Once small and overlooked, emerging-market corporate debt offers investors attractive exposure to a global growth story.
Emerging markets have come a long way since investing guru Barton Biggs took heed of their potential decades ago and predicted robust growth.
Today, economic and financial stabilization in emerging economies have spurred all kinds of investment in companies around the globe with attractive demographics. Growing populations are creating a powerful, rising middle class with purchasing power, while rapid urbanization and the need for infrastructure are even better reasons why companies are capitalizing on the growth story.
Emerging-market corporate debt, once small and often overlooked, is now considered an asset class of its own—one that offers investors attractive exposure to this growth story. Over the past five years, it has been the fastest growing sector within fixed income, up 162% in that time1. Relative to other asset classes, the universe of emerging-market corporates tops other global credit market segments, including US high-yield.
As private sector companies in emerging markets become major players in the global market and in their respective sectors, we believe an allocation to emerging-market corporate debt provides an interesting, long-term investment opportunity, especially in countries that are experiencing positive fundamental changes, have a strong global market presence, or have laid the groundwork for a strong investment story.
Mexico, India and Indonesia, for instance, are prime candidates. They have favorable economics and are recording impressive population growth and rising GDP.
In the aftermath of the financial crisis and Europe's continuing sovereign debt issues, the importance of diversifying away from core, developed markets has become clear. An allocation to emerging-market corporate debt in a fixed-income portfolio can add diversification, not only to developed markets, but within the sector itself.
Differences abound by country, region, industry, and credit quality. The lack of uniformity in this asset class can make it a challenge to track, but it is also a key reason why it can help investors reduce regional and idiosyncratic risks in their portfolios. Its inclusion also has the added value of diversification in business cycles across regions.
Some may still argue that the quality of emerging market corporate debt is "junk" or "noninvestment grade." However, it has improved dramatically with time. Today, more than 65% of the asset class is investment grade2.
Investors must consider the overall market and how factors, such as low commodity and energy prices, as well as geopolitical events, can temper growth and affect countries and sectors in different ways. Currency weakness is an important factor to monitor, as is inflation.
While the recent slide in oil has hurt a number of companies, it isn't necessarily bad for all emerging markets. In fact, about half of emerging-market countries, especially in Asia, will likely benefit from this trend as net importers of oil.
Get the full report, “Opportunities in Emerging Markets Corporate Debt,” by Warren Mar, Portfolio Manager for the Emerging Markets Corporate Debt Strategy, and explore more Ideas from Investment Management.