Institutional investors remain structurally underweight and will continue to look to emerging market (EM) bonds to diversify their exposure away from core developed bond markets.
According to Brett Diment, London-based head of emerging markets and sovereign debt for Aberdeen Asset Management, the persistent lack of yields in core developed bond markets is pushing institutional investors to EM bonds which have posted strong returns in 2014 despite negative headlines during this period.
Total returns for EM hard sovereign debt have shot up to 10% in 2014 from negative 5% in 2013. Returns on EM corporate debt have also recovered to 7% from negative 0.1%, while returns on EM local currency sovereign debt have recovered to 6.5% from negative 9% during the same period.
“Emerging market debt has done well but it still offers good valuation in relation to other fixed income markets,” Diment says.
Yields on 10-year conventional bonds of specific EM countries such as Brazil at 11.3%, Indonesia at 8.1%, Poland at 3.1%, Colombia at 5.7% and Peru at 5.2% are more compelling than that of the US and UK, both at 2.4%, Germany at 0.9% and Japan at 0.5%.