Emerging Markets Local Currency Debt consists of sovereign (government), quasi-sovereign and occasionally regional government bonds issued in the domestic currency of the issuer. The sector provides investors with exposure to both interest rates and currencies across Asia, Latin America, Eastern Europe and Africa. The sector has expanded strongly as a result of demand from a vibrant and growing domestic pension fund and insurance company universe across Emerging Markets. It has grown to more than USD 14 trillion in size. Funding in local markets, as opposed to external markets, has increasingly become the primary source of funding for governments, and today offers domestic and international investors a very large pool of liquid, tradable debt instruments.
The JP Morgan Global Bond Index (GBI) family of indices was launched in 2005, expanding the earlier Emerging Local Markets Index Plus (ELMI+) which tracked returns of local currency denominated money market instruments, to include the full range of local currency debt instruments. The most widely-used index is the GBI-EM Global Diversified, with a market capitalisation of USD 2.5 trillion and including 20 countries and nearly 290 instruments. While representation in the index increased notably with the addition of China in 2020, a number of countries with investible debt remain unrepresented in the index, presenting active investors with additional attractive Local Currency opportunities.
Local currency credit ratings tend to be higher than foreign currency debt ratings, as governments are generally seen as being able to print sufficient local currency to meet obligations. As a result, the GBI-EM Global Diversified Index has an average investment grade rating of BBB, slightly higher than that of the EMBI-Global Diversified Index. The Global Diversified Index caps the weighting of its constituents at 10%, with China at the 10% cap level, followed by Indonesia at 9.7% and Mexico at 9.1%. Four countries – Serbia, Dominican Republic, Uruguay and the Philippines each represent less than 0.3% of the index. Two additional countries – Ukraine and Egypt – are currently on Index Watch for inclusion in the index.
Ashmore has been managing Local Currency Debt as part of broader debt mandates since 1996 and on a dedicated basis since 1997. The strategy is offered via segregated accounts or commingled funds.