Considerations when investing in and pricing emerging market fixed income securities

Abstract

The concept of emerging market investing has undergone a big transformation over the past two decades. Fixed income emerging market investing has been one of the biggest resultant trends, increasingly claiming a prominent position in global portfolio construction. However, as fixed income trades over the counter, evaluating liquidity remains a challenge as it involves aggregating and rationalising highly-fragmented information relating to pricing. Capital markets infrastructure, and with it transparency, are slowly but gradually continuing to improve in many EM countries, but conditions remain distinctly different across global emerging market regions. EM governments are more sensitive towards recognising and addressing issues to attract investment into local currency bond markets. But this is likely to be a long-term process because it involves rationalising the existing capital market infrastructure, adapting economic policy as well as upgrading regulations and legislation. Information aggregators and capital market innovations remain the primary source for optimism over the medium term. The first part of this paper looks at what emerging markets are and how they are structured in terms of infrastructure, capital gains, capital market controls and legal oversight. The second part of the paper incorporates these factors into how to value such assets within control and risk functions and looks at the relative liquidity indicators. Using several assessments, the paper highlights the key challenges practitioners face. The final part brings the themes discussed together into a conclusion.