Capital Ideas^TM

An allocation to emerging market debt (EMD) can offer investors a range of potential benefits in the context of their broader portfolios – not least its low correlation with other sub-asset classes of fixed income. The growth dynamics and strengthening economic fundamentals of many emerging market (EM) countries are attractive to investors seeking growth, income and diversification.

Although a passive approach can provide a low-cost introduction to local currency EMD, in this paper we discuss the potential benefits of an active allocation. These include access to a wider source of returns, given the ability to take off-benchmark exposure, and use multiple levers to capture different drivers of return and manage risk; and a more deliberate allocation of capital, which could mitigate unintended consequences of index construction.

Market value of JPMorgan local currency benchmarks

Past results are not a guarantee of future results.
As at 31 July 2023. MV: market value. JGEGDCM: JPMorgan GBI-EM Global Diversified Composite. JGEMBCM: JPMorgan GBI-EM Broad Composite. Source: Thomson Reuters Datastream.

The chart illustrates the growth of local currency EMD as an asset class. In July 2023, the market value of the JPMorgan GBI-EM Broad Index was US$4.6 trillion, while the JPMorgan GBI-EM Global Diversified Index represented only US$1.6 trillion. An active approach provides access to a broader range of markets and instruments which can help to provide greater diversification and an increased number of tools to more effectively manage any periods of heightened volatility.