Emerging Market Debt as a core allocation (roundtable 'Emerging Market Debt' – part 1)
This report was originally written in Dutch. This is an English translation.
In part 1 of this roundtable report on Emerging Market Debt, nine experts discuss why institutional investors increasingly view EMD as a strategic long-term allocation. Topics include diversification, valuations, risk perception and the influence of the WTP framework on portfolio choices.
By Manno van den Berg
|
Chair: Sander van der Steeg, Mint Tower Capital Management Participants: Benoit Anne, MFS Investment Management Dustin Benson, Nuveen Kristin Ceva, Payden & Rygel Rob Drijkoningen, Neuberger Mohammed Elmi, Federated Hermes Rodica Glavan, BNY Investments Yong Lin, Achmea Investment Management Naki Nartey, PIMCO Rickey Thevakarrunai, bfinance |
The debate surrounding emerging market debt is shifting. Investors are no longer asking themselves whether they should invest in EMD, but how: which countries and sectors are preferable, how to deal with volatility and market shocks, and what role themes such as AI and ESG should play in portfolio construction.
These and other key questions are the focus of a round-table discussion organised by Financial Investigator, in which nine experts discuss the investment case for this asset class. The participants highlight where opportunities lie, but also where assumptions about EMD are no longer tenable. Risk is a recurring theme in the discussion.
The persistently high perception of risk remains one of the biggest obstacles, concludes moderator Sander van der Steeg. ‘That sentiment flared up again during the crisis in the Middle East, even though the quality of the asset class has clearly improved.
What role does EMD currently play in the investment portfolios of institutional investors?
Benoit Anne: ‘That role has clearly changed. The category has proven to be an excellent tool for global diversification. Emerging markets used to be the epitome of a high-beta asset class, but that image no longer holds true. The category is less volatile and plays a strategic role in an increasing number of portfolios within diversification and low-correlation strategies. The narrative surrounding emerging markets has simply become less negative. There are now greater concerns about the sustainability of US government debt and political instability in Europe.’
Naki Nartey: ‘Retail investors often view emerging markets as a tactical position, but for institutional investors it has now become a structural long-term allocation. Moreover, market timing within a tactical approach is also particularly difficult. Investors who attempt this often end up with poorer returns than long-term investors.’
Rickey Thevakarrunai: ‘Interest in EMD has increased. One of the main drivers is valuation. If you look at the spreads, emerging market debt is more attractive than, for example, corporate bonds in developed markets. There is also a clear diversification benefit, as emerging markets are less closely aligned with the economic cycle of developed markets. This provides better diversification within bond portfolios.’
Rob Drijkoningen: ‘We saw a clear trend of renewed inflows into EMD before the conflict in the Middle East. Now, many investors are adopting a more wait-and-see approach again. Emerging markets are a cyclical asset class – this applies particularly to local currency – and are sensitive to global trade, growth and inflation dynamics. Other investors, however, see volatility as an opportunity.’
Rodica Glavan: ‘We are seeing growing interest, for the time being mainly from global mandates, but no very strong inflows. We are, however, seeing a shift from tactical to structural allocations.’
Is the Wtp framework changing how pension funds view EMD? Is it a reason for larger allocations?
Yong Lin: ‘The return module within the WTP framework is aimed at maximising returns within a given risk budget, and EMD fits in well with that. EMD offers higher risk premiums than developed markets and, compared to high yield, has historically had a relatively favourable default and recovery profile. In addition, the diversification benefits improve the Sharpe ratio at portfolio level. The final allocation depends on the risk budget, lifecycle choices and liquidity requirements.’
Kristin Ceva: ‘Many institutional investors have plenty of scope to increase their allocation. Emerging markets account for almost 50% of global GDP, whilst EMD represents just over 20% of the global fixed-income market. Inflows improved last year, but this followed a period of significant outflows. The outlook remains favourable: strong fundamentals, improved inflation dynamics, resilient growth and stronger external balances.’
How do you address the high risk perception of the asset class?
Mohammed Elmi: ‘With bonds, it essentially comes down to default risk. In 2024 and 2025, we saw no defaults whatsoever in EM sovereigns denominated in hard currency, compared with around 2.5% in US high yield. This reflects stronger fiscal positions, lower debt levels and improved monetary policy frameworks. Emerging markets are distinguished by much stronger balance sheet positions. Volatility remains, but periods of weakness often present buying opportunities.’
Glavan: ‘We see a similar picture with corporate bonds. Default rates peaked in 2022, driven by the Chinese property market and the war in Ukraine, but have since fallen below the long-term average, and well below that of European high yield. More than half of the EM corporate universe is now held by local investors with a longer-term horizon. This provides greater stability and lower volatility.’
Dustin Benson: ‘The fundamentals are stronger than ever and EMD is much more diversified. Both the corporate and sovereign universes are broader, with varied exposures to commodities and economic growth. Liquidity is often seen as a weakness, but the market has become considerably deeper. There is a broad investor base with many more active local players. Even during recent geopolitical tensions, liquidity remained intact.’
