THE STAGE IS SET

After more than a decade of underperformance, there are now compelling reasons for selective and well-researched investments in emerging market debt.

- Ben Hurley

We were all much younger the last time investors excited about were emerging markets.

For at least a decade now, emerging market assets have been lashed by invasions, a pandemic, hyperinflation and record sovereign defaults. A seemingly indestructible US dollar sucked foreign capital from the sector.

But this year has seen a rapid change in how investors view emerging market assets, and particularly emerging market debt, owing to a convergence of factors including a weakening US dollar, lower inflation and some spectacular economic turnarounds.

While this change in sentiment is not yet reflected in most investors' asset allocations, outright critics of well-selected emerging market debt are getting harder to find. There is a growing view that these assets are not only attractively priced, but provide better rewards for the risk taken than some developed markets.

Opportunities now abound in both local and hard currencies, ranging across corporate and sovereign debt in mainstream and frontier markets, argues Damien Buchet, chief investment officer at investment manager Principal Finisterre, which specialises in emerging market debt.

"Everywhere we look, there is the perception of value adjusted for the risks," Buchet says.

"That's for a universe which has been totally overlooked. So we're at the cusp of a change in sentiment."

A long time coming

The last period when emerging markets significantly outperformed developed markets was during the commodities boom beginning around 2001 following China's entry into the World Trade Organisation.

Grant Webster, co-head of emerging market sovereign and FX within the emerging market fixed income team at global investment manager Ninety One, sees some parallels between the early 2000s and today.