According to a recent analysis by Standish Mellon Asset Management, the fixed income specialist for BNY Mellon Asset Management, local currency-denominated emerging markets debt has more attractive opportunities than dollar-denominated emerging markets debt.
Alexander Kozhemiakin, director of emerging markets strategies for Standish, said: “Emerging markets local currency-denominated debt is a large and liquid asset class that offers the potential to generate equity-like returns without taking on direct equity risk. Prospective returns from local bonds are supported both by their relatively high yields and by the potential for their currencies to appreciate against the US dollar. Most emerging markets currencies are competitively valued and their long-term appreciation potential is strong. This potential is now being realized as the global economic activity is bottoming out.”
In contrast, Mr Kozhemiakin noted that spreads have narrowed significantly this year for dollar-denominated emerging markets debt, which has now graduated to a somewhat lower risk, lower return status, reflecting the improvement of the average credit quality in emerging markets countries issuing external debt to border-line investment grade.
The strength of emerging markets debt classes, both local currency debt and dollar-denominated debt, became particularly evident during the recent global financial crisis, as both demonstrated resiliency. “This was due to the improved creditworthiness of most emerging markets sovereign issuers and the positive growth differentials between emerging markets countries and the developed economies. These two factors will provide support for emerging markets debt in the years ahead,” he added.
