Skip to main content
Search

June 2023 / INVESTMENT INSIGHTS

Inside the Engine Room of EM Local Currency Debt

A potentially rewarding asset class

Key Insights

  • The volatility of emerging market local currency (EMLC) debt falls significantly with the holding period. This means that investment time horizon is key when investing in the asset class.
  • The importance of coupon, price appreciation, and currency to total returns changes with the time horizon. Currency dominates the short run, while coupon dominates the longer term.
  • The current attractive yield level of EMLC debt provides a good entry point for investors with over three-year investment horizons.

Emerging market local currency (EMLC)1 debt is a complex asset class that can behave quite differently over different time horizons. This can make it challenging for investors to analyze the opportunity that it offers. In this paper, we take a look at how investors might frame the opportunity more clearly, exploring alternative ways to think about the risk and return drivers of what is potentially a rewarding asset class. 

EMLC debt is essentially a government bond investment, driven by currency and sovereign risk. It may be thought of as a higher-yielding, higher-risk extension of an investor’s global government bond allocation rather than being solely part of an EM allocation. 

EMLC debt is essentially a government bond investment, driven by currency and sovereign risk.

- Nathan Wang - Solutions Analyst, Multi-Asset Solutions, APAC

The starting point for any analysis is recognizing that the total return to investors in EMLC debt consists of three distinct drivers: coupon, price appreciation, and currency (FX). We’ll begin by looking at the impact of time horizon on EMLC debt investment outcomes and the role played by the different return drivers. We’ll then discuss some underlying dynamics of the three return drivers, seeking to draw investment implications for asset owners and asset managers along the way.

While elevated within short periods, the volatility of EMLC debt falls significantly as we extend the holding period. This means investment time horizon should be one of the first decisions to make when thinking about investing in EMLC debt.

The relative importance of the three underlying drivers—coupon, price appreciation, and currency—to total return changes dramatically depending on the time horizon: Currency is the largest driver in the short run, but coupon becomes the dominating factor over time. While investors cannot cleanly access the three components of EMLC debt returns separately, they can actively tilt their exposure toward or away from one or more return drivers.

Download the full article here: (PDF)

IMPORTANT INFORMATION

This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.  

It is not intended for distribution to retail investors in any jurisdiction.

Previous Article

June 2023 / VIDEO

Stubborn Services Inflation Keeps Fed on Guard
Next Article

June 2023 / INVESTMENT INSIGHTS

ESG Integral to Emerging Markets Corporate Bond Investing
202305-2892978

May 2023 / INVESTMENT INSIGHTS

Foundations of Emerging Markets Bond Investing

Foundations of Emerging Markets Bond Investing

Foundations of Emerging Markets Bond Investing

Four-part anchoring framework fundamental to debt sustainability

By Samy Muaddi

Samy Muaddi Portfolio Manager