A Spectrum of Possibilities: The Emerging-Market Debt Tool Kit

Paul DeNoonShamaila KhanMichael L. Mon, CFAMarco Santamaria, CFA

Today, three decades after the phrase “emerging markets” was coined, the comparative strength of developing economies is one of the dominant themes in global investing. Emerging market (EM) countries account for about 85% of the world’s population and roughly half its gross domestic product (GDP). Thanks to a virtuous cycle of conservative fiscal policies, credible monetary policies, falling inflation and faster growth, EM sovereign credit metrics are now stronger than those of most developed economies. The International Monetary Fund (IMF) expects emerging countries’ gross-debt-to-GDP ratio to fall below 30% by 2017, compared with 130% in the developed world.1

But exploiting these trends is not as straightforward as it may seem. This is especially true in emerging-market debt (EMD), which spans several sectors, each with its own set of risks and return opportunities. The EMD tool kit can be used in a wide array of strategies to help achieve a range of goals, from conservative portfolio diversification to high-octane return seeking. The challenge, as well as the opportunity, is to select the right strategy for each investor’s needs.

Sources of Risk and Return for Emerging-Market Debt

1The term “emerging markets” was coined in 1981 by Antoine van Agtmael, an investment officer at the International Finance Corporation. Population and GDP data were taken from the International Monetary Fund (IMF) World Economic Outlook, October 2012.

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