Emerging market debt best value in low yield environment

Emerging markets signEmerging market debt issued in hard currency provides the most attractive risk return profile, although there are also opportunities in local currency issuance, according to asset manager Amundi.

The bulk of debt is issued in the developed world, but fixed interest yields are at rock bottom. For example, a 10-year German bund is yielding 0.4%, while emerging market local debt yields above 6.5%.

According to Abbas Ameli-Renani, global emerging markets strategist at Amundi, emerging market economies are in much better fundamental shape today than they were during the “taper tantrum” of 2013, including the “fragile five” of India, Indonesia, South Africa, Brazil and Turkey.

Despite the potential for many external market and domestic political challenges, blow-ups in emerging markets have so far been avoided, Ameli-Renani says.

”Inflation has fallen dramatically and the tighter policy rates in many EM [emerging market] countries compared to the taper tantrum episode [in 2013], provides for a much healthier real interest rate to cushion against external shocks,” he says.

Looking at the Brics (Brazil, Russia, India, China), despite some recent economic turmoil – such as China’s slowdown and falling commodity prices affecting Russia – Amundi says that these countries have enough options to fix these issues. For instance, China’s recent interest rate cuts and Russia’s currency depreciation have offset many economic woes.

According to Amundi, the key to getting the best from emerging market fixed income debt lies in recognising the rich diversity of countries with differing characteristics stretching beyond just the Brics.

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