Emerging market debt: Think ahead

May 18, 2017

Investors have long been drawn to the prospects for higher income and diversification benefits from emerging market debt, though many remain concerned about EMD’s higher sensitivity to global risk-off sentiment. This has led to modest and mostly tactical allocations. We explore how a more forward-thinking investment process can help stabilise portfolio returns, and make a case for a strategic allocation to EMD.


Traditional investment processes in EMD typically either focus on mitigating domestic risks via bottom-up selection based on valuation and scorecard models, or attempt to ‘call the market’ in a top-down approach. We believe there is a more advanced methodology supported by risk analytics capabilities to identify, anticipate and manage the changing nature of EMD through three crucial elements of active management:

  • Asset allocation needs to be dynamic and backed by scenario analysis to access market exposures that are constantly in flux, with greater sensitivity to global forces.
  • Harvest alpha via a selection framework that reflect changing investment themes and regimes rather than valuation and scorecard models that over-rely on historical data.
  • Efficient downside risk management supported by rigorous stress testing can help stabilise EMD portfolio returns.

Seeking EMD income stability

Component for a forward-looking investment framework

Seeking EMD income stability

Sources: BlackRock, May 2017.

Sergio Trigo Paz
Head of Emerging Markets Fixed Income
Ernesto Bettoni
Head of Product Strategy for Emerging Markets Fixed Income
Pablo Goldberg
Portfolio Manager and Senior Strategist for Emerging Markets Fixed Income