Reasons To Purchase Emerging Market Bonds

By Liliana Mills

An asset class that has recently become more prominent is emerging market bonds. As a number of high growth economies were relatively unscathed by the economic crisis they are seen to be doing well compared to some developed economies. Among the high growth economies are those benefiting from the economic rise in the east, examples being Malaysia, Indonesia and Thailand.

Many countries in Africa, Asia and Latin America are high growth economies. The unpredictable economic policies of years gone by have given way to governments ruled by their heads rather than their hearts in economic policy. Many governments of these regions are guided by principles of sound governance and economic discipline, fostering solid growth and improving the living standards of their populations.

It has in past years been advisable for developing economies to issue debt instruments in foreign currency to increase their accessibility to investors. They are however increasingly issuing debt in local currency, as their social policy gives rise to institutional investors such as pension funds on their own territory. These funds are looking for longer term investments in their own currency and domestic as well as foreign investors are therefore taking up the local currency debt issues.

Credit ratings in some developing countries are improving and the government debt is therefore gaining a higher rating. As the bonds often offer a higher yield than the sovereign debt of developed countries this is becoming an attractive option for investors. Foreign investors may also hope to profit from the high growth rates in these economies and make a gain from their investment.

Many developed country investors are looking for a diversified investment portfolio. The debt instruments of developing countries are a separate asset class with their own risk factors. Although the rational investor must take account of the economic, political, credit and currency risk as with any investment, the potential rewards of diversification are worth taking into consideration.

Another beneficial effect of the high rates of development in these countries is the chance of profiting from strengthening currencies. Despite the currency risk there is a realistic likelihood that the local currencies will strengthen as the economies forge ahead. Compared to some of the meager returns available from some assets in developed countries this can be seen as a real opportunity and investors may feel that additional risks are worth the extra reward.

The emerging economies are not one entity but a large number of different countries and the potential investor must look separately at each investment opportunity. As usual the potential buyer will weigh up the risks presented by each possible investment and will study the economic and financial environment in each country. There are differences in the economic environment and the economic strategy between one high growth economy and another and these difference should be researched carefully.

The future prospects for emerging market bonds are promising as confidence in their governments and economic policies grows. International investors are realizing that many developing countries are beginning to see the fruits of sensible economic policies. The sovereign debt of these countries, and increasingly also the corporate bonds of companies based in developing countries, will become a realistic target for investors.

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