EM bonds have a low correlation to other asset classes, creating an important opportunity for diversification, volatility and risk reduction and potential long-term risk adjusted returns. In addition, a key feature of EM bonds is that it offers geographic, credit quality, duration and currency exposure diversification.
EM countries, on average, have higher economic growth, greater monetary and fiscal policy flexibility, lower debt levels and higher foreign reserves. These positive factors have contributed to a dramatic improvement in their creditworthiness and consequently higher sovereign debt ratings which reduce the risk of default, making EM bonds relatively safer for investors.
With over 50 EM countries with varying economic cycles and more than 500 corporations across different sectors issuing debt, the EM fixed income market offers exposure to a rapidly growing, geographically diverse universe of sovereign and corporate fixed income. During a 10- year period from 2004 to 2013, the total global EM fixed income asset class has more than tripled, from approximately USD 4.6 trillion to USD 16 trillion*. As a result, EM fixed income has become a core investment asset class and is attracting demand from pension funds, insurance firms, and institutional buyers.
*Source: BAML Research data, as of April 30, 2015