3 rules of thumb for emerging market debt

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The often-quoted US$17 trillion worth of negative-yielding bonds are from developed economies such as Japan, Germany and France. In stark contrast, government bonds from emerging markets such as Brazil, Russia, India, Indonesia and South Africa are all paying between 5% and 10% right across their yield curves.

But what are some of the key considerations before investing in these markets for the first time? When we caught up recently, we asked James Blair, Head of Fixed Income Asia Pacific, Capital Group to nominate some ‘rules of thumb’ for investing in emerging market debt. In this short video, he gives new investors a succinct framework to consider for thinking about this high-yield opportunity.


When you think about investing in emerging market debt, there are several things that I'd be thinking about.

Firstly, it is an adjunct to a high-quality bond portfolio. So, you don't want to be just chasing yield and sort of shifting all of your high-grade bonds into emerging market debt. High-grade bonds do have a place in a portfolio. Even when yields are so low, you may not get income, but you can still get an important risk diversifier from equities and growth assets in times of difficulty in markets. So, the first thing is get your foundations right and your fixed income portfolio and then if you've got that in place, emerging market debt can be a really interesting diversifier and income generator on top of that.

The other thing to think about is, emerging markets perform very well over long periods of time, but they do have more volatility potentially then your more G3-type (US, Europe, Japan) bond yield. So, you have to take a longer-term perspective rather than try and be too tactical about your investment.

And finally, you'd want to have a broad palette that you invest when you go into emerging market debt. Probably best not for many people to invest in just hard currency or local currency or only investment grade but try and keep to the extent that it makes sense in a portfolio, the broadest possible opportunity set. So that you can take advantage of the opportunities and also have opportunities to move to more defensive areas should that be something that a manager sees as more prudent for at that stage in the cycle.

To learn more about Capital Group's history, philosophy, people, and unique approach to investment management - The Capital System - please click here.

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