25 Sep

Emerging Market Debt Revisited

September 2016
Emerging market debt (“EMD”) has become more widely adopted by investors in recent years, partially as a result of the strong performance the asset class has experienced over the long-term. Additionally, the credit quality of the EMD USD denominated benchmark has improved over the last 15 years, even in spite of recent downgrades (e.g. Brazil). Beyond the strong performance and improving credit quality, there is also a growing list of strategies which investors can choose from leading to increased adoption. We believe EMD investors should make use of a wide opportunity set, but utilize a U.S. dollar-denominated benchmark. In our opinion, most investors should implement via opportunistic strategies or hard currency strategies which make use of hard currency bonds as well as local currency and corporate bonds. Blended mandates which have a neutral allocation of 50% local currency, in our opinion, require accepting too much volatility and uncertainty around the direction of the U.S. dollar relative to emerging market currencies. The balance of this paper will detail our rationale for these recommendations, provide guidance on benchmark selection and provide our thoughts on the current outlook for EMD.


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