In focus

The essential guide to investing in emerging market debt

In #TheZero interest rate environment, investors are reaching for yield wherever they can find it.

Emerging market debt (EMD) deserves more attention than it has received. It can meet the criteria of many investors – yield enhancement, diversification, and liquidity.

However, the way that most investors have accessed the asset class is sub-optimal. In particular, the overwhelming bias that many have towards hard currency, US dollar-denominated, bonds at the expense of local bonds and currencies. The former falls short on two of those criteria: diversification and liquidity.

Read the full paper here.

What is covered?

EMD accounted for 22% of world debt as at the end of 2019; it is far from a niche asset class.

In this paper we look at the different components of EMD, analyse the attributes of each, and assess how investors might access these opportunities. In EMD there is good reason to look beyond the index – we highlight why.    

The paper also includes a review of how EM countries have changed their approach to borrowing. And it examines why structural forces may be turning against the US dollar.  


Here are the key takeaways:

  1. EMD can be a useful addition to portfolios as core bond yields have fallen to record lows. But investors need to understand the different nature of hard and local currency bonds. While hard currency EMD can provide yield enhancement, it falls short on diversification and liquidity. Local currency bonds, on the other hand, are more liquid and are better diversifiers. They are also the largest part of the market, although investors need to look beyond benchmark indices to access the full opportunity set.
  2. Within local EMD, the value is not uniform. As EM countries vary, so do the yields of the bonds. In this environment, countries with positive real yields are a better starting point. Furthermore, the greatest value in EMD is EM currencies that have depreciated substantially since 2011.
  3. As accidents happen in EM, investors who have the flexibility are best served by opting for an unconstrained strategy that has the capability to exclude certain countries.

Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.  The content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.

Contact Schroders Wealth Management

To discuss your wealth management requirements, or to find out more about our services and how we can help you, please contact:

Marc Brodard

Marc Brodard

Head of Private Clients - Switzerland