An asset class that has recently become more prominent is emerging market bonds. As a number of high growth economies were relatively unscathed by the economic crisis they are seen to be doing well compared to some developed economies. Among the high growth economies are those benefiting from the economic rise in the east, examples being Malaysia, Indonesia and Thailand.
Many countries in Africa, Asia and Latin America are high growth economies. The unpredictable economic policies of years gone by have given way to governments ruled by their heads rather than their hearts in economic policy. Many governments of these regions are guided by principles of sound governance and economic discipline, fostering solid growth and improving the living standards of their populations.
Although many developing markets previously issued their debt in foreign currency, they are increasingly issuing local currency debt. One reason for this is the increased emphasis on social policy that is leading to the growth of pension and investment funds within developing economies. These institutions are interested in buying local currency bonds as a way of hedging against long term financial uncertainty, and outside investors are also looking at investing in local currency debt.
Credit ratings in some developing countries are improving and the government debt is therefore gaining a higher rating. As the bonds often offer a higher yield than the sovereign debt of developed countries this is becoming an attractive option for investors. Foreign investors may also hope to profit from the high growth rates in these economies and make a gain from their investment.
Many developed country investors are looking for a diversified investment portfolio. The debt instruments of developing countries are a separate asset class with their own risk factors. Although the rational investor must take account of the economic, political, credit and currency risk as with any investment, the potential rewards of diversification are worth taking into consideration.
Another beneficial effect of the high rates of development in these countries is the chance of profiting from strengthening currencies. Despite the currency risk there is a realistic likelihood that the local currencies will strengthen as the economies forge ahead. Compared to some of the meager returns available from some assets in developed countries this can be seen as a real opportunity and investors may feel that additional risks are worth the extra reward.
An investor looking for the right investment must look at each developing economy and examine the investment opportunities in each. The investment must be made after assessing the credit and currency risk and looking at the economic environment, economic and political risk and the future prospects for each economy. Emerging market debt is not just one homogeneous market but there are differences in the prospects for investors in each particular country.
The future prospects for emerging market bonds are promising as confidence in their governments and economic policies grows. International investors are realizing that many developing countries are beginning to see the fruits of sensible economic policies. The sovereign debt of these countries, and increasingly also the corporate bonds of companies based in developing countries, will become a realistic target for investors.
You can visit the website www.emlinkagecapital.com for more helpful information about Investing In Emerging Market Bonds
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