Emerging Market Debt: A Compelling Diversification Opportunity

The Case for Emerging Market Debt (EMD)

In the last decade, allocations to EMD in portfolios have grown in prominence not only due to the additional yield available but also because of the diversification benefits it offers to investors.1

One key reason behind the historically high inflows into EMD is down to basic emerging market (EM) economic fundamentals, many of which are favourable when compared with developed markets, in our view. A number of EM governments are generally in better fiscal shape than developed governments and enjoy lower debt-to–gross domestic product (GDP) ratios (Exhibit 2), as well as significantly lower projected liabilities for services such as health care or social security.2 This, in turn, allows many EM governments greater flexibility in state policies, especially when it comes to being able to maintain lower levels of taxation in order to encourage economic growth. The sum effect of being on a stronger fiscal footing is that EMs can better service their debt.

Exhibit 2: Government Gross Debt

2001–2021F

Franklin Templeton graph

 
Source: International Monetary Fund World Economic Outlook as at October 2015. Percentage of nominal GDP. F = Forecast. Advanced, emerging market and developed economies as defined by the IMF. There is no assurance that any estimate, projection or forecast will be realised.

In many EMs, a greater and growing proportion of GDP is now coming from domestic consumption. Middle classes in these economies are growing rapidly which can aid economic growth.3 A key difference with the consumers of developed markets and those of most EMs are that EMs generally have lower levels of private-sector debt. Allowing for higher saving rates on a per-capita basis as a percentage of income earned, the EM consumer is in a stronger position to spend and to help drive the growth of domestic consumption.

Demographically, many EMs are poised for continued long-term economic growth due to a younger population than DMs. The workforces tend to be more flexible than in DMs and, with education on the rise, not only are many EMs already more competitive on a global scale than ever before but we believe should continue to be so over the longer term.

For more information on the above please contact your Partners Wealth Group advisor directly or call 1800 333 143.

Article provided by Franklin Templeton Investments Australia Limited.

  1. Diversification does not guarantee profits or protect against risk of loss.
  2. Source: International Monetary Fund, Understanding the Slowdown in Capital Flows to Emerging Markets, April 2016.
  3. Source: OECD, The Emerging Middle Class in Developing Countries, January 2010.
    This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.