Research shows investors see benefits in Emerging Market Debt over long and short terms

12/06/2018

The historical risk-return profile of Emerging Market Debt (EMD) compares favourably with its developed market counterparts: investors willing to tolerate the inherent volatility have been rewarded with higher returns over the longer term, thanks to a compelling risk premium.

New research* commissioned by NN Investment Partners (NN IP) shows that professional investors do indeed appreciate the long-term benefits of holding EMD over the longer term, with the majority (62%) saying it is an attractive investment over five-plus years. By contrast, only 9% believe it is unattractive over this term.

The research* also shows that there is only slightly less enthusiasm among professional investors for holding EMD for the short term: just over half (51%) of respondents believe that EMD is still attractive over a one-year period, including 6% who believe it is ‘extremely attractive’. Scepticism is a little higher for short term positions than for long-term positions in EMD, with 17% saying it is unattractive over one year.

NN IP believes that EMD offers attractive opportunities for both long-term and short-term allocations.

The market fundamentals in EMs are superior to those in DMs. Emerging economies, which have enjoyed higher growth rates since 2000, account for 40% of global economic output yet only 13.2% of global domestic debt and just 8.3% of external debt. Their growth trajectories are also strongly supported as they benefit increasingly from globalisation, younger populations and their governments’ ever-improving credibility. While these factors are favourable for the risk-return trade-off, they also create short-term tactical opportunities.

Marcelo Assalin, Head of Emerging Market Debt, NN Investment Partners, explains: “There are unexpected situations with regards to all investments but the surprise factor is more prevalent in emerging than developed markets. This helps explain the relatively higher volatility of emerging market debt. Therefore, investors need some patience to absorb shocks and reap higher returns over the longer term. It is important to keep in perspective the strong fundamentals of emerging market countries.”

“Institutional investors focused on long-term strategic asset allocations could add value to their portfolios exploring dynamic, short-term investment policies to benefit from short term market dislocations created by high volatility. For example, they could tactically increase exposure to EMD in periods of market corrections driven by short term technical factors”

“If investors examine the risk premium they get with EMD compared with other fixed income asset classes, they soon realise they can have higher long term returns for similar risk profile.”

*NN Investment Partners’ Investor Sentiment: Emerging Markets Debt research, March 2018. 108 professional investor respondents globally, including institutions, family offices, banks, private banks, charities and endowments

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About the author

Marcelo Assalin

Marcelo Assalin

Head of Emerging Markets Debt

Experience since 1996

Business Experience

2015-to date Marcelo is Head of the EMD Boutique of NN Investment Partners.

2013-2015 Lead Portfolio Manager, EMD Local Currency Strategies. Marcelo is the Lead PM for NN IP's EMD Local Currency strategies, and is based in Atlanta

2012-2013 Head of Emerging Market Sovereign Debt and Local Currency at Voya Financial (formerly ING IM USA)

2008-2011 Senior Portfolio Manager in the EMD Team of ING IM USA

2005-2008 Chief Investment Officer at ING IM Brazil (Sulamerica Investimentos)

2002-2005 Lead Portfolio Manager, Fixed Income Sulamerica Investimentos

1996-2002 Trader and Portfolio Manager at Sulamerica (Brazil)

Qualifications

Chartered Financial Analyst (CFA)

BSc  in Economics and Accounting from the University of Sao Paulo (Brazil)

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