The Whys and Hows of Investing in Emerging-Market Corporate Bonds

What You Need to Know

Once a backwater of the bond world, emerging-market (EM) corporate debt has grown into a full-fledged asset class that investors can tap to diversify their EM allocation and boost their return potential.

For years, when institutional investors talked about the composition of their EM bond portfolios, they were talking about currency. Some bonds would be denominated in US dollars or another “hard” currency, others in the local currency of the issuing country—Mexican pesos, Turkish lire, Chinese renminbi. But nearly all of them were government-issued sovereign bonds.

EM corporate bonds have historically been relegated to the periphery of fixed-income portfolios—if they’re represented at all. There was US$113 billion benchmarked to J.P. Morgan’s EM corporate indices as of June 30, about one-sixth of the amount tied to its hard- and local-currency sovereign indices.

This underallocation may have been understandable a decade ago, when the outstanding debt stock was lower and less diversified. It isn’t anymore. The total EM corporate debt stock doubled between 2012 and 2018 to US$2.3 trillion, which is about twice the amount of outstanding hard-currency EM sovereign debt. And the standard EM corporate benchmark, the J.P. Morgan Corporate Emerging Markets Bond Index (CEMBI), encompasses bonds from more than 600 corporate issuers in 52 different countries (Display).

Widening the Opportunity Set

An allocation to corporate debt provides diversification through exposure to more countries and to different parts of the credit cycle. It also gives investors access to a wider range of issuers in different sectors, often with a spread pickup over EM sovereign debt.

How investors add EM corporates to an existing fixed-income allocation will depend to some extent on their individual needs and comfort level.

EM corporate bonds aren’t entirely without risk, of course. While corporate governance, transparency and protections for creditors and shareholders have improved over the last decade, they still lag standards in developed economies. This is why it’s so important to choose the right manager for your EMD allocation.