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Capturing opportunities in emerging markets with local currency bonds
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$4 Trillion.1
Income has been the major source of returns for local currency bonds
Past results are not a guarantee of future results.
Data is from 31 December 2002 to 30 April 2024. Returns in US$ terms, rebased to 100 as at 31 December 2002. JPMorgan GBI-EM Global Diversified Total Return Index, in unhedged US dollar terms. Source: JPMorgan
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.
1. As at April 2024. Source: JPMorgan GBI-EM Global Diversified Index
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Past results are not predictive of results in future periods. It is not possible to invest directly in an index, which is unmanaged. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.
Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.
Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.