Over US$12 trillion is currently invested in emerging markets (EM) debt. This is an asset class that is experiencing an increase in inflows and is receiving much attention from investors. Last year, 2012, was a record year in terms of inflows into EM debt funds as the asset class achieved US$94.4 billion of inflows.
Since 2008, when investors started to give more serious recognition to EM debt, we have seen US$260 billion of flows into the asset class. Year-to-date flows for 2013 have been US$18 billion as of the end of February, with US$10 billion of that going into local currency funds, US$4 billion to EM corporate funds and US$4 billion to hard currency EM funds. Most investors who are based in the developed world have recognized the need to re-profile their debt portfolios out of their home currency and into these EM currencies.
Over time, this will continue to result in a significant movement of assets into the EM debt asset class. This movement is supported by the fact that on a volatility-adjusted basis, this is clearly one of the leading asset classes of the last 10 years and is expected to continue to stand out by this metric going forward. The returns for EM local bonds have been approximately 12% per annum from 2002 until 2012. The return for 2012 was close to 17% in US dollar terms. At the same time the volatility of the asset class has been about 11.8% resulting in a Sharpe Ratio of 0.83.
