• Emerging Markets Bonds

    A Case for Emerging Markets Bonds: Part 1

    William Sokol, Senior ETF Product Manager

    The emerging markets bonds market has evolved significantly over the past two decades, growing in both size and diversity. The market’s growth reflects the dynamic structural reforms that have transformed many emerging markets economies and helped boost economic growth. Also, investor understanding and appetite for emerging markets bonds has increased significantly as more investors recognize the asset class’s potential income and diversification benefits.

    In this blog series, we advance the case for investing in emerging markets bonds and identify some of the potential opportunities the asset class provides in today’s market environment.

    Emerging Markets Bonds is a Significant Asset Class

    The emerging markets debt asset class has grown tremendously in the past two decades. It now has a market capitalization of more than $3.6 trillion (as of October 31, 2016), as measured by J.P. Morgan’s emerging markets bond indices, versus approximately $1.1 trillion ten years ago. In addition to its growing size, the emerging markets debt market has become incredibly diverse and now includes bonds issued by sovereign, quasi-sovereign, and corporate entities in both hard currencies (mainly U.S. dollars and euros) and local currencies.

    The Emerging Markets Debt Asset Class Has Grown in Size and Diversity

    The Emerging Markets Debt Asset Class Has Grown in Size and Diversity

    Source: J.P. Morgan as of 10/31/2016. EM USD Sovereign represented by J.P. Morgan EMBI Global Index. EM Local Sovereign represented by J.P. Morgan GBI-EM Broad Index. EM USD Corporate represented by J.P. Morgan CEMBI Broad Index. Past performance is not indicative of future results; current data may differ from data quoted.

    Growth in the market size has been driven primarily by the increased issuance of local currency-denominated sovereign bonds, as well as corporate bonds. The emerging markets corporate debt market alone nearly equals the size of the U.S. high yield bond market. Many foreign investors gravitate towards hard currency sovereign and corporate bonds, typically those denominated in U.S. dollars, to limit currency risk. However, the local currency market far exceeds the hard currency market in size.

    With local bond markets, some emerging markets countries impose capital controls, taxes or other hurdles that may impact a foreign investor’s ability to access the market effectively and efficiently. These restrictions may reduce the tradeable size of the local currency market. It is worth noting, however, that a significant amount of that reduction comes from China’s exclusion from investable global bond market indices. China has undertaken a series of reforms that are gradually opening up its massive onshore market to foreign investors.

    Next: A Look at Emerging Markets Bonds Fundamentals

    Fundamentals of many emerging markets countries appear to be stabilizing, and in some cases showing signs of improvement. In the next post, I examine these favorable fundamentals.

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