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Emerging Perspectives

EM debt in pensions: old age needs a new approach

28 March 2019
Author: Thys LouwPortfolio Manager, Fixed Income

Discussions around emerging market debt solutions are nothing new for us. We have long helped our pension clients to selectively tap into the yields on offer in these markets.

With demographic trends increasing pension plans’ yield needs, the US Federal Reserve’s recent shift to a more dovish tone is only likely to heighten concerns.

A recent paper from the Harvard Kennedy School in the US suggests that ‘external sovereign bonds’ (largely bonds issued by EM countries and now-advanced economies) can provide real long-term returns above those of ‘risk-free’ US government securities and that these returns have been sufficiently high to compensate investors for risk. The study also finds that the main driver of these returns is the relatively higher coupon.

Pension schemes should now take a closer look at emerging market debt

As population ageing continues and pension costs rise against a backdrop of persistently low rates, we believe that pension schemes should now take a closer look at emerging market debt. Furthermore, as we wrote recently, a new cycle in emerging markets is drawing near and we believe that after a long period of rebalancing, valuations look attractive. For investors with an understanding of the risks, an appropriate time horizon and realistic expectations, we regard this as an attractive entry point and a good time to reassess existing allocations.

Summary of Harvard Kennedy School paper
Read the full paper

Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.

Thys Louw
Thys Louw Portfolio Manager, Fixed Income

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