Emerging Markets Local Debt
As many EM countries have evolved and matured in terms of economic stability and policy, they been able to increase debt issuance in their own currencies. Today the EM local debt universe is over USD 8 trillion, representing the largest sector of EM debt with the highest average credit rating (BBB). EM local debt generally has low correlations with other asset classes and can help diversify an investment portfolio.
The market standard benchmark for local, or domestic, EM fixed income is the JP Morgan GBI-EM Global Diversified Index (GBI-EM GD) which includes 21 countries. For local currency, the standard benchmark is the JP Morgan Emerging Local Markets Index Plus (JPM ELMI+) which tracks total returns for local currency–denominated money market instruments and includes 23 currencies.
Our Global Emerging Markets (EM) Local Debt strategies seek to maximize risk-adjusted returns by investing selectively in EM local currency-denominated debt and in EM local FX. Central bank transparency and monetary policy along with a country’s credit quality are key drivers of our fundamental and valuation analysis for EM local debt.
To evaluate EM currencies, we examine several valuation metrics for each EM currency along with the expected evolution of the country’s trade balance and market dynamics.
- By integrating macro, fundamental and valuation analysis along with market technicals, we aim to create diversified portfolios with selective exposures to local debt (and currencies)
- A robust risk management framework defines our portfolio construction process, enabling continuous portfolio calibration and optimization
Portfolio management decisions incorporate the expertise and analysis of a large, dedicated team of EMD specialists, credit analysts and economists. The process is collaborative and dynamic: specialists are each responsible and accountable for numerous investment inputs and decisions.
We integrate macroeconomic views, themes and catalysts with detailed country/currency fundamentals and relative valuation analysis. Our initial investment positions are then modeled and calibrated via stress-testing and scenario analysis in an effort to create resilient and diversified portfolios.
Our approach to investing in EM local rates differs from that of local currencies:
- EM local rates. Each EM country’s local debt fundamentals are evaluated on both longer-term metrics (economic trends, central bank credibility and credit quality) and shorter-term metrics (inflation, local curve analysis and current market technicals)
- EM local currencies. EM currency valuations combine analysis of each country’s current account, capital account, and balance of payments to inform our portfolio positioning
- Our robust risk management framework then calibrates the size and scale of our positions in order to optimize the portfolio construction process using rigorous stress-testing and enhanced scenario analysis
HSBC Asset Management strengths
Emerging markets are part of our corporate DNA and we have one of the longest track records in the EMD universe, dating back to 1998:
- A global investment platform allows us to leverage the insights and local knowledge of our on-the-ground network of analysts and investment professionals from across the world
- EMD capabilities range from US dollar-denominated sovereign, quasi-sovereign and corporate bonds to local currency-denominated debt and local FX. We offer both benchmarked and total return strategies in this space.
Risks in consideration
There is no assurance that a portfolio will achieve its investment objective or will work under all market conditions. The value of investments may go down as well as up and you may not get back the amount originally invested. Portfolios may be subject to certain additional risks, which should be considered carefully along with their investment objectives and fees.
- Fixed income is subject to credit and interest rate risk. Credit risk refers to the ability of an issuer to make timely payments of interest and principal. Interest rate risk refers to fluctuations in the value of a fixed income security that result from changes in the general level of interest rates. In a declining interest rate environment, a portfolio may generate less income. In a rising interest-rate environment, bond prices fall.
- High Yield Investments in high yield securities (commonly referred to as “junk bonds”) are often considered speculative investments and have significantly higher credit risk than investment grade securities. The prices of high yield securities, which may be less liquid than higher rated securities, may be more volatile and more vulnerable to adverse market, economic or political conditions.
- Foreign and emerging markets Investments in foreign markets involve risks such as currency rate fluctuations, potential differences in accounting and taxation policies, as well as possible political, economic, and market risks. These risks are heightened for investments in emerging markets which are also subject to greater illiquidity and volatility than developed foreign markets.
- Derivative instruments Derivatives can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on performance.