GMO explores how investors can approach emerging market debt across sovereign, local currency, and corporate bonds, emphasizing diversification, valuation, and active management. The paper argues local debt markets are 5.8x larger than external sovereign debt while highlighting persistent alpha opportunities and meaningful transaction cost inefficiencies.
The What-Why-When-How Guide to Owning Emerging Country Debt: 2017 Edition
GMO
Research
23 Pages
Key Takeaways
Local Market Scale: Local currency sovereign debt totals $7.2 trillion, roughly 5.8x larger than external sovereign debt, yet benchmarks capture only 13% of the investable universe.
Active Alpha Potential: Median external debt managers outperformed EMBIG by 1.3% to 2.3%, while top managers added another 50+ bps through security selection and off benchmark exposure.
Correlation Tradeoffs Matter: Emerging debt correlations reached roughly 70% with emerging equities and 81% with U.S. high yield, complicating diversification assumptions during stressed market environments.
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