Emerging market local debt | Monthly macro insights

Invesco’s Global Debt Team offers international fixed income expertise incorporating a broad, global lens. The team is based out of New York and is part of Invesco’s global Fixed Income platform, known as IFI

Comprising 11 investment professionals, they manage USD 6bn across their platform, including USD 3bn in emerging market local debt. The team has a long, successful history of investing in international fixed income, dating back to the mid-1990s, enabling them to interpret market events through a multi-decade context.

Taking a collaborative macro and country level approach in addition to a fully integrated comprehensive environmental, social and governance (ESG) framework, has been the key drivers to the team’s success for over a decade.

Emerging market debt is fixed income debt issued by developing countries and corporations within those nations. It’s comprised of both local-denominated and hard currency-issued securities.

Local currency bonds are issued by sovereign entities or corporates in their local foreign currency. The return drivers come typically from local yields, capital appreciation (changes in yield curve or credit standing) and foreign exchange (FX). On the other hand, EM hard currency assets are issued in USD, Euros, JPY, CHF or other stronger developed market currencies. Its return drivers come from external yield moves in the base currency (e.g. US Treasuries) and developing market credit spread changes.

Given attractive nominal yields in EM, an easing bias by most EM central banks and a benign macroeconomic backdrop support income generation from both interest rates and currency carry. The normalisation of the term structures of rates will likely also be meaningful market drivers this year. We think EM rates could deliver beta returns higher than their current yield levels, with shorter-dated bonds delivering significantly higher returns relative to their yield levels.

Three key differentiators that have led to our success in the asset class are our macroeconomic risk framework, focus on downside risk mitigation and our fully integrated approach to ESG in the investment process. We seek to manage downside risk by maintaining portfolio volatility at or below that of the benchmark and only increasing tracking error to the downside. This asymmetric approach allows us to help mitigate downside risk relative to our peers. Additionally, by integrating ESG factors in our investment approach, we assess emerging market economies in a holistic manner that we believe will deliver improved returns over the long-term.