“Something happened really starting in 2000,” says Luz Padilla, senior portfolio manager of the emerging markets fixed income strategy at DoubleLine Capital in Los Angeles. “A lot of these countries started getting a lot better policymakers and a lot better policies. It’s really allowed them to improve their underlying credit dynamic. Now over 50% are investment grade.”
Driving the change, Padilla says, were past credit problems that these countries had to resolve on their own. “They couldn’t borrow their way out of overspending and have learned to live within their means,” Padilla says. “... unlike what we have in Europe.”
By comparison to the G7 and the U.S., this group of countries now has a very low debt profile, she adds -- and this has lead to double-digit returns over the past 20 years. The countries she invests in include Brazil, Indonesia, Mexico, the Philippines, Russia and Turkey.
The overall numbers for the "emerging debt" asset class are strong in part because of its diversity: Powerful economies like those of Singapore, South Korea and Quatar also have been grouped historically in this category and remain so today, according to Padilla.
As a result, substantially more money has flowed into emerging market debt -- and it seems to be staying put, she says: “Now that we have a larger investment base, the money is a lot stickier."
With a lack of appealing dollar-denominated debt offerings on the world market, Padilla says she’s been surprised by some of the investors moving into the space that she has specialized in for years. “People don’t’ realize that sometimes that when they invest in a U.S. high-yield fund they actually are investing in emerging market debt,” she says.