According to Market Vectors. emerging markets provide investors exposure to interest cycles that are at a different stage to developed markets, in addition to geographic and regional exposure.
“There has been growth of local currency and corporate markets since 2007, so the availability of quality investments is growing quickly on a global scale, giving increasing importance to the emerging debt markets,” Van Eck Global senior investment officer Francis Rodilosso said.
“While local interest rates in many emerging markets should fall through 2015, currency depreciations against the US dollar are likely to be larger drivers of returns.
“We already see emerging markets currencies adjusting for an upward trending US yield curve and a stronger US dollar, and clearly that is negatively impacting returns for US-dollar-based investors.
“The easing bias among a majority of major central banks in developed markets and emerging markets will also favour the performance of sovereign bonds against the backdrop of rising rates in the US,” Mr Rodilosso said.
Mr Rodilosso argued that emerging markets are more fiscally sound economies when compared to developed nations that have incurred large debt levels.
“With developed market bonds yielding next to nothing and with ongoing concerns of deflation, real interest rates in emerging markets relative to the US have a real advantage beyond geographic diversification,” he said.
“Reflecting this, pension funds’ and insurance companies’ strategic holdings of emerging markets debt continue to grow as they seek to diversify their portfolios geographically.
“De-risking has caused a repricing of a large portion of emerging markets' debt markets, more so than other global credit markets, which has added appeal to these types of investments,” Mr Rodilosso said.
Mr Rodilosso also noted that gross government debt to GDP – according to the IMF – in emerging markets is 41 per cent versus 114 per cent when compared to developed markets.
“Moreover, there are better growth fundamentals in emerging markets given the more severely ageing populations and declining birth rates in developed markets,” he said.
