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The Emerging View
06 September 2017
The view that Developed Market bonds are risk-free and that Emerging Markets (EMs) bonds are risky remains deeply entrenched. Occasional bouts of volatility in EM fixed income only reinforce this perception. Episodes of market volatility are often caused by shocks emanating from outside of EM and investors’ response to them. Yet EM fundamentals have proved resilient to investor panics time and time again. The resilience of EM fundamentals reflects the many material economic and political improvements, which have taken place in EM over the last few decades. Astute observers of EM fixed income markets will already be well aware of some of these, including major declines in debt levels, establishment of pension funds, better demographics, larger stock of reserves, the emergence of domestic yield curves and their integration into global financial markets, etc.
However, there are still large gaps in investors’ understanding of EM when it comes to trade. In particular, many still worry that shocks to external demand for EM exports can severely impact EM countries. This fear is rooted in the perceptions that (a) EM countries are undiversified exporters of raw materials with highly unpredictable prices and (b) that EM countries only trade with a very narrow selection of developed economies and China, wherefore even modest changes in the economic fortunes of developed countries and China in particular can severely impact EM economic health.