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EM IG sovereign bonds (for the risk averse)

Market Commentary

27 November 2020

The 2020 Triple Shock of coronavirus, crashing commodity prices and spread widening reminded many investors that segments of Emerging Markets (EM) fixed income can be extremely volatile during bouts of risk aversion.

Fortunately, there exists a panacea in the shape of EM investment grade (IG) sovereign debt for those investors who do not have the stomach for the ups and downs associated with the broader EM fixed income asset class.

EM IG sovereign debt has a superior Sharpe Ratio compared to both US Treasuries and US high yield (HY). The investment opportunity makes up more than half of the total EM sovereign debt universe, including 38 IG rated sovereigns and total outstanding securities of nearly USD 750bn. In addition to becoming more diversified and liquid every year, the issuers in the EM IG universe also have significantly better ESG scores than the rest of EM and stronger macroeconomic fundamentals than both developed economies and the rest of EM.

This backdrop of far stronger macroeconomic fundamentals and constantly improving trading characteristics makes for a particularly attractive investment proposition, particularly when one takes into account that at current valuations EM IG sovereign bonds should deliver at least 3 times more return than US government bonds of similar duration over the next five years. 

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