Prior to the onset of COVID-19, much had been written about the appeal of emerging market debt (EMD), touting the yield advantage as well as its lower correlation to other fixed income asset classes. EMD has underperformed since the pandemic, and this has left investors wondering if and how EMD fits into their asset allocation. After this difficult start to the 2020s amid sharp increases in inflation and rates, U.S. dollar strength, rising geopolitical risks, and meaningful capital outflows, conditions in the asset class warrant a fresh look. As the sector continues to develop and mature, we acknowledge that EMD performance may moderate. This does not limit its attractiveness but helps us refine our investment themes. From our perspective, we see five structural factors that should support the emerging markets over the coming five years and possibly beyond:
- The Cyclical Headwinds Turning to Tailwinds: A reversal of inflationary pressures leading to EM central bank easing cycles.
- A Maturation of EM Economies: More sustainable debt structures and a growing share of GDP.
- Solid Fundamentals: Lower debt-to-GDP and total debt burdens.
- Favorable Demographics: Younger, growing populations that fuel growth.
- Great Power Competition: EM economies expected to benefit from the global realignment.
All investments involve risk, including the possible loss of capital. Past performance is not a guarantee or reliable indicator of future results. Source: PGIM Fixed Income. The information represents the views and opinions of the author, is for information purposes only, and is subject to change. The information does not constitute investment advice and should not be used as the basis for an investment decision.
Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. The manager has no obligation to update any or all such information; nor do we make any express or implied warranties or representations as to the completeness or accuracy. Any projections or forecasts presented herein are subject to change without notice. Actual data will vary and may not be reflected here. Projections and forecasts are subject to high levels of uncertainty. Accordingly, any projections or forecasts should be viewed as merely representative of a broad range of possible outcomes. Projections or forecasts are estimated, based on assumptions, subject to significant revision, and may change materially as economic and market conditions change.
Fixed income instruments are subject to credit, market, and interest rate. Emerging market investments are subject to greater volatility and price declines.
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