Investors are “under-allocated” to emerging market bonds despite the asset class offering good prospects in a challenging rate environment, a report said.
According to ‘Investor sentiment: Emerging markets debt research’ by Netherlands-based asset manager NN Investment Partners higher yields and potential for currency appreciation means the asset class is one of the “most exciting” in the world.
Seven out of ten professional investors said current market conditions are challenging for traditional fixed income investing because of rising interest rates in developed markets.
While 85% of respondents said they have exposure to emerging market bonds the average exposure is just 3.5%.
Investors most commonly cited having greater investment priorities as a reason for low allocations to emerging market bonds, followed by an insufficient understanding of the asset class.
But flows into emerging market debt-focused funds, including exchange-traded funds, hit a record high in 2017, showing the sector appearing more prominently on investors’ radars, the company said.
Marcelo Assalin, head of emerging market debt at NN Investment Partners, said that although there were concerns among investors that the asset class would suffer because of the rising rates in developed markets, the impact could be overestimated.
He added: “We anticipate that monetary policy will be tightened more gradually than generally feared. This is particularly true of frontier market debt, which is issued by those countries at the very early stages of economic, political, financial, institutional and business development and therefore has attractive long-term prospects.”
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