Optimism grows for EMD while increasing yields remains top priority

investmentweek.co.uk:

Most investors hold emerging market debt via a diversified bond allocation, with 52% exposed to EM corporates

Boutique manager Vontobel, which assessed the views of over 200 institutional investors across Europe, North America and Asia Pacific, also found that increasing yields is the top priority for fixed income investors, with inflation and monetary policy the key issues dominating asset owners' macroeconomic considerations.

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Asia Pacific investors see increasing yields and ensuring liquidity as equally important concerns (55%), while the latter was a slightly lower priority (49%) for North American and European asset owners.

Alignment with ESG investment objectives is also an important consideration across all regions, though to varying degrees. Respondents across all regions also noted ongoing themes of diversification (30%) and capital preservation (21%) as key considerations. 

The survey also found that most investors hold emerging market debt via a diversified bond allocation, with 52% exposed to EM corporates. Just under half have exposure to EM sovereign debt in hard currency.

But underperformance has also resulted in investors reducing their exposure to EM sovereign debt in local currency, with just 23% of respondents now allocating to this area, compared to 47% in 2022.

«Investors need to position now or risk missing an attractive entry point, especially on local currency which has been an underloved, underperforming segment for the past years and now looks far more promising,» said Simon Lue-Fong, head of the Vontobel fixed income boutique. 

«Managing allocations across the EM fixed income segments can be difficult, and this is boosting the appeal of