RSS FeedIn 2010, emerging market bonds were one of the top performers in the global fixed income universe. Some of the major emerging market countries have pursued growth-oriented and somewhat conservative fiscal policies, increased their foreign currency reserves, and as a result their currencies have commensurately strengthened relative to their developed market brethren. The strength in emerging market equities also has indirectly helped to improve investor interest in and perception of emerging market bonds.
As such, the global market for emerging market bonds has grown significantly in recent years. The consistent growth in emerging market debt over the last five years for which data is available has been with a compound annual growth rate of 8.0% for international bonds and 18.8% for local bonds. As of December 2010, the total outstanding amount, including both groups, stood at close to USD 15 trillion.
In addition, the diversity of emerging market local bonds has been increasing. The following are the four main categories for local emerging market bonds.
- Floating rate
- Straight fixed rate
- Inflation indexed
- Exchange rate linked
Traditional instruments, such as those with a straight fixed rate, have been declining moderately in proportional terms. On the other hand, as inflation increasingly becomes a concern in emerging market countries, inflation-protected bonds have shown a rising share in many of these countries.
Regional Distribution
It is interesting to examine the distribution of bonds and equities across the various countries and regions. In fact, the Asian Pacific region is ahead by a large margin in both equities and bonds. In the country breakdown, China is the main reason behind the large size of Asian Pacific equity and fixed income markets. In addition, the top four countries in equities are the BRIC (Brazil, Russia, India, China) countries, which together accounted for three-quarters of the market capitalization of the top ten countries. In addition to China and India, markets such as Korea, Taiwan and Malaysia contribute to the pie for the Asian Pacific region. As for emerging market bonds, the market size in terms of outstanding amounts of issuance is smaller than in equities.
The top 10 countries by international and domestic bond issuance are:
China | Brazil | South Korea | India | Mexico | Turkey | Taiwan | Malaysia | Poland | Thailand.
One of the global risk factors is a Global Emerging Market Bonds factor that captures the risk of emerging market bonds. This factor covers the risk of fixed income assets issued in an external currency, either by a government in an emerging market country or by a corporation that is domiciled in such a country. A rise in this factor indicates that the prices of emerging market bonds are increasing and vice versa.
Investment Strategy
You generate returns through Emerging Market Bonds by actively managing a diverse portfolio of emerging market bond securities. This strategy takes advantage of both external and local currency debt and to a limited degree, emerging market corporates from diverse sectors and industries. This strategy exploits the entire quality spectrum and combines a top-down country allocation with rigorous bottom-up credit analysis and valuation of individual issuers. The strategy employs disciplined portfolio construction which places a strong emphasis on risk management.
Emerging Market outlook remains positive and well supported by strong growth projections, low financing needs, steady inflows and strong cash flows.
M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance
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