While 2013 has been challenging for emerging markets (EM) debt, the picture should improve in the long term.
That’s according to a white paper—What’s Next for Emerging Markets Debt?—from Neuberger Berman.
“In general, we believe that investors have made too much of slowing growth in emerging markets, and we expect some economic resurgence, supported by global recovery, particularly in the developed markets, which should partially offset China’s slowdown, even as EM policy-makers gradually scale back monetary support,” states the paper.
In terms of individual segments, the investment firm believes that sovereign credit spreads are attractive relative to historical levels and different expected default rates. Corporate debt should largely mirror sovereign performance but carry some risk due to recent outperformance versus sovereigns.
And local currency debt is its preferred market segment through the end of the year as monetary shifts between EM and the United States as well as commodity weakness may hamper the currencies in which such debt has been issued.
Overall, the recent underperformance of EM debt to U.S. and European debt has improved its relative value.
Also, EM debt “should continue to benefit from the long-term trend of inflows, as investors within fixed income add exposure to emerging markets, which are structurally underrepresented in their portfolios.”
Neuberger Berman believes the structural case for EM debt remains strong as investors increasingly recognize the economic significance, improved credit quality and depth of EM economies.
Although improved global growth could provide a near-term headwind of higher yields, the firm believes that slow, steady economic improvement could provide a modestly positive backdrop for EM debt, particularly in comparison to other sectors within fixed income.
This article originally appeared on Benefitscanada.com