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Time to Look at Emering Market Debt

Last year, emerging markets took it on the chin…and emerging market equity funds posted outflows of $48 billion. And the MSCI Emerging Market Index fell -20.6%. But that was then. Now the index is up 13.79% so far this year.

And investors are taking notice. Emerging market stock funds saw inflows of $5.8 billion last week…the most since October 2010. And funds dedicated to Brazil, Russia, India and China saw their biggest weekly inflows since late 2009.

But it’s not only stocks. Emerging market bond funds posted a record $2.14 billion in weekly inflows. And those inflows have been met with emerging market governments issuing more new bonds. That issuance reached $32.8 billion last month…the highest amount ever issued in the month of January (according to Dealogic).

Even with that, the supply of new bonds is being overwhelmed by the demand for them.

Not that that’s a surprise. Emerging economies have a much better outlook for growth. The International Monetary Fund expects developing economies to grow 5.4% this year, and 5.9% next year…while developed economies will eek out growth of 1.2%, then 1.9%.

And emerging economies look even more attractive when you stand them up next to debt-laden developed economies. Emerging markets have much lower debt-to-GDP ratios…and much better projections for the next few years.

Still, emerging economies have lower credit ratings than developed nations. But credit risk isn’t just about a rating. The shift into emerging market sovereign debt signals that, to investors, it’s also about fundamentals. And fundamentally, developing markets look strong.

The WisdomTree Emerging Markets Local Debt Fund (ELD) holds the government bonds of 15 emerging countries denominated in local currencies, with a current duration of 4.4 years. And last week, the fund signaled a long-term buy.


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