State Street Global Advisors: Allocating to EMD – Considerations for Euro Investors

Emerging market debt (EMD) is a versatile asset. It offers equity investors risk mitigation potential with modest return dilution. “For fixed income investors willing to move out the risk spectrum, EMD presents a significant yield pick-up opportunity as fundamentals continue to be relatively healthy, notwithstanding some notable deterioration in the fiscal backdrop during 2020”, Jeremy de Pessemier, Senior Investment Strategist at State Street Global Advisors, writes in his new article. According to Jeremy’s, investors need to be comfortable with headline and idiosyncratic risk, but in a low (and in some quarters, negative) yield environment, EMD offers significant potential for those investors willing to take a closer look.

Key items

Yield Enhancement: Emerging market debt provides an attractive yield pick-up relative to developed market bonds.

Diversification Benefits: The low correlation and higher growth factor exposures of EMD assets provide diversification benefits for global bond and equity investors.

Supportive Fundamentals: Emerging economies, on average, offer stronger growth potential and lower debt burdens than their advanced counterparts despite the negative effects of COVID-19.

Higher Volatility/Drawdown and Idiosyncratic Risks: Investors need to be aware of the potential higher volatility and drawdowns as well as the idiosyncratic risks of EMD assets.