Emerging-markets debt (EMD) can provide investors with access to some of the fastest-growing economies around the world. The potential benefits of EMD include better-than-average long-term growth prospects, higher yields, and significant portfolio diversification. SEI has been investing in EMD, in a dedicated fund structure since 1997.

Higher growth rates

Emerging markets are often characterized by higher economic growth rates than developed markets, driven by factors such as population growth, urbanization, and technological adoption. International Monetary Fund (IMF) forecasts from January 2023 have advanced economies growing at 1.2% in 2023 before marginally increasing to 1.4% in 2024, as shown in Exhibit 1. In contrast, emerging and developing economies are expected to grow at 4.0% and 4.2% in 2023 and 2024, respectively. China is a major factor powering this growth. The rapid spread of COVID-19 in China dampened growth in 2022, but the recent reopening has paved the way for a faster-than-expected recovery in emerging markets reflected in this growth wedge between developed and emerging economies.

Access to higher yields

The local currency market, on average, is rated as investment-grade credit quality. This rating, which is reserved for higher quality institutions, is a reflection of the transition emerging economies have made. Despite this, and as can be seen in Exhibit 2, the local currency sovereign market yields nearly 4% higher than the developed sovereign market. This difference is, in part, explained by home country bias (investors either prefer or are required by regulation to own their own government’s bonds), the less liquid nature of local-currency EMD, and a reward for the greater volatility of purchasing bonds in foreign exchange rates exposing an investor to currency volatility. We expect a degree of convergence overtime as greater adoption of local debt occurs. Indeed one signal of this is the growth of the local-currency EMD market to over USD2.5 trillion (Source: SEI, J.P. Morgan Emerging Markets Bond Index (EMBI®) Monitor, March 2023 edition).

The hard currency market sits on the top rung of high-yield ratings with an average BB+ rating. This reflects the greater coverage of the hard currency focused JPM EMBI GD Index with near 70 issuers, many of which are earlier in their development cycles. For these “early stage” sovereigns, lending in hard currency is intuitively simpler given it eliminates the currency exposure to these lesser traded currencies. The higher yield reflects the increased risk of stress and default resultant from their fundamentals. Further, funding in a foreign currency creates challenges if the local currency becomes devalued against hard currencies—for example, the recent and ongoing restructuring of hard-currency obligations by Sri Lanka. These risks are rewarded with a higher yield (7.66% as of March 2023).

Diversification within a broader portfolio

SEI has developed an approach to EMD investing which allows for access to our best ideas in both hard currency and local currency debt by blending an allocation to the two assets. This balances exposure to the higher yields on offer in the asset class with an appropriate assessment of risk.

The blended debt allocation in SEI’s EMD portfolio provides diversification as these markets often have different economic cycles and risk profiles to developed markets. A percentage of less than 100% in Exhibit 4 evidences the diversification benefit gained from blending EMD with another asset as part of a total portfolio solution.

Risks

There are geopolitical risks to investing in EMD, such as a greater escalation of the Russia-Ukraine conflict, but these same risks often impact emerging and developed economies alike. For example, oil and food supply pressure has been felt across economies globally, pressuring global growth forecasts. These externalities need to be assessed country by country, developed and emerging. We believe active management can be useful in evaluating these risks.

SEI Capital Market Assumptions (“CMA”)

There are figures in this commentary based on SEI’s Capital Market Assumptions (CMA). Asset class assumptions are set using a combination of empirical and forward-looking analysis and are designed to be long-term in nature. Assumptions include estimates of annual return, volatility and correlations by asset class, as well as prospective ranges for these values over various time horizons.

Changes in assumptions may have a material impact on the simulated performance presented. Past performance is not a reliable indicator of future performance.

All projected returns are presented gross of all fees and charges, which will have the effect of reducing the illustrated performance.

The CMAs are revisited regularly on a minimum basis to reflect the changes in the market environment.

The forecasts shown on those pages are not indicative of the future or likely performance of the portfolios, especially over a shortterm time period. CMAs are not predictions of how asset classes will perform or reliable indicators of future performance. The data includes or has been based on anticipated future performance determined using various assumptions. Such forecasts are not a reliable indicator of future performances.

Important information

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. Positioning and holdings are subject to change. All information as of the date indicated. There are risks involved with investing, including possible loss of principal. This information should not be relied upon by the reader as research or investment advice, (unless you have otherwise separately entered into a written agreement with SEI for the provision of investment advice) nor should it be construed as a recommendation to purchase or sell a security. The reader should consult with their financial professional for more information.

Statements that are not factual in nature, including opinions, projections and estimates, assume certain economic conditions and industry developments and constitute only current opinions that are subject to change without notice. Nothing herein is intended to be a forecast of future events, or a guarantee of future results.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties, which in certain cases have not been updated through the date hereof. While such sources are believed to be reliable, neither SEI nor its affiliates assumes any responsibility for the accuracy or completeness of such information and such information has not been independently verified by SEI.

There are risks involved with investing, including loss of principal. The value of an investment and any income from it can go down as well as up. Investors may get back less than the original amount invested. Returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results. Investment may not be suitable for everyone.

This material is not directed to any persons where (by reason of that person's nationality, residence or otherwise) the publication or availability of this material is prohibited. Persons in respect of whom such prohibitions apply must not rely on this information in any respect whatsoever.

The information contained herein is for general and educational information purposes only and is not intended to constitute legal, tax, accounting, securities, research or investment advice regarding the strategies or any security in particular, nor an opinion regarding the appropriateness of any investment. This information should not be construed as a recommendation to purchase or sell a security, derivative or futures contract. You should not act or rely on the information contained herein without obtaining specific legal, tax, accounting and investment advice from an investment professional.

Information issued in the UK by SEI Investments (Europe) Limited, 1st Floor, Alphabeta, 14-18 Finsbury Square, London EC2A 1BR which is authorised and regulated by the Financial Conduct Authority. Investments in SEI Funds are generally medium- to long-term investments.

SIEL has appointed SEI Investments (Asia) Limited (SEIAL) of Suite 904, The Hong Kong Club Building, 3 Jackson Road, Central, Hong Kong as the sub-distributor of the SEI UCITS funds.

The contents of this document have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise caution in relation to the offer. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice

This information is made available in Latin America FOR PROFESSIONAL (non-retail) USE ONLY by SIEL.

Any questions you may have in relation to its contents should solely be directed to your Distributor. If you do not know who your Distributor is, then you cannot rely on any part of this document in any respect whatsoever.

Issued in South Africa by SEI Investments (South Africa) (Pty) Limited FSP No. 13186 which is a financial services provider authorised and regulated by the Financial Sector Conduct Authority (FSCA). Registered office: 3 Melrose Boulevard, 1st Floor, Melrose Arch 2196, Johannesburg, South Africa.

*The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction. Our outlook contains forward-looking statements that are judgments based upon our current assumptions, beliefs and expectations. If any of the factors underlying our current assumptions, beliefs or expectations change, our statements as to potential future events or outcomes may be incorrect. We undertake no obligation to update our forward-looking statements.