Despite emerging markets (EM) accounting for over 60 per cent of global gross domestic product and being home to nearly 90 per cent of the world’s population, European investors have, on average, a 6 per cent allocation to emerging markets debt (EMD) in their portfolios. Many miss the chance therefore to diversify their portfolios by not incorporating more exposure to EM.
Some of the key attributes of emerging markets debt hard currency (EMD HC) are:
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Attractive yields: EMD HC offers yields that are much higher when compared to developed market debt, with a significant portion of the universe rated investment grade, presenting robust return potential over the long term.
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Resilience and stability: Despite preconceptions, EMs have demonstrated marked improvement in economic fundamentals, making them more resilient to global economic shifts.
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Diversification: EMD HC provides fundamental diversification of risk by offering exposure to a multifaceted range of countries. It provides access to the EM risk premium combined with the more defensive properties associated with hard currency bonds.
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Active management opportunities: The complexity and inefficiencies inherent in the asset class necessitate active management strategies to successfully navigate and capitalise on opportunities that, in our view, indices and passive exchange-traded funds (ETF) overlook.
Here are 10 of the most common myths that may be holding investors back from taking advantage of this growing and maturing asset class:
Myth 1: Currency and rate volatility erodes EM returns
Hard-currency EM debt is far less exposed to local foreign exchange swings. Returns are driven more by US Treasury rates and credit spreads than local currency moves, or in other words, “hard currency” really means less local currency risk.
Myth 2: EM is low-rated junk debt
Over 50 per cent of the EM hard currency debt universe is now rated investment grade. The average credit rating of the asset class has risen significantly over the past two decades, offering yields similar to US high-yield bonds but with stronger fundamentals and higher average credit quality.
Myth 3: EM debt is inherently unstable
The sovereign debt market in EMs has grown deeper and more sophisticated. Many countries have embraced structural reforms, improved fiscal discipline and demonstrated the ability to weather external shocks more effectively than many developed peers.
Myth 4: EM debt is niche and undiversified
With over 70 countries issuing debt across the credit spectrum, EM hard currency bonds provide meaningful diversification. The market includes energy exporters, service economies and manufacturing hubs from Latin America to Southeast Asia, providing varied exposure.
Myth 5: EM debt is excessively volatile
While volatility exists, it is more comparable to US high-yield credit than to equities or EM equities. And thanks to rising credit quality and broader investor participation, EM hard currency debt has seen increased resilience, even during periods of global market stress.
Myth 6: Passive ETFs can outperform active managers
The EM sovereign debt market remains inefficient, with frequent mispricings due to geopolitical noise or idiosyncratic risk. Active managers consistently outperform, capturing value through deep country research, selective risk-taking and yield curve positioning.
Myth 7: EM defaults are frequent and catastrophic
Sovereign defaults in EM are rare and recovery rates are often better than perceived. The asset class has matured with access to multilateral support (e.g. the International Monetary Fund), and many countries now proactively manage debt burdens and engage constructively with creditors.
Myth 8: Hard-currency EM debt lacks regional and sectoral breadth
The diversity within the market is a key strength. From commodity-rich African nations to Asian technology exporters and European frontier economies, the EM hard-currency universe is far more balanced than the stereotypes suggest.
Myth 9: Rising US rates cripple EM debt
While EM spreads may react in the short term to rate hikes, strong fundamentals often prevail. EMs with solid external balances, fiscal buffers and reform momentum tend to outperform, even in tightening cycles.
Myth 10: A strong dollar kills EM hard currency returns
A strong dollar impacts local currency EM debt more than hard currency. For hard currency sovereigns, the key variables remain credit spreads and US Treasury movements. Many EM issuers also maintain reserves in USD, reducing dollar-related distress.
The EMD HC asset class presents a compelling long-term investment opportunity, despite prevailing misconceptions. Emerging markets hard currency debt is no longer the risky outlier many assume it to be. With attractive yields, improving fundamentals and strong diversification benefits, it stands as a credible, resilient component of a modern fixed income portfolio.
Thomas Haugaard, portfolio manager on the emerging markets debt hard currency (EMD HC) team at Janus Henderson Investors
