By 2024, the majority of investors expect to increase their EMD allocations
According to a new report from Vontobel Asset Management, over half of institutional investors (64 percent) plan to increase their allocation to emerging markets debt over the next 24 months.
Investors still see the wider emerging markets space as appealing, according to the study, which received responses before and after Russia's invasion of Ukraine.
Prior to the Russian invasion, the majority of investors (72 percent) were optimistic about emerging market GDP growth, inflation, and bond yield premiums.
This number has since dropped to 55% based on the responses received. The study found three main reasons for increasing allocations after polling 342 institutional investors and discretionary wealth managers in North America, Europe, and Asia-Pacific.
Diversification benefits (56 percent), a highly liquid market (48 percent), and favorable ESG prospects were among them (47 percent ).
"Despite market headwinds, global institutional investors recognise the need to diversify to provide both higher yields and insulation from market and geopolitical volatility in other asset classes," said Simon Lue-Fong, head of Vontobel's fixed income boutique.
"Emerging markets fixed income can meet those needs in investor portfolios but requires an experienced active manager to navigate the unique challenges associated."
When it came to investing in European emerging markets fixed income, investors cited default rates and debt load (51%), liquidity (48%), volatility (45%), and concerns about corporate governance, data quality and transparency, and reporting standards (38%).
The appeal of emerging markets fixed income was even greater among UK institutions, with 72 percent planning to increase their allocation versus only 3% planning to decrease.
Furthermore, 24% said they would increase their earnings by more than 10%.
In fact, 14 percent of UK institutional investors hold 10-20% of their portfolio in emerging market fixed income, compared to the global average of 8%.
By fLEXI tEAM