Emerging Value Bond – introducing our approach to capturing the growing opportunity in EM credit

With the emerging-market (EM) debt universe now almost half the size of its developed-market (DM) counterpart, it has become a core component of global fixed-income allocations. As part of this shift, the EM hard-currency (EM HC) corporate-bond universe has expanded to USD 2.5 trillion, eclipsing the USD 1.5 trn sovereign market¹. What is driving this momentum?

EM HC credit offers diversification and enhanced return potential for global investors, in our view. From a risk-adjusted perspective, the market generates one of the highest Sharpe ratios of any major fixed-income segment – second only to US credit and equities. It is also characterised by low correlations with major asset classes. The volatility of EM credit cycles has moderated, signalling the growing maturity of the asset class and robustness of policy frameworks across key EM economies.

Within this universe, EM HC corporates offer a more diversified, higher quality credit exposure with a shorter duration profile than EM HC sovereigns. They have a higher proportion of investment-grade issuers and, compared to DM credit markets, lower leverage.

A new strategy focused on the emerging-market credit opportunity

At LOIM, we have launched a new strategy – Emerging Value Bond (EVB) – aiming to capitalise on the opportunities within EM HC corporates for investors. It is built upon the approach of our Asia Value Bond strategy, which has been in the market since 2013, is highly rated and has won several accolades².

The EVB investment process centres on a disciplined integration of top-down macroeconomic analysis and bottom-up issuer selection:

• Top-down research features a comprehensive assessment of global macroeconomic conditions, including Federal Reserve (Fed) policy, term premia and the global growth outlook. Next, we perform macro evaluations for each country – focusing on growth prospects, fiscal and debt dynamics, and external vulnerabilities – then assess geopolitical stability, encompassing regional conflicts, trade relations and sanctions risks
• Bottom-up analysis focuses on individual issuers, as well as sector screening and fundamental credit evaluation. This includes a thorough review of financial metrics, business and management quality, relative value assessments and integration of environmental, social and governance metrics.

Three drivers for emerging-market hard-currency corporate credit

Strong credit fundamentals, supportive technical dynamics and monetary policy cycles support the case for EM HC corporate credit, in our view.

1. An attractive fundamental backdrop
EM corporates enter 2025 with strong credit metrics – including significantly lower leverage ratios than DM peers, providing the potential for enhanced downside protection and upside spread compression. Despite this, they are trading at attractive valuations, in our view, with EM HC corporate spreads offering meaningful pickup over DM counterparts

2. Market technicals are supportive
The Fed and EM central-bank rate-cutting cycles will increase liquidity for EMs, supporting a growing savings pool for investment, especially in Asia. Meanwhile, corporates are enlarging funding channels (i.e., non-USD financing), leading to supportive technicals for their international USD bonds. Growing recognition of EM HC corporates as a distinct asset class is driving increased institutional adoption as a long-term capital allocation

3. Policy tailwinds are in force
EM central banks are maintaining policy flexibility while DM rates face structural pressures, supporting relative-value propositions. Corporate-sector financial discipline contrasts favourably with sovereign fiscal challenges, highlighting the relative attractiveness of corporate credit.

Read also: Positive macroeconomic drivers for Asia bonds are in play

Within the growth of EM debt, we believe an allocation to EM HC corporate bonds is attractive for global investors seeking return potential and diversification. Leveraging our long experience in Asian hard-currency credit, we are expanding this tested approach in an effort to capture the EM opportunity.