Exploiting the potential of emerging market short-term debt

We believe that short-dated EM debt offers compelling investment opportunities, enabling bond investors to capitalize on the potential of developing countries with some protection from the inflation risks that massive levels of global quantitative easing could ignite.

Investors are generally well versed in the long-term positive fundamentals driving emerging markets; many economies have strong economic fundamentals, with robust levels of growth, low levels of debt relative to their developed peers, competitive labour costs and favourable demographic profiles. However, given that there are still some lingering uncertainties in the global economic outlook, the key question is how to capture the potential of emerging markets’ growth without taking on excessive risks in the risk on/risk off environment.

We believe that for those investors prepared to accept some degree of risk by investing in emerging economies, EM bond markets offer attractive potential returns, with considerable valuation anomalies relative to developed market debt. Emerging economies generally bear lower levels of public, private and corporate debt than their developed counterparts, while corporates benefit from the supportive backdrop of high levels of economic growth in their domestic and local markets. Additionally, the emergence of the consumer class in many EM countries looks set to continue to present opportunities for companies to tap into rising levels of disposable income. Meanwhile, EM debt markets offer investors the prospect of more stable returns relative to the more volatile EM equity markets.

Macroeconomic uncertainties will undoubtedly continue to affect financial markets in 2013. However, at least some of the extreme outcomes that investors feared in 2012 – such as the Chinese leadership change, a complete and disorderly breakup of the eurozone and the US fiscal cliff – are now much less of a concern than they were previously. We have held a very cautious view of the global economy for some time and we expect that the economic outlook will remain challenging in 2013, with the overhang of debt across many of the developed economies set to cast its heavy shadow for an extended period.

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