Investment in emerging market local debt will become increasingly popular with emerging market pension funds and OECD-based pension funds according to Baring Asset Management.

Barings has predicted pension funds will turn their attention to emerging market local debt as a result of the ongoing structural change in global asset allocation following the recent financial crisis. This area has produced attractive risk-adjusted returns for portfolios and has proved resilient, despite a risk-averse environment resulting from the European sovereign debt crisis and the sustainability of global growth, it explained.

In addition, Barings stated that relative to their developed market peers, many emerging market currencies remain undervalued. It expected currency appreciation to be a main source of outperformance in the future, along with the income and capital gains potential that come from investing in emerging market debt.

Baring Emerging Markets Debt Local Currency Fund manager Thanasis Petronikolos said: “The fundamentals in many emerging market economies are favourable due to the region’s strong economic growth potential as well as the relative strength of the banking systems and sovereign balance sheets. A lack of yield in alternative areas of fixed income means that investor demand for emerging market assets remains strong.

“In terms of current asset allocation of the Baring Emerging Markets Debt Local Currency Fund, we continue to see value in Hungary, Mexico and Brazil government debt. In the case of Hungary, the higher spreads on offer over German bunds have proved attractive.

“With modest correlations against most developed fixed income and equity markets and a track record of delivering superior risk-adjusted returns, emerging market debt can improve the return to risk profile for investors when held as part of a global diversified investment portfolio.”

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