As we head towards the end of Q1, Polina Kurdyavko discusses the opportunities and risks in EM debt, how geopolitics could impact the asset class this year, and what's top of mind for investors.
A resilient asset class....
Despite the opportunities for double-digit yield, emerging markets debt ("EMD") as an asset class has faced challenges attracting inflows in recent years. To understand why, it's important that we consider the wider picture with respect to the macro environment and how this has influenced the investor mindset.
In light of the prolonged economic uncertainty that has plagued markets, we have witnessed investor behaviour becoming more risk averse. This has resulted in a move to what are typically seen as safer (and more familiar) assets, with EMD seen as too much of an 'unknown', despite the potential for attractive returns.
At the same time, we have also seen two key headwinds in the asset class: firstly, the withdrawal of liquidity given the increase in Fed rates; and secondly, an increase in default rates for EM sovereign debt, driven by a number of frontier markets struggling with debt sustainability.
