent central banks, developed yield curves and investment-grade credit ratings. Furthermore, high nominal yields and potential rate cuts from the Federal Reserve (Fed) can offer attractive entry points, especially for active managers who are adept at steering through the intricacies of the global landscape and the ongoing geopolitical shifts, as well as differentiate between the winners and the losers.