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The Investment Case for Emerging Markets

  • Long term growth potential above global average
  • Competitive labour market
  • Abundant commodity resources
  • Structural maturation
  • Economic reforms
  • Improving governance, sound fiscal and monetary policies
  • Manageable Debt-to-GDP-ratios
  • Improving Credit Quality
  • Portfolio diversification benefits

Since the mid 1990s emerging and developing countries have had growth rates above the global average, especially so over the last decade. The most recent crisis (2008/2009) has helped to underline the emergence of emerging economies as the economic powerhouse of the world. At the same time trade between emerging economies is rising with domestic consumption getting a higher priority as a source of growth. Being the powerhouse of the world, it comes as no surprise that large economies such as Brazil and China have gained in self-confidence and have become increasingly vocal and influential in international economic matters. Thanks to improving governance and overall sound fiscal policies many emerging economies now are in a situation allowing them to point at the advanced economies. Furthermore, due to competitive labour markets and rising commodity prices over the past 5 to 10 years external balances have improved markedly with net debtors now being net creditors. Besides being a prime growth engine and commodity consumer with large foreign currency reserves China also fund large parts of the US budget deficit and acts as a lender of last resort and investor in indebted large companies as well as in sovereigns and international institutions like the IMF.

Measured by credit default risk premiums the boundary between advanced economies and emerging economies has certainly become blurred. BB+ to BBB- rated emerging sovereigns that traded with wide risk premiums just a few years back now trade inside some advanced European economies. For sure, the western European debt crisis of 2010 serves as a wake-up call with respect to the conventional perception of advanced world sovereign risk and the need for and advantage of diversification into emerging markets sovereign risk.

Portfolio Characteristic and Diversification Benefits
Persuasive improvements of fundamentals over the past decade and attractive portfolio characteristics and diversification benefits have attracted an increasing number of investors globally to the asset class of sovereign emerging markets debt. However, using the share of global GDP and the market capitalisation as yardsticks investors are still under-allocated to emerging markets debt. We expect this to gradually change over the coming years as investors realize the need to diversify away from debt ridden advanced world economies to the favour of more favourable debt metrics of emerging market sovereigns. According to IMF the average emerging markets debt-to-GDP ratio is expcted to remain stable below 40% whereas the average advanced world debt-to-GDP ratio is rapidly approaching 100%.

Also, an increased emerging markets debt exposure is being supported by the fact that global growth today is driven first and foremost by emerging market economies – a fact unlikely to change in years to come.