Emerging market investment grade debt: An attractive alternative for insurers series

Could emerging market investment grade hard currency debt be an attractive option for insurers’ long-term investment portfolios?

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EM credit outperformed from 2010 to 2019 - so what's the future?

This article was produced by Invesco as part of their valued industry partnership to Insurance Investor.

Returns in historical perspective

The last three years have been a tumultuous period for emerging market (EM) owing to a series of rare and disruptive events; however, with yields currently at historical highs, recent history indicates that the asset class could deliver attractive risk-adjusted returns over the long term.

Following the last major global financial crisis in 2008, EM credit outperformed from 2010 to 2019, with EM investment grade (IG) debt producing higher returns than US IG debt, with only moderately more risk. We believe the asset class is poised to perform similarly well in comparison to US credit coming out of this recent period of crisis.

Greatly improved credit quality across EM investment grade universe

Credit quality has also greatly improved across the sovereign and corporate segments of the EM investment grade universe, making it more suitable and attractive for insurers. In recent years, weaker credits fell out of IG to junk status, solid IG issuers sought more borrowing, the investable stock of bonds from solid IG issuers grew, and institutions across IG strengthened. More than half the market is now rated investment grade.

The diversification benefits of a broad investment opportunity

Beyond the primary consideration of attractive risk-adjusted returns, EM debt also offers diversification benefits, with more than 130 countries and over 1,000 distinct issuers represented. In the past, a justifiable view held that EM hard currency debt was a narrow, highly correlated asset class. That is no longer the case and the safety provided by the dispersion of credits by region, country and individual issuer, especially in periods of stress, can be significant. The EM market is broad in terms of credit quality and maturity profile, which reflects the strong growth in market size over the past decade of more than six times for corporates and three times for sovereigns.

An attractive investment for insurers

EM investment grade debt is a large, diverse asset class that offers compelling value and will likely make up an increasingly large share of the global fixed income universe. As such, we believe an allocation to the asset class warrants serious consideration by insurers. At Invesco, we have extensive experience investing in EM debt and working with institutional clients to provide access to the asset class via tailored solutions that can meet their exact requirements.

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Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

Important information

This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication.

Views and opinions are based on current market conditions and are subject to change.