Over half (64%) of institutional investors are planning to increase their allocation to emerging markets debt over the next 24 months, according to a new report by Vontobel Asset Management.
The study, which received answers before and after the Russian invasion of Ukraine, found that despite sentiment wavering investors still view the wider emerging markets space as appealing.
Of the responses received before the Russian invasion, the majority of investors (72%) were optimistic about GDP growth, inflation and bond yield premiums in emerging markets.
From the responses received afterwards, this number declined to 55%.
The study, which surveyed 342 institutional investors and discretionary wealth managers in North America, Europe and Asia-Pacific, found three main reasons for increasing allocations. These included diversification benefit versus current holdings (56%), a highly liquid market (48%) and favourable ESG prospects (47%).
Simon Lue-Fong, head of the fixed income boutique at Vontobel, commented: “Despite market headwinds, global institutional investors recognise the need to diversify to provide both higher yields and insulation from market and geopolitical volatility in other asset classes.
“Emerging markets fixed income can meet those needs in investor portfolios but requires an experienced active manager to navigate the unique challenges associated.”
Investors cited default rates and debt load (51%), liquidity (48%), volatility (45%) and concern about corporate governance, data quality and transparency, and reporting standards (38%) as challenges they faced when investing in European emerging markets fixed income.
However, the appeal of emerging markets fixed income was even greater among UK institutions with 72% of planning to increase their allocation compared to only 3% who planned to decrease.
Even more, 24% reported they would make an increase of more than 10%.
This confidence already exists in UK portfolios, with 14% of UK institutional investors holding 10-20% of their portfolio in emerging market fixed income compared to the global average of 8%.
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