The ‘Investor Sentiment: Emerging Markets Debt’ research commissioned by NN Investment Partners¹ (NN IP) shows that three out of four (75%) professional investors expect fundamental economic drivers in the Emerging Market Debt (EMD) sector will improve over the next two to three years, including nearly a fifth (18%) who expect a significant improvement.
More than seven out of 10 (72%) respondents expect institutional investors’ allocations to EMD to rise over the next 12 months, including 10% who expect a dramatic rise. Only one in eleven (9%) expect a decrease. The key reason for this increase, cited by 62% of respondents, is the support provided by EMs’ fundamentals and 50% cited the credit quality of issuers specifically. Other reasons cited include diversification benefits (47%).
There are some reservations among investors, too. More than three in four (77%) of respondents in our survey say there is a general perception of high risk around investing in EMD, with 23% who think this is a serious risk. For 73%, the investment risk versus the potential return is an issue while 52% say they do not have the risk and/or illiquidity budget to invest in EMD. Other deterrents include a lack of available data and information on EMD (47%); and a lack of knowledge on how to incorporate EMD in their asset allocation (40%). Nearly nine in 10 (89%) of those professional investors who expect investments in EMD to turn negative believe rising interest rates are creating a headwind and 56% point to a slowdown in China.
Marcelo Assalin, head of Emerging Market Debt, NN Investment Partners, commented: “Emerging markets are catching up with the developed world, thanks to a number of factors including strong economic growth, credible economic policies and clear rule of law. Their economic growth has outstripped that of developed markets since 2000 and currently, they are benefiting significantly from recovering commodity prices and historically low inflation, all of which are supporting their debt fundamentals and reducing the risks for investors.
“The political risks are also often over-estimated by investors. In our experience of investing in EMD for the last 25 years, government policies are often significantly more moderate and pragmatic in tone than election rhetoric would suggest.
“EMD now offers a broad spectrum of sub-asset classes that constitute one of the most exciting investment universes in the world. But market inefficiencies mean there are fantastic opportunities for experienced, active managers to deliver the most attractive returns.”