Almost 15 years have passed since investing in government bonds of emerging countries was almost a must given the performance of the decade 2002 > 2011 which led to truly excellent performances for theasset class. As you can see from the JP Morgan graph at the end of 2011, with a total return of 225% over the decade, the local currency debt as it is defined on the markets, it was the best bond asset class among those spread.
The presence of foreign investors on these markets was important, with numerous funds investing in them.
You can observe for yourself how the subsequent period, 2012 > 2024, was instead very unfavorable to this asset class (lateral trend with performance even negative ending) and almost led to it being forgotten in theasset allocation of a wallet. This is also because the asset class competitors continued to perform well.
Even seeing how low the presence of foreigners is today bonds governments of countries such as Mexico or Brazil, not to mention Turkey and obviously Russia, a significant level of disaffection can be perceived.
Precisely the affair linked to the non-investability of the Russian markets was the last negative blow for this asset class which had already come from complicated years: lower growth in emerging markets, strength of the dollar compared to most of the currencies of these countries, levels of carry historically low real values, predilection for investments in emerging bonds in hard currencies or hard currency (mostly US dollars).
We believe that today there are valid reasons to reinsert it:
- The level of real yield offered (nominal yield minus current inflation) of most emerging countries is high and much higher than that of developed countries as the Alpine Macro chart shows.
- The central banks of many emerging countries moved better and more promptly than Western ones in 2021-22 when inflation started to bite (a question of getting used to managing situations of that type I would say) and today they are in a much better position both in terms of credibility and room for maneuver.
- Most of the currencies of emerging countries are today theoretically undervalued (Alpine Macro graph, blue bars) and in some cases to a significant extent (Turkish Lira, Brazilian Real, South African Rand all around 30%).
What does it mean to invest in local currency government debt today? It means basically exposing yourself to these countries and these currencies that fall into the composition of the best-known index in commodities, that is, the JP Morgan Government Bond Index Emerging Markets Global Diversified:
An ETF or active fund is good for exposure toasset class.
Alternatively, it is possible to use supranational issues (and therefore with typically AAA ratings) denominated in emerging currencies, always taking care to diversify the overall exposure across multiple currencies.
