Asset Allocators Want to Boost Their Stakes in EM Debt, Says Vontobel

Emerging stock markets are down 17% this year, on the order of the battered S&P 500. No one can say what will happen to the volatile stock markets. But institutions increasingly think a smart play now is in emerging market bonds, according to a Vontobel Asset Management survey.

Some 60% of asset allocators say that they plan to increase their allocations to EM fixed income over the next 24 months. Higher income from these bonds is a top reason. Others are diversification, availability to purchase and favorable environmental, social and governance prospects.

“Despite market headwinds, institutional investors recognize the need to diversify to provide both higher yields and insulation from market volatility in other asset classes,” said Simon Lue-Fong, head of the fixed-income boutique at Vontobel, in a statement. “Emerging markets fixed income can meet those needs in investor portfolios, but requires an experienced active manager to navigate the unique challenges associated.”

When investing in EM bonds, U.S. institutional investors say the top challenges they encounter are: liquidity, low expectations of risk-adjusted returns, concern about default rates and debt load and worries about their institution’s lack of expertise in the area.

The rewards, in terms of bond yield, are bounteous. Consider a list of nations’ sovereign 10-year debt, culled for only investment grade, by Standard & Poor’s measure: Botswana, BBB+, 6.6%; Indonesia, BBB, 7.4%; Mexico, BBB, 9.1%; Philippines, BBB+, 6.4%; and Romania, BBB+, 8.1%. By comparison, the U.S. 10-year Treasury, AA+, yields 2.9%.