Foreign currency appreciation drives 60% of EM ETP returns

Rio de JaneioroEmerging market debt exchange-traded products (ETPs) hold about one-third in local currency, says BlackRock’s latest issue of ETP Investment Landscape, with the remainder in dollar-denominated debt. 

While ETP holdings of Brazilian and Mexican debt have an average of 33% and 35% of local currency debt, respectively, Russian and Philippine debt are 23% and 13% local currency, respectively.

The data is significant because the main factor influencing investment returns are foreign exchange fluctuations, BlackRock says.

According to its data, foreign currency appreciation led the way to 60% of total returns in emerging market debt in the course of the past eight years. On the flipside, however, it also contributed to 75% of risk.

Overall, Brazil, Mexico and Russia are the three most commonly held countries when it comes to emerging market debt ETPs.

“Inflows are powered by an appreciation for the emerging world’s improving fiscal, governmental and economic conditions,” the report notes.

Furthermore, it highlights that 11 emerging markets rank in the top 25 countries of the BlackRock Sovereign Risk Index, but only three – South Korea, Russia and the Philippines – feature in the ETP top 10 list.

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