Three Reasons to Embrace Emerging Market Corporate Credit

Robert Nelson, a portfolio manager with Franklin Templeton Fixed Income Group, believes emerging market corporate debt presents a compelling but under-appreciated investment story. Here he sets out three reasons why investors might consider an allocation to the asset class.

A combination of depth, diversity, quality and value leads us to believe emerging market corporate debt offers a persuasive investment opportunity in its own right.

Emerging market corporate debt is a large and well-diversified asset class of higher quality than many people realize. Valuations have improved and we think there are attractive yields on offer in what we consider a misunderstood part of the fixed income world.

Furthermore, correlations with other asset classes are such that emerging market corporates can greatly complement existing fixed income strategies, potentially helping to enhance returns while reducing overall volatility.

With that in mind, here are three specific reasons to consider an emerging market corporate debt allocation.

Emerging Market Corporate Credit’s Attractive Yield, Rating & Duration Dynamic

Emerging market corporate credit offers what we think is a compelling combination of nominal yield, low duration1 and high quality.

For example, the nominal yield to worst of the BofAML Emerging Market Corporate Debt (EMCB) Index2 was 5.2% at the end of January 2019. Its average duration at the same time was low at 4.6 years.

By comparison, duration for emerging market sovereign debt stood at around seven years at the end of January 2019.3

In addition, it may come as a surprise to many investors to learn 68% of the EMCB Index is investment-grade rated, which suggests to us that investors looking for quality income or carry without excessive duration risk might consider an allocation to emerging market corporates.