Emerging market fixed income is less concentrated than equities
Emerging markets debt and equity have many overlapping traits, but also differ in their exposure to countries and risks. The MSCI Emerging Markets Index contains 27 countries, with the five largest accounting for 70% of market value. Three countries in Asia - China, South Korea and Taiwan - comprise more than 50% of the index.
Compared to equities, the fixed income universe is more diverse. The JP Morgan EMBI Global Index, which includes dollar-denominated debt issued by emerging market countries, contains 66 countries. The largest five countries account for only 40% of market value, and the top three for 28%. Of the 66 countries in the emerging market fixed income benchmark, only 19 countries overlap with the equity universe.
"EM equity and debt are distinct asset classes. Investors should allocate between the two based on the risk profile desired."
Emerging markets include commodity importers and exporters
Although some countries are heavily dependent on oil exports, across the wider emerging market universe – and specifically in South East Asia, Eastern Europe and the Caribbean – many countries are net importers rather than exporters. Even Mexico, commonly perceived as a significant exporter, imports oil and exports refined products.
Hence low commodity prices are not necessarily bad for emerging markets. They can come as a relief for importing countries as they improve their current account balance. On the other hand, very high commodity prices are not necessarily good as they may encourage a lack of fiscal discipline among exporter nations. This divergence between importers and exporters can be positive for active investors as it enables them to differentiate within the universe.
"We think oil prices will be range bound in the near-term. This can be a sweet spot for emerging markets."