Nartey: ‘We are actually seeing a convergence where balance sheets in developed markets are deteriorating and those in emerging markets are improving. Furthermore, you can build your exposure to EMD selectively – via an active manager – and you do not need to invest across the entire universe. The perception that emerging markets are inherently very risky is not sufficiently substantiated.’
Retail investors often view emerging markets as a tactical position, but for institutional investors it has now become a structural long-term allocation.
Drijkoningen: ‘An important point is the strength of local reform programmes, which are actually being embraced by national governments this time. Countries such as Oman and Azerbaijan are shifting from high yield to investment grade, and there is a pipeline of countries that could follow. This suggests that the underlying credit quality of a number of countries may already be stronger than the ratings indicate.’
Thevakarrunai: ‘The main benchmark, the EMBI Global Diversified, consists of approximately 50% investment grade and 50% high yield, but offers spreads comparable to US high yield. Investors therefore get comparable spreads with a higher average credit quality.’
Lin: ‘An environment of geopolitical fragmentation, structurally higher inflation and persistent policy uncertainty is putting pressure on securities in developed markets, including so-called safe-haven assets. In that context, EMD looks attractive. In our base case scenario, we expect this category to offer a more favourable risk-return profile than both equities and high-yield bonds in developed markets. Not having an EM allocation is a risk in itself.’
|
Sander van der Steeg Sander van der Steeg has been working as a Portfolio Manager at Mint Tower Capital Management since January 2026, where he is responsible for investments in emerging markets fixed income. Prior to that, he spent 10 years at Shell Asset Management Company, where his most recent role was Head of the in-house managed EMD mandate. Van der Steeg began his career at APG Asset Management. |
|
Benoit Anne Benoit Anne is Senior Managing Director and Head of Market Insights at MFS Investment Management, where he leads the market insights team and focuses on fixed-income strategy. He joined the firm in 2021 and is based in London. Previously, he worked at Liberty Mutual, Société Générale and Merrill Lynch. He worked as an economist at both the Institute of International Finance and the International Monetary Fund. |
|
Dustin Benson Dustin Benson is a Trader within Nuveen’s global fixed income team and has been a member of the international EMD team since 2011, where he is responsible for non-US credit markets, interest rates and currencies. Previously, he worked as an Analyst and Portfolio Manager for emerging markets and was employed at Black River Asset Management. He has been trading in emerging markets since 2002. |
|
Kristin Ceva Kristin Ceva is Managing Director at Payden & Rygel, a member of the Investment Policy Committee and Senior Portfolio Manager for emerging markets bond strategies. She regularly speaks at forums and in the media on the subject of international investment. Ceva holds a PhD in Political Science from Stanford and was a Fulbright Scholar in Mexico. She sits on the boards of several non-profit organisations and holds a BBA in Finance from Texas A&M. |
|
Rob Drijkoningen Rob Drijkoningen, Managing Director, joined Neuberger in 2013. He is Head of Fixed Income Europe and Co-Head of the EMD team. Prior to this, Drijkoningen spent almost 18 years at ING Investment Management, where his roles included Global Head of EMD and Head of Multi-Assets. He began his career at Nomura and Goldman Sachs and studied Macroeconomics at Erasmus University Rotterdam. |
|
Mohammed Elmi Mohammed Elmi is a Senior Portfolio Manager and is responsible for portfolio management and research within global fixed income. He is Co-Portfolio Manager of the EMD franchise at Federated Hermes, where he has worked since 2013, and has 25 years’ investment experience. Previously, he held positions at Société Générale, Credit Suisse, Mashreq Capital and Bloomberg. Elmi holds a bachelor’s and master’s degree from the University of London. |
|
Rodica Glavan Rodica Glavan is Head of Corporate Fixed Income for emerging markets at Insight and Lead Portfolio Manager for EM corporate bond strategies. She has been with Insight since 2006, having previously held roles at Schroders in London and New York. She holds a BBA in Economics and Finance (University of Alaska Anchorage) and an Investment Management Certificate (CFA UK). She speaks four languages. |
|
Yong Lin Yong Lin is a Portfolio Manager at Achmea Investment Management, where he has been responsible for the selection and monitoring of external asset managers for fixed-income portfolios since 2015. Prior to that, he worked for over five years at FactSet Research Systems, where he specialised in analytical and quantitative products for the Benelux region. Lin obtained his Master’s degree in Finance and Investments from Erasmus University Rotterdam. |
|
Naki Nartey Naki Nartey is Senior Vice President and Product Strategist for emerging markets at PIMCO. She previously worked in institutional fixed income sales at BBVA, where she managed the sale of European bonds to North American clients. Prior to that, she was an Emerging Markets Product Specialist at JPMorgan Private Bank in New York and held positions in investment sales at JPMorgan Private Bank in Geneva and JPMorgan Investment Bank in London. |
|
Rickey Thevakarrunai Rickey Thevakarrunai joined bfinance in May 2023 as a Director within the public markets team. Prior to that, he spent 10 years at Aberdeen as a Senior Investment Analyst, responsible for selecting managers for fixed-income, equity and multi-asset funds. Before that, he was an Associate at PIMCO, focusing on portfolio and attribution analysis. Thevakarrunai holds a BSc in Economics from the University of Nottingham. |
Read the full article in Financial Investigator magazine
