March 2021 / VIDEO
Attractive Risk-Return Tradeoff in EM Corporates
A history of equity-like returns, with a fraction of the volatility
EM debt represents a large and diverse opportunity set. With over US$6 trillion of bonds outstanding it rivals both US investment-grade corporates and EM equity in scale. Furthermore, emerging corporate debt is over US$2 trillion in size. It's larger than both the sovereign market for EM and also larger than US high yield. However, investor allocations to emerging corporates are a fraction of those two categories. This is something that we feel will change in the years ahead. We feel advocacy for the EM credit category as an asset class will increase as clients better understand the quality of the income stream that underlies EM corporate debt.
EM corporate debt has high yields, but with an average investment-grade credit quality. Importantly, investors are obtaining that yield through harvesting risk and illiquidity premia in the triple B and double B credit categories primarily, whereas in other asset classes to obtain that same income stream you would need to take on either frontier market risk or triple-C bonds, both of which are fairly de-emphasised in the EM corporate category.
We feel the relative quality of Emerging corporate debt has also been empirically evidenced through history and a 10-year risk-return profile: high returns with moderate level of volatility. We do feel that this is something this likely to continue, because the average credit quality of the asset class has actually increased over time, because the vast majority of supply in recent years has come from the highest quality parts of EM, in particular Asia investment grade and Asia double B credit Emerging corporate debt is a reasonable allocation in a variety of interest-rate environments.
In a rising interest rate environment, it has lower duration than most other credit categories. In a falling interest rate environment, in particular where fears of recession are looming, keep in mind this is an average investment-grade quality asset class, so will likely outperform other higher-yielding asset classes as it has in prior periods of volatility in the last decade.
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.