Emerging market investment grade debt offers insurers high credit quality, elevated yields and income generating potential, and diversification benefits.
We believe emerging market (EM) investment grade hard currency debt is an attractive option for insurers. The asset class offers:
- Compelling long-term value potential, underpinned by better growth prospects for EM economies compared to advanced economies.
- Historically strong fundamentals and improved credit quality due to the growth in A-rated assets.
- A large and diverse investment universe that supports portfolio diversification.
- Favourable regulatory capital treatment.
Emerging market (EM) investment grade hard currency debt is an attractive option for insurers, in our view, as it is an increasingly broad and mature asset class that offers attractive return potential and potential diversification benefits.
While the last three years have been a tumultuous period for EM due to a series of rare and highly disruptive events, recent history indicates that the asset class can deliver attractive risk-adjusted returns over the long term.
From 2010-2019, EM investment grade debt produced higher returns than US investment grade debt, with only modestly more risk. We believe the asset class is set up to perform similarly well in comparison to US credit coming out of this recent period of crisis.
Our latest paper by Jason Trujillo, Head of Emerging Market Credit, explores why we feel the asset class currently looks favourable to insurers, including sections covering:
- EM's evolution
- EM in the post-pandemic landscape
- The greatly improved credit quality across EM investment grade universe
- The compelling long-term return opportunity
- Diversification benefits and broad investment opportunity
- Currency considerations – Cross currency swaps
- Regulatory capital treatment:
- Standard formula considerations
- Matching adjustment considerations
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 is marketing material and not financial advice. It is not intended as a recommendation to buy or sell 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.
Author: Jason Trujillo, Head of Emerging Market Credit
