While the potential for inflation and rising rates could create a headwind for EM debt, a short duration approach can provide an opportunity to pick up incremental yield and diversification, with less volatility.
Like all risk assets, emerging market (EM) asset classes experienced somewhat of a rollercoaster ride in 2020, weakening as the global pandemic took hold in March and then rallying strongly in the subsequent months. While some economic uncertainty remains, countries and individuals are learning to deal with COVID-19, with the continued roll-out of vaccines further brightening the picture. As valuations have snapped back from stressed levels, investors are rightly asking if opportunities in EM debt still exist. The answer, we believe, is yes—but selectivity is critical.
For investors looking to pick up incremental yield opportunities versus developed markets (DM) and gain exposure to the diversification on offer in EM—but who are more risk-averse, particularly against the backdrop of potentially rising rates—EM corporate debt, and more specifically short duration debt, could be part of the solution. In particular, we think there are three reasons short-dated EM bonds are worth consideration for investors.