Emerging Markets External Debt consists primarily of dollar-denominated sovereign (government) and quasi-sovereign (government-sponsored) bonds. There are currently nearly 80 Emerging Market countries, defined by a number of metrics including GDP per capita and integration into the global financial system, among other metrics. The asset class originally emerged out of the Brady Plan in the late 1980s and early 1990s.
Ashmore has been investing in this asset class since 1992. External Debt has historically been considered to be the “core” component of the Emerging Markets fixed income asset class, offering global investors exposure to hard currency assets issued by a finite, but expanding, universe of countries in Asia, Latin America, Eastern Europe, the Middle East and Africa. As interest in Emerging Markets has grown, investors have been increasingly interested in diversifying their exposure to the Local Currency Sovereign and Corporate Debt markets. Blended Debt, which combines these three themes, has also taken on a much bigger role in clients’ portfolios.
Today, Emerging Markets External Debt is approximately a USD 1.5 trillion investment universe, dominated by USD-denominated sovereign and quasi-sovereign issuers, and a small but increasing portion of EUR-denominated bonds. The JP Morgan EMBI family of indices has been in existence since 1993; the JP Morgan EMBI Global Diversified Index, which currently includes 72 countries, 170 issuers and more than 900 securities, is the most widely-used index, and comprises securities denominated in USD with a large minimum issue size.
The Emerging Markets External Debt Index has an average investment grade rating of BBB-. The index is currently weighted 52.9% investment grade and 47.1% high yield. Of the ten largest countries by index weight, eight are investment grade. As the market has evolved, a more diverse universe of investors has developed, including the world’s largest institutional investors, central banks, sovereign wealth funds, pension funds, endowments, foundations, insurance companies, and private investors.
Investing in Emerging Markets Sovereign External Debt provides investors with exposure to countries that today represent nearly two-thirds of global GDP. Issuers now have the ability to choose the most attractive market into which to issue their debt, diversifying their funding sources and providing the ability to establish new yield curves for their corporate sectors to access. Debt issuance volumes have been steadily increasing and there are several new issuers entering the asset class every year, adding further depth and diversification. The External Debt market now includes newer instruments such as sukuks (Islamic finance) and ESG securities.
Ashmore currently offers External Debt investments as segregated accounts or via commingled funds. The strategy is offered as a pure, stand-alone product (“Sovereign External Debt” and “Investment Grade Sovereign External Debt”) or combined with other Emerging Markets debt products like corporate bonds and local currency bonds (“External Debt Broad”).